2021 Annual Report
A heritage of responsibility
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Federated Hermes, Inc.
2021 at a glance…
(as of Dec. 31, 2021)
$669 billion assets under management
65+ years managing assets
$1.6 trillion assets under stewardship advice
80% revenue generated from long-term assets
60+ global stewardship and responsible investing team
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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 earnings per share
Diluted earnings per share
Cash dividends per share:
Quarterly
Special
Total dividends
Managed assets (in millions)
Total long-term assets
Fixed income
Equity
Alternative/private markets
Multi-asset
Money market
Total managed assets
$
$
$
2021
2020
$
1,300,447
366,272
270,293
1,448,268
418,151
326,364
$
2.77
2.75
1.08
—
1.08
$
220,966
97,550
96,716
22,920
3,780
447,907
668,873
3.25
3.23
1.08
1.00
2.08
199,097
84,277
91,788
19,084
3,948
420,333
619,430
Total managed assets
in billions
Long-term managed assets
in billions
Dividend history
per share
19
20
21
$575.9
$619.4
$668.9
19
20
21
$180.3
$199.1
$221.0
$1.00
$1.08
19
20
21
$1.08
$2.08
$1.08
■ Special ■ Quarterly
2021 Federated Hermes Annual Report
1
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Dear fellow shareholders:
Inc.
As a leading global investment manager, Federated
Hermes,
has focused on delivering responsible
investment management, innovation, performance and
exceptional customer service for more than six decades.
Our commitment to these ideals is an outgrowth of our
fi duciary mindset and our dedication to risk management.
It is our heritage of responsibility and the foundation of
our future.
In 2021, Federated Hermes continued to be among the
foremost providers of actively managed investment
strategies, as the fi rm achieved record sales and solid
earnings. Overall assets under management reached a
record $668.9 billion at year-end, up $49.4 billion or 8%
from the previous year. Federated Hermes’ products in
long-term asset categories—which comprise equity, fi xed
income, alternative/private markets and multi-assets—
rose by 11% to a record $221.0 billion at year-end, with
fi xed-income assets growing by 16% to reach a record
of $97.6 billion at year end and alternative/private
markets increasing 20% to reach a record $22.9 billion
at year-end. Long-term assets drove 80% of the fi rm’s
revenue. Diluted earnings per share were $2.75 on net
income of $270.3 million in 2021.
We acquired the remaining 29.5% interest in Hermes
Fund Managers Limited held by BT Pension Scheme
in 2021, building upon the 2018 acquisition of a
majority share in our London-based subsidiary and the
subsequent rebranding of our fi rm as Federated Hermes,
Inc. We continue to focus on expanding our investment
and stewardship capabilities while growing our global
distribution footprint. In the last year, we also made a
range of other signifi cant investments in our future—from
technology to diversity and inclusion initiatives—that
position the company for continued success.
Federated Hermes continued to employ capital to
benefi t shareholders in 2021. The company repurchased
7,145,838 shares of class B common stock and, through
year-end, paid quarterly dividends to our shareholders for
the 96th consecutive quarter. Four quarterly dividends of
$0.27 each brought dividends to a total of $1.08 per
share in 2021. Federated Hermes has generated $5.9
billion in cash from operations since the company’s initial
public offering in 1998, and Federated Hermes’ use of
cash has included $2.6 billion for dividends, $1.5 billion
for share repurchases and $1.3 billion for acquisitions.
2021 highlights
Achieved record gross sales of long-term
strategies for the second consecutive year.
Gross sales of these strategies were
$69.6 billion, a 14% increase from the
prior year.
Reached $18.2 billion in gross sales of
products managed in the U.K., refl ecting
strong demand for responsible investment
management strategies in Europe.
Increased liquidity assets by $27.6 billion
from 2020.
Achieved a year-end record $1.6 trillion
at
in assets under advisement by
Federated Hermes, our industry-leading
engagement business.
EOS
Launched two active, transparent fi xed-income
, the Federated Hermes Short Duration
and Federated Hermes Short
ETFs
Corporate
Duration High Yield
ETF
.ETF
Launched the Federated Hermes Emerging
Market Debt Fund, a
from Pittsburgh and London and distributed
by the international sales team.
product managed
UCITS
Introduced the Federated Hermes
MDT
Market
Neutral Fund, expanding our proprietary
Federated Hermes
quantitative offerings.
MDT
Launched Federated Hermes Conservative
Microshort Fund and Federated Hermes
Conservative Municipal Microshort Fund, two
actively managed funds that offer an innovative
approach to liquidity management.
Completed transition of approximately
$560 million in equity and fi xed-income
Hancock Horizon fund assets to Federated
Hermes funds.
2 Federated Hermes, Inc.
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Range of investment solutions
Federated Hermes’ long-term investment products
combined for record gross sales and record net sales in
2021—a testament to our differentiated product mix
across asset classes.
ESG
Equity products—funds, separately managed accounts
SMAs
(
) and institutional separate accounts—had record
gross sales of $21.8 billion in 2021. Several of our
responsible investing strategies managed by equity
investment teams at our London-based business produced
solid net sales in 2021, led by the Federated Hermes
Global Equity
Engagement Equity Fund (a
Hermes Asia ex-Japan Equity Fund. A trio of equity
strategies managed from our Cleveland offi ce—offering
international equity, international growth and emerging
markets options—delivered solid performance. These
strategies can provide an important diversifi cation option
for our customers as they manage against infl ation.
Overall, 59% of our equity funds managed in the U.S.
outperformed their peers over the prior three-years
Fund, Federated Hermes
UCITS
fund) and Federated
SDG
.1
SMAs
We fi nished the year with record net sales of $12.9 billion
in fi xed-income products (combined funds,
and
institutional separate accounts). Top-selling strategies
included Federated Hermes Total Return Bond Fund,
which pursues risk-adjusted returns by investing in
diversifi ed portfolios of fi xed-income securities, and
Federated Hermes Ultrashort Bond Fund, which
seeks higher yields than liquidity products but lower
interest-rate risk than products that invest in longer-term
debt securities. The Federated Hermes
UCITS
High Yield Credit Fund, a
among our top-selling fi xed-income funds. The strategy,
SDG
product, was also
Engagement
which is also available through a comparable fund for
U.S. investors, seeks current income and capital
appreciation through a commitment to responsible
investment practices aligned with Sustainable
SDGs
Development Goals (
earned top-quartile, three-year performance and
18 beat their peers over those three years.
). Eight fi xed-income funds
As a money market leader for more than 45 years,
Federated Hermes continues to be a liquidity solutions
provider of choice for a broad cross-section of
institutional investors and fi nancial intermediaries
seeking diligent credit analysis, broad diversifi cation
and competitive yields. Despite the continued low-yield
environment of 2021, Federated Hermes fi nished the
year with $447.9 billion in money market assets, an
increase of 7% from the previous year. We continue to
closely monitor and comment on the U.S. Securities and
Exchange Commission’s and other regulators’ proposed
money market fund regulatory changes, and we will
champion the essential role of money market funds in
meeting client liquidity needs and in capital markets.
Newly developed strategies
To complement and broaden our existing Federated
Hermes diversifi ed solutions, we launched newly
developed investment strategies in 2021 to meet
evolving customer needs. In the fourth quarter, we
ETFs
—the Federated Hermes
debuted our fi rst two
Short Duration Corporate
ETF
ETF
Short Duration High Yield
products benefi t from the experience, insights and
capabilities developed over the fi rm’s 50 years of
managing fi xed-income solutions for investors.
and Federated Hermes
. These actively managed
Equity assets
in billions
Fixed-income assets
in billions
Alternative/private markets
and multi-asset
in billions
Money market assets
in billions
19
20
21
19
20
21
$89.0
$91.8
$96.7
$69.0
$84.3
$97.6
19
20
21
$22.3
$23.0
$26.7
19
20
21
$395.5
$420.3
$447.9
2021 Federated Hermes Annual Report
3
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structure—
ETF
ETFs
also offer the advantages of an
The
tax effi ciency, lower costs and intraday trading—as well
as the fi rm’s extensive capabilities with authentic
ESG
tools for investors concerned about infl ation and the
potential interest-rate risk associated with products
that invest in longer-duration securities.
integration. The short-duration
are new
ETFs
Earlier in 2021, we launched the Federated Hermes
Conservative Microshort Fund and Federated Hermes
Conservative Municipal Microshort Fund. These actively
managed funds offer an innovative approach to liquidity
management by pursuing higher yields than money
market strategies while simultaneously aiming to maintain
lower
volatility by investing in securities with shorter
maturities than traditional ultrashort products.
NAV
MEPC Limited, our leading U.K. commercial real estate
development and asset management business, acquired
Argent’s eight-member team working on sustainable
urban redevelopment and regeneration initiatives,
including the Paradise redevelopment scheme in
Birmingham, England. With projects in Birmingham,
Bristol, Leeds and Manchester,
’s portfolio now
includes four of the fi nest sustainable urban regeneration
placemaking developments in English cities.
MEPC
PEC
GPE
, Federated Hermes’
V, and had a successful
LLP
Also in 2021, Hermes
private equity manager, launched the fi fth vintage of its
PE co-investment fund,
foundation close with $342 million. Additionally, Federated
Hermes launched its second vintage of our European
Direct Lending strategy and had a successful fi rst close
with approximately 300 million Euros ($272 million) from a
range of institutional investors. We will continue to raise
capital for both
V and European Direct Lending II.
PEC
Emphasis on customer relationships
Responsibility is embedded in everything we do at
Federated Hermes and it is central to our customer
relationships, our long-term approach and fi duciary
mindset. Our sales force focuses on having a thorough
understanding of our customers and their needs,
offering solutions-based approaches to achieve defi ned
outcomes. Despite the challenges of operating during
the global pandemic in 2021, Federated Hermes’ sales
force leveraged a consultative approach to produce
another year of record sales, with managed assets
growth across every distribution channel in 2021.
Assets in our institutional channel grew by 14%, those
in our U.S. fi nancial intermediary channel grew by 6%
and international assets (those sold through non-U.S.
intermediary customers) grew by 5%.
The fi rm’s 231 regional consultants enhanced our
reputation as a trusted investment manager to
more than 11,000 customers, including corporations,
government entities, insurance companies, foundations
and endowments, banks and broker/dealers. It comes
back to being responsible to our clients for building
and preserving wealth.
We continued to see customer interest in the
diversifi ed solutions and a high customization
SMAs
available through our
, which are currently
available in 20 equity, 14 fi xed-income and one
multi-asset category. In 2021,
$23.9 billion—ranking Federated Hermes as the
. 2
10th-largest manager of model-delivered SMAs
assets were at
SMA
Equity
$96.7 billion
Fixed income
$97.6 billion
■ International/global $36.5
■ Value and income $30.0
■ Growth $24.1
■ Blend $6.1
■ Multisector $59.7
■ High-yield $19.3
■ U.S. corporate $6.3
■ Municipal $5.9
■ U.S. government $4.3
■ International/global $1.5
■ Mortgage-backed $0.6
4 Federated Hermes, Inc.
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Engagement and ESG
EOS at Federated Hermes, our industry-leading
stewardship service provider and pioneer in effective
corporate engagement, had $1.6 trillion in assets
under advisement, an increase of $300 billion from
the previous year, and completed more than 1,200
company engagements.
17 years of experience in corporate engagement.
EOS
at Federated Hermes has
issues and opportunities
engagers meet
EOS
ESG
EOS
team members are subject-matter experts
issues.
Our
ESG
across the full range of
with companies’ senior leadership to seek positive
changes related to material
in the context of that company’s long-term business
strategy. Drawn from a range of industries and
nationalities, they include climate change experts,
sustainability consultants, data scientists, academics,
legal experts and former corporate sustainability
executives. Throughout the fi rm, Federated Hermes’
stewardship and responsible investing team comprises
more than 60 staff members.
ESG
ESG
investing, the fi ndings of our 2021
On the subject of
survey of more than 400 U.S. fi nancial advisors, wealth
management professionals, institutional investors and
high-net-worth individuals underscored the continuing
importance of
initiatives. Of those surveyed, 95% of
fi nancial advisors said that their clients have asked about
ESG
or responsible investing, up from 90% in 2020. We
launched the Responsible Investing Institute in 2021 to
provide our customers with continuing education about
ESG
web-based courses designed to ensure that fi nancial
issues. The curriculum features a series of interactive,
professionals are not only fl uent, but confi dent in
their understanding of responsible investing and
ESG
authentic
customer conversations.
integration in order to deepen
The long-term view
Looking back on our accomplishments in 2021, I’m
grateful for our 1,968 employees. They continued to
show amazing resilience, commitment and agility in
adjusting to ever-changing market conditions and
meeting the changing needs of our clients. I’m also
thankful for our Board of Directors for their wisdom,
guidance and support throughout the year.
And, fi nally, my thanks to you, our shareholders, for your
continued confi dence in Federated Hermes. On behalf
of the board, our leadership team and staff, I reaffi rm
our commitment to rewarding your confi dence every day
as we work to position Federated Hermes for success as
a global leader in active, responsible investing for the
coming decades.
J. Christopher Donahue
President, Chief Executive Offi cer
and Chairman
1 All mutual fund performance cited is Morningstar as of Dec. 31, 2021.
2 Money Management Institute/Cerulli Associates, Q3 2021.
Alternative/private markets
and multi-asset
$26.7 billion
Money market
$447.9 billion
■ Real estate $8.7
■ Private equity $5.3
■ Other alternative $4.6
■ Infrastructure $4.0
■ Multi-asset $3.8
■ Bear $0.2
■ Market neutral $0.1
■ Government $321.9
■ Prime $119.0
■ Municipal (tax-exempt) $7.0
2021 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
Gordon J. Ceresino
Vice Chairman, Federated Hermes,
Chairman, Director and President
of Federated International Securities
and Vice Chairman of Federated
Inc.
Corp.
, LLC
MDTA
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Hermes, Inc.
President, FII Holdings, Inc.
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Hermes, Inc.
FII
Holdings,
President,
Inc.
Committee: Executive
John B. Fisher
Inc.
Vice President, Federated Hermes,
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
Dolores D. Dudiak
Vice President and Director, Human Resources
Federated Hermes, 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
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, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-14818
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
FHI
Trading Symbol(s) Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
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 an 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
x
☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
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, 2021 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 18,
2022, was 9,000 and 92,006,568, respectively.
Documents incorporated by reference:
Part III of this Form 10-K incorporates by reference certain information from the registrant's 2022 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
[Reserved]
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
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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
Item 9C
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Signatures
Exhibit Index
Page
4
36
51
51
51
51
51
52
53
69
71
106
106
106
106
106
107
107
107
107
107
112
113
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 (collectively, Federated Hermes), 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: the coronavirus, its impact and plans in response; asset flows, levels, values and
mix; business mix; the level, timing, degree and impact of changes in interest rates or yields; fee rates and recognition; sources
and levels of revenues, expenses, gains, losses, income and earnings; the level and impact of reimbursements, rebates or
assumptions of fund-related expenses and fee waivers for competitive reasons such as to maintain certain fund expense ratios,
to maintain positive or zero net yields (Voluntary Yield-related Fee Waivers), to meet regulatory requirements or to meet
contractual requirements (collectively, Fee Waivers); whether and under what circumstances Fee Waivers may be implemented;
the integration of environmental, social and governance factors, the impact of market volatility, liquidity and other market
conditions; whether and when revenue or expense is recognized; whether performance fees or carried interest will be earned or
clawed-back; whether and when capital contributions may be made; the components and level of, and prospect for, distribution-
related expenses; guarantee and indemnification obligations; the timing and amount of acquisition-related payment obligations;
payment obligations pursuant to employment or incentive arrangements; vesting rights and requirements; business and market
expansion opportunities, including acceleration of global growth; interest and principal payments or expenses; taxes, tax rates,
tax elections, deferred tax assets and the impact of tax law changes; tax treatment of dividends from non-U.S. subsidiaries;
benefits of foreign net operating losses and deferred tax assets; 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 Hermes' product and market performance and Federated Hermes' 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; regulatory matters, including
the pace, level, focus, scope, timing, impact, effects and other consequences of regulatory developments; the attractiveness and
resiliency of money market funds; dedication of resources; accounting-related assessments, judgments and determinations;
compliance, and related legal, compliance and other professional services expenses; interest rate, concentration, market,
currency and other risks; impact or potential impact of risks on Federated Hermes' financial condition; plans and timing for, and
amount of stock required for, a tender offer to acquire the remaining approximate 10% interest in a foreign subsidiary; and
various other items set forth under Item 1A - Risk Factors. Among other risks and uncertainties, market conditions may change
significantly and impact Federated Hermes' business and results, including by changing Federated Hermes' 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 Hermes. 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 Hermes' 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 intermediary customers
who offer Federated Hermes' products to other 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 Hermes' risks and uncertainties also include liquidity and credit risks in Federated Hermes' 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 Hermes 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 Hermes 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 (collectively, Federated
Hermes), was formerly known as Federated Investors, Inc. Effective January 31, 2020, Federated Investors,
changed to Federated Hermes, Inc.
Inc.
's name was
Federated Hermes is a leading provider of investment management products and related financial services. Federated Hermes
has been in the investment management business since 1955 and is one of the largest investment managers in the United States
(U.S.) with $668.9 billion in assets under management (
or managed assets) at December 31, 2021.
AUM
one
Federated Hermes operates in one operating segment, the investment management business. Federated Hermes sponsors,
markets and provides investment-related services to various investment products, including sponsored investment companies
and other funds (Federated Hermes Funds) and Separate Accounts (which include separately managed accounts (
institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. In addition,
Federated Hermes markets and provides stewardship and real estate development services to various domestic and international
companies. Federated Hermes' principal source of revenue is investment advisory fees earned by various domestic and foreign
subsidiaries pursuant to investment advisory contracts and based primarily upon the
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.
of the investment products and
SMAs
AUM
),
UK
Federated Hermes provides investment advisory services to 168 Federated Hermes Funds as of December 31, 2021. Federated
Hermes 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 including intermediaries, customers), including, among others,
retail investors, corporations and retirement plans. The Federated Hermes Funds are domiciled in the U.S., as well as Ireland,
), Luxembourg, Guernsey, Jersey and the Cayman Islands. Most of Federated Hermes' U.S.-domiciled
the United Kingdom (
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 Hermes.
In general, material amendments to such advisory agreements must be approved by a fund's shareholders. These advisory
agreements are generally terminable upon 60 days' notice to the investment advisor. See Item 1A - Risk Factors - Specific Risk
Factors - Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements for additional information on
Federated Hermes' advisory agreements.
Of the 168 Federated Hermes Funds as of December 31, 2021, Federated Hermes' investment advisory subsidiaries managed 23
money market funds with $312.8 billion in AUM, 55 fixed-income funds with $59.9 billion in
AUM
$57.0 billion in
.
AUM
billion in
, 42 equity funds with
, 43 alternative/private markets funds with $14.8 billion in AUM and five multi-asset funds with $3.6
AUM
As of December 31, 2021, Federated Hermes provided investment advisory services to $220.7 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
agreements that are generally terminable upon notice to Federated Hermes (or, in certain cases, after a 30 day, 60 day or similar
notice period).
pursuant to investment advisory
AUM
Certain Federated Hermes Funds have adopted distribution plans that, subject to applicable law, provide for payment to
Federated Hermes for distribution services. These distribution plans are implemented through distribution agreements between
Federated Hermes and the Federated Hermes Funds. Although the specific terms of each such agreement vary, the basic terms
of the agreements are similar. Pursuant to these agreements, a Federated Hermes subsidiary acts as underwriter for these funds
and distributes shares of the funds primarily through unaffiliated broker/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.
4
Federated Hermes also provides a broad range of services to support the operation and administration of the Federated Hermes
Funds. These services, for which Federated Hermes receives fees pursuant to agreements with the Federated Hermes Funds,
include administrative services and shareholder servicing.
BT
) from
HFML
Noncontrolling Interests). As a result of the 2018
On July 2, 2018, Federated Hermes completed, effective as of July 1, 2018, the acquisition of a 60% controlling interest in
Hermes Fund Managers Limited (
Pension Scheme (
Federated Hermes completed the acquisition of the 29.5% noncontrolling interests in
HFML
and environmental, social and governance (
Hermes offers customers a range of solutions for engagement, advocacy, active ownership and impact and delivers effective
engagement with the companies in which its customers may invest. In order to continue to seek and enhance long-term
performance for its customers and clients, Federated Hermes continues to take steps to integrate the proprietary insights from
fundamental
Acquisition). On August 31, 2021,
(2021 Acquisition of
from
Acquisition, Federated Hermes provides stewardship services
) integrated investment strategies. Through the stewardship services, Federated
factors and engagement research into nearly all of its investment strategies.
) (2018
HFML
HFML
HFML
BTPS
BTPS
ESG
ESG
Acquisition). The principal activity of
On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of
HCL
(
private equity investment management business. As a result of the acquisition of
HGPE
gained control of Hermes
HCL
provides the opportunity to further accelerate and broaden Federated Hermes' global growth.
HGPE
Capital Limited,
) (collectively with
HGPE
HGPE
LLP (
GPE
Capital Limited is that of a holding company for an infrastructure and
Capital Limited, Federated Hermes
HCL
). The addition of London-based
HGPE
Capital Limited
Assets Under Management
AUM
Total
time. Total managed assets for the past two years were as follows:
are composed of Federated Hermes Funds and Separate Accounts and represent the balance of
AUM
at a point in
dollars in millions
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
As of December 31,
$
2021
96,716
97,550
22,920
3,780
220,966
447,907
$ 668,873
$
2020
91,788
84,277
19,084
3,948
199,097
420,333
$ 619,430
2021
vs. 2020
5 %
16
20
(4)
11
7
8 %
during a period of time. Because substantially all revenue and
Average managed assets represent the average balance of
certain components of distribution expense are generally calculated daily based on
, 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:
AUM
AUM
dollars in millions
Equity
Fixed-Income
1
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Managed Assets
Year Ended December 31,
$
2021
98,040
91,564
20,754
3,879
214,237
418,562
$ 632,799
$
2020
80,591
74,403
18,206
3,813
177,013
436,895
$ 613,908
$
2019
81,212
65,375
17,896
4,192
168,675
340,505
$ 509,180
2021
vs. 2020
22 %
23
14
2
21
(4)
3 %
2020
vs. 2019
(1) %
14
2
(9)
5
28
21 %
1 The average balance for the year ended December 31, 2019 includes $8.2 billion of fund assets managed by a previously
, in which Federated Hermes held an equity method investment. Effective March 1, 2020,
HGPE
became a consolidated subsidiary. See Note (2) to the Consolidated Financial Statements for additional
non-consolidated entity,
HGPE
information.
5
Changes in Federated Hermes' average asset mix year-over-year across both asset classes and product/strategy types have a
direct impact on Federated Hermes' operating income. Asset mix impacts Federated Hermes' total revenue due to the difference
in the fee rates earned on each asset class and product/strategy type per invested dollar. Generally, advisory fees charged for
services provided to equity and multi-asset products and strategies are higher than advisory fees charged to fixed-income and
alternative/private markets products and strategies, which in turn are higher than advisory fees charged to money market
products and strategies. Likewise, Federated Hermes Funds typically have higher advisory fees 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 Hermes 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 Hermes' revenue 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
Investment Products and Strategies
Year Ended December 31,
2021
$ 915,984
306,639
77,824
$ 1,300,447
2020
$ 1,011,467
318,152
118,649
$ 1,448,268
2019
$ 907,605
245,887
173,402
$ 1,326,894
2021
vs. 2020
(9) %
(4)
(34)
(10) %
2020
vs. 2019
11 %
29
(32)
9 %
Federated Hermes offers a wide range of products and strategies, including money market, equity, fixed-income, alternative/
private markets and multi-asset investments. Federated Hermes' offerings include products and strategies expected to be in
demand under a variety of economic and market conditions. Federated Hermes has structured its investment process to meet the
requirements of fiduciaries and others who use Federated Hermes' products and strategies to meet the needs of their customers.
Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance.
Federated Hermes, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers
of money market assets, with $447.9 billion in
managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and
competitive yields. Federated Hermes also manages retail money market products that are typically distributed through broker/
dealers. At December 31, 2021, Federated Hermes managed money market assets across a wide range of categories:
government ($321.9 billion); prime ($119.0 billion); and municipal (or tax-exempt) ($7.0 billion).
at December 31, 2021. Federated Hermes has developed expertise in
AUM
Federated Hermes' equity assets totaled $96.7 billion at December 31, 2021 and are managed across a wide range of categories
including: international/global ($36.5 billion); value and income ($30.0 billion); growth ($24.1 billion); and blended ($6.1
billion).
Federated Hermes' fixed-income assets totaled $97.6 billion at December 31, 2021 and are managed across a wide range of
categories including: multisector ($59.7 billion); high-yield ($19.3 billion); U.S. corporate ($6.3 billion); municipal (or tax-
exempt) ($5.9 billion); U.S. government ($4.3 billion); international/global ($1.5 billion); and mortgage-backed ($0.6 billion).
Federated Hermes' alternative/private markets and multi-asset investments totaled $22.9 billion and $3.8 billion, respectively, at
December 31, 2021. Federated Hermes' alternative/private markets assets are managed across a wide range of categories
including: real estate ($8.7 billion); private equity ($5.3 billion); other alternative ($4.6 billion); infrastructure ($4.0 billion);
bear market ($0.2 billion); and market neutral ($0.1 billion).
Investment products are generally managed by a team of portfolio managers supported by fundamental and quantitative
research analysts. Federated Hermes' proprietary, independent investment research process is centered on the integration of
several disciplines including: fundamental research and credit analysis;
research models; style-consistent and disciplined portfolio construction and management; performance attribution; and trading.
integrated investment strategies; quantitative
ESG
See Note (4) to the Consolidated Financial Statements for information on revenue concentration risk.
6
Distribution Channels and Product Markets
Federated Hermes' distribution strategy is to provide investment management products and services to more than 11,000
institutions and intermediaries, including, among others, banks, broker/dealers, registered investment advisors, government
entities, corporations, insurance companies, foundations and endowments. Federated Hermes uses its trained sales force of
more than 230 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 Hermes' investment products and strategies are offered and distributed in three markets. These markets and the
relative percentage of managed assets at December 31, 2021 attributable to such markets are as follows: U.S. financial
intermediary (62%); U.S. institutional (26%); and international (12%).
U.S. Financial Intermediary Federated Hermes offers and distributes its products and strategies in this market through a large,
diversified group of over 7,500 national, regional and independent broker/dealers, banks and registered investment advisors.
Financial intermediaries use Federated Hermes' products to meet the needs of their customers, who are often retail investors.
Federated Hermes offers a full range of products to these customers, including Federated Hermes Funds, Separate Accounts and
private funds. As of December 31, 2021, managed assets in the U.S. financial intermediary market included $301.2 billion in
money market assets, $59.1 billion in equity assets, $49.8 billion in fixed-income assets, $3.3 billion in multi-asset and $0.2
billion in alternative/private markets assets.
U.S. Institutional Federated Hermes offers and distributes its products and strategies to a wide variety of domestic institutional
customers including, among others, government entities, not-for-profit entities, corporations, corporate and public pension
funds, foundations, endowments and non-Federated Hermes investment companies or other funds. As of December 31, 2021,
managed assets in the U.S. institutional market included $131.9 billion in money market assets, $40.7 billion in fixed-income
assets, $3.9 billion in equity assets, $0.5 billion in multi-asset and $0.5 billion in alternative/private markets assets.
International Federated Hermes manages assets from non-U.S. institutional and financial intermediary customers through
subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. As of
December 31, 2021, managed assets in the international market included $33.7 billion in equity assets, $22.2 billion in
alternative/private markets assets, $14.8 billion in money market assets and $7.1 billion in fixed-income assets.
Competition
As of December 31, 2021, Federated Hermes had $448.1 billion of Federated Hermes Fund
Separate Account
. Of the Separate Account
, $23.9 billion related to
SMAs
AUM
AUM
.
AUM
and $220.7 billion of
The investment management business is highly competitive across all types of investment products and strategies, including
mutual funds, exchange traded funds (
strategies. Competition is particularly intense among mutual fund and
Institute (
investment objectives whose shares are currently being offered.
), at the end of 2021, there were over 7,000 open-end mutual funds and over 2,500
, institutional accounts, sub-advised funds and other managed products and
providers. According to the Investment Company
of varying sizes and
SMAs
ETFs
ETFs
ETF
ICI
),
In addition to competition from other mutual fund managers,
competes with investment alternatives offered by insurance companies, commercial banks, broker/dealers, deposit brokers,
private markets/alternative product managers and other financial institutions. Federated Hermes launched its first
fixed-income, fully transparent
providers and investment advisors, Federated Hermes
- in mid-December 2021.
ETFs
ETFs
ETF
- two
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 other customers and type and quality of services.
Regulatory Matters
Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S.
Federated Hermes and its products, such as the Federated Hermes 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 - General Risk Factors - Regulatory and Legal Risks - Potential
Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.
7
Current Regulatory Environment - Domestic
In 2021, as the Pandemic continued, the regulatory environment in the U.S. and globally shifted away from the adoption of
measures intended to provide regulatory flexibility. Despite the Pandemic, the
(among other regulatory authorities, self-
regulatory organizations or exchanges) continued to advance rulemaking initiatives, conduct risk-based examinations, bring
enforcement actions, and review and comment on issuer and fund filings. In the fourth quarter of 2021, the SEC issued five
final, and nine proposed, rules or regulations, including a final rule on performance-based advisory fees and proposed rules on
money market fund reforms, share repurchase disclosure modernization, securities lending disclosure and insider trading.
SEC
As 2022 begins, the impact of the continuing Pandemic on the regulatory environment in the U.S., and globally, remains
uncertain. It is possible that the impact of the Pandemic could continue to decrease (but likely not completely dissipate) as 2022
progresses due to the continued distribution of vaccines on a larger scale, the potential for continued, but lessened, market
intervention from the U.S. Federal Reserve Board (Fed), and the possibility of additional stimulus packages, similar to the $900
billion Consolidated Appropriations Act, 2021, passed by Congress in December 2020 and the $1.9 trillion American Rescue
Plan Act of 2021 passed by Congress in March 2021. U.S. and global regulators continued in 2021, and continue in 2022, to
focus on the impact of the Pandemic on the markets.
As of December 31, 2021, the Fed's balance sheet was approaching $8.76 trillion. With several facilities established by the Fed
) announced the establishment of two
in 2020 winding down, on July 28, 2021, the Federal Open Market Committee (
standing repurchase agreement (repo) facilities—a domestic repo facility against Treasury securities, agency debt securities,
and agency mortgage-backed securities with a $500 billion daily limit, and a repo facility for foreign and international monetary
authorities against their holdings of Treasury securities maintained in custody at the Federal Reserve Bank of New York with a
$60 billion per counterparty limit. Primary dealers are counterparties to the domestic facility and depository institutions began
to be added as counterparties in the fourth quarter of 2021. These facilities, among others, were adopted to address market
inefficiencies and provide financial backstops.
FOMC
In March 2020, in response to disrupted economic activity as a result of the Pandemic, the
funds target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. These low interest rates, and
the possibility of negative interest rates, caused the investment management industry to engage with the
regulators globally) to discuss ways to address a negative interest rate environment. In its December 15, 2021 proposed rule on
money market fund reforms, the
cancellation methodologies to maintain the stability of stable net asset value (
environment. Any solution to the difficulties presented by a potential negative interest rate environment can require significant
internal and external resources to implement necessary changes, including system programming and implementing disclosure
changes, both for money market funds and their service providers or vendors (service providers).
refused to allow the implementation of reverse distribution mechanisms or share
) money market funds in a negative rate
also decreased the federal
(and other
FOMC
NAV
SEC
SEC
SEC
U.S. and global regulators also continue to re-examine existing and propose new laws, rules, and regulations. With the
aggressive 54 item rulemaking schedule announced in its Fall 2021 Unified Agenda of Regulatory and Declaratory Actions
(Fall Reg Flex Agenda), the expectation is that the pace of new proposed and final laws, rules and regulations and other
SEC
regulatory activity will increase in 2022. For example, the
35d-1 under the 1940 Act (Names Rule), climate change disclosures, human capital management disclosures, corporate board
diversity, reporting of proxy votes on executive compensation, special purpose acquisition companies (
voting advice, among other proposals. The regulatory actions to address the Pandemic, any other laws and regulations that have
or are expected to be re-examined, modified or reversed, or that become effective, and any new proposed laws, rules and
regulations, continue to impact the investment management industry (collectively, both domestically and internationally, as
applicable, Regulatory Developments).
's Fall Reg Flex Agenda signals upcoming proposals on Rule
), and proxy
SPACs
's
U.S. and global regulators also continue to focus on the market conditions that existed in March 2020, and their impact on
open-end funds, including institutional prime and municipal (or tax-exempt) money market funds. On October 5, 2021, while
testifying before the House Financial Services Committee,
staff for
recommendations to address the challenges to money market funds experienced in the spring of 2020, and stated that he
believes "it is time to reflect upon the reforms of 2014 and 2010 to see if we can further improve resiliency, particularly in times
of stress." It has been reported that Financial Stability Oversight Council (
's
reform efforts. In the
by the
FSOC
[
funding markets and support orderly market functioning, including during periods of heightened market stress."
SEC
] is encouraged
's engagement on this critical issue" and, "[g]iven the interconnectedness of financial institutions and markets, the
SEC
] will continue to monitor this initiative in the broader context of efforts by financial regulators to strengthen short-term
's Statement on Money Market Fund Reform, the
Chair Gensler indicated that he had asked
) Chairperson Yellen fully supported the
indicated that "the [
FSOC
FSOC
FSOC
FSOC
SEC
SEC
8
NAV
PWG
PWG
PWG
NAVs
MMFs
Report), on April 15, 2021, the
at the Onset of the Pandemic: Asset Flows,
) entitled, "Overview
SEC
Division
Report and regulators on money market funds as a cause of the market turmoil in
," which concluded (among other things) that March 2020 outflows reduced prime money market
per share increased at the onset of the Pandemic.
Building on the December 22, 2020 report by the President's Working Group on Financial Markets (
of Recent Events and Potential Reform Options for Money Market Funds" (
of Investment Management's Analytics Office issued an article, "Prime
Liquidity Buffers, and
funds' liquidity buffers and that volatility of prime money market funds'
Contrary to the focus placed by the
March 2020, the Investment Company Institute (
During the Covid-19 Crisis" (
rather than money market funds, triggered the market turmoil. The
MMF Report rebuked suggestions that money market
funds, particularly institutional prime money market funds, were a primary, if not the sole, cause of market distress in March
2020, noting that, "[t]hese suggestions are inconsistent with the data and early press reports." The MMF Report points to the
fact that the market dislocations were widespread, including in markets in which institutional prime money market funds are not
significant players, such as the U.S. Treasury bonds, longer-term U.S. agency securities, municipal securities, corporate bonds,
and foreign exchange markets. The MMF Report also studied institutional prime money market fund asset flows and
spreads in the Treasury bond market, concluding, "by March 11[, 2020] these spreads had widened substantially, yet prime
MMF
money market funds had seen virtually no outflows." The
theory that money market funds were at the forefront of the market stress" and that, "Treasury markets were in the news several
days before any real mention of money market funds . . .".
Report), in November 2020 that supports the view that the Treasury securities markets,
) had issued a report entitled, "Experiences of U.S. Money Market Funds
Report also noted that, "press reports do not support the
MMF
ICI
ICI
ICI
ICI
ICI
ICI
SEC
PWG
Report
ICI
PWG
's Division of Investment Management regarding aspects of the
and other industry participants, submitted
Report. In its first comment letter, dated
In response to requests for comments by the
and potential money market fund reforms, Federated Hermes, along with the
comment letters that strongly disagree with the conclusions reached in the
April 12, 2021, Federated Hermes emphasized, among other points, that money market funds did not cause or exacerbate the
turmoil in the financial markets in March 2020, and money market funds have no "structural vulnerabilities" warranting the
more significant policy options outlined in the PWG Report, such as capital buffers and holdbacks. Federated Hermes stressed
that the market turmoil in March 2020 was created by the Pandemic and the unprecedented global government response and
economic shut-down to stem the spread of the coronavirus. In its comment letter, Federated Hermes supported the
eliminating the requirement for a fund's board to consider imposing redemption gates and liquidity fees if weekly liquid assets
drop below 30% of the fund's total assets. This is one of the requirements that was imposed under the
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 was required by October 14, 2016. In its second comment letter,
dated June 1, 2021, Federated Hermes recommended certain structural reforms that address the root causes of the failure of
critical funding markets in March 2020 and the consequent systematic risks, including: (1) the provision of liquidity in stressed
markets, as well as reforms to promote market-making in stressed conditions; (2) amendments to rule 2a-7 to delink the
consideration of redemption gates and liquidity fees from the 30% of a fund's total assets threshold; (3) reforms to the short-
term market structure itself to improve liquidity in times of stress; and (4) considerations for balancing the SEC's statutory
mandate with liquidity and financial stability concerns. In a third comment letter, dated September 21, 2021, Federated Hermes
expressed its belief that the combination of delinking the potential imposition of redemption gates and liquidity fees with a
money market fund's weekly liquid asset requirements, adoption of certain liquidity fee procedures, and enhancements to
money market funds' ability to "know their customer" via an amendment to Rule 22c-2 under the 1940 Act, when combined
with consideration of, and improvements in, the short-term markets generally, can address the concerns identified in the PWG
Report without adversely impacting the viability of money market funds and their benefits to investors, issuers and capital
formation.
's structural,
SEC
SEC
in
SEC
SEC
SEC
statements,
comments and public responses to the
Chair Gensler cited the
SEC
Commissioners voted to propose new amendments to money market fund rules. In his
PWG
Report, international regulatory concern, the prior
's requests for comment, as evidence for the systemic risk
On December 15, 2021, the
statement announcing the proposals,
FSOC
posed by money market funds. According to the
of money market funds by: (1) increasing minimum liquidity requirements for daily and weekly liquid assets to 25% and 50%,
respectively, to provide a more substantial buffer in the event of rapid redemptions; (2) removing the ability of money market
funds to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, which would eliminate an
incentive for preemptive redemptions; (3) requiring certain money market funds (e.g., institutional prime and institutional
municipal (or tax-exempt) money market funds) to implement swing pricing, which involves a process of adjusting a fund's
current
shareholders, so that they bear the liquidity costs of their redemptions; (4) enhancing certain reporting requirements (e.g., Form
's ability to monitor and analyze money market fund data; and (5) requiring stable
N-
such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming
, the proposed amendments would improve the resilience and transparency
) to improve the
and Form N-
NAV
MFP
SEC
SEC
CR
9
SEC
NAV
if future market conditions result in negative money market fund
's proposed rule will end on April 11, 2022. At its February 4, 2022 meeting, the
NAV money market funds to convert to a floating
FSOC
yields. The comment period on the
recognized that open-end funds were not the sole or primary cause of market turmoil in 2020, but mistakenly noted that the size
of their asset liquidations indicates that they were one of the significant contributors to the market stress. At the same meeting,
the
s efforts to
reform money market funds and to strengthen short-term funding markets.
significant contributors to the March 2020 turmoil contradicts the conclusion of the
Hermes' April 12, 2021 comment letter, (each discussed above) which demonstrate that the March 2020 market turmoil was
caused by the Pandemic and the unprecedented global response and economic shut-down, not open-end funds.
s proposed money market fund reforms and indicated that the
's conclusion that open-end funds were
MMF Report, as well as Federated
supports the
reviewed the
FSOC
FSOC
FSOC
SEC'
SEC'
ICI
Federated Hermes is currently reviewing the proposed rule to assess any potential impact to Federated Hermes' business, and
intends to participate in the comment process. Federated Hermes believes that swing pricing is not a workable alternative for
institutional prime and municipal (or tax-exempt) money market funds because it creates uncertainty around redemption
proceeds and requires significant system changes for money market funds, investors and their respective service providers.
Federated Hermes also opposes increasing the liquidity requirements for daily and weekly assets because of the negative effect
such increased requirements will have on money market fund yields. Federated Hermes also opposes the elimination of
liquidity fees and redemption gates, and believes money market funds should have a choice between imposing liquidity fees
and redemption gates and implementing swing pricing. Finally, Federated Hermes disagrees with the
's refusal to permit
money market funds to use reverse distribution mechanisms or share cancellation methodologies to maintain a stable
negative rate environment. If swing pricing and the other money market fund reforms proposed by the
proposed, Federated Hermes believes that they could result in a shift of assets from institutional prime and municipal (or tax-
exempt) money market funds to government money market funds. The comment period ends 60 days after the proposed rule is
published in the Federal Register.
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are adopted as
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SEC
in a
ICI
Federated Hermes has expended, and will continue to expend, significant internal and external resources to engage with
regulators on potential money market fund reforms, including through additional comment letters and meetings with U.S. and
global regulators and legislators, the
and other industry participants. Management believes money market funds provide a
more attractive investment opportunity than other competing products, such as insured deposit account alternatives.
Management also believes that money market funds are resilient investment products that have proven their resiliency during
the Pandemic. While Federated Hermes believes that some regulations could be improved, such improvements should be
measured and appropriate, preserving investors' ability to invest in all types of money market funds. Federated Hermes believes
that regulators should look closely at the 2014 Money Fund Rules and Guidance and supports efforts to reduce regulation,
including the
requirement and redemption gates and liquidity fees. Federated Hermes also continues to support efforts to permit the use of
amortized cost valuation by, and override the floating
and certain other requirements imposed under the 2014 Money
Fund Rules and Guidance for, institutional and municipal (or tax-exempt) money market funds. Legislation has been re-
introduced in the Senate and in the House of Representatives in a continuing effort to get these revisions to money market fund
reform regarding the use of amortized cost passed and signed into law.
's proposal, to eliminate the link between the 30 percent liquid asset
Report's recommendation, and the
PWG
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SEC
SEC
also has been adjusting, or terminating, the targeted, temporary Pandemic-related relief and assistance it provided to
The
the investment management industry. The
delivery of disclosure documents and indicated support for related issues such as remote work, e-authorization and
dematerialization of physical security certificates. Federated Hermes supports many of these recommended actions, particularly
allowing for increased use of electronic delivery of disclosure documents.
staff is considering issuing updated guidance to enable broader use of electronic
SEC
SEC
SEC
ESG
ESG
SEC
's Fall Reg Flex Agenda discussed above, the
) to develop initiatives to proactively identify
-related disclosure. On March 4, 2021, the
's Division of Enforcement (
has
announced the creation of a Climate Change
-related
In addition to the anticipated proposed regulations included in the
also increased its focus on
DOE
and
Task Force in the
misconduct, with an initial focus on identifying any material gaps or misstatements in issuers' disclosure of climate risks under
existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisors' and funds'
strategies. On April 9, 2021, the
of investment advisors, registered investment companies, and private funds offering
2021,
2010 climate change disclosure guidance and soliciting public comment on the
apply to climate change and other
mandate disclosure of greenhouse gas emissions and workforce diversity to give fund managers the consistent, comparable, and
reliable data they need to better assess current and future sustainability-related risks. However, the
disclosure, stating that the
overly prescriptive approach to
ESG
's Division of Examinations issued a risk alert to highlight observations from recent exams
products and services. On March 15,
Chair Allison Herren Lee issued a statement reminding issuers of the
SEC
's
's disclosure rules and guidance as they
to
-related disclosures. In its June 4, 2021 comment letter, the
should develop a regulatory framework that is flexible
Commissioner and then acting
also warned against an
called on the
ESG
SEC
SEC
ESG
ESG
ESG
SEC
SEC
SEC
SEC
SEC
ICI
ICI
10
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to: (1) supplement, not replace, its principles-based disclosure regime with prescriptive metrics; (2) focus on
enough to allow disclosure practices to develop organically over time. In its June 14, 2021 comment letter, Federated Hermes
urged the
material disclosures; and (3) maintain the global competitiveness of U.S. capital markets. Hermes Equity Ownership Services
(d/b/a
companies to report on material climate-related information that may impact the long-term value of companies to allow
investors the ability to access timely, accurate, comprehensive, consistent and comparable information.
, also submitted a comment letter that supported the
at Federated Hermes), a subsidiary of
requiring
HFML
SEC
EOS
SEC
SEC
SEC
SEC
ESG
SEC
TCFD
TCFD
's forthcoming climate
-related claims about their products, and whether the
staff to consider recommendations regarding emission
should review the Names Rule holistically. Chair Gensler
Chair Gensler outlined his views on likely components of the
) for guidance. On September 1, 2021, Chair Gensler stated that he has instructed
In a July 28, 2021 speech,
disclosure rulemaking proposal. Chair Gensler discussed that the proposal could include: (1) mandatory climate risk disclosure;
(2) qualitative and quantitative data disclosures; (3) climate-related risk management and strategy disclosures; and
(4) disclosure of metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards
climate-related goals. Chair Gensler indicated that he asked the
disclosures, industry-specific disclosures, whether fund managers should disclose the criteria and underlying data they use to
make
also indicated that the proposal may consider which data or metrics companies might use to inform investors about how they
are meeting their climate-related pledges. He also noted that the
will likely develop its own disclosure requirements rather
than rely on external standard setters, and may look to existing frameworks such as the Task Force on Climate-related Financial
Disclosures (
"proposal for climate risk disclosure requirements" and that the proposal should be informed by other frameworks, including
. On September 14, 2021, Chair Gensler reiterated that "[t]oday's investors are looking for consistent, comparable,
the
SEC
and decision-useful disclosures around climate risk," and that the
information. Chair Gensler further noted that proposals developed by the
be available for public comment. On September 22, 2021, the
comment letter that the
filings. In his remarks to the House Financial Services Committee at the October 5, 2021
Gensler signaled a phased-in climate disclosure approach that would take into account company size and the types of disclosure
Principles for
required. In his fireside chat on October 19, 2021,
SEC
Responsible Investment that the
US
requirements, but will promulgate
Investor Action on Climate Webinar,
rule proposal would be built upon prior and existing disclosure regimes, and that the
jurisdictions in climate-related disclosure. As noted above, climate change disclosure is on the
Agenda.
may look to international standard setters when setting climate change disclosure
-specific disclosure requirements. On October 20, 2021, in remarks at the
SEC
's Division of Corporation Finance published a sample
SEC
staff intends to issue to public companies regarding their climate change disclosures in
Commissioner Allison Herren Lee indicated that the forthcoming climate disclosure
should "step in" when there is high demand for relevant
Chair Gensler reaffirmed his previous remarks to the
will be "informed by economic analysis" and will
would seek consistency with other
' s 2021 Fall Reg Flex
oversight hearing,
staff to prepare a
PRI
LSEG
/
Chair
SEC
SEC
SEC
SEC
SEC
SEC
SEC
SEC
SEC
UN
FSOC
FSOC
released a report on climate-related risks to financial stability in which it recognized that
's members issuing requirements for climate-related disclosures consider whether such disclosures
On October 21, 2021, the
climate change is an emerging and increasing threat to U.S. financial stability and, among other recommendations,
recommended that the
should include disclosure of greenhouse gas emissions, as appropriate and practicable, to help determine exposure to material
climate-related financial risks. On December 17, 2021, the Chair of the House Committee on Financial Services issued a
statement in response to the Office of the Comptroller of the Currency's releasing principles on climate-related financial risk
and the
, in which she emphasized that the
FSOC
report recommended that all of its members and their agencies take action to guard against climate risk. On that same
date, the
and collateral risks associated with weather patterns, natural disasters and climate conditions, and the transition risk associated
with shifts to new technologies or changes in public policy, as well as elevated risks relating to corporate debt, vulnerabilities in
short-term wholesale funding markets, real estate and the transition away from the London Interbank Offered Rate (
issued its 2021 Annual Report in which, among other things, it highlighted both the physical risks to institutions
establishing a Climate-related Financial Risk Committee within the
LIBOR
FSOC
FSOC
FSOC
).
SEC
and the
, regulations adopted, and actions taken, by the Department of Labor (
DOL
FSOC
In addition to the
investment management industry, including Federated Hermes. The
by the United States Court of Appeals for the Fifth Circuit. On December 15, 2020, the
proposed fiduciary rule to regulate "investment advice fiduciaries" (Final
February 16, 2021. With the transition of Presidential administrations, and new agency leadership, certain regulations
promulgated by the
temporary enforcement policy, under which the
fiduciaries who are working diligently on compliance with relevant components of the Final
DOL
remain in place until December 20, 2021. In Field Assistance Bulletin No. 2021-02, the
by extending its position on pursuing prohibited transaction claims through January 31, 2022. The
prior to 2021 are being re-examined. On February 12, 2021, the
issued the final version of a re-
Fiduciary Rule), which became effective on
will not pursue prohibited transaction claims against investment advice
DOL
Fiduciary Rule, would
provided further transition relief
's April 2016 fiduciary rule was vacated in June 2018
announced that its
) impact the
also stated that it would
SEC
DOL
DOL
DOL
DOL
DOL
DOL
DOL
or
11
DOL
DOL
Fiduciary Rule would be subject to full enforcement as of February 1,
indicated that it would be proposing another new fiduciary rule. According to the
's Fall Reg Flex Agenda, the new proposed fiduciary rule will amend the regulatory definition of the term "fiduciary" to
not enforce the specific documentation and disclosure requirements for individual retirement account rollovers through June 30,
2022, but that all other requirements of the Final
2022. In its Fall Reg Flex Agenda, the
DOL
more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual
and the Internal Revenue Code. As of December 31, 2021, a new
retirement accounts are fiduciaries for purposes of
fiduciary rule has not yet been proposed. It has been reported that a proposed new fiduciary rule will be issued following the
appointment of a new Assistant Secretary of Labor for the Employee Benefits Security Administration. In January 2022,
President Biden's nominee for the position advanced through the Senate Health, Education, Labor, and Pensions Committee. As
of February 25, 2022 the nominee has not yet been approved by a full Senate vote.
ERISA
ESG
DOL
DOL
DOL
Proposed
issued for comment, its proposed "Prudence and Loyalty in Selecting Plan Investments and
/Proxy Voting Rule), which would replace the
Proxy Voting Rule), which was issued on December 11, 2020, and its final rule
Rule), which was issued on October 30, 2020. Previously, on March 10, 2021, the
DOL
On October 13, 2021, the
Exercising Shareholder Rights" rule (New
voting and shareholder rights rule (Final
restricting fiduciaries from selecting plan investments on the basis of non-pecuniary factors, such as
ESG
enforcement policy with respect to the Final
Proposed
ESG/Proxy Voting Rule would amend the "Investment Duties" regulation, which addresses the duties of prudence and loyalty
in selecting plan investments and exercising of shareholder rights, including proxy voting. The New
Voting Rule would retain the core principle that the duties of prudence and loyalty require
material risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the
provision of benefits under the plan, but clarify that, when considering investment returns, a fiduciary's duty of prudence may
require an evaluation of the economic effects of climate change and other
course of action. The New
Proposed
investment alternatives as apply to other investments.
/Proxy Voting Rule also would apply the same standards to qualified default
Proposed
plan fiduciaries to focus on
factors on a particular investment or investment
Proxy Voting Rule. The New
issued an indefinite non-
Rule and the Final
factors (Final
ERISA
ESG
DOL
DOL
DOL
DOL
DOL
DOL
DOL
ESG
ESG
ESG
ESG
/Proxy
's final proxy
DOL
ESG
DOL
ESG Rule, the New
/Proxy Voting Rule also would amend the "tie-
In a change from the Final
Proposed
breaker" standard by: (1) imposing a standard that would require a fiduciary to conclude prudently that competing investments,
or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon;
and (2) permitting a fiduciary to select an investment, or an investment course of action, based on economic or non-economic
DOL
benefits other than investment returns. The New
Proxy Voting Rule's requirements for the exercise of shareholder rights, including proxy voting, by: (1) removing from the
current regulation the statement that "the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not
require the voting of every proxy or the exercise of every shareholder right"; (2) removing from the current regulation safe
harbors relating to proxy voting that permit (a) a policy to limit voting resources to particular types of proposals that a fiduciary
has prudently determined are substantially related to the issuer's business activities or are expected to have a material effect on
the value of the investment and (b) a policy of refraining from voting on proposals or particular types of proposals when a plan's
holding in a single issuer relative to the plan's total investment assets is below a quantitative threshold; and (3) eliminating from
the current regulation the requirement that, when deciding whether to exercise, and in exercising, shareholder rights, a plan
fiduciary must maintain records on proxy voting activities and other exercises of shareholder rights.
/Proxy Voting Rule also would adjust the Final
Proposed
DOL
ESG
In a December 10, 2021 comment letter, Federated Hermes commented on the New
with respect to, among other points, the interrelationship between the Final
Proposed
Proxy Voting Rule and the exclusive benefit rule under relevant fiduciary law in the U.S. In its comment letter, Federated
Hermes generally supported the
ERISA
fiduciaries to consider
view would unnecessarily subject fiduciaries to regulatory and litigation risk and expose any final rulemaking to further
scrutiny over time.
's proposal but suggested modifications to certain language that could be read to require
factors independent of the fiduciary's own prudent analysis, which in Federated Hermes'
Proposed
Fiduciary Rule and New
/Proxy Voting Rule
DOL
ESG
DOL
DOL
DOL
ESG
ESG
/
Since the beginning of the fourth quarter 2021, other proposed rules, new guidance and other actions have been issued or taken
that impact U.S. investment management industry participants, including Federated Hermes. For example:
•
On February 14, 2022, the
Climate-Related Financial Risk, to solicit public comment on the
climate-related financial risk. The request contains 22 questions, including whether the
to improve data and analytics that
published a Request for Information (
DOL
ERISA
DOL
RFI
), in furtherance of the Executive Order on
's future work relating to retirement savings and
DOL
should publish research
plan fiduciaries could use to evaluate climate-related financial risks and
12
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•
•
•
•
•
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whether
related financial risks. The comment period will end on May 16, 2022.
plan administrators should be required to publicly report on the steps they take to manage climate-
SEC
proposed new Rule 206(4)-9 under the Advisers Act and new Rule 38a-2 under the
On February 9, 2022, the
1940 Act, as well as other amendments, which constitute new cybersecurity risk management rules and amendments
that purport to enhance cybersecurity preparedness and improve the resilience of investment advisors and investment
management companies against cybersecurity threats and attacks. The new rules and amendments would: (1) require
investment advisors and funds to adopt and implement written policies and procedures that are reasonably designed to
address cybersecurity risks; (2) require investment advisors to report significant cybersecurity incidents to the
on
proposed Form
incidents; and (4) require investment advisors and funds to maintain, make, and retain certain cybersecurity-related
books and records. The comment period will end 30 days after the proposed rules are published in the Federal Register
or on April 11, 2022 (which is 60 days after issuance by the
-C; (3) enhance investment advisor and fund disclosures related to cybersecurity risks and
), whichever is later.
ADV
SEC
SEC
SEC
SEC
upon certain events occurring; (3) require registered private fund advisors, in
proposed new rules and amendments under the Advisers Act intended to enhance the
On February 9, 2022, the
regulation of private fund advisors. The proposed new rules would: (1) require private fund advisors registered with
the SEC to provide investors with quarterly statements detailing information about private fund performance, fees and
expenses; (2) require registered private fund advisors to obtain an annual audit for each private fund and cause the
private fund's auditor to notify the
connection with an advisor-led secondary transaction, to distribute to investors a fairness opinion and a written
summary of certain material business relationships between the advisor and the opinion provider; (4) prohibit all
private fund advisors, including those that are not registered, from engaging in certain activities and practices that are
contrary to the public interest and the protection of investors; and (5) prohibit all private fund advisors from providing
certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all
other types of preferential treatment unless disclosed to current and prospective investors. The
is also proposing
to require all registered advisors, including those that do not advise private funds, to document the annual review of
their compliance policies and procedures in writing. The comment period will end 30 days after the proposed rules and
amendments are published in the Federal Register or on April 11, 2022 (which is 60 days after issuance by the
whichever is later.
SEC
SEC
),
SEC
proposed to reduce risks in the clearance and settlement of securities. The proposed
On February 9, 2022, the
changes would: (1) shorten the standard settlement cycle for securities transactions from two business days after trade
date (T+2) to one business day after trade date (T+1); (2) eliminate the separate T+4 settlement cycle for firm
commitment offerings priced after 4:30 p.m.; (3) improve the processing of institutional trades by proposing new
requirements for broker-dealers and registered investment advisors intended to improve the rate of same-day
affirmations; and (4) facilitate straight-through processing by proposing new requirements applicable to clearing
agencies that are central matching service providers. The comment period will end 30 days after publication in the
Federal Register or on April 11, 2022 (which is 60 days after issuance by the
), whichever is later.
SEC
SEC
reopened the comment period for the pay versus performance proposing release, which
On January 27, 2022, the
was issued in 2015. The proposed rule would amend Item 402 of Regulation S-K to implement Section 14(i) of the
Exchange Act, as added by Section 953 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(Dodd-Frank Act). Section 14(i) of the Exchange Act requires the
compensation actually paid by a registrant relates to the financial performance of the registrant. The comment period
will end on March 4, 2022.
to adopt rules relating to how executive
SEC
SEC
proposed amendments to Form
On January 25, 2022, the
SEC
-registered investment advisors that manage private funds. The proposed amendments would: (1) require new
current reporting of certain events for large hedge fund advisors and advisors to private equity funds; (2) decrease the
reporting threshold for large private equity advisors; and (3) revise reporting requirements for large private equity
advisors and large liquidity fund advisors. The comment period will end on March 21, 2022.
, which is a confidential reporting form for certain
PF
SEC
On January 15, 2022, the
proposed amendments to Rule 10b-5 under the Exchange Act that would: (1) add new
conditions to the availability of the affirmative defense under Exchange Act Rule 10b5-1(c)(1) which allows trading
on behalf of a director, officer or issuer while in possession of material nonpublic information provided certain
conditions are satisfied; (2) creates new disclosure requirements regarding issuers' insider trading policies and
regarding the adoption, modification and termination of Rule 10b5-1 and certain other trading arrangements by
directors, officers and issuers; (3) creates new disclosure requirements for executive and director compensation
13
•
•
•
•
•
regarding the timing of certain equity compensation awards; and (4) updates Form 4 and Form 5 to require corporate
insiders subject to Section 16 of the Exchange Act to identify transactions made pursuant to Rule 10b5-1(c)(1) trading
arrangements and to disclose all gifts of securities on Form 4 (rather than on Form 5). The comment period will end on
April 1, 2022.
SEC
proposed amendments to its share repurchase disclosure rules that would require an
On December 15, 2021, the
regarding repurchases of the issuer's equity
issuer (such as Federated Hermes) to provide disclosure on a new Form
securities for each day that the issuer, or an affiliate, makes a share repurchase. The proposed amendments also would
enhance the existing periodic disclosure requirements about share repurchases in an issuer's annual report on Form 10-
K and periodic (quarterly) Form 10-Q. Federated Hermes believes that daily reporting of share repurchases is
excessive and burdensome. The comment period will end on April 1, 2022.
SR
SEC
proposed a new rule that would require lenders of securities to provide the material
On November 18, 2021, the
terms of securities lending transactions within 15 minutes of "being effected" or modified. The terms must be reported
, which would then make the data available publicly. On
to a registered national securities association, such as
January 7, 2022, Federated Hermes submitted a comment letter to the
proposed rule imposes impractical reporting requirements that are likely to increase transaction costs and undermine an
important source of potential fund income (i.e., securities lending). The comment period ended on January 7, 2022.
in which it expressed concern that the
FINRA
SEC
SEC
proposed amendments to its rules governing proxy voting advice in an effort to
On November 17, 2021, the
enhance proxy advisory firms' ability to deliver independent proxy voting advice to their clients in a timely manner.
The proposed amendments would rescind two rules applicable to proxy advisory firms that the
The proposed amendments rescind conditions to the availability of two exemptions from the proxy rules' informational
and filing requirements on which proxy advisory firms often rely. Those conditions require that: (1) registrants that are
the subject of proxy voting advice have such advice made available to them at or before the time proxy advisory firms
make the advice available to their clients, and (2) clients of proxy advisory firms are provided with a means of
becoming aware of any written responses by registrants to proxy voting advice. The proposed amendments also would
rescind the 2020 changes made to the proxy rules' liability provisions. The comment period ended on December 27,
2021.
adopted in 2020.
SEC
SEC
On November 4, 2021, the
issued a final rule amending Rule 205-3 under the Advisers Act, which addresses
performance-based advisor compensation, to streamline the process relating to the adjustment of the assets under
management and net worth tests for "qualified client" status, and ensure that the rule's text remains at all times
consistent with the inflation adjustment orders periodically issued by the
SEC
.
SEC
re-opened the comment period for its proposal to implement the provisions of Section
On October 14, 2021, the
954 of the Dodd-Frank Act. The proposed rule and rule amendments would direct the national securities exchanges
and national securities associations to establish listing standards that would require each issuer to develop and
implement a policy providing for the recovery (or claw back), under certain circumstances, of incentive-based
compensation that is received by current or former executive officers based on financial information required to be
SEC
reported under the securities laws, and require disclosure of the policy. The proposal was initially issued by the
2015. The comment period ended on November 22, 2021.
in
Investment management industry participants, such as Federated Hermes, also continued, and will continue, to monitor, plan for
and implement certain changes in response to previously-issued, new, proposed or adopted rules and guidance. Previously
proposed and final rules and guidance included, among others: (1) final rules and amendments to the investment advisor
advertising and solicitation rules; (2) a final rule providing an updated regulatory framework for fund valuation practices; (3) a
final rule regulating the use of derivatives in mutual funds and other funds registered under the 1940 Act; (4) final rules and
amendments to the existing regulatory framework governing fund of funds arrangements among investment funds governed by
the 1940 Act; (5) proposed extensive changes to fund shareholder reports and other fund disclosure documents; (6)
staff
statements and other communications related to registered investment companies investing in Bitcoin futures; (7) rule changes
intended to enhance the ability to clear certain trades, particularly those involving repurchase agreements through the Fixed
Income Clearing Corporation; (8) the Presidential executive order prohibiting investment in companies linked to the Republic
SEC
risk alerts and other staff statements; and (9) changes to Form
of China's military and state security apparatus, and related
N-
submitted a comment letter to the
concerns about several elements of the proposed changes that raise operational challenges, may not achieve the
's
objectives and that would place a higher emphasis on voting of proxies relative to an asset manager's fiduciary duty to
proxy voting records. On December 14, 2021, Federated Hermes
regarding the proposed changes to Form N-
to enhance disclosure for mutual fund and
in which Federated Hermes raised
SEC
SEC
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ETF
PX
PX
14
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also has requested comment on the Names Rule to determine whether it can be improved to help ensure that
investors. The
fund names inform and do not mislead investors. Federated Hermes has submitted three comment letters regarding the Names
Rule's application to cash and cash equivalent investments when held for temporary or defensive purposes and its application to
ESG
or sustainable funds. Please refer to our prior public filings for more detailed discussions
of these, and other, previously-issued proposed and final rules and guidance.
-integrated, impact and other
ESG
's
SEC
SEC
SEC
SEC
DOE
DOE
SEC
SPACs
's annual
. According to the
, and 143 "follow-on" administrative proceedings seeking bars
staff continues to engage in a series of investigations, enforcement
released its results for fiscal year 2021, highlighting a seven percent
filed 697 total enforcement actions in fiscal year 2021, including 434 new actions, 120 actions against issuers
In addition to the above Regulatory Developments, the
actions and/or examinations involving investment management industry participants, including investment advisors and
investment management companies such as Federated Hermes' investment advisory subsidiaries and the Federated Hermes
Funds. It has been reported that the
's enforcement focus under the current administration could shift back to publicly-
traded company matters (such as insider trading, issuer reporting, and accounting fraud), and to a more aggressive investor
protection stance. On November 18, 2021, the
increase in enforcement actions over 2020. The report notes enforcement actions across all areas of the securities industry, as
well as emerging new actions, including in respect of digital asset exchanges and
report, the
who were delinquent in making required filings with the
against individuals based on criminal convictions, civil injunctions, or other orders. On October 13, 2021, the
Director of Enforcement announced that he intends to recommend aggressive use of available remedies in enforcement actions,
including, among other remedies, requiring admissions of wrongdoing in certain cases. It also has been reported that the
Division of Examinations is significantly expanding the scope of its examinations involving private markets fund managers. On
DOE
March 3, 2021, the
(1) compliance with Regulation Best Interest and Form
security and operational resilience; (3) financial technology innovation; (4) anti-money laundering programs; (5) the transition
from
disclosures and practices; (7) fund valuation
and other disclosures and fund governance practices; (8) the design, implementation and maintenance of investment advisor and
fund compliance programs and fund liquidity risk management programs; and (9) money market fund compliance with stress-
testing requirements. In addition to routine examinations, additional sweep examinations addressing various topics have been
conducted. For example, as previously announced in June 2021, the
conducted a sweep exam regarding the cyberattack
involving the compromise of software created by the SolarWinds
guidance, the
among others, fixed-income principal and cross trades, managing client assets in wrap programs,
investing and product
, the
offerings, anti-money laundering, suspicious activity monitoring and reporting, digital assets, securities issued by
Executive Order on Securities Investments that Finance Communist Chinese Military Companies, cyber-security, large trader
obligations, investment advisor compliance and the transition from
staff has also issued various guidance statements and risk alerts on a variety of compliance issues, including,
released its examination priorities for 2021, which included, among other priorities:
, as well as investment advisor fiduciary duties; (2) information
to an alternate reference rate; (6) investment advisor and fund
In addition to its Pandemic-related actions and
LIBOR
.
LIBOR
SPACs
's new
Corp.
ESG
CRS
ESG
SEC
SEC
SEC
SEC
SEC
's
These investigations, examinations and actions have led, and can lead, to further regulation, guidance statements and scrutiny of
the investment management industry. The degree to which regulatory investigations, actions and examinations will continue, as
well as their frequency and scope, can vary and is uncertain.
and
DOL
SEC
FINRA
FINRA
) filed with the
also continued, and can continue, to affect
a proposed rule change to amend the provisions of
issued a regulatory
member firms to incorporate government-wide anti-money laundering and countering financing of
SEC
Regulation or potential regulation by regulators other than the
investment management industry participants, including Federated Hermes. For example, on December 20, 2021, the Financial
Industry Regulatory Authority (
2251 (Processing and Forwarding of Proxy and Other Issuer-Related Materials) relating to reimbursement from issuers for
forwarding proxy and other materials and make minor conforming revisions. On October 8, 2021,
notice encouraging
terrorism priorities into their anti-money laundering programs.
trading, bank sweep programs, zero commission and cyber-security sweep examinations. In a 2021 Report on its Examination
and Risk Monitoring Program,
activities, private securities transactions, Regulation Best Interest and Form
cash management accounts and digital assets, best execution and liquidity risk management controls as areas of focus and
potential examination. In addition to federal regulation, various state legislatures or regulators also have adopted or are
beginning to adopt state-specific cyber-security and/or privacy requirements that can apply to varying degrees to investment
management industry participants, including Federated Hermes.
identified, among other areas of concern, anti-money laundering, outside business
examinations have included, among others, options
compliance, misrepresentations relating to
FINRA
FINRA
FINRA
FINRA
Rule
CRS
FSOC
also continue to be monitored by the investment management industry, including Federated Hermes.
The activities of the
In December 2019, the
changed its systemically important designation approach for non-bank financial companies from
an entity-based approach to an activities-based approach under which an individual firm would only be so designated if it were
determined that efforts to address the financial stability risks of that firm's activities by its primary federal and state regulators
FSOC
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FSOC
FSOC
has focused on potential risks in the asset management industry, including
has been required first to focus on regulating activities that pose systemic risk
but are not subject to the 2014 Money Fund Rules and Guidance. As discussed
have been insufficient. Since then, the
through actions by primary regulators. The
money market funds, and other types of cash management vehicles (such as local government investment pools), that continue
to use amortized cost or have a stable
above, the market volatility and liquidity stress on money market funds experienced as a result of the Pandemic beginning in
March 2020 has drawn the attention of U.S. and global regulators, including the
the
FSOC
mitigate risks to financial stability. Any possibility of the
reverting to its pre-December 2019 systemically important
designation practices, and recommending new or heightened regulation for non-bank financial companies, which the Fed's
Board of Governors (Governors) have indicated can include open-end investment companies, such as money market funds and
other mutual funds, increases the potential for further regulation of the investment management industry, including Federated
Hermes and the Federated Hermes Funds.
to reverse its 2019 decision to change its approach as outlined above in order to better fulfill its statutory mandate to
. Certain policy advocates have called for
FSOC
FSOC
FTT
FTT
FTT
) on securities
of 0.5% on stock trades, 0.1% on bond trades, and 0.005% on
proposals have been discussed, none of the bills introduced to date have progressed in Congress.
As a candidate, the current President stated that he is open to the idea of a financial transactions tax (
transactions, an idea proposed by certain former Democratic candidates, including the current Vice President. The Wall Street
Tax Act, introduced in the House of Representatives on January 15, 2021 together with its companion Senate bill introduced on
March 18, 2021, would impose, if enacted, a 0.1% tax on stock, bond and derivatives transactions and reportedly would raise an
estimated $777 billion over a decade. The Tax on Wall Street Speculation Act, introduced in the Senate and House of
Representatives on April 21, 2021, would impose an
derivative transactions. These proposals are being introduced for a variety of reasons, including to fund infrastructure programs
and college education programs or in an attempt to reduce speculation on Wall Street. While Congressional hearings have taken
place during which the
The President initially proposed (and the House Ways and Means Committee approved a reconciliation tax bill) raising the
corporate income tax rate to 26.5%; although the White House later abandoned the proposal in favor of a new separate 15%
minimum tax on firms with more than $1 billion in profit. The President has also proposed a "wealth tax" on the unrealized
investment income of Americans with at least $1 billion in assets, which reportedly is supported by certain Senators who
initially opposed the President's budget proposals. A 1% percent excise tax on the value of stock repurchased by publicly-traded
U.S. corporations also has been proposed. While these tax increases, among others, are being proposed to fund infrastructure
plans and the proposed budget, the President has not signaled an intent to include an
has been introduced in various states, such as New York, New Jersey, and Illinois, that, if enacted, would have imposed
on various types of securities, commodities or other financial transactions. In March 2021, a bill was re-introduced into the U.S.
on security industry participants. As of December 31,
House of Representatives that would prohibit states from imposing
2021, that bill has not progressed in Congress. Management believes that an
, particularly if enacted with broad application,
would be detrimental to investors and Federated Hermes' business and could adversely affect, potentially in a material way,
Federated Hermes' business, results of operations, financial condition, cash flows and/or stock price (collectively Financial
Condition).
in any tax proposals. Legislation also
FTTs
FTTs
FTT
FTT
ESG
The regulatory environment has impacted, and will continue to impact, to various degrees, Federated Hermes' Financial
Condition. For example, Regulatory Developments can result in shifts in product structures, as well as changes in asset flows
and mix and customer relationships. It also remains uncertain the degree to which previously issued Regulatory Developments
will be rescinded or changed. It also remains unclear whether, or to what degree, investment advisors, broker/dealers or other
intermediaries will roll-back, modify or continue changes made prior to the original, vacated
or additional changes in light of the Final
Voting Rule, Final
DOL
Rule, New
fiduciary duty interpretations. As noted above, the
Fiduciary Rule, and has proposed the New
intermediaries continue to reduce the number of Federated Hermes Funds offered on their platforms, mutual fund-related sales
and distribution fees earned by Federated Hermes can decrease. In that case, similar to other investment management industry
participants, Federated Hermes could experience a further shift in asset mix and
operating income. On the other hand, management continues to believe that Federated Hermes' business can 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 Hermes' experience with bank trust departments
and fiduciary experience and resources presents an opportunity to add value for customers.
CRS
/Proxy Voting Rule, Regulation Best Interest, Form
has taken non-enforcement positions with respect to the Final
/Proxy Voting Rule, which increases this uncertainty. If
Fiduciary Rule, the
Proposed
's final investment duty amendments, Final
, and a further impact on revenues and
fiduciary rule, or make new
DOL
Proposed
, or
DOL
DOL
DOL
AUM
DOL
DOL
DOL
DOL
ESG
ESG
Proxy
SEC
Federated Hermes continues to analyze the potential impact of these Regulatory Developments on Federated Hermes' Financial
Condition. Federated Hermes has dedicated, and continues to dedicate, significant and additional internal and external resources
to monitor, analyze and address regulatory responses to the impact from the Pandemic and Regulatory Developments generally,
16
and their effect on Federated Hermes' Financial Condition. Additional internal and external resources have been, and will
continue to be, devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters.
These efforts included, and will continue to include, having conversations internally, and with intermediaries, customers,
service providers, counsel and other advisors regarding Regulatory Developments, and analyzing and/or affecting legislative,
regulatory, product offering, development and structure adjustments, technology or information system development, reporting
capabilities, business processes and other options, in an effort to comply, and/or to assist Federated Hermes' intermediaries and
other customers to comply, with new Regulatory Developments or minimize the potential impact of any adverse consequences
stemming therefrom. As appropriate, Federated Hermes also participated, and will continue to participate, either individually or
with industry groups, in the comment process for proposed regulations. Federated Hermes continues to expend legal and
ESG
compliance resources to examine corporate governance, public company,
and other regulators, to adopt, revise and/or implement policies and procedures, and to
and final rules issued by the
respond to examinations, inquiries and other matters involving its regulators, including the
, customers or other third
parties. Federated Hermes also has devoted, and will continue to devote, resources to technology and system investment,
business continuity, cybersecurity and information governance, and the development of other investment management and
compliance tools, to enable Federated Hermes to, among other benefits, be in a better position to address Regulatory
Developments. In connection with the Pandemic, Federated Hermes has devoted internal and external resources to endeavor to
comply with the requirements of federal and state orders imposing work- and travel-related restrictions, and the requirements
under the
procedures.
's and state and local health departments' guidance, as well as enhanced disinfection and contamination
, climate change, and other disclosure proposals
SEC
CDC
SEC
Federated Hermes is unable to fully assess at this time whether, or the degree to which, any continuing efforts or potential
options being evaluated in connection with modified or new Regulatory Developments ultimately will be successful. The
degree of impact of Regulatory Developments on Federated Hermes' Financial Condition can vary, including in a material way,
and is uncertain.
Management also continues to monitor and assess the potential impact of the Pandemic generally, and the impact of the low
interest rate environment and anticipated increasing interest rate environment on money market fund and other fund asset flows,
and related asset mixes, as well as the degree to which these factors impact Federated Hermes' institutional prime and municipal
(or tax-exempt) money market business and Federated Hermes' Financial Condition. Management also continues to monitor,
and expend resources in connection with, the potential for additional regulatory scrutiny of money market funds, including
prime and municipal (or tax-exempt) money market funds.
The Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or can impact, Federated
Hermes' intermediaries, other customers and service providers, their preferences and their businesses. For example, these
developments have caused, and/or can 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 Hermes Funds offered by intermediaries, changes in the
fees Federated Hermes, retirement plan advisors and intermediaries will be able to earn on investment products and services
sold to retirement plan clients, changes in work arrangements and facility-related expenses, and reductions in AUM, revenues
and operating profits. In addition, these developments have caused, and/or can cause, changes in asset flows, levels and mix, as
well as customer and service provider relationships.
Federated Hermes will continue to monitor regulatory actions in response to the Pandemic and other Regulatory Developments
as necessary and can implement additional changes to its business and practices as it deems necessary or appropriate. Further
analysis and planning, or additional refinements to Federated Hermes' product line and business practices, can be required in
response to market conditions, customer preferences or new or modified Regulatory Developments, such as the new investment
advisor advertising, valuation, derivatives, and fund of funds rules, any proposed changes to the Final
Fiduciary Rule, the
DOL
New
issued by the
/Proxy Voting Rule and other Regulatory Developments, or any additional regulation or guidance
or other regulatory authorities.
Proposed
SEC
,
ESG
DOL
DOL
In addition to the impact on Federated Hermes'
business described above, Federated Hermes' 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 can continue to have, on a cumulative basis, a material impact on Federated Hermes' expenses and, in turn, financial
performance.
, revenues, operating income and other aspects of Federated Hermes'
AUM
As of December 31, 2021, given the regulatory environment, the Pandemic and the possibility of future additional regulation or
oversight, Federated Hermes is unable to fully assess the impact of regulatory actions in response to the Pandemic or other
17
Regulatory Developments, and Federated Hermes' efforts related thereto, on its Financial Condition. Modified or new
Regulatory Developments in the current regulatory environment, and Federated Hermes' efforts in responding to them, could
have a material and adverse effect on Federated Hermes' Financial Condition. As of December 31, 2021, management also
believes that any designation as a systemically important non-bank financial company, or any reforms ultimately put into effect
by the
affect Federated Hermes' Financial Condition.
, would be detrimental to Federated Hermes' money market fund business and could materially and adversely
FSOC
Current Regulatory Environment - International
Similar to the situation in the U.S., in 2021, as the Pandemic continued, the regulatory environment globally shifted away from
the adoption of measures intended to provide regulatory flexibility. In its October 27, 2021 Annual Report, the Financial
Stability Board (FSB) noted that the outlook for financial stability continued to be dominated by the Pandemic, with the
recovery being uneven across economies and sectors and financial vulnerabilities related to stretched asset valuations and high
non-financial sector debt. In an October 28, 2021 final report to the G20, the
resilience, operational resilience and crisis preparedness as key policy objectives. While the full impact of the Pandemic
UK
remains unclear as of the first quarter of 2022, regulators in the
granted in 2020 to expire, while extending other relief, continue policy efforts to address the effects of the Pandemic and related
market instability, and advance new and proposed consultations, directives, regulations and laws. These Regulatory
Developments continue to impact the investment management industry in the
have continued to allow certain regulatory relief
highlighted market and institutional
and
and
FSB
UK
.EU
EU
, the transition period under the European Union Withdrawal Agreement Bill (Withdrawal Agreement Bill), which
UK
In the
implemented the agreement reached between the
UK
's withdrawal from the
Cooperation Agreement (
mutual market access for services, removes any role for the European Court of Justice in the
requirement for the
and
(Brexit), ended on December 31, 2020. On December 30, 2020, the
) became effective. Among other things, the
regarding a range of policy areas and
data protection directives. The
participation in certain
and the other 27
to comply with
EU
TCA
programs.
TCA
TCA
EU
UK
EU
UK
UK
UK
EU
EU
Member States and set out the arrangements for the
EU
–
provides for free trade for goods and limited
Trade and
UK
, and eliminates the
also provides for cooperation between the
UK
. See Item 1A
UK
Political, economic, legal and regulatory uncertainty continues regarding the impact of Brexit on a post-Brexit
- Risk Factors - General Risk Factors - Economic and Market Risks - Potential Adverse Effects of a Decline or Disruption in
the Economy or Markets and General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in
Laws, Regulations and Other Rules for further discussion of the risks of political instability, currency abandonment and other
market disruptions on Federated Hermes and its business. Brexit has affected, and will likely continue to affect, the
EU
UK
,
requirements and/or timing of implementation of legislation and regulations applicable to doing business in the
including the laws and regulations applicable to Federated Hermes, as well as to the sponsoring, management, operation and
distribution of Federated Hermes' products and services, both within and outside the
European Securities and Markets Authority (
Benchmark Regulation, which indicates that
December 31, 2023 and that this transition period is also recognized in the
Commons Treasury Committee published the
Government's response (Response) to its report on the Future Regulatory
Framework of Financial Services, which was published on June 30, 2021. Among other key points, the Response expresses
support for incorporating into
regulators are continuing with the process of rationalizing the
shored" upon Brexit taking effect. In October 2020, the
and other
among others, certain reporting obligations and market abuse requirements.
EU
. On March 24, 2021, the
) issued an updated statement on the consequences of Brexit under the
regulators granted firms until March 31, 2022 to comply with certain of these regulatory changes including,
financial services rules that were "on-shored" into the
-supervised entities can continue to use third-country
Financial Conduct Authority (
), the Bank of England (BoE)
. On September 20, 2021, the
as a result of Brexit.
benchmarks until
legislation and regulatory requirements that were quickly "on-
ESMA
EU
House of
FCA
and
and
UK
UK
UK
UK
EU
UK
UK
UK
UK
UK
UK
law
EU
HM
UK
's financial services regulatory framework and the
Treasury) published, "Financial Services Future Regulatory Framework
On November 9, 2021, Her Majesty's Treasury (
UK
Review: Proposals for Reform," its second consultation on the
framework for financial services following Brexit. The consultation builds on a previous consultation, and seeks to build on the
strengths of the
's existing model of regulation established by the
Financial Services and Markets Act 2000. It sets forth proposals: (1) to include changes to regulators' statutory objectives,
including giving
EU
UK
and implementing regulatory requirements to the
period ended on February 9, 2022.
broader rule-making powers to establish new
regulation is gradually repealed; (2) for enhanced mechanisms for accountability, scrutiny and oversight of the regulators by
Parliament,
Treasury intends to return responsibility for designing
Treasury and stakeholders; and (3) as to how
regulators, a break from the approach under
government's proposals for adapting the
financial conduct standards as
law. The consultation
Treasury and the
regulatory
FCA
HM
HM
UK
HM
UK
UK
UK
EU
18
UK
UK
UK
UK
TCA
FCA
FCA
EEA
UK
. On January 18, 2022, the
)-domiciled
, and allows
-based firms that passported into the
authorization. On March 4, 2021, the
to continue new and existing regulated business within the scope of their
UK
for up to five years, while they seek full
temporary permissions regime by advising firms of the opening and closing dates (or landing slot)
addresses the financial services industry, it does so on a limited basis and does not provide for passporting
has implemented a temporary permissions regime that allows European Economic Area (
under a passport to continue temporarily to be marketed in the
While the
rights nor address equivalence decisions. Passporting ended at the expiration of the Brexit transition period and firms now must
rely on temporary permission regimes and comply with the local laws of each country. Regarding providing a replacement for
passporting, the
investment funds that were marketed in the
EEA
permissions in the
further guidance on the
during which firms must either apply for full permission or cancel their temporary permission and then cease any regulated
financial conduct in the
business while in the temporary
relying on the temporary permissions regime, where appropriate, cannot expand their
permissions regime. The
also indicated that, if firms miss their landing slot, fail to respond to mandatory information
requests, do not intend to apply for full authorization, or have their authorization application refused, and do not voluntarily
leave the temporary permissions regime, the
contracts regime that allows, for a limited time,
the
them to conduct an orderly exit from the
Netherlands, Italy and Germany, also have adopted similar temporary permission regimes or other laws to permit
to be sold, and
implemented by the Withdraw of the United Kingdom from the European Union (Consequential Provisions) Bill 2020, a firm
that is authorized in the
and/or Gibraltar, which has previously passported into Ireland, will be deemed to be authorized for
specific and limited purposes in Ireland for a 15-year period following the end of the transition period, subject to the fulfillment
of certain conditions.
UK
also has created a financial services
-based firms not taking advantage of the temporary permissions regime in
financial transactions to continue, for a period of time in their countries. Pursuant to amendments
customers under contracts entered into prior to the end of the transition period in order for
issued a statement indicating that it would seek to ensure that firms
governments, such as, among others, France, the
will take action to remove them. The
to continue to service
. In addition to the
provided
products
FCA
FCA
FCA
FCA
UK
EEA
EU
,
UK
UK
EU
UK
UK
UK
UK
UK
-
HM
HM
HM
.
UCITS
UCITS
Treasury used the Financial Services Act 2021 to formally introduce the
Treasury released a consultation paper proposing an Overseas Fund Regime (
OFR
) which is targeted at
) and would be a long-term replacement to the
funds to continue to be marketed in the
after
Treasury proposed this equivalence regime which will determine countries which are equivalent to the
In March 2020,
Undertakings for the Collective Investment in Transferable Securities (
temporary permissions regime which enabled Federated Hermes' Irish
December 31, 2020.
UK
retail funds to be able to market to
Treasury has also
proposed a separate regime for money market funds to be able to market to all investors, noting that the process will be
different if the fund wants to market to retail or professional investors. These regimes will function similarly to the existing
FCA
approach to equivalence.
and different fund types in order to identify those that can take advantage of the
OFR
requirements that will apply under the
process. Federated Hermes has received permission from the
Luxembourg-based direct lending funds to continue to be marketed in the
to undertake equivalence assessments for different countries
is continuing to consider the
and whether those funds will need to put in place some form of value assessment
investors, including retail investors, on appropriate terms.
under the temporary permissions regime.
as an equivalence regime for overseas
to allow certain Irish-domiciled
Treasury is working with the
funds and
UCITS
. The
OFR
OFR
FCA
FCA
HM
HM
UK
UK
EU
UK
EU
HM
and
FCA
,
ESMA
regulators previously signed memoranda of understandings (MoUs) covering
Regarding equivalency, the
cooperation and exchange of information that came into effect at the end of the transition period (i.e., on December 31, 2020)
and provide for some level of regulatory coordination and mutual equivalence until a new regime is agreed and in place. On
agreed to
March 26, 2021,
Treasury announced that technical discussions had concluded, and that the
UK
another MoU that creates a framework for voluntary regulatory cooperation in financial services and establishes a Joint
-
Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services matters. The MoU,
however, does not reflect progress on equivalency determinations. In addition to a few other equivalency decisions, such as two
time-limited equivalency decisions in connection with the
securities, on June 26, 2021, the European Commission issued two adequacy decisions recognizing the level of protection of the
UK
continue after Brexit. In September 2021, as part of a broader announcement on the future of the
the
countries, including the U.S., Australia, Singapore and others.
EU
, in addition to those granted to 32 other jurisdictions.
Government announced plans to work on granting adequacy decisions regarding the data protection laws of other
HM
laws. These adequacy decisions allow
UK
relating to central counterparty clearing and settlement of Irish
Treasury has granted over 25 equivalency decisions to the
EU
's data protection regime,
's data protection laws as "essentially equivalent" with
data flow to
and the
UK
UK
UK
EU
EU
UK
EU
to
Despite these developments, there remains a risk of regulatory divergence between the
Sunak, the
EU
regulations) with
EU
Chancellor of the Exchequer, called an end to negotiations with the
financial services regulation. This decision means that the
investment firms in
. On July 1, 2021, Rishi
UK
on regulatory equivalence (or common
has elected to have its own financial rules.
) and Investment
Member States were required to comply with the Investment Firms Directive (
and the
UK
IFD
EU
EU
UK
EU
19
EU
UK
UK
UK
IFR
IFR
IFR
IFD
IFD
and
KID
and
and
IFD
IFPR
IFPR
. The
in the
as a new
, however, do not
IFR
, and a new
) was included in the Financial Services Bill 2019-2021, which was based on the
's on-shored Packaged Retail and Insurance-based Investment Products Regulation (
) by June 26, 2021, the effective date of the
UK
law as the Financial Services Act
prudential regime for investment firms; (2) amended
prudential regime for Markets in Financial Instruments (MiFID) firms titled Investment Firms
. On
Firms Regulation (
UK
bind the
Prudential Regime (
April 29, 2021, the Financial Services Bill 2019-2021 received Royal Assent and became
2021. Among other things, this Act: (1) introduced the
the
additional powers to clarify the scope of the regulations and amend the requirements within the
to ensure a smooth transition away from
Document (
); (3) increased the power of the
FCA
process enabling non-UK investment funds to be marketed in the
make general rules providing that authorized persons owe a duty of care to consumers. On June 29, 2021, the
first of three policy statements based on a prior consultation on the
that set forth "near final" rules on consolidation, own-
UK
fund requirements, and concentration risk, which will apply to
issued
its second policy statement, which set forth industry feedback to the first policy statement, and additional "near-final" rules to
supplement and amplify those rules that were set forth in the first policy statement. On August 6, 2021, the
IFPR
another consultation on the
closed on September 17, 2021. On November 26, 2021, the
on the
became effective on January 1, 2022, introduced a single prudential regime and represents a significant change for
authorized investment firms in the
MiFID top-up permissions.
with additional disclosure requirements and other technical changes. The consultation period
published its final policy statement setting out its final rules
PRIIPs
Key Information
LIBOR
; (4) simplified the
to consult on whether it should
FCA
IFPR
-authorized MiFID firms. On July 26, 2021, the
that are authorized under MiFID, including alternative investment fund managers with
, which implement most of the policy proposals set forth in the
's consultation papers. The
; and (5) required the
, which
FCA
-
) to provide the
published
issued its
PRIIPs
IFPR
IFPR
with
FCA
FCA
FCA
FCA
FCA
FCA
UK
UK
EU
regulators have previously issued or proposed directives, rules and laws regarding sustainable finance,
As another example,
including the Sustainability-Related Disclosures Regulation or Sustainable Finance Disclosure Regulation (
Taxonomy Regulation. The Taxonomy Regulation establishes a framework to facilitate sustainable investment, including when
Member States establish measures (e.g., labels or standards) setting requirements regarding financial products or corporate
bonds presented as "environmentally sustainable." On April 21, 2021, the European Commission issued a Sustainable Finance
EU
Package that contained: (1) an
clarifying which economic activities most contribute to meet the
Sustainability Reporting Directive (
) and revisions to the Non-Financial Reporting Directive, which aim to make
sustainability reporting by companies more consistent, so that financial firms, investors, and the broader public can use
comparable and reliable sustainability information; and (3) amendments to delegated acts to better reflect sustainability
preferences in insurance and investment advice and sustainability considerations in product governance and fiduciary duties.
The amendments provide for a 12-month implementation period that is expected to end in October 2022.
Taxonomy Climate Delegated Act, which aims to support sustainable investment by
's environmental objectives; (2) a proposal for a Corporate
) and the
CSRD
SFDR
EU
EU
TRV
ESAs
ESMA
) Report" in which it assessed
published a "Trends, Risks and Vulnerabilities (
), the European Commission stated that, due to the length and
On May 7, 2021, the European Commission published a draft delegated act setting out definitive standards for the disclosure of
information on environmental sustainability that certain large companies must make, as required under the Taxonomy
Regulation. On June 8, 2021,
investment funds' exposure to climate-sensitive economic sectors and identified certain key risks. On July 6, 2021, the
European Commission adopted a delegated regulation that supplemented certain disclosure requirements under the Taxonomy
Regulation which specified the content, methodology and presentation of information that certain large financial and non-
financial entities must disclose concerning their environmentally-sustainable economic activities. By letter dated July 23, 2021,
addressed to the European Supervisory Authorities (
technical detail of the Level 2 technical standards, their late submissions, and forthcoming amendments to the draft Level 2
technical standards, the European Commission will bundle all of the regulatory technical standards in a single delegated act and
defer the date of application from January 1, 2022 to July 1, 2022. On July 26, 2021, the European Commission published
updated Questions and Answers concerning a number of questions raised by the
including the application of the
Fiduciaries (
sustainable finance initiatives regarding sustainability risks and sustainability factors to be taken into account by
and investment firms, among other regulated entities. On August 3, 2021, the Platform on Sustainable Finance: Technical
Working Group published a draft report on preliminary recommendations for technical screening criteria for the Taxonomy
Regulation. Comments on the report were due by September 24, 2021, with the results analyzed and submitted to the European
Commission in November 2021. On October 7, 2021, the European Parliament issued a press release announcing the rejection
of a supplement to the Taxonomy Regulation that would have specified the technical screening criteria under which certain
economic activities qualify as contributing substantially to climate change mitigation and climate change adaptation and for
determining whether those activities cause significant harm to any other relevant environmental objectives. On October 22,
2021, the
). On August 2, 2021, the European Commission published additional regulations and a directive as part of its
UCITS
published their final report on the draft taxonomy regulatory technical standards for financial product
regarding the application of the
) and Accredited Investment
to Alternative Investment Fund Managers (
ESAs
AIFM
SFDR
,
ESAs
SFDR
AIFs
AIF
,
20
. The final regulatory technical standards aim to create a single "rulebook" for sustainability-related
SFDR
pre-contractual and periodic product disclosures. These final rules for taxonomy reporting for financial
disclosures under the
SFDR
disclosures for
products diverge from those for financial undertakings themselves for which the Delegated Act for Taxonomy Article 8 apply.
The European Commission notified the European Parliament and the European Council of a further six-month delay (from July
2022 to January 1, 2023) to the application of the delegated act regulatory technical standards that will set out the detailed
requirements regarding the form and content of disclosures to be made for financial products under the
SFDR
.
's
UK
UK
UK
UK
ESG
FSB
disclosure rules aligning with
TCFD
TCFD
TCFD
TCFD
SFDR
UK
issued a statement
proposed to introduce
-regulated market disclose
announced on November 9, 2020 that it will introduce
government solicited views on proposals to require that
-aligned disclosure requirements for asset managers, life insurers and
, the
the first country to adopt that approach. On December 22, 2020, the
-aligned climate-related information. The consultation stated that new
published "Consultation Paper 21/17:
-regulation pension providers" in which the
Rather than adopt the
the
, making the
encouraging the International Financial Reporting Standards Foundation and financial authorities to use the
recommendations as the basis for standards for climate-related financial disclosures. In a consultation launched on March 24,
2021, the
companies with more than 500 employees that are
traded on a
regulations would come into force on April 6, 2022. On June 22, 2021, the
Enhancing climate-related disclosures by asset managers, life insurers and
FCA
providers, with a focus on the information needs of clients and consumers. The
climate disclosure requirements to all companies with standard listed equity shares, except for standard listed investment
entities and shell companies. The consultation period ended on September 10, 2021. Based on its June 2021 consultation, on
December 10, 2021, the
insurers and
guidance for asset managers and certain
portfolio level consistent with
Policy Statement on "Enhancing client-related disclosures by standard listed companies" in which the
application of its climate-related disclosure requirements to issuers of standard listed shares and Global Depositary Receipts
representing equity shares (but not listed investment entities and shell companies). On November 3, 2021, the
discussion paper, "Sustainability Disclosure Requirements (
new sustainability disclosure requirements for asset managers and
and labelling system for sustainable investment products. The consultation period ended on January 7, 2022.
published a Policy Statement, "Enhancing climate-related disclosures by asset managers, life
sourcebook containing rules and
introduced a new
-regulated asset owners to make disclosures at an entity level and product or
recommendations on an annual basis. On December 10, 2021, the
-regulated pension providers," in which the
) and investment labels" in which the
also proposed to extend the
-regulated asset owners, as well as a new classification
sought views on
also published a
extended the
FCA
FCA
TCFD
FCA
-regulated pension
-aligned
TCFD
published a
FCA
FCA
SDR
FCA
FCA
FCA
FCA
FCA
FCA
FCA
FCA
ESG
TCFD
On June 7, 2021, the
began to seek public comment on two documents, "Proposed Guidance on Climate-related Metrics,
Targets, and Transition Plans," and the associated, "Measuring Portfolio Alignment: Technical Supplement," in order to update
its final recommendations on climate-related financial disclosures as disclosure practices and the use of disclosures by financial
and non-financial organizations continued to progress. In a July 10, 2021 statement, the G20 Finance Ministers indicated that,
"[w]e will work to promote implementation of disclosure requirements or guidance, building on the [
with domestic regulatory frameworks, to pave the way for future global coordination efforts, taking into account jurisdictions'
circumstances, aimed at developing a baseline global reporting standard." Based on its June 2021 consultations, on October 14,
released a new guidance document on climate-related metrics, targets, and transition plans. This new guidance
2021, the
seeks to support organizations that make
-aligned disclosures in preparing decision-useful metrics, targets, and transition
plan information and linking that information to estimates of financial impact.
] framework, in line
TCFD
TCFD
TCFD
Despite a continuing possibility of negative deposit interest rates, euro-denominated European money market funds have
successfully operated and provided investors with high quality diversified investments which continue to provide same day
liquidity, first through the use of an approved share cancellation methodology and more recently through the use of
) on appropriate
accumulating share classes. Federated Hermes has worked with the
permissions to operate in each jurisdiction, in a manner similar to euro-denominated money market funds, should official rates
in U.S. dollars or British pound sterling become negative.
and the Central Bank of Ireland (
FCA
CBI
EU
EU
EU
UK
and
EU
and
funds and
, increasing regulatory burdens and compliance and other costs for
funds (such as Irish-domiciled funds) being distributed in the
UK
The post-Brexit regulatory environment (particularly the need to obtain full authorizations on a country-by-country basis) also
creates a level of uncertainty regarding the ability and requirements to distribute products and provide investment management
services between the
funds being distributed
The ability to engage investment managers
in the
-domiciled funds.
for
The impact of Brexit on Federated Hermes'
domiciled funds is difficult to quantify and remains uncertain given the overlap
with the Pandemic and recent surge in the number of
December 31, 2021, Brexit has not had a material adverse effect on Federated Hermes' Financial Condition. As of
December 31, 2021,
Federated Hermes' Irish-domiciled funds were permitted to remain in the funds. Subscriptions also can continue as long as there
funds also could be impacted, resulting in structural and other changes for
-resident shareholders in Federated Hermes'
-related money market funds in both the
domiciled funds and the
-resident shareholders in
. As of
- and
and
ESG
UK
UK.
UK
UK
UK
UK
UK
EU
EU
EU
21
is not a proactive sales effort. Regarding the regulatory environment for money market funds post-Brexit,
UK
market funds remain on par with current
simply not adopt - any new or amended
regulatory requirements; however, it is possible that the
money market fund laws, rules or regulations that may be adopted in the future.
UK
-domiciled money
may deviate from - or
EU
EU
FSB
FSB
IOSCO
and the
highlighted the
also continue to be monitored by the investment management industry, including
The activities of the
Federated Hermes. Building on consultations and other reports published from 2015 through 2021 regarding methodologies for
identifying non-bank, non-insurance company global systemically important financial institutions, recommendations to address
structural vulnerabilities from asset management activities, and liquidity risk management,
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. In its October 27, 2021 Annual
Report, the
risks, including, among others, work to: (1) enhance the resiliency of non-bank financial intermediaries; (2) enhance cyber
incident response and recovery; (3) address "global stablecoin" arrangement risks; (4) enhance cross-border payments; and
(5) address climate-related financial risks. The
October 19, 2021 report issued by the
Convergence" in which the
reporting: (1) the development of best practices that authorities could consider when developing their cyber incident reporting
regime; (2) the identification of common types of information to be shared, including identifying and reducing legal and
operational impediments to sharing such information; and (3) the creation of common terminologies for cyber incident
reporting, including a common definition of "cyber incident."
's statements in its Annual Report on cyber incidents followed an
on "Cyber Incident Reporting: Existing Approaches and Next Steps for Broader
identified three ways that it will work to achieve greater convergence in cyber incident
's policy work to foster global financial stability in response to the Pandemic and emerging
have continued,
IOSCO
FSB
FSB
FSB
FSB
FSB
and
IOSCO
IOSCO
IOSCO
published its Final Report setting forth its "Recommendations on
also indicated that, among other efforts, it will continue efforts (headed by the
In its 2021-2022 work program, published February 26, 2021,
indicated that its priorities include financial stability and
systemic risks of non-bank financial intermediation activities, as well as risks exacerbated by the Pandemic, such as misconduct
risks, fraud, and operational resilience.
Sustainable Finance Task Force) to improve the completeness, consistency, and comparability of sustainability reporting. Based
on a prior consultation, on November 2, 2021,
Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management," which aims to improve
sustainability-related practices, policies, procedures and disclosures in the asset management industry through five
recommendations for securities regulators and policymakers. The five recommendations are: (1) setting regulatory and
supervisory expectations for asset managers in respect of the development and implementation of practices, policies and
procedures relating to material sustainability-related risks and opportunities, as well as related disclosure; (2) clarifying or
expanding on existing, or adopting new, regulatory requirements to improve product-level disclosure to help investors
understand sustainability-related products and material sustainability-related risks for all products; (3) providing securities
regulators and policymakers access to supervisory tools to assess whether asset managers and sustainability-related products are
in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements; (4) securities
regulators and policymakers encouraging asset management industry participants to develop common sustainable finance-
related terms and definitions, including related to
management industry; and (5) securities regulators and policymakers considering to promote financial and investor education
initiatives relating to sustainability or enhance existing sustainability-related initiatives.
approaches, to ensure consistency throughout the global asset
ESG
ESG
IOSCO
IOSCO
ESG
ESG
ratings and data products and
) Ratings and Data Providers" in which
noted that "the use of environmental, social and governance (
issued a Final Report on "Environmental, Social and Governance
) ratings
ESG
ratings and data products providers could consider adopting and
Based on a prior consultation, on November 23, 2021,
ESG
(
and data products has grown considerably . . ." and sets forth 10 recommendations. The recommendations are: (1) regulators
could consider focusing more attention on the use of
providers that may be subject to their jurisdiction; (2)
implementing written procedures designed to help ensure the issuance of high quality
ratings and data products based on
publicly disclosed data sources where possible and other information sources where necessary, using transparent and defined
methodologies; (3)
ratings and data products providers could consider adopting and implementing written policies and
procedures designed to help ensure their decisions are independent, free from political or economic interference, and
appropriately address potential conflicts of interest that may arise from, among other things, the
providers' organizational structure, business or financial activities, or the financial interests of the
ESG
products providers and their officers and employees; (4)
avoiding or appropriately managing, mitigating and disclosing potential conflicts of interest that may compromise the
ratings and data
independence and objectivity of the
ESG
products providers could consider making adequate levels of public disclosure and transparency a priority for their
and data products, including their methodologies and processes to enable the users of the product to understand what the
product is and how it is produced, including any potential conflicts of interest, while maintaining a balance with respect to
data
ratings and data products providers could consider identifying,
data products provider's operations; (5)
ratings and data products
ratings and data products
ESG
ESG
ratings and
ratings and
ratings
ESG
ESG
ESG
ESG
ESG
ESG
22
ESG
ESG
ratings and data products providers could consider
ratings and data products that they use in their internal processes, including understanding what is
proprietary or confidential information, data and methodologies; (6)
adopting and implementing written policies and procedures designed to address and protect all non-public information received
from or communicated to them by any entity, or its agents, related to their
appropriate in the circumstances; (7) market participants could consider conducting due diligence or gathering and reviewing
information on the
being rated or assessed by the product, how it is being rated or assessed and, limitations and the purposes for which the product
is being used; (8)
entities covered by their products in a manner that leads to more efficient information procurement for both the providers and
ESG
these entities; (9) where feasible and appropriate,
addressing issues flagged by entities covered by their
products; and (10) entities subject to assessment by
disclosure processes for sustainability related information to the extent possible, bearing in mind applicable jurisdictions'
regulatory and other legal requirements.
ratings and data products providers could consider responding to and
ESG
ratings and data products while maintaining the objectivity of these
ratings and data products providers could consider streamlining their
ratings and data products providers could consider improving information gathering processes with
ratings and data products, in a manner
ESG
ESG
ESG
IOSCO
published its final report providing a thematic review of the consistency in implementation of
On November 20, 2020,
money market reforms across the nine largest money market fund jurisdictions. In this report,
jurisdictions generally implemented money market fund reforms in line with 2012
policy recommendations for money
market funds, but that market conditions in March 2020 highlighted continuing vulnerabilities in certain types of money market
funds and the need for further reforms. Similar to the PWG Report in the U.S.,
IOSCO
during the March-April Episode," (
functioning of money market funds, investor behavior and elements of the existing regulatory framework for money market
funds which could have played a role in accelerating the outflow of assets from non-government money market funds in March
2020.
Paper called for further consideration of the
issued a paper, "Money Market Funds
Paper) in November 2020. The
concluded that these
IOSCO
IOSCO
IOSCO
IOSCO
FSB
FSB
published a consultation report,
Report) published in November 2020, on June 30, 2021, the
Following prior speeches and reports on the need for money market fund reforms, including the "Holistic Review of Money
Market Turmoil" (
"Policy Proposals to Enhance Money Market Fund Resilience," in which it identified characteristics of money market funds
that, in their view, make them susceptible to vulnerabilities, such as sudden and disruptive redemptions and the forced sale of
assets to meet significant redemptions. The
including: (1) swing pricing; (2) minimum balance at risk; (3) capital buffers; (4) removing ties between regulatory thresholds
and imposition of fees and gates; (5) removing stable
; (6) limiting eligible assets; and (7) imposing additional liquidity
requirements and escalation procedures. The
August 16, 2021 comment letter to the
combination of delinking the potential imposition of redemption gates and liquidity fees from a money market fund's weekly
liquid asset requirements and enhancing money market funds' ability to "know their customer", when combined with
consideration of, and improvements in, the short-term funding markets generally, can address the
adversely impacting the viability of money market funds and their benefits to investors, issuers and capital formation.
, among other comments, Federated Hermes expressed its belief that the
also evaluated policy proposals purporting to enhance funds' resilience,
held a virtual workshop on the policy proposals on July 12, 2021. In an
's concerns without
NAVs
FSB
FSB
FSB
FSB
FSB
and
IOSCO
reports, similar to the
ESMA
As a result of these
money market fund regulation. On March 26, 2021,
money market regulation. Similar to the
played by money market funds in the March 2020 market turmoil, perceived structural vulnerabilities of money market funds
and possible money market fund regulatory reforms that could be adopted. Most of the proposed reforms are similar to those set
forth in the
gates. The consultation period closed on June 30, 2021. Among other comments, Federated Hermes provided to
comments to those provided to the
SEC
published a consultation paper on the legislative review of the
Review, this consultation reviewed the role
Report, including decoupling the link between regulatory liquid asset thresholds and redemption fees and
regulators are re-examining existing
EU
in response to its consultation discussed above.
in the U.S.,
Paper and
similar
IOSCO
Report,
ESMA
PWG
PWG
FSB
FSB
UK
and
EU
The BoE also published a May 12, 2021 speech by BoE Governor Andrew Bailey in which he advocated for reforms to money
market regulations in response to the March 2020 "dash for cash". The proposals outlined by Mr. Bailey in that speech align to
the proposals of other global regulators, including U.S. regulators. The five proposals discussed were: (1) redemption terms
should be aligned with the underlying liquidity of assets; (2) running minimal maturity mismatch risk; (3) money market funds
should not hold less liquid assets on a scale that would make them more suitable to be traditional investment funds; (4) money
market funds should not be designed with regulatory thresholds or cliff-edges which create adverse incentives and amplify first-
mover advantage behavior; and (5) reforms should improve the ability of funds to support short-term funding markets,
including by making them more resilient. On July 13, 2021, the BoE published a report, "Assessing the resilience of market-
based finance," which set forth the conclusions from a joint BoE and
mismatches in open-end funds, including money market funds. Regarding money market funds, the report stated: "To address
vulnerabilities in the global money market fund sector, a robust and coherent package of international reforms needs to be
review of the vulnerabilities associated with liquidity
FCA
23
identified. As noted in a speech by the Governor of the BoE, it is important that any package removes the adverse incentives
introduced by liquidity thresholds related to the use of suspensions, gates and redemption fees." The report identified the
following three priorities for remediating vulnerabilities in market-based finance: (1) limiting the demand for liquidity rising
unduly in stress periods; (2) increasing the resilience of the supply of liquidity in stress periods; and (3) agreeing upon
appropriate options for central banks to backstop market function. The report also discussed possible frameworks for
consistently and realistically classifying the liquidity of fund assets and enhancing the calculation and use of swing pricing.
ESRB
MMFs
) published an "Issues note on systemic vulnerabilities of and
ESRB
On July 1, 2021, the European Systemic Risk Board (
preliminary policy considerations to reform money market funds (
provided an overview of the
money market fund sector in the EU, set out its analysis of systemic vulnerabilities in money market funds, and identified a
broad set of preliminary policy options for money market fund reform. The Issues note, which primarily focused on non-public
debt money market funds (i.e., non-Government money market funds), identified the following systemic vulnerabilities: (1) the
large footprint for these money market funds in the commercial paper and certificate of deposit markets; (2) high portfolio
overlap; (3) lack of reliable asset liquidity in the commercial paper and certificate of deposit markets; and
(4) interconnectedness and the pressure a low interest rate environment places on liquidity. The Issues note also identified the
following initial policy options for money market fund reform, among others: (1) decoupling regulatory thresholds; (2) capital
requirements and buffers; (3) implementing redemption holdbacks; (4) imposing notice periods for redemptions; (5) removing
stable
money market funds; and (6) improved availability and use of swing pricing.
)," in which the
NAV
EBA
) published a consultation paper "Draft Regulatory Technical
On July 26, 2021, the European Banking Authority (
Standards on criteria for the identification of shadow banking entities under Article 394(4) of Regulation (
) No 575/2013"
that purported to set out criteria for the identification of shadow banking entities for the purposes of reporting large exposures.
defined as
In the consultation, the
entities that offer banking services and perform banking activities as defined in the draft regulatory technical standards but are
not regulated and are not being supervised in accordance with any of the acts that form the regulated framework for banking.
Among other things, the consultation solicited comments on whether money market funds should be considered shadow
banking entities. The consultation period ended on October 26, 2021.
funds as conducting shadow banking, which the
discussed money market
UCITS
EBA
EBA
EU
On September 17, 2021, the Managing Director of the International Monetary Fund (
March 2020 global financial crisis exposed fundamental vulnerabilities that could affect global financial stability, and
advocating that global financial regulators work together to boost the resilience of investment funds. The Managing Director
identified money market funds as particularly vulnerable to redemptions triggered by economic shocks and advocated for
certain policy measures to address the identified vulnerabilities. In a November 2, 2021 comment letter to the IMF, Federated
Hermes noted that the problems experienced in March 2020 in the short-term markets did not relate to the regulation or
structure of money market funds, but rather resulted from the government-imposed lockdown of global economies. In addition
suggested that enhancing regulation surrounding
to other points discussed below, Federated Hermes' comment letter to the
"know your customer" requirements in both the U.S. and
manage its liquidity in all market conditions.
would significantly improve a money market fund's ability to
) released a report stating that the
IMF
IMF
EU
FSB
FSB
FSB
FSB
FSB
Final Report, the
Final Report") in which the
found that money market funds are subject to two broad types of vulnerabilities that
issued its "Policy Proposals to Enhance Money Market Fund
set forth its final policy proposals for money market fund
Based on the prior consultation, on October 11, 2021, the
FSB
Resilience: Final Report" ("
reform. In the
can be mutually reinforcing: (1) susceptibility to sudden and disruptive redemptions; and (2) challenges in selling assets,
particularly under stressed conditions. The proposals included mechanisms to: (1) impose on redeeming fund investors the cost
of their redemptions (i.e., swing pricing); (2) absorb credit losses; (3) address regulatory thresholds that may give rise to cliff
effects; and (4) reduce liquidity transformation. In the
to
review progress made by member jurisdictions in adopting reforms to enhance money market fund resilience, which are to be
completed by the end of 2023, and then to assess the effectiveness of those measures in addressing risks to financial stability by
2026. Based on its prior consultation, on November 1, 2021, the
Resilience of Non-Bank Financial Intermediation" in which it summarized the progress of, and key findings from, its work on,
among other things, policies to enhance money market fund resilience, including with respect to the appropriate structure of the
sector and of underlying short-term funding markets and to assess liquidity risk, and its management in open-end funds,
including the redemption pressures faced by such funds in March 2020 and their drivers, the availability and effectiveness of
liquidity risk management tools, and the extent to which fund vulnerabilities impacted the financial system and wider economy.
Regarding improving money market fund resilience, the FSB reiterated in its Progress Report that options include: (1) swing
pricing or economically equivalent measures (to impose on redeeming investors the cost of their redemptions); (2) minimum
balance at risk and a capital buffer (to absorb losses); (3) removal of ties between regulatory thresholds and imposition of
redemption fees and gates and removal of the stable
(to reduce threshold effects); and (4) limits on eligible assets, and
also published its Progress Report on "Enhancing the
noted that it will be working with
Final Report, the
IOSCO
NAV
FSB
FSB
24
FSB
FSB
, Federated Hermes: (1) supported the
additional liquidity requirements and escalation procedures (to reduce liquidity transformation). In a November 15, 2021
's objectives of financial stability, sound functioning of
comment letter to the
securities markets, and improved market reforms which, when supported by data, enhance the safety and stability of markets,
including the functioning of short-term funding markets; (2) supported the
specific, targeted approach to future money market fund reforms; (3) supported the
and the potential imposition of redemption fees and gates; (4) disagreed with requiring money market funds to hold higher
amounts of liquid securities; (5) supported the
of liquidity management tools available to money market fund managers, provided that a fund's board retains discretion as to
's assessment on the potential
what liquidity management tools to use and when to implement them; (6) disagreed with the
money market funds. In a
application of swing pricing to money market funds; and (7) advocated for retaining stable-
December 15, 2021 comment letter to the FSB, Federated Hermes discussed regulatory reforms to address structural issues
supporting market liquidity, including, among others, permanent access to the Central Bank discount windows, a standing bank
repurchase agreement facility, a complete review of regulations affecting market making, and improved secondary market
trading infrastructure.
's recommendation that regulatory reforms should aim to increase the range
's acknowledgement of a need for a jurisdiction-
's recommendation to delink liquidity
FSB
NAV
FSB
FSB
FSB
FSB
ESRB
adopted a recommendation on money market funds to the European Commission and an
, but does not envisage capital buffers or a minimum balance at risk for money market funds. The
On December 2, 2021, the
accompanying report. The recommendation aims to ensure the resilience and functioning of money market funds while
minimizing the likelihood of central banks needing to step in during times of crisis. The recommendation is consistent with the
proposals of the
also believes own-fund requirements are not needed provided that deposit-like features of money market funds are reduced and
fund-like features of money market funds are increased. The recommendation aims to reduce threshold effects that accentuate
first-mover advantages, including by reducing deposit-like features of money market funds, reducing liquidity transformation
by improving and diversifying asset portfolio liquidity via requirements to hold public debt assets and by making sure this
liquidity can be used when needed, facilitating the use of tools that impose trading costs on redeeming investors (i.e., swing
pricing), and enhancing monitoring and stress-testing frameworks.
ESRB
NAV
NAV
NAV
ESMA
ESMA
published a final report, "
Opinion on the review of Money Market Fund Regulation,"
money market funds and decoupling regulatory thresholds from suspensions, gates and
money market funds; (2) addressing liquidity concerns by ensuring
On February 16, 2022,
which makes recommendations to improve the resiliency of money market funds. Among other recommendations, it
recommends: (1) addressing the threshold effects for constant
amortized cost for low volatility
redemption fees for low volatility
mandatory availability of at least one liquidity management tool for all money market funds; (3) amending daily liquid asset
and weekly liquid asset ratios; (4) adjusting the pool of eligible assets to require money market funds to hold public debt assets,
which could be used to satisfy the daily and weekly asset liquidity ratios; (5) reinforcing the possibility of temporarily using
liquidity buffers in times of stress; and (6) enhancing reporting and disclosure requirements and the stress testing framework for
money market funds. On February 14, 2022,
published a separate final report, "Guidelines on stress test scenarios under
Regulation," in which it sets forth updated guidelines and specifications on the types of money market fund stress
the
tests and their calibration in order to allow managers of money market funds to have the information needed to complete the
reporting required under the
money market funds by removing the possibility to use
Money Market Fund Regulation.
and constant
ESMA
MMF
NAV
EU
Federated Hermes does not believe money market funds are shadow banking entities. As discussed above, Federated Hermes
believes that money market funds are resilient investment products that have proven their resiliency during the Pandemic.
Federated Hermes intends to continue to engage with
through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the
erosion of benefits that money market funds provide.
(as well as U.S.) regulators in 2022, both individually and
and
EU
UK
Since the beginning of the fourth quarter 2021,
directives, rules, laws and guidance that impact
Hermes. For example:
UK
UK
and
and
EU
EU
regulators issued, proposed or adopted other new consultations,
investment management industry participants, including Federated
•
•
ESMA
ESMA
published a consultation paper, "Guidelines on certain aspects of the MiFID II suitability
requests comments on proposed updates to its November 2018 Guidelines on certain
On January 27, 2022,
requirements," in which
aspects of the MiFID II suitability requirements. MiFID II is the Markets in Financial Instruments Directive II (MiFID
II). The consultation period closes on April 27, 2022.
final guidelines in the third quarter 2022.
to MiFID II made under the
also intends to consult separately on the product governance changes
expects to then publish a final report followed by the
framework in August 2021.
ESMA
ESMA
ESG
EU
's
FCA
On January 19, 2022, the
risk investments, including cryptoassets," in which the
published a consultation paper, "Strengthening our financial promotion rules for high-
's
solicits comments on proposed changes to (1) the
FCA
FCA
25
classification of high-risk investments; (2) the consumer journey into high-risk investments; (3) strengthen the role of
firms approving and communicating financial promotions; and (4) apply the
qualifying cryptoassets. The consultation period ends on March 23, 2022.
financial promotion rules to
FCA's
• On January 13, 2022,
IOSCO
issued a consultation report, "Operational resilience of trading venues and market
intermediaries during the COVID-19 pandemic," in which
solicits comments on the operational resilience of
trading venues and market intermediaries. The final report highlights a series of "lessons learned" from the Pandemic
that may be useful to enhance practices in the future, including: (1) greater automation and less dependence on
physical documents and manual processes; (2) considering the role of service providers and offshore services;
(3) reviewing, updating and testing business continuity plans, including scenario planning; and (4) monitoring
processes to help ensure information security in order to prevent cyberattacks. The consultation period ends on
March 14, 2022.
IOSCO
• On January 3, 2022,
ESMA
published a Final Report, "Guidelines on certain aspects of the
MiFID
II appropriateness
and execution-only requirements," based on prior consultations. The purpose of the Guidelines is to enhance clarity
and foster convergence in the application of the appropriateness and execution-only requirements applicable under
MiFID
II to investment firms providing non-advised services to request information on the knowledge and experience
of clients or potential clients to assess whether the investment service or product is appropriate and to issue a warning
in case the investment service or product is deemed inappropriate.
• On December 17, 2021, the
CBI
published cross-industry outsourcing guidance and a feedback statement based on a
prior consultation to supplement existing legislation, regulations and guidance on outsourcing, which apply to specific
firms. The guidance: (1) sets out the
(2) highlights the responsibilities of a company's board of directors and senior management when outsourcing; and
expectations for outsourcing frameworks to manage the associated risks.
(3) outlines the
expectations on governance and management of outsourcing risk;
CBI's
CBI's
• On November 30, 2021, the
FCA
published a final Policy Statement, "Changes to
UK
MiFID's
conduct and
organizational requirements," in which the
removal of certain best execution reporting that the
wider reform work being undertaken on capital markets. The changes being made by the
rules for research and best execution under the
unnecessary regulation.
sets forth its policy and rules on changes to
MiFID
FCA
FCA
UK
are more proportionate to the risks arising and remove
FCA
are intended to ensure
believes did not appear to benefit users within the
FCA's
UK
research rules and the
• On November 25, 2021, the European Commission adopted a package of measures to ensure that investors have better
) action plan. The four legislative proposals that form the package include: (1) the European Single Access
access to company and trading data. The proposals related to several commitments in the 2020 capital markets union
CMU
(
Point, which will offer a single point of access to public information about
products; (2) a Review of the European Long-Term Investment Funds (
attractiveness of
Investment Fund Managers Directive (
order to facilitate lending; and (4) a Review of the Markets in Financial Instruments Regulation (
intended to adjust the trading rules to ensure more transparency for all parties trading on capital markets.
and make it easier for retail investors to invest in them; (3) a Review of the Alternative
) to harmonize the rules around loan-originating funds (debt funds), in
companies and
) Regulation, to increase the
EU
ELTIFs
investment
), which is
ELTIFs
AIFMD
MiFIR
EU
• On November 18, 2021,
EBA
ESMA
and the
and methodologies for the supervisory review and evaluation process (
process and criteria for the assessment of the main
arrangements and firm-wide controls; (3) risks to capital and capital adequacy; and (4) liquidity risk and liquidity
also is consulting on regulatory technical standards on the policy that could be determined by
adequacy. The
) for investment firms. The consultation period ended on February 18, 2022.
national competent authorities (
elements, such as: (1) business model; (2) governance
published a consultation paper "Draft Guidelines on common procedures
" in which they set out the
SREP
) under
NCAs
EBA
SREP
IFD
• On November 9, 2021,
HM
Treasury and the BoE issued a statement announcing next steps on the development of a
UK
Central Bank Digital Currency that would exist alongside cash and bank notes.
• On November 1, 2021, the
PRIIPs
FCA
decided to delay publishing its policy statement in response to its July 20, 2021
- Proposed scope rules and amendments to Regulatory Technical Standards," in which the
requested comments on proposed amendments to the
consultation titled "
FCA
among other things, clarify the scope of
indicators. The consultation period ended on September 30, 2021. The policy statement is delayed until the first
quarter of 2022 to consider the implementation date of the new requirements.
and address misleading performance scenarios and summary risk
disclosure regime. The amendments are intended to,
PRIIPs
PRIIPs
26
• On October 25, 2021, the
FCA
finalized rules that create a Long-Term Asset Fund (
) regime for a new type of
authorized open-end fund designed to invest efficiently in long-term assets, such as infrastructure, private equity, real
estate, private debt and venture capital. The
is aimed at defined contribution pension
indicated that the
funds, sophisticated investors and some high-net worth individuals, and that it would be consulting in 2022 on the
potential for widening the distribution of the
to certain retail investors.
LTAF
LTAF
LTAF
FCA
UK
UK
HM
UK
HM
; (4)
IFPR
FCA's
retail
UCITs
MiFID
ESMA
II; (8)
MiFID
ESMA's
ESMA's
,
AIFMs
management
proposed rules on the
Treasury on its review of the
updated guidelines for money
Treasury's ongoing review of the
regulation of financial institutions, including
funds regime to identify options that will make the
investment firms, outsourcing to cloud service providers; (6)
guidance on marketing communications under the Regulation on Cross-
II; (2)
to update and modify collection of information for
Investment management industry participants, such as Federated Hermes, also have continued and will continue, to monitor,
plan for and implement certain changes in response to previously issued new, proposed or adopted consultations, directives,
rules, laws and guidance. Previously proposed and final consultations, directives, rules, laws and guidance included, among
others: (1) the ongoing amendment and implementation of
MiFID
Regulation; (3) efforts by
disclosure regime and the
PRIIPs
ESMA
monitoring systemic risk among
AIFMs
Border Distribution of Funds; (5)
ESMA's
companies, and
, which is the new
market fund stress tests under the Money Market Fund Regulation; (7) the
prudential regime for
report regarding the preparedness of investment funds
firms authorized under
with significant exposure to corporate debt and real estate assets for potential future adverse liquidity conditions and valuation
shocks; (9) a call for input from
a
UK
II framework on best
more attractive location to set up, manage and administer funds; (10) a review by
execution reports; (11) a systematic review by
" letter from the
and Prudential Regulation Authority (
expectations of such firms, including an expectation to demonstrate that they have taken a risk sensitive approach to their
control environment to ensure that the inherent risks within trade finance activity are effectively mitigated; (13) European
Commission amendments to the technical standards regarding the
IOSCO
(14) an
managers; (15)
communications under the new
(17) the
and sustainable investment funds; (18)
requirements for the purposes of enhancing clarity and fostering convergence in the application of the requirements; (19) the
FCA's
regulatory framework to facilitate a market-based transition to net-zero carbon emissions; (b) amendments to the regulatory
framework for money market funds; (c) adapting legacy
Commission draft directive that would extend the exemption from the
additional six months from December 31, 2021 to June 30, 2022; and (21) the
financial risks to support and promote international coordination on disclosures, data collection, vulnerabilities analysis and
regulation.
KIIDs
Final Report on the use of artificial intelligence and machine learning by market intermediaries and asset
ESMA's
final guidelines for marketing
AIFs
transition; (20) the European
Regulation for an
considerations regarding climate-related
guidance on the design, delivery and disclosures of
II remuneration
Cross-Border Distribution of Funds Regulation, which applies to
) to firms that carry on trade finance activity to reiterate the
priorities, including, among other things: (a) adapting the
final guidelines applicable to market data providers; (16)
for retail and insurance-based investment products;
2021-2022 business plan, which indicated that the
request for comments on certain aspects of the
of the Short Selling Regulation; (12) a "Dear
regulatory regimes; and (d)
requirement under the
"Dear Chair" letter to
setting forth the
;
ESG
ESMA's
ESMA's
LIBOR
UCITS
PRIIPs
of the
MiFID
ESMA
ESMA
MiFID
AFMs
FCA's
FCA's
FCA's
FCA's
PRA's
KIID
FSB's
CEO
FCA
PRA
and
and
EU
EU
EU
FCA
FCA's
and other global regulators continue to monitor investment
CBI
,
In addition to the above Regulatory Developments, the
management industry participants by examining various reports, financial statements and annual reports and conducting regular
review meetings and inspections. They also continue to take enforcement action when determined necessary. Examples of
recent reviews include reviews regarding closet index fund managers, CP86 compliance, fitness and probity, best execution,
FCA
client asset arrangements, and operational resilience.
non-financial misconduct and alternative investment managers. In a recent speech, the Chief Executive of the
priorities set forth in the
2021/22 Business Plan and indicated that the
powers to their limits" to ensure market integrity, and that over time it plans to "become as much a data regulator as a financial
one". In terms of its approach to enforcement actions, it has been reported that these statements follow the ongoing narrative
that the
considers to be the six most important cross-market issues: (1) fraud; (2) financial resilience; (3) operational resilience;
(4) diversity and inclusion; (5)
published a
Securities Market Risk Outlook Report that identifies key conduct risks to securities markets, actions investment firms should
take to identify, mitigate and manage those risks, and the
others, dealing with the Pandemic and Brexit, fund governance, money market fund reform, diversity and inclusion, climate
change, and bolstering systems to identify, mitigate and manage misconduct risk, including market abuse risk.
enforcement priorities have included financial crime, market abuse,
echoed the
will be willing to take more risks and to act quickly. It also has been reported that the
work; and (6) international cooperation. On February 8, 2021, the
wants to be a regulator that "tests [its]
supervisory priorities. The
priorities include, among
is focusing on what it
CBI's
CBI's
FCA
FCA
FCA
FCA
ESG
CBI
27
Federated Hermes continues to analyze the potential impact of these Regulatory Developments on Federated Hermes' Financial
Condition. Please refer to our prior public filings for more detailed discussions of these, and other, previously proposed and
final rules and guidance.
EU
FTT
also continues to be discussed although it remains unclear if or when an agreement will be reached regarding its
have sought the widest
An
adoption. Since the European Commission first proposed an
FTT
possible application of the
imposed 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 (
equity funds and similar products for private pensions. Under the German proposal, the five countries with the highest incomes
would have shared a small part of their revenues with the other countries, so that each participating country would receive at
least €20 million of
with low tax rates. In December 2019, Germany proposed a draft directive that would have
) would have been excluded, and each Member State would have been free to tax
revenue. No formal action has been taken on this German proposal.
in 2011, proponents of the
IPOs
FTT
FTT
FTT
EU
EU
EU
EU
FTT
FTT
FTT
FTTs
FTTs
design, whether the
involving a gradual
already implemented in France and Italy. Member States that would want
EU
level regarding the design of an
Council, proposed at a meeting of the
FTT
more quickly would have been permitted to do so. Member States were invited to provide input on the
in France and Italy would be a solid basis for an
should apply to equity derivative transactions. Subject to certain exemptions, the French
On February 24, 2021, Portugal, the successor to the German Presidency of the
Working Party on Tax Questions to begin discussions at the
implementation by Member States based on the
to implement an
proposed approach to the
whether an
EU
of up to 0.3% on stock purchases of French publicly traded companies with a market value over €1 billion, American and
European depository receipts of covered company securities, high frequency trades, credit default swaps against
debt, and certain corporate actions. Subject to certain exemptions, the Italian
levies a tax on equity transactions, certain
derivative transactions on equities and certain high frequency trades of up to 0.2% of the value of the net balance of purchase
and sale transactions executed on the same day on the same financial instrument by the same party. The Italian
applies to
shares issued by Italian companies with a capitalization of at least €500 million, cash equity contracts, equity derivative
contracts, and certain other equity transactions. It has been reported that Austria's Finance Minister has spoken out against the
Portuguese proposal on the basis that an
Member States electing not to participate in the enhanced cooperation initiative to provide input on whether the need to find
additional sources for financing the
recovery effort might increase their interest in further working on an
would harm business. The Portuguese proposal on an
, and
FTT
levies a tax
sovereign
EU
FTT
invited
FTT
.
FTT
FTT
FTT
FTT
EU
EU
EU
EU
EU
EU
and
Member States look to fund their budgets and the
on securities transactions, or even bank account transactions,
EU
As attention turns to a post-Pandemic economy and as the
FTT
EU
Pandemic-related measures that have been adopted, an
remains a potential additional source of revenue. On May 18, 2021, the European Commission issued a communication on
"Business Taxation for the 21st Century," in which it indicated that, after July 2021, it would make certain additional proposals,
which could include an
Commission recently clarified that, if there is no agreement by the end of 2022, the European Commission will, based on
impact assessments, propose a new resource for the
endeavor to make those proposals by June 2024 with the
indicated at its June 3, 2021 meeting that further work will be required before final policy choices are made and an agreement
on a possible
planned introduction by January 1, 2026. The Council also
on June 3, 2021, the Council recognized that the European
and that the European Commission will
. In a meeting of the Council of the
budget based on a new
can be reached.
FTT's
FTT
FTT
FTT
EU
EU
The exact time needed to reach a final agreement on an
EU
at this time. As discussed above, certain individual
Member State-level. Spain's 0.2%
FTT
has been reported that Spain's
Europe can increase the risk that additional jurisdictions propose to implement
previously proposed a
also could further delay agreement on, and the implementation of, an
(in addition to the existing
FTT
FTT
UK
UK
FTT
EU
Member States, such as Italy and France, have implemented
, implement any agreement and enact legislation is not known
FTTs
at the
on certain securities transactions, effective on January 16, 2021, is another example. It
FTT
tax revenues were only approximately 31% of projections. The weakened economy in
has also
. The Labour Party in the
FTTs
UK
stamp duty), but it has not been advanced to date. The Pandemic
in the
EU
,
UK
or other European countries.
LIBOR
. Separate working groups were formed in the
Notwithstanding the impact of the Pandemic, global securities regulators urged the adoption of new risk free reference rates as
, and other jurisdictions (e.g., Japan
alternatives to
FCA
, as well
and Switzerland) to recommend an alternative to
and the
to the
as other global regulators, continued efforts started in September 2018 regarding the proposed transition from
ICE
)
Sterling Overnight Index Average (
and the
published a feedback statement from
administrator of
LIBOR
after December 31, 2021; (2) cease publication of the
December 31, 2021; and (3) cease the publication of all other tenors of
, formally confirming its intention to: (1) cease the publication of the one-week and two-month
EUR
CHF
,
GBP
after June 30, 2023. On June 2, 2021,
EU
for their respective markets. The
) by the end of 2021. On March 5, 2021, Intercontinental Exchange,
Benchmark Administration Limited, a wholly-owned subsidiary of
PRA
LIBOR
Inc.
(
for all tenors after
SONIA
ICE
and
LIBOR
JPY
,
USD
, the U.S., the
LIBOR
LIBOR
LIBOR
USD
, the
BoE
ICE
UK
28
FSB
FCA
USD
ISDA
LIBOR
LIBOR
-linked
use of powers over use of critical benchmarks," in which the
) spread adjustments in cash products; and (4) a statement that
IOSCO issued a statement in which it urged all global market participants to "discontinue new use of
contracts, as soon as practicable and no later than the end of 2021, to avoid the safety and soundness risks associated with the
released statements and reports that set out recommendations for financial and non-
continued use." On June 2, 2021, the
financial sector firms, as well as the authorities, to consider as they seek to transition away from
by the end of 2021.
The statements and reports included: (1) a summary of high-level steps firms will need to take now and over the course of 2021
to complete their transition; (2) a paper reviewing overnight risk-free rates and term rates; (3) a statement on the use of the
International Swaps and Derivatives Association's (
encouraged authorities to set globally consistent expectations that regulated entities should cease the new use of
USD
line with the relevant timelines for that currency, regardless of where those trades are booked. In September 2021, the
issued a "Feedback Statement:
topics, its authority to prohibit some or all new uses of a critical benchmark, which includes
September 9, 2021, the
(Articles 23C and 21A
orderly wind-down of
in actively transitioning contracts away from
outstanding sterling and Japanese yen
LIBOR
contracts that reference the 1 month, 3 month and 6 month sterling and Japanese yen
LIBOR
duration of 2022. The synthetic panels are not intended for new issues, as the
overnight, 1 month, 3 month, 6 month and 12 month U.S. dollar
2023. On November 22, 2021, the
to reinforce the message and timeline from supervisors globally to ensure there is no interruption to new business and financing.
On December 10, 2021, the
"Decisions on the use of
above.
. On
also updated its website, and issued a consultation, "Proposed decisions on the use of
)," setting forth further guidance and requests for comment regarding further arrangements for the
found that market participants have made good progress
by the end of 2021. Although the
LIBOR
contracts by the end of 2021. Consequently, to avoid disruption to legacy
, which will continue to be published through June 30,
cessation and
benchmark administrator to publish these tenors under a 'synthetic' methodology, based on term risk-free rates, for the
also issued final guidance on the transition to
" (Articles 23C and 21A
issued a statement urging swift action to ensure preparedness for
) summarizing the results of its prior consultation discussed
concluded that it will not be practicable to convert all
, including a feedback statement on its
also proposed to prohibit new use of
FCA
BMR
LIBOR
discussed, among other
FCA
LIBOR
LIBOR
FCA
required the
tenors, the
LIBOR
LIBOR
LIBOR
LIBOR
LIBOR
LIBOR
in the
BMR
, the
FCA
FCA
FCA
FCA
FCA
FSB
UK
in
SEC
IBOR
2020
ARRC
LIBOR
LIBOR
ARRC
LIBOR
LIBOR
cessation. The
, with particular
SOFR
USD
to the Secured Overnight Financing Rate (
, U.S. regulators continued to urge financial institutions to
-based term rate relatively soon." Despite the extension of the
LIBOR
was selected as the preferred
) at the Federal Reserve Bank of New York. On May 6, 2021, the
Fallbacks Protocol, which enables parties to protocol-covered documents to amend their terms to:
transactions by the end of 2021. The Governors have indicated that, "[n]ew contracts entered
or have robust fallback language that
and other regulators in the U.S. have undertaken efforts to identify risks and prepare for
SOFR
) or another alternative reference rate by
replacement in the U.S. by the Alternative Reference Rates
published market indicators that
and confirmed that "a recommended term rate is now in clear sight" and the
Legislators and regulators in the U.S. and other countries are also working on the transition from
emphasis on legacy financial agreements that lack sufficient "fallback" language to transition to a new reference rate in the
LIBOR's
event of
the proposed transition from
SOFR
the end of 2021. The
Committee (
SOFR
would support a recommendation of term
to recommend a
ARRC
recent guidance "would allow the
transition deadline to June 30, 2023 for certain tenors of
stop entering into new
into before December 31, 2021 should either utilize a reference rate other than
includes a clearly defined alternative reference rate after
ISDA
(1) regarding a protocol-covered document which incorporates, or references, a rate as defined in a Covered
Booklet, include either the terms of, or a particular defined term included in, the Supplement to the 2006
(2) in respect of a protocol-covered document which otherwise references a relevant interbank lending rate (
new "fallbacks" for that relevant
passed a law that implements fallback provisions that favor the transition to
without effective fallback provisions that are written under New York law. The New York law also provides a safe harbor from
litigation where
market demand for credit sensitive rates as alternatives to
LIBOR
which is operationally similar to
delivered prepared remarks regarding the
Short Term Bank Yield Index (
over
investment advisors reminding firms of their obligations to disclose the steps that they have taken to reduce
(particularly those tenors that expire on December 31, 2021), mitigate risks, address fallback provisions, and avoid new
obligations.
. This protocol became effective January 25, 2021. On March 24, 2021, New York
plus a spread adjustment for contracts
LIBOR
. Regulators have also taken note of the growing
because credit sensitive rates have a term component built in,
. During the open session of the June 11, 2021
LIBOR
Staff released a statement providing guidance for registered broker-dealers and
transition in which he specifically condemned one such rate, the Bloomberg
Definitions
Definitions; and
), include
), as featuring many of the same flaws as
discontinuation." On October 23, 2020,
is selected as a replacement rate for
, and generally advocated for term
. On December 7, 2021, the
USD
SOFR
Chair Gensler
published its
exposure
meeting,
LIBOR's
LIBOR
LIBOR
FSOC
LIBOR
BSBY
BSBY
SOFR
SOFR
SOFR
IBOR
IBOR
ISDA
ISDA
ISDA
SEC
SEC
The phase-out of
transactions to which investment management industry participants, including Federated Hermes and its products, customers or
can cause the renegotiation or re-pricing of certain credit facilities, derivatives or other financial
LIBOR
29
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 can increase operating
expenses. The extent of such renegotiation or re-pricing could be mitigated by the adoption of, or advocacy for, a historical
five-year median difference spread adjustment methodology by certain regulators, self-regulatory organizations and trade
groups (including, for example, the
ARRC
ISDA
and
).
LIBOR
tenor cessation date, Federated Hermes has sought to proactively address transition-related questions with
Federated Hermes has closely monitored regulatory statements and industry developments regarding the obligations of
registered investment advisors and funds when recommending and purchasing securities or other investments that use
LIBOR
as a reference rate or benchmark. Federated Hermes has focused on identifying LIBOR-linked securities or other investments,
including, but not limited to: derivatives contracts; floating-rate notes; municipal securities; and tranches of securitizations,
including collateralized loan obligations. With respect to
LIBOR
applicable
the issuers or lead arrangers of such securities and other investments, as applicable, including, for example, questions regarding
transition events, benchmark replacement, and benchmark replacement adjustments. As necessary, Federated Hermes has
sought to negotiate modifications to benchmark fallback language for such securities and other instruments to contemplate the
. Federated Hermes will be continuing these efforts with respect to any remaining securities or
permanent cessation of
other investments held by Federated Hermes' products and strategies that continue to use a U.S.
tenor with a cessation
date of June 30, 2023. Federated Hermes also negotiated fall back language that provides for the use of an alternative reference
rate or benchmark in its corporate credit facility and its U.S.-registered Federated Hermes Funds' credit facility. Federated
Hermes continues to monitor the impact that the transition from
products and strategies, customers and service providers.
-linked securities or other investments with maturities after the
will have on Federated Hermes and Federated Hermes'
LIBOR
LIBOR
LIBOR
While Brexit has not had a significant impact on Federated Hermes' business as of December 31, 2021, given the post-Brexit
regulatory environment and potential continuing impact of the Pandemic, Federated Hermes remains unable to fully assess the
degree that any potential Brexit impact and resulting changes could have on Federated Hermes' Financial Condition. The 2018
HFML
Acquisition), each increased the
Acquisition, and
FTT
, particularly if enacted with
potential Brexit impact to Federated Hermes. Management also believes that a
broad application, would be detrimental to Federated Hermes' business and could adversely affect, potentially in a material way,
Federated Hermes' Financial Condition.
HFML
Limited effective as of January 1, 2020 (
FTT
Acquisition and the 2021 Acquisition of
MEPC
Noncontrolling Interest (together the
MEPC
or
EU
Acquisition), the
acquisition of
HFML's
HFML
HCL
UK
or
UK
, or
FTT
EU
Management continues to monitor and evaluate the impact of Regulatory Developments (including potential new money market
fund reforms) on Federated Hermes' Financial Condition. Regulatory changes stemming from Brexit, money market fund
reform, a
potential political and economic uncertainty surrounding Brexit and the continuing Pandemic, also can adversely affect,
potentially in a material way, Federated Hermes' Financial Condition. Similar to its efforts in the U.S., Federated Hermes has
dedicated, and continues to dedicate, significant internal and external resources to analyze and address
international Regulatory Developments that impact Federated Hermes' investment management, stewardship and real estate
development businesses.
or other initiatives or Regulatory Developments, as well as the
FSB
,
IOSCO
,
and other
ESMA
,
UK
,
CBI
,
FCA
EU
EU
and other international Regulatory Developments, and Federated Hermes' efforts relating thereto, have had, and can
UK,
continue to have, an impact on Federated Hermes' expenses and, in turn, financial performance. As of December 31, 2021,
Federated Hermes is unable to fully assess the potential impact that an
have on its Financial Condition. Federated Hermes also is unable to fully assess at this time whether, or the degree to which,
Federated Hermes, any of its investment advisory subsidiaries or any of the Federated Hermes 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
the potential impact that the above matters can have on Federated Hermes' Financial Condition.
or other international Regulatory Developments can
Acquisition each increased
Acquisition and
Acquisition,
HFML
MEPC
HCL
FTT
Human Capital Resource Management
At December 31, 2021, Federated Hermes had 1,968 employees, with 1,185 employees in Pittsburgh, Pennsylvania and
surrounding areas, 527 employees in London, England, 59 employees in New York, New York, 28 employees in Boston,
Massachusetts, 137 employees in other U.S. locations and 32 employees in other locations outside the U.S.
The investment management business is highly competitive and experienced professionals have significant career mobility.
Like other companies, Federated Hermes experiences employee turnover which is tracked at various levels within the company
and conducts exit interviews with departing employees. The information derived from these interviews, as well as our employee
30
development initiatives described below and succession planning, allows Federated Hermes to cultivate leaders, manage
turnover and retain talented and qualified individuals. Federated Hermes' ability to attract, retain and properly motivate highly
qualified professionals across the company is a critical factor in maintaining its competitive position within the investment
management industry and positioning Federated Hermes for future success. See Item 1A - Risk Factors - General Risk Factors -
Other General Risks - Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk) for more
information on the risks to Federated Hermes if it is unable to attract and retain talented and qualified employees. For additional
information on remote and hybrid working arrangements, see Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations – Business Developments – The Pandemic.
Competitive Compensation
Understanding that Federated Hermes' business success depends on its ability to attract, retain and incentivize talented and
qualified individuals, Federated Hermes' compensation programs across the company strive to meet this goal. Federated
Hermes endeavors to reward individual contribution, as demonstrated by the delivery of long-term sustainable results.
Federated Hermes' compensation programs are also designed to align the interests of its officers and employees with its
business strategy, values and objectives, including the interests of its clients, shareholders and stakeholders, while affording the
business the opportunity to grow.
For employees managed from the U.S., Federated Hermes' compensation programs are comprised of competitive levels of cash
compensation together with equity and other components for certain positions. Compensation is structured in the form of:
salary, which is competitively evaluated annually; bonus; and, where appropriate, long-term incentives.
For employees managed from the
include base salary, a retirement plan and other corporate benefits, and is designed to provide competitive fixed compensation
at a level that reflects market-compensation. Variable compensation is discretionary based on, among other factors, an
employee's performance and behavior, as well as team and overall company performance.
, compensation is based on fixed and variable compensation. Fixed compensation can
UK
Across Federated Hermes, the mix of overall salary, bonus and long-term incentives varies by division, position and employee.
Across Federated Hermes, national and industry-specific compensation surveys are utilized to monitor competitive pay levels.
Compensation across the company is generally administered in four employee categories: Sales, Investment Management,
Administration and Executive. The employee category and seniority of position generally drives the mix of fixed versus
variable compensation, bonus structure/opportunity and long-term incentive structure/opportunity. Across the company (unless
otherwise noted below):
• The pay mix for Sales employees is more heavily weighted in variable compensation based on quantitative and qualitative
sales metrics. Depending upon the position, U.S. Sales employees are also eligible to receive cash-based long-term
incentive awards annually which generally vest after three years, and, for certain levels of Sales employees, annual bonus
restricted stock awards and periodic restricted stock awards.
• The pay mix for Investment Management employees is more heavily weighted in variable compensation in the form of
discretionary bonuses and, among other factors deemed relevant, takes into account investment product performance from
one- through five-year periods. For employees managed from the U.S., all or a portion of any annual performance bonus
can be paid in cash or a combination of cash and annual bonus restricted stock. U.S. Investment Management employees
are also eligible for periodic restricted stock awards.
• Administrative employees have a pay mix more heavily weighted in fixed pay and are eligible for annual discretionary cash
bonuses. U.S. management employees are eligible for periodic restricted stock awards and senior management employees
are also eligible for annual bonus restricted stock awards.
• The components of Federated Hermes' executive compensation programs are designed to be competitive within the
investment management industry. Federated Hermes' executive compensation programs are designed to reward outcomes
related to a variety of factors including Federated Hermes' financial, investment, sales and customer service performance as
measured against other similar companies within the investment management industry. Please refer to the Compensation
Discussion and Analysis section of Federated Hermes' Information Statement for additional information regarding
executive compensation.
Federated Hermes' Stock Incentive Plan is designed to support its retention and attraction objectives. Under this program,
executive officers and certain employees are eligible to receive periodic restricted stock awards that vest over specified vesting
31
periods (e.g., for U.S. employees, a ten- year period). The restrictions on the vested portion of an award typically lapse on
specified anniversary dates of an award (e.g., for U.S. employees, the award's fifth- and tenth-year anniversaries). Additionally,
for certain groups of U.S. employees, a portion of their bonus awards are paid in the form of bonus restricted stock with a three-
year ratable vesting schedule with restrictions lapsing on each vesting date.
UK
For all employees managed from the
, discretionary bonus awards above a certain threshold are subject to deferral. Under
the deferred bonus scheme, a portion of the bonus is deferred, notionally tracks the performance of certain Federated Hermes
LTIP
Funds and vests over three years. Employees have also been eligible to receive awards under a long-term incentive plan (
. These shares normally
that offers certain employees the chance to acquire beneficial ownership of ordinary shares in
vest over a five-year period. Subject to certain approvals and contingencies, as part of a tender offer intended to acquire the
remaining approximately 10% interest in
restricted Federated Hermes Class B common stock under its Stock Incentive Plan to
2022 in exchange for the beneficial interests in these
shares awarded under the
Federated Hermes Class B common stock in exchange for the remaining interests in the
shares that are held by a former
employee and those that have not yet been awarded to employees and are held by an employee benefit trust that was established
in connection with the
stock, will have the same vesting schedule and similar transfer restrictions as the awards granted under the
to the Consolidated Financial Statements for additional information. The Private Equity and Infrastructure businesses of
Federated Hermes also operate carried interest and share of performance fee programs typical to such asset classes.
not owned by Federated Hermes, Federated Hermes intends to issue awards of
HFML
LTIP
. These awards of restricted Federated Hermes stock, as well as the treasury Federated Hermes
employees in the first quarter of
and issue treasury shares of
. See Note (22)
HFML
HFML
HFML
HFML
LTIP
LTIP
)
For 2021, Federated Hermes' total compensation expense was $532.5 million and included salary, bonus and stock-based
compensation expense.
Benefits
Federated Hermes' benefit offerings across the company are designed to reflect the local market and equip Federated Hermes
employees with resources and services to help them stay healthy, balance the demands of work and personal life, develop their
careers, and meet their financial goals, as well as to further employee engagement and retention. Along with the traditional
health and welfare benefits, such as medical and dental coverage, an employee assistance program, disability, paid time off and
retirement programs, the company also offers flexible work arrangements, education assistance, paid parental leave, adoption
benefits, paid volunteer time, employee discounts and other programs and services. Federated Hermes also has introduced a
range of resources to provide employees with information and support to remain physically and emotionally healthy during the
Pandemic. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations – Business
Developments – The Pandemic for additional information on the steps Federated Hermes has taken to safeguard the health and
safety of employees.
Employee Development
Federated Hermes provides a professional work environment for employees across the company that supports employees' career
aspirations and professional development interests through training programs and mentoring initiatives. Training is provided on
the job and by Federated Hermes' training staff and a network of specialist training providers through a blend of internal/
external classroom and online courses. Federated Hermes' extensive training curriculums focus on Technical, Professional,
Leadership & Management, and include, among others, courses on: the securities markets and Federated Hermes' products;
compliance/regulatory requirements; license exam preparation; sales skills; customer service skills; financial, physical and
mental health well-being; remote working and hybrid management; dignity and respect in the workplace; individual and team
performance; communication skills; technical (systems) topics; and general professional development. The attraction, training
and retention of qualified employees across the company supports Federated Hermes' succession planning at all levels.
Diversity and Inclusion
As of December 31, 2021, across the company, approximately 40% of Federated Hermes' employees are women. Federated
Hermes' Board has approximately 17% women, and approximately 10% of Federated Hermes' executives are women. In the
United States, approximately 7% of Federated Hermes' employees are minorities, 33% of business managers are women and/or
managed from the
minorities, 27% of investment professionals are women and/or minorities, and approximately 89% of
United States are in products that have at least one portfolio manager that is a woman and/or minority.
AUM
Federated Hermes recognizes that a diverse and inclusive workplace benefits employees and supports stronger long-term
business performance. Federated Hermes developed its diversity and inclusion strategy with the mission of fostering a diverse,
inclusive and respectful workplace where employees across the company are encouraged to be innovative and creative and
32
where unique perspectives and experiences are recognized and appreciated for the contributions they bring to the company.
Federated Hermes has made a long-term commitment to enhancing the diversity of the company's workforce and providing an
inclusive environment. The company's diversity and inclusion strategy is centered around four pillars: driving diversity;
creating inclusion; expanding outreach; and ensuring program sustainability by evaluating results and implementing
enhancements.
Federated Hermes cultivates the benefits of workplace diversity throughout the company through its recruitment process, the
onboarding of new employees, and the ongoing education and training of employees. In the U.S., the company implemented
several programs to advance diversity and inclusion, which include: launching a Women in Investing Employee Resource
Business Group with the mission of supporting and advancing the professional development and representation of women
within the company, the investment management industry and the community; implementing an internship program with a local
high school for underrepresented students; and implementing a University Ambassador Program, enabling employees to serve
as liaisons between the company and universities to facilitate building a diverse, early-career talent pipeline and enhance the
company's brand recognition. In London, a number of diversity and inclusion initiatives have been launched, including:
inclusive leadership training for management; Employee Resource Groups with several Employee Networks; and cultural
events such as National Inclusion Week, Mental Health Awareness Week, Pride Week and Black History Month.
The company's diversity and inclusion initiatives are sponsored and endorsed by the Board and executive management. The
Compensation Committee of the Board receives periodic updates and reports on the company's diversity and inclusion strategy
and its compensation practices, including an annual pay equity analysis. In collaboration with management and employees at all
levels, these initiatives are advanced by various teams and employee resource business groups across the company, including
Human Resources and, in the U.S., a dedicated Diversity Officer/Senior Talent Acquisition Manager and, in London, a
dedicated Head of Inclusion.
Federated Hermes is committed to providing equal employment opportunities across the company to qualified individuals
without regard to: race; color; national origin; religion; sex; pregnancy; sexual orientation; gender identity or expression; mental
or physical disability; age; familial or marital status; ancestry; military status; veteran status; or genetic information; as well as
any other prohibited criteria under law applicable to Federated Hermes.
Federated Hermes encourages its employees across the company to raise human resources questions or concerns with their
managers or the Human Resources Department in the U.S. or London. Separately, the company also provides a phone line and
website portal through a third-party service provider for employees to report, anonymously should they so choose, various
compliance matters.
33
Information about our Executive Officers
The following section sets forth certain information regarding the executive officers of Federated Hermes as of February 25,
2022:
Name
J. Christopher Donahue President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc.
Position
Age
72
Gordon J. Ceresino
Thomas R. Donahue
Vice Chairman of Federated Hermes,
International Securities
and Vice Chairman of Federated
, Chairman, Director and President of Federated
MDTA
Corp.
LLC
,
Inc.
Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes,
and President of
Holdings, Inc.
FII
Inc.
Dolores D. Dudiak
Vice President, Director of Human Resources of Federated Hermes, Inc.
John B. Fisher
Vice President and Director of Federated Hermes,
Officer of Federated Advisory Companies*
Inc.
and President and Chief Executive
Peter J. Germain
Executive Vice President, Chief Legal Officer 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.
64
63
63
65
62
58
60
55
46
*
Federated Advisory Companies include the following: Federated Advisory Services Company, Federated Equity
Management Company of Pennsylvania, Federated Global Investment Management
, Federated Investment
Counseling, Federated Investment Management Company and Federated
Federated Hermes.
, each wholly owned by
MDTA
Corp.
LLC
Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer of Federated Hermes since 1998 and
was elected as Chairman effective April 2016. He also serves as a director, trustee or officer of various Federated Hermes
subsidiaries. He is President of 30 investment companies managed by subsidiaries of Federated Hermes. He is also director or
trustee of 33 investment companies managed by subsidiaries of Federated Hermes. Mr. Donahue is the brother of Thomas R.
Donahue who serves as Vice President, Treasurer, Chief Financial Officer and director of Federated Hermes.
Mr. Gordon J. Ceresino has served as Vice Chairman of Federated Hermes since 2007. He is Chairman and President of
Federated International Management Limited and Federated International Securities
MDTA
LLC, each of which are wholly-owned subsidiaries of Federated Hermes. He serves as a director of Hermes Fund
Managers Limited. Mr. Ceresino also serves as a director, trustee, President or Chief Executive Officer of certain other wholly-
owned subsidiaries of Federated Hermes focusing on Federated Hermes' non-U.S. operations.
and Vice Chairman of Federated
Corp.
Mr. Thomas R. Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated Hermes 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.
, a wholly-
He also serves as an Assistant Secretary of Federated Hermes and is a director and President of
owned subsidiary of Federated Hermes. He serves as a director of Hermes Fund Managers Limited. He also serves as a director,
trustee or officer of various other Federated Hermes subsidiaries. He is also a director or trustee of seven investment companies
managed by subsidiaries of Federated Hermes. Mr. Donahue is the brother of J. Christopher Donahue who serves as President,
Chief Executive Officer, Chairman and director of Federated Hermes.
Holdings,
Inc.
FII
Ms. Dolores D. Dudiak has served as Vice President of Federated Hermes,
Director, Human Resources since November 1997. She also has served as an officer of various Federated Hermes,
subsidiaries since 1994, holding the title Senior Vice President since July 2002. In these capacities, she is responsible for the
Human Resources Department at Federated Hermes,
Employee Relations, Organization Development, and Human Resources Information Management, as well as the company's
response to the Pandemic.
since February 2021. She has served as
Inc.
, including Total Compensation Management, Employment Services/
Inc.
Inc.
34
Mr. John B. Fisher has served as Vice President of Federated Hermes 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 wholly-owned
subsidiaries of Federated Hermes. He serves as a director of Hermes Fund Managers Limited. He also serves as a director,
trustee or officer of certain other Federated Hermes subsidiaries. He is President of three investment companies managed by
subsidiaries of Federated Hermes. He is also director or trustee of 26 investment companies managed by subsidiaries of
Federated Hermes. Prior to 2006, Mr. Fisher served as President of the Institutional Sales Division of Federated Securities
Corp., a wholly-owned subsidiary of Federated Hermes.
Mr. Peter J. Germain has served as Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes since
October 2017, as General Counsel from January 2005 through June 2021 and Vice President of Federated Hermes 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 Hermes and its affiliates. He also serves as a director, trustee or officer of various Federated
Hermes subsidiaries. Mr. Germain also serves as Chief Legal Officer, Executive Vice President and Secretary of 33 investment
companies managed by subsidiaries of Federated Hermes.
Mr. Richard A. Novak has served as Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes
since April 2013. Prior to that time, he served as Fund Treasurer of Federated Hermes' U.S.-based mutual funds beginning in
2006 and served as the Controller of Federated Hermes from 1997 through 2005. He serves as a director of Hermes Fund
Managers Limited. He also serves as director or officer for various subsidiaries of Federated Hermes. Mr. Novak is a Certified
Public Accountant.
Mr. Saker A. Nusseibeh is a director and Chief Executive Officer of Hermes Fund Managers Limited, a majority-owned
subsidiary of Federated Hermes beginning July 1, 2018. He joined Hermes Fund Managers Limited 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 Fund Managers Limited and as a director or officer of certain subsidiaries of
Hermes Fund Managers Limited.
Mr. Paul A. Uhlman has served as Vice President of Federated Hermes, and President and a director of Federated Securities
Corp., a wholly-owned subsidiary of Federated Hermes, since June 2016. He is also a director, trustee or officer of certain
subsidiaries of Federated Hermes. As President of Federated Securities Corp., he is responsible for the marketing and sales
efforts of Federated Hermes. He had previously served as a Vice President of Federated Securities Corp. from 1995 through
2010, and most recently served as Executive Vice President of Federated Securities
position of National Sales Director, Institutional Sales, from 2007 through June 2016.
since 2010. Mr. Uhlman also held the
Corp.
Mr. Stephen P. Van Meter has served as Vice President and Chief Compliance Officer of Federated Hermes since July 2015.
Between October 2011 and July 2015, he served as Compliance Operating Officer at Federated Hermes. Between October 2007
and October 2011, he served as Senior Counsel in the Division of Investment Management, Office of Chief Counsel, at the
SEC
Enforcement.
. Between September 2003 and October 2007, Mr. Van Meter served as Senior Counsel in the
Division of
SEC's
Available Information
Federated Hermes 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 Note (4) 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.
35
ITEM 1A – RISK FACTORS
As an investment manager, risk is an inherent part of Federated Hermes' business. U.S.,
securities, capital, commodities, currency, real estate, credit, and other markets (collectively, as applicable, markets), by their
nature, are prone to uncertainty and subject participants to a variety of risks. If any of the following risks actually arise,
Federated Hermes' Financial Condition could be materially adversely affected. The risks described below are not the only risks
to Federated Hermes' business. Additional risks not presently known to Federated Hermes or that are currently considered
immaterial can also adversely affect its Financial Condition.
and other global financial/
UK
Specific Risk Factors
Risks Related to Federated Hermes' Investment Management Business
AUM
AUM
Potential Adverse Effects of a Material Concentration in Revenue. At any point in time, a significant portion of Federated
Hermes' total
or revenue can be attributable to one or more of its products or strategies, or asset classes, or one or more
customers with whom it has a relationship. See Note (4) to the Consolidated Financial Statements for information on material
concentrations in Federated Hermes' revenue. A significant and prolonged decline in the
of a product, strategy, or asset
class with a material concentration could have a material adverse effect on Federated Hermes' future revenues and, to a lesser
extent, net income, due to a related reduction in distribution expenses associated with these products, strategies, and assets.
Likewise, significant negative changes in Federated Hermes' relationship with a customer or shareholder with a material
concentration could have a material adverse effect on Federated Hermes' future revenues and, to a lesser extent, net income due
to a related reduction in distribution expenses associated with this customer or shareholder. A significant change in Federated
Hermes' business or a significant reduction in
due to Regulatory Developments, market changes, 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, declines in asset values, the availability, supply and/or market interest in
repurchase agreements and other investments, significant deterioration in investor confidence, continuing declining or
prolonged periods of low short-term interest rates or negative interest rates or negative yields and resulting fee waivers, investor
preferences for deposit products or other Federal Deposit Insurance Corporation (
funds, index funds or other passive investment products, changes in product fee structures, changes in relationships with
customers or other circumstances, could have a material adverse effect on Federated Hermes' Financial Condition.
)-insured products, or exchange-traded
AUM
FDIC
Potential Adverse Effect of Providing Financial Support to Investment Products. Federated Hermes can, from time to
time, elect to provide financial support to its sponsored investment products. 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 Hermes' Financial Condition (including, but not
limited to, its reputation).
NAV
NAV
NAV
NAV
FDIC
if such fund's
NAV
.
, but will move
falls outside of a 20 basis point collar. While stable or constant
Risk of Federated Hermes' Money Market Products' Ability to Maintain a Stable Net Asset Value. Approximately 19%
of Federated Hermes' total revenue for 2021 was attributable to money market assets. An investment in money market funds is
neither insured nor guaranteed by the
or any other government agency. Federated Hermes' retail and government/public
debt money market funds, and its private and collective money market funds, seek to maintain a stable or constant
Federated Hermes also offers non-U.S. low volatility money market funds that seek to maintain a constant
to a four-digit
funds seek to maintain a
of $1.00 per share, it is also possible to lose money by investing in these funds. Federated
Hermes also offers institutional prime or municipal (or tax-exempt) money market funds which transact at a fluctuating
that uses four-decimal-places ($1.0000), and a short-term variable
money by investing in these funds. Federated Hermes devotes substantial resources, such as significant credit analysis,
consideration of
factors and attention to security valuation, in connection with the management of its products and
strategies. However, the
or, if the above described conditions are met, a low-volatility
government/public debt or retail (i.e., stable or constant
NAV
be able to preserve a stable or constant
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 Developments could lead to shifts in asset levels and mix, which could impact
money market fund
money market fund
were to decline to less than $1.00 per share, such Federated Hermes money market fund would likely experience significant
AUM
redemptions, resulting in reductions in
, loss of shareholder confidence and reputational harm, all of which could cause
material adverse effects on Federated Hermes' Financial Condition. If the fluctuating
NAV
fund, can fluctuate, and there is no guarantee that a
) money market fund, or a low-volatility money market fund, will
of an institutional prime or municipal (or tax-exempt) money market fund, or variable
non-U.S. money market fund. It is also possible to lose
of a Federated Hermes stable or constant
of an institutional prime or
and performance. If the
money market
NAVs
NAV
NAV
NAV
NAV
NAV
NAV
NAV
ESG
NAV
NAV
fund
36
municipal (or tax-exempt) money market fund, or variable
consistently or significantly declines to less than $1.0000 per share, such Federated Hermes money market fund could
experience significant redemptions, resulting in reductions in
of which could cause material adverse effects on Federated Hermes' Financial Condition.
money market fund or low volatility money market fund
, loss of shareholder confidence and reputational harm, all
NAV
AUM
Potential Adverse Effects of Increased Competition in the Investment Management Business. The investment
management business is highly competitive. Federated Hermes competes in the management and distribution of investment
products and strategies (such as the Federated Hermes Funds and Separate Accounts), stewardship services and real estate
development 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 Hermes. Competition is based on various factors, including, among others, business
reputation, investment performance, quality of service, engagement, carbon neutrality and other
initiatives, the strength and continuity of management and selling relationships, distribution services offered, technological
innovation (e.g., the use of financial technology, artificial intelligence, natural language processing, digital client engagement
tools, and data science in managing and distributing products and strategies), the ability to generate, validate and publish
accurate reports in a timely manner, the ability to offer customers and shareholders 24/7 access to their funds, the type (e.g.,
passive- versus actively-managed, fund versus
charged, customer or shareholder preferences and geopolitical developments. As with any highly competitive market,
competitive pricing structures are important. If competitors charge lower fees for similar products or strategies, Federated
Hermes has reduced, or could 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 and shareholders. Increased
competition also can require changes in Federated Hermes' business strategy or model, products (e.g., launching
and
creating a philanthropic share class), investment strategies, operational strategies,
management strategies to respond to competition from existing and new market innovations and competitors, which can
increase expenses and create the risk that such changes will not be successful or implemented properly, or that Federated
Hermes will not achieve its long-term strategic objectives. Such fee reductions, changes in business models or strategies, or
other effects of competition, or failures to adequately adjust business practices, products, or services to meet competition, could
have a material adverse effect on Federated Hermes' Financial Condition.
ETFs
strategies and human resource
-insured deposits) and range of products and strategies offered, fees
-related commitments and
FDIC
ESG
ESG
Many of Federated Hermes' products and strategies are designed for use by institutions such as banks, insurance companies and
other corporations. A large portion of Federated Hermes' managed assets, particularly money market, fixed-income, and
alternative/private markets assets, are held by institutional investors. If 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
) or otherwise, Federated Hermes could
be unable to retain or grow its share of this market and this could adversely affect Federated Hermes' future profitability and
have a material adverse effect on Federated Hermes' Financial Condition. Certain of Federated Hermes' products and strategies
also can be impact oriented and might not be suitable investments for certain fiduciary customers in the U.S. without obtaining
appropriate consent. This can limit Federated Hermes' ability to market or grow assets and this could adversely affect Federated
Hermes' future profitability and affect, potentially in a material way, Federated Hermes' Financial Condition.
ETFs
A significant portion of Federated Hermes' revenue is derived from providing products and strategies to the U.S. Financial
Intermediary market, comprising over 11,000 institutions and intermediaries. Its future profitability 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 Regulatory Developments impact its customers and shareholders.
Potential Adverse Effects of Changes in Federated Hermes' Distribution Channels. Federated Hermes acts as a wholesaler
of investment products and strategies to its customers, including, for example, banks, broker/dealers, registered investment
advisors and other financial planners. It also sells investment products and strategies, and stewardship services and real estate
development services, directly to corporations, institutions, government agencies, and other customers. There can be no
assurance that any product diversification efforts (whether to Federated Hermes' fund line-up or geographically),
positioning or investments in data and analytics to bolster Federated Hermes' distribution efforts will be successful. There also
can be no assurance that Federated Hermes will continue to have access to any customer that currently distributes its products
and strategies, that its relationship with any one or more such customers will continue over time or on existing economic terms,
or that its 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 such customers' distribution fee arrangements, changes in
customer or shareholder relationships and changes in the extent to which the impact of the waivers is shared by one or more
customers. In addition, exclusive of the impacts of waivers and related reductions in distribution expense, Federated Hermes
ESG
37
has experienced decreases in the cost of distribution as a percentage of total fund revenue from 32% in 2020 to 31% in 2021. As
interest rates increase, Federated Hermes expects such costs 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
Hermes' operating and net income.
AUM
Potential Adverse Effects of Declines in the Amount of or Changes in the Mix of Assets under Management. A significant
portion of Federated Hermes' 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
Hermes also can earn performance fees or carried interest on certain products and types of assets. Mutual fund and other fund
products generally have higher advisory fees 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 or shareholder
relationship. Consequently, significant fluctuations in the number of shareholders or customers of Federated Hermes' products
and strategies, the value of securities or other investments held by, or the level of subscriptions to or redemptions from, the
products or strategies advised by its advisory subsidiaries and overall asset mix among products and strategies, can materially
affect
and thus Federated Hermes' revenue, profitability, and growth. Similarly, changes in Federated Hermes' average
asset mix across products, strategies or asset types have a direct impact on Federated Hermes' revenue and profitability.
Federated Hermes 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 portion of Federated Hermes' 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
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
partially or fully closed to new investments, which can result in redemptions or a reallocation of assets to other products,
strategies, or asset classes. Additionally, changing market conditions can cause a shift in Federated Hermes' asset mix towards
money market and fixed-income products or strategies, and Regulatory Developments can cause a shift between money market
fund products or from money market funds to other products. Each of the above factors can cause a decline in or otherwise
affect, potentially in a material way, Federated Hermes' Financial Condition.
AUM
Impairment Risk. At December 31, 2021, Federated Hermes had intangible assets including goodwill totaling $1.3 billion on
its Consolidated Balance Sheets, the vast majority of which represents assets capitalized in connection with Federated Hermes'
acquisitions and business combinations. Federated Hermes might not realize the value of these assets. Management performs a
review of the carrying values of goodwill and indefinite-lived intangible assets annually or when indicators of potential
impairment exist and periodically reviews the carrying values of all other assets to determine whether events and circumstances
indicate that an impairment in value has occurred. A variety of factors could cause the carrying value of an asset to become
impaired. For example, the value of an asset could be impacted if, among other factors, projected future revenue streams are
reduced due to lower managed assets or revenue is subject to claw back provisions. 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 Hermes' financial position and results of operations for the period.
Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements. A substantial majority of Federated
Hermes' revenues are derived from investment advisory agreements with Federated Hermes Funds (and to a lesser extent, sub-
advised mutual funds) registered under the 1940 Act that 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, 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
Hermes' Financial Condition. As required by the 1940 Act, each investment advisory agreement with a mutual fund
automatically terminates upon its assignment, although new investment advisory agreements can be approved by the mutual
fund's directors or trustees and, as required by law, shareholders. A sale or other transfer of a sufficient number of shares of
Federated Hermes' voting securities to transfer control of Federated Hermes could be deemed an assignment in certain
circumstances. An assignment, actual or constructive, will trigger these termination provisions and can adversely affect
Federated Hermes' ability to realize the value of these agreements. Federated Hermes' investment advisory agreements for such
Separate Accounts that are not investment companies subject to the 1940 Act are generally terminable upon notice to Federated
Hermes (or, in certain cases, after a 30-day, 60-day or other notice period). As required by the Advisers Act, investment
advisory agreements for Separate Accounts also provide that consent is required from customers before the agreements can be
assigned. An assignment, actual or constructive, also will trigger these consent requirements and can adversely affect Federated
Hermes' ability to realize the value of these agreements. Regarding the investment advisory agreements with non-U.S.
registered Federated Hermes Funds, shareholder notice or consent can be required if, after an investment advisory agreement is
38
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 (or other) 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 (or other) notice period.
Under the terms of a 2005 settlement agreement with the
and New York State Attorney General, as amended, a Federated
Hermes investment advisory subsidiary cannot serve as investment advisor to any registered investment company unless: (1) at
least 75% of the fund's directors are independent of Federated Hermes; (2) the chairman of each such fund is independent of
Federated Hermes; and (3) no action can 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.
SEC
Risks Related to Interest Rates and Investment Performance
FOMC
decreased the federal funds target rate range to 0% - 0.25%. The federal funds target rate
Potential Adverse Effects of Low Short-Term Interest Rates. In March 2020, in response to disrupted economic activity as a
result of the Pandemic, the
drives short-term interest rates. As a result of the near-zero interest-rate environment, the gross yield earned by certain money
market funds is not sufficient to cover all of the fund's operating expenses. Beginning in the first quarter 2020, Federated
Hermes began to waive fees in order for certain money market funds to maintain positive or zero net yields (Voluntary Yield-
related Fee Waivers). These waivers have been partially offset by related reductions in distribution expense as a result of
Federated Hermes' mutual understanding and agreement with third-party intermediary customers to share the impact of the
Voluntary Yield-related Fee Waivers. See Item 1A - Risk Factors - Specific Risk Factors - Risks Related to Federated Hermes'
Investment Management Business - Potential Adverse Effects of Increased Competition in the Investment Management
Business for information on competitive waivers currently being implemented by Federated Hermes, other than the Voluntary
Yield-related Fee Waivers.
AUM
in certain money market funds and thus can vary
Voluntary Yield-related Fee Waivers are calculated as a percentage of
depending upon the asset levels and mix in such funds. While the level of fee waivers are impacted by various factors, as an
isolated variable, increases in short-term interest rates that result in higher yields on securities purchased in money market funds
would likely reduce the negative pre-tax impact of these waivers. Also, as an isolated variable, a further decrease in short-term
interest rates that results in lower or negative yields on securities purchased in money market funds generally would increase
these fee waivers for certain money market funds and the negative pre-tax impact of these waivers. In that case, Federated
Hermes could be required to implement structural changes to certain money market funds and incur additional expenses
associated with implementing such changes. Moreover, at this time, while representatives of the Fed have signaled that the
FOMC
will start raising U.S. interest rates in March 2022 to address inflation, any corresponding increases in yields and
resulting decreases in fee waivers would be uncertain and not directly proportional. In addition, the level and actual amount of
fee waivers, and the resulting negative impact of these fee waivers, are contingent on a number of variables, including, but not
limited to, changes in assets within the money market funds, changes in yields available for purchase by such funds, changes
due to the level of government stimulus programs which could result in the issuance of additional Treasury debt instruments,
SEC
actions by the
expenses of the money market funds, changes in the mix of money market assets, changes in customer or shareholder
relationships, changes in money market product structures and offerings, demand for competing products, changes in the
distribution fee arrangements with third parties, Federated Hermes' willingness to continue the Voluntary Yield-related Fee
Waivers and changes in the extent to which the impact of the waivers is shared by third parties. In any given period, a
combination of these variables impacts the amount of Voluntary Yield-related Fee Waivers. Given the variables involved, the
actual amount and resulting negative impact of future fee waivers, if any, could vary significantly from period to period.
and other governmental entities, changes in
, the U.S. Department of Treasury, the
FOMC
FSOC
, the
With regard to asset mix, changes in the relative amount of 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 funds will waive less than government funds due to higher gross
yields on their underlying investments. As such, as an isolated variable, an increase in the relative proportion of average
managed assets invested in prime 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.
For the year ended December 31, 2021, Voluntary Yield-related Fee Waivers totaled $420.3 million. These fee waivers were
partially offset by related reductions in distribution expenses of $277.1 million, such that the net negative pre-tax impact to
Federated Hermes was $143.2 million. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations for information on management's expectations regarding fee waivers in the first quarter 2022. The duration, level,
39
and impact of a further decline in interest rates and/or future Voluntary Yield-related Fee Waivers could have a material adverse
effect on Federated Hermes' Financial Condition.
Potential Adverse Effects of Rising Interest Rates. Increases in interest rates could also have an adverse effect on Federated
Hermes' 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 can 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 can shift these investments to direct investments in
comparable instruments in order to realize higher yields. In addition, rising interest rates will tend to reduce the fair value of
securities held in various investment products and strategies. Rising interest rates can also impact demand for and cost to
finance real estate and impact the value of and returns on real estate and other alternative products and strategies. Among other
potential adverse effects, rising interest rates can result in decreased liquidity, inflation and decreased affordability, changes in
investor preferences, higher costs for borrowings, and increased volatility, and could negatively impact the performance of
Federated Hermes' products and strategies and Federated Hermes' revenue. Management cannot estimate the impact of rising
interest rates (including, for example, on Federated Hermes' revenue), but such impact could have a material adverse effect on
Federated Hermes' Financial Condition.
, resulting in additional revenues. Good performance can also result
Potential Adverse Effects of Poor Investment Performance. Success in the investment management business is largely
dependent on the performance of Federated Hermes Funds, Separate Accounts, or other investment portfolios relative to market
conditions and the performance of competing products and strategies. Investment performance also depends on the quality of
investment selection, proper valuation of investments, liquidity management, and the performance of the portfolio companies
and other investments in which Federated Hermes', shareholders' and customers' assets are invested. The value and performance
of the portfolio companies in which Federated Hermes', shareholders' and customers' assets are invested also may be adversely
impacted, potentially in a material way, by climate, social, environmental, governance, and geopolitical changes, or other
factors, which, in turn, can adversely impact Federated Hermes' and its products' and strategies' performance. Good
performance generally assists retention and growth of
AUM
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 have the opposite effect. There can be no guarantee that any
product or strategy, or underlying investment, will be successful or have good performance. A product or strategy being, or
becoming, an unsuitable product or strategy for a customer or shareholder, whether due to changes in 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
neutrality or climate change strategies, or sustainability or responsible investment principles, can be considered in determining,
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 to Federated Hermes. Poor performance could, therefore, have a material adverse effect on
Federated Hermes' Financial Condition (including, but not limited to, business prospects). Market conditions, such as volatility,
illiquidity and rising or falling interest rates, among other conditions, can adversely affect the performance of certain
quantitative or other investment strategies or certain products, asset classes or sectors. Limitations imposed by certain
customers, trade agreements, and government-imposed restrictions, such as those on investments in certain countries or
companies, can limit investment opportunities and negatively affect performance. Performance also can be adversely affected
by inferior security selection, human error, government or issuer financial constraints, climate change that impacts portfolio
company performance, the Pandemic and other factors. The effects of poor performance on Federated Hermes could be
magnified where assets, customers or shareholders are concentrated in certain strategies, products, asset classes or sectors.
Changes in foreign currency exchange rates and poor performance of investments made by Federated Hermes, or derivatives
(including, for example, hedges or forward contracts) or other financial transactions entered into by Federated Hermes, can
result in investment or capital losses and also can materially adversely affect Federated Hermes' Financial Condition.
standards, carbon
ESG
Risk Related to Federated Hermes' Corporate Structure
Status as a Controlled Company. Federated Hermes has two classes of common stock: Class A, which has voting power; and
Class B, 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 Hermes' President and Chief Executive Officer and Chairman of the Board, J. Christopher Donahue, his
brother, Thomas R. Donahue, Federated Hermes' Vice President, Treasurer and Chief Financial Officer and a director, and their
mother, Rhodora J. Donahue. Accordingly, Federated Hermes qualifies as a "controlled company" under Section 303A of the
NYSE
) Listed Company Manual. As a controlled company, Federated Hermes qualifies for and
New York Stock Exchange (
relies upon exemptions from several
NYSE
corporate governance requirements, including requirements that: (1) a majority of
40
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 Hermes' board does not have a majority of independent directors nor does it maintain a
nominating/corporate governance committee. Federated Hermes is also exempt as a "controlled company" from certain
additional independence requirements and responsibilities regarding compensation advisors applicable to Compensation
Committee members. While Federated Hermes believes its dual-class structure is appropriate and benefits its shareholders, and
should be a factor taken into account by shareholders when investing in Federated Hermes, as a company with a dual-class
structure, Federated Hermes can be excluded from certain financial indexes, which could result in decreased investments in
Class B common stock and adversely affect its stock price.
General Risk Factors
Economic and Market Risks
Potential Adverse Effects of a Decline or Disruption in the Economy or Markets. Economic or market downturns,
disruptions, or other conditions (domestic or international) can cause volatility, illiquidity, and other potential adverse effects in
the markets. Such conditions also can 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
investment products, strategies, and services, including those of Federated Hermes. Such economic or market downturns,
disruptions or other conditions can include, for example, disruptions in the markets, defaults or poor performance in certain
sectors of the economy, changes in the levels of consumer spending and personal savings, unemployment, excessive corporate
debt levels, increased personal, business or government/municipality bankruptcies, supply chain disruptions, the
commencement, continuation or ending of government policies and reforms, stimulus programs, and other market-related
actions, quantitative easing or tightening or other changes in monetary policy, central bank changes in risk perception or
activism through continued, increased or decreased ownership, exchange, cancellation or issuance of debt or other means,
increased regulation or a slower or faster 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, deflation, or stagflation, index changes, widening
bid/ask spreads, changes in the allocation of capital to market-making, restructuring of government-sponsored entities,
imposition of economic sanctions or government-imposed investment restrictions, trade friction or trade wars and increased
trade tariffs, economic or political weakness, political turmoil, geopolitical tensions (such as between the U.S. and both Russia
and China) or military escalation or other instability in certain countries or regions, technology-related or cyber-attacks or
incidents, terrorism, climate change, the prospects for or concerns about any of the foregoing factors or events, or other factors
or events that affect the markets. Each of the above factors, among others, can cause or contribute to economic or market
downturns, disruptions or other conditions and their potentially adverse effects. In addition, Federated Hermes' products and
strategies, and their investments, can be adversely affected, potentially in a material way, by changes in U.S., UK,
markets, downgrades of U.S.,
and other countries as well as by actual or potential deterioration in international sovereign or other market conditions.
or other countries' credit ratings, the U.S. debt limit or other developments in the U.S.,
or other
UK
,
UK
EU
NAV
At December 31, 2021, Federated Hermes' liquid assets of $492.7 million included investments in certain money market and
Federated Hermes Funds that can have direct and/or indirect exposures to international sovereign debt and
fluctuating
currency risks. Federated Hermes and its money market and other Federated Hermes Funds also interact with various other
financial industry participants, such as counterparties, broker/dealers, banks, clearing organizations, other investment products,
customers, and shareholders, as a result of operations, trading, distribution, and other relationships. As a result, Federated
Hermes' Financial Condition (including, but not limited to, its reputation) could be adversely affected by the creditworthiness or
financial soundness of other financial industry participants, particularly in times of stress or disruption. There can be no
assurance that any potential losses realized as a result of these exposures will not have a material adverse effect on Federated
Hermes' Financial Condition (including, but not limited to, its reputation).
The ability of Federated Hermes to compete and sustain asset and revenue growth is dependent, in part, on the relative
attractiveness of the types of investment products and strategies it offers and their investment performance under prevailing
market conditions. Adverse market conditions or other events also could impact Federated Hermes' customers and shareholders.
In the event of extreme circumstances, such as economic, political, or business crises, Federated Hermes' products and
strategies can suffer significant net redemptions in
certain other investment products and strategies and declines in the value of and returns on
material adverse effects on Federated Hermes' Financial Condition (including, but not limited to, its reputation).
causing severe liquidity issues in its short-term, fixed-income or
, all of which could cause
AUM
AUM
41
Custody, depository, and portfolio accounting services for the Federated Hermes Funds generally are outsourced to third-party
financial institutions. Accounting records for the Federated Hermes Funds are maintained by these service providers. These
service providers, or other service providers of Federated Hermes and its products, customers, or shareholders, 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 Hermes or its products receive 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 Hermes' ability to find
a suitable replacement would not have a material adverse effect on Federated Hermes' Financial Condition (including, but not
limited to, its reputation).
No Assurance of Access to Sufficient Liquidity or Capital. From time to time, like other companies, Federated Hermes'
operations (including corporate initiatives, such as stock repurchases, acquisitions and other corporate actions) can require more
cash than is available from operations. In these circumstances, it can be necessary to borrow from lending facilities or to raise
capital by securing new debt or by selling Federated Hermes equity or debt securities. Certain subsidiaries of Federated
Hermes, such as its non-U.S. subsidiaries, also can be required to maintain a specified level of regulatory capital. Federated
Hermes' ability to raise additional capital in the future will be affected by several factors including, for example, its
creditworthiness and the market value of its common stock, as well as interest rates and general market conditions. There can be
no assurance that Federated Hermes will be able to obtain or maintain necessary capital or obtain these funds and financing on
acceptable terms, if at all. If Federated Hermes cannot obtain or maintain necessary capital or obtain such funds and financing,
it could have a material adverse effect on Federated Hermes' Financial Condition. If a Federated Hermes Fund requires liquidity
to meet shareholder redemptions or for other reasons, there also can be no assurance that such Federated Hermes 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 Hermes Fund cannot obtain sufficient liquidity, it could have a material
adverse effect on such Federated Hermes Fund, result in redemptions and a corresponding reduction in Federated Hermes'
AUM
Federated Hermes Fund, Federated Hermes' liquidity and income could be adversely impacted. These factors could have a
material adverse effect on Federated Hermes' Financial Condition.
and Federated Hermes' revenue. While not obligated, if Federated Hermes decides to provide credit support to a
Regulatory and Legal Risks
Potential Adverse Effects of Changes in Laws, Regulations and Other Rules. Like other companies, Federated Hermes and
its investment management business are (and any new business line commenced or acquired by Federated Hermes would be)
subject to extensive regulation both within and outside the U.S. Federated Hermes and its products (such as the Federated
Hermes 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 internationally, including, but not
limited to, the
. From time to time, applicable securities laws can be amended substantially.
FINRA
,
NYSE
FCA
,
SEC
,
and
CBI
SEC
CFTC
. Federated Hermes, and certain Federated Hermes Funds, are also subject
Federated Hermes and its domestic products and strategies, and any non-U.S. products and strategies to the extent offered in the
U.S., continue to be primarily regulated by the
to regulation by the U.S. Commodity Futures Trading Commission (
) due to
their investment in futures, swaps or certain other commodity interests in more than de minimis amounts. In addition, during the
and
past several years, regulators, self-regulatory organizations, or exchanges, such as the
state or local governments and regulators, have adopted, and could adopt, other regulations, rules and amendments that have
AUM
increased Federated Hermes' operating expenses and affected the conduct of its business, as well as Federated Hermes'
,
revenues, and operating income, and could continue to do so. Federated Hermes' business is affected by laws, regulations, and
regulatory authorities that impact the manner in which Federated Hermes' products are structured, distributed, provided, or sold.
Federated Hermes and its products and strategies also are affected by certain other laws and regulations governing banks, other
financial institutions, intermediaries, or real estate. The fourth quarter of 2021 saw an uptick in proposed regulations issued by
the
additional money market fund reforms.
and other regulators, and the market turmoil in March 2020 as a result of the Pandemic has brought a renewed focus on
) and the National Futures Association (
,
,
CFTC
NFA
,
SEC
FINRA
,
NYSE
SEC
NFA
CBI
for London-based
for Dublin-based operations, the German Federal Financial Supervisory Authority for Frankfurt-based
Federated Hermes' and its products' activities outside of the U.S. are subject to foreign laws and regulations, which are
promulgated or amended from time to time, by foreign regulatory or other authorities, such as the
operations, the
operations, and the Cayman Island Monetary Authority for Cayman Island products. In addition, Federated Hermes'
stewardship services can be impacted by proxy advisor regulations. In addition to existing and potential future regulation, a
FTT
or
Hermes' business. Regulatory reforms stemming from Brexit or other initiatives also can increase volatility in the
and could be detrimental to Federated Hermes' business, particularly as it expands in the
, or even the U.S., would be detrimental to Federated
and
, particularly if enacted with broad application in the
FCA
EU
.
UK
UK
UK
EU
and
EU
42
FSOC
. Similarly, it is possible that the
In addition, the Dodd-Frank Act provides for a systemic risk regulation regime under which it is possible that Federated
Hermes, and/or any one or more of its products could be subject to designation as a systemically important financial institution
by the
non-U.S. Federated Hermes Funds), as a non-bank, non-insurance company global systemically important financial institution.
Among other potential impacts, any such designation would result in Federated Hermes and/or its products being subject to
. Any such designation of
additional banking regulation and bank-oriented measures and oversight by the Governors or
Federated Hermes or one or more of its products (particularly money market funds) would be detrimental to Federated Hermes'
business and could materially and adversely affect Federated Hermes' Financial Condition.
could designate Federated Hermes, and/or one of its products (such as the
FSB
FSB
ESG
ESG
ESG
disclosure requirements that can differ
As Federated Hermes' business grows (whether organically or through acquisition, new products, strategies or services being
offered, increased market values of assets held by products, expansion into new countries, jurisdictions or markets, or
otherwise), Federated Hermes' products, strategies and operations need to comply with applicable laws, rules, regulations,
interpretations and government policies, which increases compliance risk and operating expenses, including reporting risks and
the costs associated with compliance. Compliance risk and operating expenses also can increase as Federated Hermes continues
, sustainability, stewardship or other data inputs or investment techniques in providing its investment
to expand its use of
products, strategies, and services, and/or offering financial products and other investments, as well as when markets, customer
requirements, support models and technology increase in complexity. Federated Hermes has expanded integration of
, and
related compliance expense is further exacerbated by the increasing spectrum of
between jurisdictions, countries and markets. Failure to comply with legal and regulatory requirements, or changes to legal and
regulatory requirements, whether due to conflicts of interest, breaches of fiduciary duty, trading on the basis of material
nonpublic information, other improper conduct by employees or service providers, inadequate processes, procedures and
controls, or another cause, can impact market integrity, customer or shareholder outcomes and satisfaction, performance and
Federated Hermes' reputation, as well as its compliance with its investment advisory and other agreements, licensing
requirements and governance and compliance policies, and result in lost business, fines, penalties or other sanctions. Significant
or repeated failures also could change Federated Hermes' regulators' views of, and relationship with, Federated Hermes.
Regulators also have undertaken or could undertake examinations, investigations, and/or enforcement actions involving
investment management industry participants, such as Federated Hermes and its products. Federated Hermes 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 - Regulatory Matters) on
Federated Hermes' Financial Condition. Among other potential impacts, Regulatory Developments have increased, and could
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. Regulatory Developments and requirements also have caused,
and could continue to cause: (1) certain product line-up, structure, pricing and product development changes; (2) changes in the
ability to utilize "soft dollars" to pay for certain research and brokerage services (rather than Federated Hermes paying for such
services directly); (3) money market, equity, fixed-income, alternative/private markets and multi-asset products becoming less
attractive to institutional and other investors; (4) reductions in the number of Federated Hermes Funds offered by intermediary
customers; (5) changes in fees charged, asset flows, levels and mix, and customer or shareholder relationships; and
(6) reductions in
can become less attractive to institutional or other investors, which could result in changes in asset mix and reductions in
revenues, and operating income. The renewed focus on additional money market fund regulation increases this risk.
, revenues and operating profits. For example, certain money market funds or other products or strategies
AUM
,
AUM
On a cumulative basis, Federated Hermes' regulatory, product development and restructuring, and other efforts in response to
Regulatory Developments, including the internal and external resources dedicated to such efforts, have had, and could continue
to have, a material impact on Federated Hermes' expenses and, in turn, Financial Condition. There is no guarantee that
additional money market fund reforms will not result in a shift in asset mix away from institutional prime and municipal (or
tax-exempt) money market funds and toward government money market funds. Using mid-December 2021
estimates that approximately $8 billion in
market funds to government money market funds.
could shift from institutional prime and municipal (or tax-exempt) money
, management
AUM
AUM
Regulatory Developments in the current regulatory environment, and Federated Hermes' efforts in responding to them, could
have a material and adverse effect on Federated Hermes' Financial Condition. Given the current regulatory environment,
Federated Hermes is unable to fully assess the degree of the impact of adopted or proposed regulations and other Regulatory
Developments, and Federated Hermes' efforts related thereto, on its Financial Condition.
Changes in laws, regulations, rules, interpretations, or governmental policies, domestically and abroad, also impact the service
providers, intermediaries and other customers, shareholders and other third parties with whom Federated Hermes, and its
products, conduct business. For example, provisions of the Dodd-Frank Act or Regulation Best Interest can affect customers'
43
sale or use of Federated Hermes' products or strategies. Among other potential impacts, these changes are affecting, and could
continue to affect, Federated Hermes' arrangements with these customers, and could continue to increase fee pressure, reduce
the number of Federated Hermes products and strategies offered by them, cause certain other customers or shareholders 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 Hermes' or such customers' respective
businesses. This resulted, and will likely continue to result, in Federated Hermes or one or more of these third parties seeking to
restructure or alter their compensation or other terms of the business arrangements between Federated Hermes or its products
and one or more of these third parties. The above factors could have a material adverse impact on Federated Hermes' Financial
Condition. For a further discussion of U.S. and international Regulatory Developments that can impact Federated Hermes and
its business, products, strategies, and services, see Item 1 - Business - Regulatory Matters.
UK
AUM
, and service provider fees, and Federated Hermes' Financial Condition. The failure to properly calculate,
Federated Hermes' business also has been, and will continue to be impacted by changes in tax laws. For example, the corporate
tax rate in the
was increased from 19% to 25%, effective April 1, 2023. See Note (15) to the Consolidated Financial
Statements for additional information. Any repeal of U.S. tax laws that allow exchange traded funds to receive favorable
treatment of capital gains could adversely impact Federated Hermes' exchange traded fund business. When tax laws are
amended to increase taxes applicable to Federated Hermes, its products, customers, shareholders and service providers, the
increased tax expense can have an adverse impact, potentially in a material way, on Federated Hermes' products' and strategies'
performance,
report and remit such taxes also could subject Federated Hermes, its products, customers, shareholders and service providers to
additional tax liability, fines, and penalties. 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 or services
that subject it, or Federated Hermes or its products, to tax in a jurisdiction, (e.g., sales, use or other types of taxes), (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
Hermes' tax liability and effective tax rate and, as a result, net income. Various investment products also can be impacted by tax
changes, which could have an adverse effect on the products and Federated Hermes' Financial Condition.
AUM
Potential Adverse Effects of Litigation, Investigations, Proceedings and Other Claims. Like other companies, Federated
Hermes and its products (such as the Federated Hermes Funds) can be subject to regulatory examinations, inquiries,
investigations, litigation and other claims and proceedings. Regarding examinations, Federated Hermes and its products are
subject to routine, sweep and other examinations, inquiries, investigations, proceedings (administrative, regulatory, civil, or
otherwise) and other claims by its regulators (regulatory claims). Federated Hermes and its products also can be subject to
employee, former employee, customer, shareholder, and other third-party, complaints, proceedings (such as civil litigation) and
other claims (business-related claims). Among other factors, as Federated Hermes' business grows (whether organically or
through acquisition, growth in
, or new products, strategies or services being offered, or otherwise), the attention and
resources devoted to compliance, and the possibility of noncompliance, can increase. The attention and resources devoted to
compliance, and the possibility of noncompliance, also can increase as Federated Hermes expands its use of
sustainability, stewardship or other data inputs or investment techniques in providing its investment products, strategies, and
services, enters new countries, jurisdictions, or markets, and offers financial products and other investments, as well as when
markets, customer requirements, support models and technology increase in complexity. Federated Hermes has business-related
claims asserted and threatened against it, and Federated Hermes and its products are subject to certain regulatory claims (such
as routine and sweep examinations and other inquiries), in the ordinary course of business. In addition, Federated Hermes and
its products can be subject to business-related claims, claims related to Federated Hermes sponsorship or management of, or
inclusion of proprietary products 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 Hermes cannot assess or
predict whether, when or what types of business-related claims, fiduciary claims or regulatory claims (collectively, claims)
could be threatened or asserted, the types or amounts of damages or other remedies that could be sought (which can be material
when threatened or asserted), whether claims that have been threatened will become formal asserted pending investigations,
proceedings or litigation, whether claims ultimately will be successful (whether through settlement or adjudication), entirely or
in part, or whether or not any such claims are threatened or asserted in or outside the ordinary course of business. Federated
Hermes can initially be unable to accurately assess a claim's impact. Given that the outcome of any claim is inherently
unpredictable and uncertain, a result can arise from time to time that adversely impacts, potentially in a material way, Federated
Hermes' Financial Condition (including, but not limited to, its reputation). In certain circumstances, insurance coverage might
not be available or deductible amounts might not be exceeded, and Federated Hermes, and/or its products or strategies
(including the Federated Hermes Funds or Separate Accounts), could have to bear the costs related to claims or any losses or
ESG
,
44
other liabilities resulting from any such matters, or from the operation of Federated Hermes' business, products, strategies, and
services.
Risks Related to Auditor Independence. Public companies, such as Federated Hermes, 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 applicable securities laws. For example,
in the U.S., 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. Rule 2-01(c)(1)(i)(A)
of Regulation S-X (Investment Rule) also 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 audit client or funds or other products that it or its affiliates manage, or other circumstances, an
Accounting Firm can 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.
Like other public companies, there is a risk that activities or relationships of the Accounting Firm engaged by Federated
Hermes, 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 Hermes, which could render such firm ineligible to serve as Federated
Hermes' independent Accounting Firm. Certain Federated Hermes Funds also utilize the Accounting Firm engaged by
Federated Hermes. Since Federated Hermes' 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 Hermes Funds, if a
determination cannot be made that the Accounting Firm satisfies the independence requirements with respect to an applicable
Federated Hermes Fund, the Accounting Firm also could be prevented from making a determination that it satisfies the
independence requirements with respect to Federated Hermes, since Federated Hermes is an affiliate (i.e., the ultimate parent
company) of the investment advisor to the relevant Federated Hermes Fund.
There can be no assurance that an Accounting Firm will remain eligible to serve as the independent Accounting Firm to
Federated Hermes or any Federated Hermes Fund. If it were to be determined that the independence requirements under
applicable securities laws were not complied with regarding Federated Hermes, its previously filed Annual Reports on Form
10-K (including financial statements audited by its existing Accounting Firm) and Quarterly Reports on Form 10-Q (including
financial statements reviewed by its existing Accounting Firm) might not be considered compliant with the applicable securities
laws. If it were to be determined that an Accounting Firm did not comply with the independence requirements, among other
things, the financial statements audited by the Accounting Firm and the interim financial statements reviewed by the
Accounting Firm could have to be audited and reviewed, respectively, by another independent Accounting Firm, Federated
Hermes' eligibility to issue securities under its existing registration statements can be impacted and certain financial reporting
and/or other covenants with, and representations and warranties to, Federated Hermes' lenders or debt holders can be impacted.
Similar issues would arise for a Federated Hermes Fund for which Federated Hermes' Accounting Firm (or another Accounting
Firm) serves as such Federated Hermes Fund's independent Accounting Firm if it were to be determined that Federated Hermes'
Accounting Firm (or such other Accounting Firm) was not in compliance with the independence requirements under applicable
securities laws, with respect to such Federated Hermes Fund. In either case, such events could have a material adverse effect on
Federated Hermes' Financial Condition.
Operations-Related Risks
Operational Risks. Like other companies, Federated Hermes' products, business and operations are supported internally and
through management of relationships, including, for example, outsourcing relationships, with various third-party service
providers, 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, non-resilient, deficient or non-scalable technology,
processes, operating systems, security or other infrastructure, resources or controls; poor performance by internal resources or
third party service providers; failure to appropriately attract, retain, train, supervise and promote the wellbeing and resiliency of
qualified human capital resources, whether internal or external; failure to perform due diligence on third party service providers
(particularly in light of the Pandemic, which has required remote due diligence to be conducted); business disruptions; supply
chain disruptions (whether within Federated Hermes or third party); employee turnover (particularly involving executives,
management or other key employees); failure to effectively upgrade or patch technology or transition to a "cloud-based"
environment; inadequacies or breaches in Federated Hermes', its products' or a service provider's governance policies or internal
control processes; unauthorized disclosure or manipulation of, or access to, confidential, proprietary or non-public personal or
45
business information; unauthorized access to accounts, applications or systems; and noncompliance with regulatory
requirements, investment mandates and related investment parameters or customer-imposed restrictions. As Federated Hermes'
and its relevant service providers' businesses expand or become more complex and require additional scalability or
customization, operational risk increases. There is a risk that changes (including upgrades or patches) 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 Hermes' Financial Condition (including, but not limited to, its reputation).
Systems, Technology and Cybersecurity Risks. Like other companies, Federated Hermes utilizes software and related
technologies throughout its business, including, for example, both proprietary systems and those provided by outside service
providers. Service providers to whom certain services, functions or responsibilities are outsourced by or for, and customers and
shareholders of, Federated Hermes and its products, and third parties on which such service providers, customers and
shareholders rely, also utilize software and related technologies in their businesses. Federated Hermes continues to increase its
investment in systems and technology, including externally hosted or cloud-based systems and technology, and its reliance on
third parties, for investment management and trading operations, information and data management and governance, 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
Hermes or a third party to address technology or computer system problems. Along with cyber incidents described more fully
below, business changes, data or model imprecision, control failures, obsolescence, software or other technology malfunctions,
severe weather, natural disaster or other climate conditions, human error, programming inaccuracies and similar or other
circumstances or events can impair the performance of systems and technology or render them non-available. Systems and
technology risk is increased as Federated Hermes' systems and technology are deployed on an enterprise-wide basis.
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 Hermes' Financial Condition (including, but not
limited to, its reputation and business prospects).
In addition, like other companies, Federated Hermes' business relies on the security and reliability of information and
communications technology, systems, and networks. Federated Hermes uses digital technology, including, for example,
networked systems, email, and the internet, to conduct business operations and engage products, accounts, customers,
employees, shareholders, and relevant service providers, among others. The use of the internet and other electronic media,
computers and technology exposes Federated Hermes, its business, products, accounts, customers, employees, shareholders,
service providers and other third parties, and their respective operations, to potential risks from frequent cybersecurity attacks,
events, or incidents (cyber incidents). For example, Federated Hermes and relevant service providers collect, maintain, and
transmit confidential, proprietary, and non-public personal customer, shareholder, business, 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. The work-from-home and hybrid work
environments necessitated by the Pandemic have increased the risk of cyber incidents given the increase in cyber-attack surface
stemming from the use of personal devices and non-office or personal technology. Federated Hermes, 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 or providing reports or statements to customers or shareholders, and a cyber incident that
impacts that information, or the generation and filing processes, can prevent required regulatory filings and reports from being
made or reports or statements from being delivered. Cyber incidents involving Federated Hermes or its products or service
providers, regulators, or exchanges to which confidential, personally identifiable, or other information is reported or filed also
can result in unauthorized disclosure or compromise of, or access to, such information.
Cyber incidents can result from human error or intentional (or deliberate) attacks or unintentional events by insiders (e.g.,
employees) or third parties, including cybercriminals, competitors, nation-states and "hacktivists," among others. Cyber
incidents can include, for example, phishing, credential harvesting or 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, exfiltration of data to
malicious sites, the dark web or other locations or threat actors, the use of fraudulent or fake websites, and other 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
46
addition to intentional cyber incidents, unintentional cyber incidents can occur (for example, the inadvertent release of
confidential or non-public personal information). Changes to Federated Hermes' business, processes, systems, or technology, if
not implemented properly, can increase Federated Hermes' vulnerability to cyber incidents.
Like other companies, Federated Hermes has experienced, and will continue to experience, cyber incidents on a daily basis. As
of December 31, 2021, cyber incidents have not had a material adverse effect on Federated Hermes' Financial Condition. Cyber
incidents can affect, potentially in a material way, Federated Hermes' relationships with its products, accounts, customers,
employees, shareholders, relevant service providers and other third parties. A cyber incident can cause Federated Hermes, its
business, products, accounts, customers, employees, shareholders or relevant service providers, or other third parties, to lose
proprietary, sensitive, confidential or non-public business, product, account, customer, employee, shareholder, or personal
information, or intellectual property, suffer data corruption or business interruption, impair data coverage or quality, lose
operational capacity (for example, the loss of the ability to process transactions, generate or make filings or deliver reports or
statements, calculate
applicable privacy and other laws. Among other potentially harmful effects, cyber incidents also can 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, protection, detection,
remediation and corrective measures, and credit monitoring for impacted individuals), 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 employee perceptions of the company, damage to competitiveness, stock price and shareholder value, and
other negative or adverse impacts. Cyber incidents affecting issuers in which Federated Hermes' or its customers' or
shareholders' assets are invested also could cause such investments to lose value. Any of these cyber incidents can become
incrementally worse if they were to remain undetected for an extended period of time.
, or allow the transaction of business, or other disruptions to operations), and/or fail to comply with
NAVs
The operating systems of Federated Hermes, and its products, customers, shareholders, and relevant service providers are
dependent on the effectiveness of information security policies and procedures (both at Federated Hermes and its service
providers) which seek to ensure that such systems are protected from cyber incidents. Federated Hermes has established a
committee to oversee Federated Hermes' information security and data governance efforts, and updates on cyber incidents and
risks are reviewed with relevant committees, as well as Federated Hermes' 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 Hermes 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 Hermes 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 service provider management efforts, Federated Hermes conducts due diligence on key service
providers relating to cybersecurity. However, there is no guarantee that such efforts will be successful, either entirely or
partially, as there are limits on Federated Hermes' 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 Hermes, 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 Hermes' risk from cyber incidents
also can increase as a result of expansion into new markets, jurisdictions or countries, acquisitions, new technology, or
previously unexploited vulnerabilities in software or related patches becoming activated (or "weaponized") by hackers.
While Federated Hermes has obtained cyber-insurance, there is no guarantee that a particular incident would be covered by
such insurance. In certain circumstances, insurance coverage might not be available or deductible amounts might not be
exceeded, and Federated Hermes or its products could have to bear the costs related to claims or any losses or other liabilities
resulting from a cyber incident.
While Federated Hermes 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 Hermes' Financial Condition (including, but not limited to, its
reputation). The internal and external resources and efforts necessary to implement system and technology upgrades, data
governance and cybersecurity policies, procedures and measures, as well as service provider management, have increased, and
will continue to increase, Federated Hermes' operating expenses, and can adversely affect, potentially in a material way,
Federated Hermes' Financial Condition.
47
Other General Risks
Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk). Like other industries, the
investment management business is highly competitive and experienced professionals have significant career mobility.
Federated Hermes' 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 and shareholders. The market for qualified
executives, portfolio managers, analysts, traders, sales representatives, and other key personnel is extremely competitive. The
prolonged Pandemic has increased employee stress and fatigue, and placed an emphasis on employee mental wellness. The
move to remote and hybrid work environments (including opportunities to work from home at competitors), along with
increases in competitor salaries, during the Pandemic has increased competition for quality personnel, increased employee
turnover and created job vacancies that have become harder to fill with qualified and experienced personnel. A lack of financial
flexibility, regulatory requirements and business performance also are factors in attracting and retaining qualified personnel.
There can be no assurance that Federated Hermes will be successful in its efforts to recruit or acquire, and motivate, train 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. The Pandemic, and related work environment changes, including work-
from-home and hybrid-working arrangements, can create retention and other human capital resource management risks. Cyber
incidents, misconduct or other matters that negatively reflect on Federated Hermes and its reputation also can change employee
or prospective employee opinions regarding the company and could affect Federated Hermes' ability to hire or retain
employees. Federated Hermes has encouraged the continued retention of its executives and other key personnel through
measures such as providing competitive compensation arrangements, a non-discriminatory, diverse, and inclusive work
environment, work arrangement flexibility (particularly in light of the Pandemic) and, in certain cases, employment agreements.
The loss of any such personnel could have an adverse effect on Federated Hermes. In certain circumstances, the departure of
or the loss of customer or shareholder relationships.
key employees could cause higher redemption rates for certain
Moreover, since certain of Federated Hermes' products and strategies, or customer or shareholder 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 or shareholder relationships, could have a disproportionate adverse impact, potentially in a material way,
on Federated Hermes' Financial Condition. See Item 1 - Business - Human Capital Resource Management for additional
information on Federated Hermes' recruiting and retention programs and practices.
AUM
No Assurance of Successful Acquisitions. Like other companies, Federated Hermes' business strategy contemplates seeking
acquisition candidates. For Federated Hermes, acquisitions generally involve acquisitions of other investment management
companies, investment assets and related businesses, both domestically and internationally. There can be no assurance that
Federated Hermes 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 acquisition
agreements or consummating acquisitions, or successfully collaborating with, or integrating or consolidating, acquired
companies or assets into Federated Hermes 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 will
increase value or otherwise prove to be advantageous to Federated Hermes. On the other hand, successful collaboration with, or
integration or consolidation of, acquired companies or assets can increase the value of such acquired companies or assets and
result in increased contingent deferred payments or other payment obligations for Federated Hermes, which can affect
Federated Hermes' Financial Condition.
Potential Adverse Effects of Reputational Harm. Like other companies, any material losses in customer or shareholder
confidence in Federated Hermes, its products or strategies, or in the investment management industry as a result of actual or
potential regulatory proceedings or litigation, economic or market downturns or disruptions, material errors in public news
reports, oppositions to trade mark or other intellectual property registration applications or 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, improper corporate actions, poor communications with investors or the public via
social media or otherwise, abuse of authority, a cyber incident, rumors or inaccurate information being posted on the internet or
social media, failure to achieve carbon neutrality, climate change or other public commitments or pledges, failure to implement
or accurately disclose
strategies or initiatives, controversial tenants in real estate owned or managed by Federated Hermes,
fraudulent or fake websites or domain names using Federated Hermes' or a subsidiary's name, logo or address, or similar names,
logos or addresses, or other matters could negatively impact Federated Hermes' brand, culture, trusted status, reputation and/or
stock price, increase redemptions from and/or reduce sales of Federated Hermes' products (such as the Federated Hermes
Funds), strategies and services, and/or change employee or potential employee perceptions of the company which could impact
the willingness of a potential employee to be hired by or an employee to remain at Federated Hermes. If such losses or events
were to occur, it could have a material adverse effect on Federated Hermes' Financial Condition (including, but not limited to,
ESG
48
business prospects) . With increased focus on sustainability, as well as
Hermes' policies and practices on these matters can impact Federated Hermes' brand, reputation or stock price, as well as
investor preference for Federated Hermes' securities, products, strategies, and services, and, accordingly, adversely affect,
potentially in a material way, Federated Hermes' Financial Condition (including, but not limited to, business prospects).
matters, any perceived deficiency in Federated
ESG
ESG
changes could adversely impact Federated Hermes', its products', accounts', customers', shareholders' and portfolio
Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic). Like other companies,
unpredictable events, such as a natural disaster, pandemic (e.g., the coronavirus outbreak), war, terrorist attack or other business
continuity event, unexpected market, economic or political developments, or extreme weather, droughts, storms, climate, or
other
companies (in which Federated Hermes and its products and strategies are invested), and each of their respective service
providers', ability to conduct business. Physical climate change risks arising from changing or adverse weather and climate
change, and transition climate change risks arising as economies and markets transition to low carbon and other sustainable
environments, also can have adverse impacts. Such unpredictable events or consequences could cause, among other effects,
business disruptions, supply chain disruptions, disruptions in economic conditions, market disruptions or transformation,
changes in management or governmental processes, changes in consumer demand and investor preferences, obsolescence of
certain products or services affecting certain sectors, stranded assets across a range of assets, sectors or geographies,
infrastructure and real estate destruction, abandonment or damage leading to increased refurbishment and repair costs, changes
in technology, system interruption, loss of life, unavailability of personnel, increased insurance costs or an inability to insure
certain assets, an inability to provide information or services, either at all or in accordance with applicable requirements,
standards, or restrictions, and/or additional costs.
AUM
A failure in, or disruption to, Federated Hermes' operational systems or infrastructure, including business continuity plans,
could adversely affect operations, damage Federated Hermes' reputation, and cause Federated Hermes
, revenue and
earnings to decline. Remote or hybrid work arrangements can stress business processes, such as due diligence of service
providers, customer or shareholder onboarding, and controls, as well as increase cybersecurity, privacy, and digital
communications risks. The failure to maintain an infrastructure commensurate with the size and scope of Federated Hermes'
business, or the occurrence of a business outage or event outside of Federated Hermes' control (particularly in locations where
Federated Hermes has offices), or if Federated Hermes fails to keep business continuity plans up-to-date or if such plans are
improperly implemented or deployed during a disruption, Federated Hermes' ability to operate could be adversely impacted
which can cause its
obligations leading to reputational harm, regulatory fines, penalties, and/or sanctions. Any such failure or disruption also could
impact, potentially in a material way, Federated Hermes' Financial Condition. Management relies on its employees, systems,
and business continuity plans, and those of relevant service providers, to seek to mitigate such risks, but there can be no
guarantee that these mitigation efforts will be successful in whole or in part. There also can be times when industry databases or
other third parties publish or distribute information regarding Federated Hermes, or its products or services (including
Federated Hermes Fund asset levels), that might be inaccurate or incomplete, and there can be no assurance that a third party
will interpret or report information accurately.
, revenue and earnings to decline or impact Federated Hermes' ability to comply with regulatory
AUM
and
SEC
LIBOR
LIBOR
LIBOR
SOFR
SONIA
,
can cause the renegotiation or re-pricing of certain credit facilities, derivatives, or other financial
Unpredictable consequences, or side effects, of certain known or planned events, such as the planned phase-out of
or another alternative interest rate, also could adversely impact Federated Hermes', its products',
transition to
staff has indicated
customers', and shareholders', and their respective service providers' ability to conduct business. The
that the expected discontinuation of
could have a significant impact on the markets and can present a material risk for
certain market participants, including public companies, investment advisors, investment companies and broker/dealers. The
phase-out of
transactions to which Federated Hermes, its products, customers, shareholders, 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, thereby increasing operating expenses. Neither the effect of
the transition process nor the viability of
converting certain longer-term securities and transactions to new benchmarks. As market participants transition away from
LIBOR
, its usefulness can deteriorate. The transition process can lead to increased volatility and illiquidity in markets that
continue to rely on
potential deterioration can adversely affect the liquidity and/or
market value of securities that use
as a benchmark interest rate, including remaining LIBOR-based securities and other
financial instruments held by Federated Hermes or its products or strategies. Further, the utilization of an alternative reference
rate, or the transition process to an alternative reference rate, can adversely affect Federated Hermes' or its products' and
strategies' 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
Hermes' Financial Condition (including, but not limited to, business prospects).
transition measures can be fully determined. There can be obstacles to
to determine interest rates.
LIBOR's
LIBOR
LIBOR
LIBOR
49
The Pandemic. The outbreak of the coronavirus, and the resulting Pandemic, were unprecedented events that have been, and
continue to be, impossible to fully predict. The Pandemic initially resulted in, among other effects, travel bans, stay-at-home
orders, disruptions to supply chains, workflow, operations and customer activity, economic uncertainty, market volatility,
trading halts, market illiquidity and declining and variable stock prices, as well as general concern and uncertainty. While
economies of various countries have rebounded from the global economic shutdown that began in the late first quarter and early
second quarter 2020, the impact of the Pandemic continues, to varying degrees, in 2022. For example, spikes of coronavirus
cases, including breakthrough infections of vaccinated individuals, continue to occur in certain jurisdictions driven by more
contagious variants of the initial strain of the coronavirus. These variants, spikes, and breakthrough infections have resulted in
certain jurisdictions continuing or re-imposing certain travel and other restrictions, although in many cases not to the same
degree as those initially imposed. While economic uncertainty and market volatility have continued, it generally is not to the
same degree as initially seen in March 2020. The economic uncertainty, market volatility and impact of the Pandemic could
continue for an extended period of time (depending upon, among other factors, the extent to which effective vaccines continue
to be widely disseminated and vaccination rates continue to increase) and result in a continuing or further economic downturn
or recession. Health crises caused by outbreaks, such as the Pandemic, can exacerbate other pre-existing political, social, and
economic/market risks.
The overall impact of the Pandemic has negatively affected, and other epidemics and pandemics that arise in the future could
negatively affect, the worldwide economy, as well as the economies of individual countries, national, state, or local
governments, individual companies (including Federated Hermes, and its products, strategies, customers, shareholders, and
service providers) and the market in general in significant, potentially material, and unforeseen ways. For example, market
disruptions, supply chain disruptions, and other events relating to the Pandemic have caused, and can continue to cause, market
volatility, illiquidity in the money market, fixed-income or other markets, a decline in interest rates to near zero with the
possibility of negative interest rates, a decline in the value of and/or returns on investments, increased expenses, slower
production, a decline in the value of Federated Hermes'
and stock price, an increase in the risk of reduction, elimination
AUM
or claw back of carried interest or performance fees, changes in asset mix, and increased Fee Waivers, which results in lower
revenue and earnings for Federated Hermes. The market disruption and other events relating to the Pandemic also can cause
impairment of intangible assets (including goodwill) or other assets, among other effects. It is possible that remote or hybrid
work environments will increase investor comfort with technology, resulting in more online investment or other changes in
investor preferences (such as for passive investments over actively managed investments), increased metric-based decision-
making and alternative distribution practices. If essential employees, or a significant number of employees, contract the
coronavirus and are unable to perform their duties either at all or only in a significantly diminished capacity, the absence of
these employees can adversely impact Federated Hermes' ability to continue to remain fully operational and/or to deliver
Federated Hermes' investment products and services. Remote or hybrid work environments also can reduce opportunities for
collaboration among employees, increase stress of processes and the risk of errors, increase cyber risk, prevent utilization of
certain processes or practices (such as the inability to use "white rooms" by certain service providers), reduce productivity and
efficiency, and create additional risk around "return to the office" arrangements. The Pandemic could have a material adverse
effect on Federated Hermes' Financial Condition. For example, to the extent that the Pandemic caused near zero interest rates,
which required Federated Hermes to implement the Voluntary Yield-related Fee Waivers, the Pandemic has had a material
adverse effect on Federated Hermes' net revenue and income. Any scenario whereby the Pandemic, and its resulting effects,
persist for a further significant period of time will likely increase the impact of the Pandemic on Federated Hermes' Financial
Condition. Federated Hermes continues to monitor the impact of the Pandemic on its Financial Condition. See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of Operations – Business Developments – The
Pandemic for further information regarding the Pandemic and its effects.
50
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
Federated Hermes has material operating leases related to its corporate headquarters where it occupies approximately 259,000
square feet in Pittsburgh, Pennsylvania. Federated Hermes' leased office space is used for its investment management business.
ITEM 3 – LEGAL PROCEEDINGS
The information required by this item is included in Note (20) 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 Hermes' Class B common stock is traded on the
Hermes Class B common stock was trading under the ticker symbol
NYSE
. FII
under the symbol
FHI
. Prior to February 3, 2020, Federated
The approximate number of beneficial shareholders of Class A and Class B common stock as of February 11, 2022, was 1 and
22,021, respectively. See Item 1A - Risk Factors - Specific Risk Factors - Risk Related to Federated Hermes' Corporate
Structure - Status as a Controlled Company for additional information on its Class A common stock.
The following table summarizes stock repurchases under Federated Hermes' share repurchase program during the fourth quarter
of 2021.
October2
November2
December2
Total
Total Number
of Shares
Purchased
130,700
1,246,784
2,676,635
4,054,119
Average
Price Paid
Per Share
$ 31.39
34.84
36.48
$ 35.81
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
125,000
1,245,720
2,676,035
4,046,755
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs1
2,486,755
1,241,035
6,065,000
6,065,000
1
2
In April and December 2021, the board of directors authorized share repurchase programs with no stated expiration dates that allow the
repurchase of up to 4.0 million and 7.5 million shares, respectively, of Class B common stock. The April 2021 program was fulfilled in
December 2021. No other program existed as of December 31, 2021. See Note (14) to the Consolidated Financial Statements for
additional information.
In October, November and December 2021, 5,700, 1,064 and 600 shares, respectively, of Class B common stock with a weighted-
average price of $3.00, $0.00 and $3.00 per share, respectively, were repurchased as employees forfeited restricted stock.
See Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for
information on Federated Hermes' securities authorized for issuance under equity compensation plans.
51
Stock Performance Graph
The following performance graph compares the total shareholder return of an investment in Federated Hermes' 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, 2021.
The graph assumes that the value of the investment in Class B common stock and each index was $100 on December 31, 2016.
Total return includes reinvestment of all dividends. As a member of the S&P MidCap 400 Index as of December 31, 2021,
Federated Hermes is required to include this comparison. The historical information set forth below is not necessarily indicative
of future performance. Federated Hermes does not make or endorse any predictions as to future stock performance.
Federated Hermes
S&P MidCap 400 Index
$
$
132.26
116.24
S&P 1500 Asset Management & Custody Banks Index $
129.40
$
$
$
101.39
103.36
96.88
$
$
$
128.83
130.44
122.30
$
$
$
123.95
148.26
142.12
$
$
$
166.94
184.97
191.61
12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
ITEM 6 – [RESERVED]
52
Comparison of Cumulative Five Year Total ReturnFederated HermesS&P MidCap 400 IndexS&P 1500 Asset Management & Custody Banks Index201620172018201920202021$50$100$150$200
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 and Item 8 - Financial Statements and Supplementary Data.
General
Federated Hermes is one of the largest investment managers in the U.S. with $668.9 billion in managed assets as of
December 31, 2021. The majority of Federated Hermes' revenue is derived from advising Federated Hermes Funds and
Separate Accounts in both domestic and international markets. Federated Hermes also derives revenue from providing
administrative and other fund-related services (including distribution and shareholder servicing) as well as stewardship and real
estate development services. For additional information on Federated Hermes' markets, see Item 1 - Business - 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 and are generally calculated as a percentage of the average net assets of managed investment
portfolios. Federated Hermes' 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 Hermes' investment
products and strategies can be redeemed or withdrawn at any time with no advance notice requirement. Fee rates for Federated
Hermes' services generally vary by asset and service type and may vary based on changes in asset levels. Generally, advisory
fees charged for services provided to equity and multi-asset products and strategies are higher than advisory fees charged to
fixed-income and alternative/private markets products and strategies, which in turn are higher than advisory fees charged to
money market products and strategies. Likewise, Federated Hermes Funds typically have higher advisory fees than Separate
Accounts. Similarly, revenue is also dependent upon the relative composition of average
across both asset and product
types. Federated Hermes may implement Fee Waivers for competitive reasons such as Voluntary Yield-related Fee Waivers, to
maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements. Since Federated
Hermes' products are largely distributed and serviced through financial intermediaries, Federated Hermes 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 Hermes
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.
AUM
Federated Hermes' 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 Hermes, investment management
performance and sales performance.
The discussion and analysis of Federated Hermes' financial condition and results of operations are based on Federated Hermes'
Consolidated Financial Statements. Management evaluates Federated Hermes' performance at the consolidated level. Therefore,
Federated Hermes 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 Hermes' growth and profitability are dependent upon its ability to attract and
retain
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 and, as required by
law, fund shareholders. Management believes that meaningful indicators of Federated Hermes' financial performance include
AUM
, gross and net product sales, total revenue and net income, both in total and per diluted share.
AUM
53
Business Developments
Equity Acquisition
On August 31, 2021, Federated completed the 2021 Acquisition of
Consolidated Financial Statements for additional information.
HFML
Noncontrolling Interests. See Note (2) to the
The Pandemic
The outbreak of the Covid-19 respiratory disease was first detected in China in late 2019, spread globally in 2020, and
continues to spread in 2022. The Pandemic initially resulted in travel bans, closing of borders, changes to the ways in which
healthcare workers prepare and deliver services, enhanced monitoring and increased health screenings/testing, and increased
data analytics. In addition, the Pandemic resulted in the development of effective vaccines without harmful side effects and
identification of effective therapeutics, enhanced disinfection and contamination procedures, stay-at-home orders, quarantines,
cancellations and disruptions to supply chains, workflow, operations and customer activity, as well as general concern and
uncertainty. The Pandemic also initially resulted in economic uncertainty, market volatility, trading halts, market illiquidity and
declining and variable stock prices, among other effects. These impacts continue, to varying degrees, in 2022. See Item 1A -
Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or
Consequences (including the Pandemic) for additional information regarding the impacts, and potential impacts, resulting from
the Pandemic.
Policymakers responded to certain apparent and acute economic and market consequences with multiple monetary and fiscal
policy actions. Regulators pursued and, to a lesser degree, have continued actions focused on facilitating market function and
preserving market integrity, as well as providing guidance and relief to market participants affected by the Pandemic. See Item
1 - Business - Regulatory Matters - Current Regulatory Environment sections for additional information regarding the monetary
and fiscal policy actions taken by governmental authorities.
As of December 31, 2021, economies of various countries have rebounded from the global economic shutdown that began in
the late first quarter and early second quarter 2020. With the world vaccination rate of people receiving at least one dose of a
vaccine at over 58%, and vaccination rates nearing or exceeding 60% or greater in several jurisdictions, including the United
States and the United Kingdom, economies in many jurisdictions have reopened as national, state/provincial, and local
governments have removed or lessened travel restrictions and requirements for staying-at-home and quarantining, as well as
other Pandemic-imposed restrictions. Spikes of coronavirus cases, however, continue to occur in certain jurisdictions. These
spikes are reportedly being driven by more contagious variants of the initial strain of the coronavirus, including the Delta and
Omicron variants. Breakthrough infections of vaccinated individuals are also prevalent in many jurisdictions. These variants,
spikes and breakthrough infections have resulted in certain jurisdictions continuing or re-imposing certain travel and other
restrictions, although in many cases not to the same degree as initially imposed. As a result, while many governments have
taken action to open economies, economic, market, regulatory and other uncertainty persists as a result of the Pandemic. While
economic uncertainty and market volatility have continued, in many cases it is not to the degree initially seen late in the first
quarter and early in the second quarter 2020.
Federated Hermes has not implemented its business continuity plans in its U.S. offices as there has not been a significant
disruption of its business processes, allowing it to remain fully operational and to continue to provide services to its customers.
Federated Hermes' London office did activate its business continuity plans on March 20, 2020 to support the transition to a
remote working environment per the advice of the
government and regulators.
UK's
Federated Hermes designated an internal task force (which meets as necessary) to address events related to the Pandemic that
have impacted or that can potentially impact Federated Hermes' business. Federated Hermes has supported its employees by
moving initially to remote, and then hybrid, working arrangements. With input and guidance from senior management and the
internal task force, increased vaccinations, and the removal of Pandemic-related restrictions, beginning in April 2021, Federated
Hermes encouraged (but did not require) its employees to begin to return to working from its U.S. offices. Beginning on July 6,
2021, Federated Hermes implemented a structured return to office plan that requires most of its U.S. employees to work from
Federated Hermes' offices at least two days a week, or at least three days every other week, depending on their work location
and office or work station configuration. All U.S. employees have been asked to work from the office for at least three days a
week beginning on March 1, 2022. Managers also have the flexibility to alter work arrangements to address individual
employee circumstances. In the
least two days a week through February 28, 2022, and, thereafter, all full-time employees have been asked to be in the office for
at least three days a week. Part-time employees have been asked to prorate their time in the office according to days worked
, from February 1, 2022, all full-time employees have been asked to be in the office for at
UK
54
based on the foregoing. Any structured return to office plans for Federated Hermes' non-U.S. employees will be consistent with
applicable government requirements.
Federated Hermes intends its remote and hybrid working arrangements to allow employees the flexibility to work from home or
in the office, while continuing to support the operation of Federated Hermes' business and meet business needs. Federated
Hermes continues to monitor the ongoing Pandemic situation (as described in more detail below) and will continue to assess its
return to office plans for U.S. and
employees.
UK
Federated Hermes has developed and implemented a series of return to office protocols intended to assure employees that it is
taking the safety and well-being of its employees seriously as return to office plans are implemented. Federated Hermes
continues to review and, in certain cases, revise or enhance these protocols to provide for the safety of its employees, to seek to
ensure the resiliency of Federated Hermes' business and to keep its customers informed.
Among other actions, Federated Hermes has taken the following steps:
•
•
•
Federated Hermes made technology investments, including laptops for employees, expanded internet bandwidth, video
conferencing and collaboration software, and added video equipment. Federated Hermes also has increased usage and
reliance on virtual meeting tools and prioritized the deployment of additional equipment and technology. These actions
have allowed Federated Hermes to remain fully operational with minimal disruptions, support a remote and current
hybrid working environment and continue to deliver Federated Hermes' investment products and services to
customers.
Federated Hermes continues to undertake to comply with any remaining requirements applicable to Federated Hermes
under relevant Federal, state, and local government orders or laws, as well as remaining requirements applicable to
Federated Hermes under the Center for Disease Control and Prevention's (
guidance and cleaning procedures.
) and state health departments'
CDC
In addition to maintaining enhanced cleaning protocols and other measures, Federated Hermes continues to make
available hand sanitizer stations and disinfectant wipes for employees in the office, and encourage employees to take
standard precautions such as washing their hands with soap and water and staying home if sick.
• As a result of a travel advisory issued by the
CDC
, the company instituted a travel ban on February 27, 2020 to certain
countries, including those designated as high risk by the
follow national, state/provincial, local and
venue requirements when planning or attending conferences or other events. Planning activity for conferences and
events scheduled for the fourth quarter 2021 and for 2022 increased in the second half of 2021 over the first half of
2021. Fourth quarter 2021 travel reservations were down from the third quarter 2021 peak during the Pandemic,
although fourth quarter 2021 was the second most active quarter since the first quarter of 2020. Travel reservations
remain below pre-Pandemic levels.
. Federated Hermes now recommends that employees
requirements or recommendations when traveling, as well as specific
CDC
CDC
•
•
•
•
Federated Hermes Fund Board meetings, Federated Hermes corporate Board meetings, and offshore fund and
subsidiary Board meetings, are being held in person as well as via teleconference allowing those who prefer to
participate remotely to do so.
Federated Hermes has continued to on-board new hires, providing necessary equipment to them and conducting
training remotely when necessary.
Federated Hermes has introduced a range of resources to provide employees with information and support to remain
physically and emotionally healthy during the Pandemic.
Federated Hermes investment professionals and strategists continue to publish fresh content to the Insights section of
Federated Hermes' website, offering their unique perspectives to investors.
Federated Hermes continues to take a measured approach that involves implementing procedures aimed at safeguarding
employee health while maintaining a high level of customer service. Federated Hermes expects those procedures and related
timelines to vary by location in order to endeavor to meet local regulatory requirements and support community health
practices. Federated Hermes is also prepared to continue to implement a variety of other strategies to ensure the resiliency of its
business. Examples include transferring processes to alternate personnel, prioritizing technology resources to service critical
processing, and leveraging service providers and counterparties to promote efficient delivery of services.
55
, the
SEC
Federated Hermes continues to monitor the ongoing global health situation through resources provided by, or contact with, the
CDC
, the World Health Organization and the Securities Industry and Financial Markets Association (
financial services industry trade association, among others. As of December 31, 2021, while Federated Hermes' stock price has
fluctuated amidst the volatility in stock prices on major exchanges, and Federated Hermes' business operations have had to
adapt to a remote and current hybrid working environment, the Pandemic has not materially affected Federated Hermes'
financial condition or cash flows except to the extent that the increased net Voluntary Yield-related Fee Waivers discussed
below resulting from the near-zero interest rate environment can be attributed to the Pandemic. A further prolonged period of
economic and financial distress and volatility as a result of the Pandemic could exacerbate human resource capital management,
economic, market and other risks, and could impact, including in a material way, Federated Hermes' Financial Condition. See
Item 1A - Risk Factors - General Risk Factors – Economic and Market Risks and General Risk Factors - Other General Risks -
Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk) and Potential Adverse Effects of
Unpredictable Events or Consequences (including the Pandemic) for additional information.
SIFMA
), a
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the Pandemic,
target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. As a result of the near-zero
interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's
operating expenses. Beginning in the first quarter 2020, Federated Hermes has implemented Voluntary Yield-related Fee
Waivers. These waivers have been partially offset by related reductions in distribution expense as a result of Federated Hermes'
mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee
Waivers.
decreased the federal funds
FOMC
For the year ended December 31, 2021, Voluntary Yield-related Fee Waivers totaled $420.3 million. These fee waivers were
partially offset by related reductions in distribution expenses of $277.1 million, such that the net negative pre-tax impact to
Federated Hermes was $143.2 million in 2021. For the year ended December 31, 2020, Voluntary Yield-related Fee Waivers
totaled $113.0 million. These fee waivers were partially offset by related reductions in distribution expenses of $98.4 million,
such that the net negative pre-tax impact to Federated Hermes was $14.6 million in 2020.
FOMC
Short-term interest rates remained near historic lows during the fourth quarter of 2021 as technical factors at the front end of the
yield curve kept yields on short-term government securities—including repurchase agreements and Treasury bills—just above
will raise interest rates multiple times in 2022, starting in March. Higher yields in
zero. Market expectations are that the
2022 will lower the impact of Voluntary Yield-related Fee Waivers. The net negative impact on pre-tax income from Voluntary
Yield-related Fee Waivers in the first quarter 2022 may result in a net negative pre-tax impact on income of approximately $22
million. Assuming an increase in interest rates of 25 basis points by the
in March 2022, the first quarter 2022 estimated
$22 million of net negative impact on pre-tax income from Voluntary Yield-related Fee Waivers is expected to be reduced by
approximately 90% for the second quarter 2022. The actual amount of future Voluntary Yield-related Fee Waivers and the
resulting negative impact of these fee waivers could vary, including in a material way, from management's estimates as they are
contingent on a number of variables including, but not limited to, changes in assets within the money market funds, changes in
yields on instruments available for purchase by the money market funds, including changes due to the level of government
measures to further stimulate the economy which could result in the issuance of additional Treasury debt instruments, actions
by the
expenses of the money market funds, changes in the mix of money market customer assets, 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 Hermes' willingness to continue the Voluntary Yield-
related Fee Waivers and changes in the extent to which the impact of these fee waivers is shared by any one or more third
parties.
and other governmental entities, changes in fees and
, the U.S. Department of Treasury, the
FOMC
FOMC
FSOC
SEC
, the
Current Regulatory Environment
Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S.
Federated Hermes and its products, such as the Federated Hermes 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 - Regulatory Matters and Item 1A - Risk Factors - General Risk Factors - Regulatory and Legal Risks - Potential
Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.
56
Asset Highlights
Managed Assets at Period End
in millions as of December 31,
By Asset Class
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
By Product Type
Funds:
Equity
Fixed-Income
Alternative / Private Markets
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
2021
2020
2021
vs. 2020
$
96,716
97,550
22,920
3,780
220,966
447,907
$ 668,873
$
91,788
84,277
19,084
3,948
199,097
420,333
$ 619,430
$
57,036
59,862
14,788
3,608
135,294
312,834
448,128
39,680
37,688
8,132
172
85,672
135,073
220,745
$ 668,873
$
54,312
53,557
12,100
3,744
123,713
301,855
425,568
37,476
30,720
6,984
204
75,384
118,478
193,862
$ 619,430
5 %
16
20
(4)
11
7
8 %
5 %
12
22
(4)
9
4
5
6
23
16
(16)
14
14
14
8 %
57
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 Markets
Multi-Asset
Total Long-Term Assets
Money Market
1
Total Average Fund Assets
Separate Accounts:
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
2021
2020
2019
2021
vs. 2020
2020
vs. 2019
$ 98,040
91,564
20,754
3,879
214,237
418,562
$ 632,799
$
80,591
74,403
18,206
3,813
177,013
436,895
$ 613,908
$
81,212
65,375
17,896
4,192
168,675
340,505
$ 509,180
$ 58,426
58,095
13,266
3,696
133,483
293,644
427,127
39,614
33,469
7,488
183
80,754
124,918
$
45,585
46,899
11,424
3,622
107,530
324,490
432,020
35,006
27,504
6,782
191
69,483
112,405
$
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
22 %
23
14
2
21
(4)
3 %
28 %
24
16
2
24
(10)
(1)
13
22
10
(4)
16
11
13
3 %
(1)%
14
2
(9)
5
28
21 %
7 %
12
1
(10)
8
36
27
(9)
17
3
1
1
11
7
21 %
Total Average Separate Account
Assets
Total Average Managed Assets
205,672
$ 632,799
181,888
$ 613,908
170,334
$ 509,180
1
The average balance for the year ended December 31, 2019 includes $8.2 billion of average fund assets managed by a previously non-
consolidated entity,
became a
consolidated subsidiary. See Note (2) to the Consolidated Financial Statements for additional information.
, in which Federated Hermes held an equity method investment. Effective March 1, 2020,
HGPE
HGPE
58
Changes in Equity Fund and Separate Account Assets
in millions for the years ended December 31,
2021
2020
Equity Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
Equity Separate Accounts
Beginning Assets
3
Sales
Redemptions
3
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
Total Equity
Beginning Assets
3
Sales
Redemptions
3
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
$
$
$
$
$
54,312
14,265
(15,915)
(1,650)
(362)
408
(522)
4,850
57,036
37,476
7,564
(10,846)
(3,282)
403
0
(574)
5,657
39,680
91,788
21,829
(26,761)
(4,932)
41
408
(1,096)
10,507
96,716
$
$
$
$
$
48,112
14,457
(15,675)
(1,218)
(64)
0
509
6,973
54,312
40,899
6,006
(11,046)
(5,040)
(6)
(71)
686
1,008
37,476
89,011
20,463
(26,721)
(6,258)
(70)
(71)
1,195
7,981
91,788
1
2
3
Ending Assets
Reflects the impact of translating non-U.S. dollar denominated
AUM
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.
into U.S. dollars for reporting purposes.
$
$
59
Changes in Fixed-Income Fund and Separate Account Assets
in millions for the years ended December 31,
2021
2020
Fixed-Income Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Fixed-Income Separate Accounts
Beginning Assets
3
Sales
3
Redemptions
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Total Fixed-Income
Beginning Assets
3
Sales
Redemptions3
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
Impact of Foreign Exchange1
Market Gains and (Losses)2
$
$
$
$
$
53,557
30,862
(24,902)
5,960
(33)
17
(90)
451
59,862
30,720
11,764
(4,842)
6,922
(48)
0
(43)
137
37,688
84,277
42,626
(29,744)
12,882
(81)
17
(133)
588
97,550
$
$
$
$
$
44,223
29,453
(22,564)
6,889
(16)
0
129
2,332
53,557
24,800
7,830
(3,574)
4,256
1
(1)
61
1,603
30,720
69,023
37,283
(26,138)
11,145
(15)
(1)
190
3,935
84,277
1
2
3
Ending Assets
Reflects the impact of translating non-U.S. dollar denominated
AUM
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.
into U.S. dollars for reporting purposes.
$
$
60
Changes in Alternative / Private Markets Fund and Separate Account Assets
in millions for the years ended December 31,
Alternative / Private Markets Funds
Beginning Assets
1
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
2
Impact of Foreign Exchange
Market Gains and (Losses)3
Ending Assets
Alternative / Private Markets Separate Accounts
Beginning Assets
4
Sales
Redemptions
4
Net Sales (Redemptions)4
Acquisitions/(Dispositions)
2
Impact of Foreign Exchange
Market Gains and (Losses)3
Ending Assets
Total Alternative / Private Markets
1
Beginning Assets
4
Sales
Redemptions
4
Net Sales (Redemptions)4
Net Exchanges
Acquisitions/(Dispositions)
2
Impact of Foreign Exchange
Market Gains and (Losses)3
$
$
$
$
$
2021
2020
12,100
3,699
(2,657)
1,042
(2)
81
(162)
1,729
14,788
6,984
1,124
(513)
611
0
(92)
629
8,132
19,084
4,823
(3,170)
1,653
(2)
81
(254)
2,358
22,920
$
$
$
$
$
11,389
2,277
(2,047)
230
(4)
0
400
85
12,100
6,713
563
(568)
(5)
452
215
(391)
6,984
18,102
2,840
(2,615)
225
(4)
452
615
(306)
19,084
HGPE
,
1
2
3
4
Ending Assets
The beginning assets at December 31, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity,
in which Federated Hermes held an equity method investment. Effective March 1, 2020,
Note (2) to the Consolidated Financial Statements for additional information.
Reflects the impact of translating non-U.S. dollar denominated
AUM
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.
into U.S. dollars for reporting purposes.
became a consolidated subsidiary. See
HGPE
$
$
61
Changes in Multi-Asset Fund and Separate Account Assets
in millions for the years ended December 31,
2021
2020
Multi-Asset Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
Market Gains and (Losses)1
Ending Assets
Multi-Asset Separate Accounts
Beginning Assets
2
Sales
2
Redemptions
Net Sales (Redemptions)2
Net Exchanges
Impact of Foreign Exchange3
Market Gains and (Losses)1
Ending Assets
Total Multi-Asset
Beginning Assets
2
Sales
2
Redemptions
Net Sales (Redemptions)2
Net Exchanges
Acquisitions/(Dispositions)
Impact of Foreign Exchange3
Market Gains and (Losses)1
$
$
$
$
$
$
$
$
$
$
3,744
299
(894)
(595)
41
54
364
3,608
204
2
(42)
(40)
1
(1)
8
172
3,948
301
(936)
(635)
42
54
(1)
372
3,780
4,000
214
(688)
(474)
(19)
0
237
3,744
199
27
(36)
(9)
(1)
1
14
204
4,199
241
(724)
(483)
(20)
0
1
251
3,948
Ending Assets
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.
Reflects the impact of translating non-U.S. dollar denominated
into U.S. dollars for reporting purposes.
AUM
$
$
1
2
3
62
Changes in Total Long-Term Assets
in millions for the years ended December 31,
Total Long-Term Fund Assets
1
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
2
Impact of Foreign Exchange
Market Gains and (Losses)3
Ending Assets
Total Long-Term Separate Accounts Assets
Beginning Assets
4
Sales
4
Redemptions
Net Sales (Redemptions)4
Net Exchanges
Acquisitions/(Dispositions)
2
Impact of Foreign Exchange
Market Gains and (Losses)3
Ending Assets
Total Long-Term Assets
1
Beginning Assets
4
Sales
4
Redemptions
Net Sales (Redemptions)4
Net Exchanges
Acquisitions/(Dispositions)
2
Impact of Foreign Exchange
Market Gains and (Losses)3
Ending Assets
2021
2020
$ 123,713
49,125
(44,368)
4,757
(356)
560
(774)
7,394
$ 135,294
$
$
75,384
20,454
(16,243)
4,211
356
0
(710)
6,431
85,672
$ 199,097
69,579
(60,611)
8,968
0
560
(1,484)
13,825
$ 220,966
$ 107,724
46,401
(40,974)
5,427
(103)
0
1,038
9,627
$ 123,713
$
$
72,611
14,426
(15,224)
(798)
(6)
380
963
2,234
75,384
$ 180,335
60,827
(
56,198)
4,629
(109)
380
2,001
11,861
$ 199,097
HGPE
,
1
2
3
4
The beginning assets at December 31, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity,
in which Federated Hermes held an equity method investment. Effective March 1, 2020,
Note (2) to the Consolidated Financial Statements for additional information.
Reflects the impact of translating non-U.S. dollar denominated
AUM
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.
into U.S. dollars for reporting purposes.
became a consolidated subsidiary. See
HGPE
63
Changes in Federated Hermes' average asset mix year-over-year across both asset classes and product types have a direct
impact on Federated Hermes' operating income. Asset mix impacts Federated Hermes' 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
2019
2020
2021
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
66 %
16 %
14 %
3 %
1 %
0 %
46 %
9 %
9 %
2 %
1 %
0 %
20 %
7 %
5 %
1 %
0 %
0 %
71 %
13 %
12 %
3 %
1 %
0 %
53 %
7 %
8 %
2 %
1 %
0 %
18 %
6 %
4 %
1 %
0 %
0 %
67 %
16 %
13 %
3 %
1 %
0 %
47 %
8 %
8 %
2 %
1 %
0 %
20 %
8 %
5 %
1 %
0 %
0 %
Percent of Total Revenue
2021
19 %
52 %
18 %
8 %
2 %
1 %
15 %
41 %
15 %
5 %
2 %
0 %
4 %
11 %
3 %
3 %
0 %
1 %
2020
40 %
38 %
13 %
6 %
2 %
1 %
37 %
29 %
11 %
3 %
2 %
0 %
3 %
9 %
2 %
3 %
0 %
1 %
2019
40 %
40 %
14 %
3 %
2 %
1 %
37 %
30 %
12 %
1 %
2 %
0 %
3 %
10 %
2 %
2 %
0 %
1 %
Total managed assets represent the balance of
balance of
generally calculated daily based on
revenue earned and asset-based expenses incurred during the same period.
AUM
AUM
AUM
during a period of time. Because substantially all revenue and certain components of distribution expense are
, changes in average managed assets are typically a key indicator of changes in
at a point in time, while total average managed assets represent the average
Average managed assets increased 3% for 2021 as compared to 2020. Period-end managed assets increased 8% at
December 31, 2021 as compared to December 31, 2020 primarily due to an increase in money market assets and, to a lesser
extent, an increase in fixed-income assets. Total average money market assets decreased 4% for 2021 compared to 2020.
Period-end money market assets increased 7% at December 31, 2021 as compared to December 31, 2020. Average equity assets
increased 22% for 2021 as compared to 2020. Period-end equity assets increased 5% at December 31, 2021 as compared to
December 31, 2020 primarily due to market appreciation, partially offset by net redemptions. Average fixed-income assets
increased 23% for 2021 as compared to 2020. Period-end fixed-income assets increased 16% at December 31, 2021 as
compared to December 31, 2020 primarily due to net sales.
In the U.S., a vibrant job market, wage and income gains, rising capital expenditures and robust consumer spending
overwhelmed the impact of a lingering Pandemic, driving economic growth and the equity markets higher. For the year, the
S&P 500, Dow Jones Industrial Average and Nasdaq Composite rose 26.9%, 18.7% and 21.4%, respectively, with the S&P
ssetting 70 record highs during the year, the most since 1995. Overseas, where Pandemic-related restrictions created more
havoc, economic and equity performance was less enthusiastic but still positive, with the
the year and the
inflation at multi-decade highs and a Federal Reserve pivoting toward tightening earlier than had been expected in 2022 sent
yields rising across the Treasury curve, with the biggest increases on the short-to-intermediate end. For example, yields rose by
65 basis points on the 10-year Treasury to close 2021 at 1.51% and by 79 basis points on the 3-year Treasury to end the year at
gaining 5.5% in 2021. In the fixed-income markets, the combination of
All Country World ex
rising 10.1% on
World ex
MSCI
MSCI
USA
USA
64
0.96%. Lower-quality segments of the credit market performed better, bolstered by strong corporate balance sheets and
increasing corporate earnings.
For an explanation of the changes in managed assets at December 31, 2020 compared to December 31, 2019 and changes in
average managed assets for 2020 as compared to 2019, see Federated Hermes' Annual Report on Form 10-K for the year ended
December 31, 2020, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset
Highlights.
Results of Operations
For an explanation of changes for 2020 as compared to 2019, see Federated Hermes' Annual Report on Form 10-K for the year
ended December 31, 2020, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations.
Revenue. Revenue decreased $147.8 million in 2021 as compared to 2020 primarily due to an increase of $307.3 million in
Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information,
including the impact to expense and the net pre-tax impact) and a decrease in money market revenue of $38.1 million primarily
due to lower average money market assets. These decreases were partially offset by an increase in equity and fixed-income
revenue of $127.6 million and $46.6 million, respectively, due to higher average assets, an increase of $11.0 million as a result
of the consolidation of certain variable interest entities (
Acquisition (see Note (2) to the Consolidated Financial Statements) and an increase in alternative/private market revenue of
$7.3 million due to the revenue of a previously nonconsolidated entity being recorded to operating revenue beginning in March
2020.
) not previously consolidated prior to 2021 related to the
HCL
VIE
Federated Hermes' ratio of revenue to average managed assets for 2021 was 0.20% as compared to 0.23% for 2020. The
decrease in the rate was primarily due to the reduction of revenue from higher Voluntary Yield-related Fee Waivers, partially
offset by a higher proportion of revenue earned on average equity assets during 2021 as compared to 2020.
Operating Expenses. Total operating expenses for 2021 decreased $95.9 million compared to 2020. Distribution expense
decreased $157.5 million primarily related to an increase of $178.7 million in Voluntary Yield-related Fee Waivers (see
Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net
pre-tax impact), partially offset by an increase of $19.5 million in competitive payments. Compensation and Related expense
exchange rate
increased $29.1 million driven by (1) an increase of $13.6 million due to the increase in the average
for 2021 as compared to 2020, (2) an increase of $11.0 million as a result of the consolidation of certain
not previously
consolidated prior to 2021 related to the
increase of $6.6 million related to an increase in staff and compensation rates and (4) an increase of $5.4 million related to the
compensation expenses of a previously nonconsolidated entity being recorded to Compensation and Related expense beginning
in March 2020. These increases in Compensation and Related expenses were partially offset by a decrease of $14.7 million in
incentive compensation primarily due to decreased sales and investment performance. Systems and Communications expense
increased $10.7 million due primarily to technology-related projects.
Acquisition (see Note (2) to the Consolidated Financial Statements), (3) an
USD
/
VIEs
HCL
GBP
Nonoperating Income (Expenses). Nonoperating Income (Expenses), net, decreased $17.9 million in 2021 as compared to
2020. The decrease is primarily due to an $8.5 million decrease in Gain (Loss) on Securities, net due primarily to a smaller
increase in the market value of investments in 2021 as compared to 2020 and a $7.5 million gain from a fair value adjustment to
an equity investment of a previously nonconsolidated entity recorded in Nonoperating Income (Expenses) - Other, net in 2020.
Income Taxes. The income tax provision for 2021 and 2020 was $104.0 million and $110.0 million, respectively. The
provision for 2021 decreased $6.0 million as compared to 2020 primarily due to a decrease in pre-tax book income less non-
taxable, non-controlling interests ($15.2 million), partially offset by the net increase in deferred taxes associated with the
change in the
effective tax rate was 27.6% for 2021 and 24.7% for 2020. See Note (15) to the Consolidated Financial Statements for
additional information on the effective tax rate, as well as other tax disclosures.
tax rate in 2020 from 17% to 19% and in 2021 from 19% to 25% effective April 1, 2023 ($11.1 million). The
UK
Net Income Attributable to Federated Hermes,
primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted
above. Diluted earnings per share for 2021 decreased $0.48 as compared to 2020 primarily due to decreased net income ($0.57),
partially offset by a decrease in shares outstanding due to share repurchases ($0.09).
. Net income decreased $56.1 million in 2021 as compared to 2020
Inc
65
Liquidity and Capital Resources
Liquid Assets. At December 31, 2021, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents,
investments and receivables, totaled $492.7 million as compared to $432.5 million at December 31, 2020. The change in liquid
assets is discussed below.
At December 31, 2021, Federated Hermes' liquid assets included investments in certain money market and fluctuating-value
Federated Hermes Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks.
Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with
respect to certain European countries (such as the
in light of Brexit), China and certain other countries subject to economic
sanctions. Federated Hermes' experienced portfolio managers and analysts work to evaluate credit risk through quantitative and
fundamental analysis. Further, regarding international exposure, certain money market funds (representing approximately $173
million in
) that meet the requirements 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 Hermes' credit analysis process.
AUM
UK
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $170.4 million for 2021 as
compared to $373.2 million for 2020. The decrease of $202.8 million was primarily due to (1) a net increase of $166.4 million
in cash paid for trading securities in 2021 as compared to 2020, (2) a decrease in cash received related to the $147.8 million
decrease in revenue previously discussed and (3) an increase of $23.1 million in cash paid for incentive compensation for the
year ended December 31, 2021 as compared to 2020. These decreases were partially offset by a decrease in cash paid related to
the $157.5 million decrease in Distribution expense previously discussed.
Cash Provided by Investing Activities. In 2021, net cash provided by investing activities was $10.8 million which primarily
represented $36.0 million in cash received from redemptions of Investments—Affiliates and Other, partially offset by $10.4
million paid for property and equipment, $9.4 million paid for purchases of Investments—Affiliates and Other and $5.3 million
paid for an asset purchase during 2021.
Cash Used by Financing Activities. In 2021, net cash used by financing activities was $249.5 million. Of this amount,
Federated Hermes paid $228.3 million to repurchase shares of Class B common stock primarily in connection with its stock
repurchase programs (see Note (14) to the Consolidated Financial Statements for additional information), paid $165.9 million to
(see Note (2) to the Consolidated Financial Statements), paid $147.3 million in connection
acquire additional equity of
with its debt obligations and paid $105.8 million or $1.08 per share in dividends to holders of its common shares. This activity
was partially offset by $295.7 million borrowed from Federated Hermes' revolving credit facility and $107.6 million of
contributions from noncontrolling interests in subsidiaries.
HFML
PNC
Bank, National Association as administrative agent,
Borrowings. On July 30, 2021, Federated Hermes entered into an unsecured Fourth Amended and Restated Credit Agreement
by and among Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of eleven banks as Lenders
party thereto,
joint lead arranger, Citigroup Global Markets,
Dominion Bank, New York Branch as documentation agent (Credit Agreement). The Credit Agreement amended and restated
Federated Hermes' Third Amended and Restated Credit Agreement, which was dated June 5, 2017 and scheduled to mature on
June 5, 2022 (Prior Credit Agreement). The Credit Agreement consists of a $350 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, 2021, Federated Hermes has $126.6 million available to borrow under the Credit Agreement. See Note (11) to
the Consolidated Financial Statements for additional information.
, as sole bookrunner and
., as joint lead arranger, Citibank, N.A. as syndication agent, and Toronto-
Capital Markets
LLC
PNC
Inc
EBITDA
) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated
) as well as other customary terms and conditions. Federated Hermes was in compliance with all of its covenants,
The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation
and amortization (
EBITDA
including its interest coverage and leverage ratios at and during the year ended December 31, 2021. An interest coverage ratio
of at least 4 to 1 is required and, as of December 31, 2021, Federated Hermes' interest coverage ratio was 359 to 1. A leverage
ratio of no more than 3 to 1 is required and, as of December 31, 2021, Federated Hermes' leverage ratio was 0.51 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
66
of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of
amounts borrowed.
Dividends. Cash dividends of $105.8 million, $207.8 million and $109.1 million were paid in 2021, 2020 and 2019
respectively, to holders of Federated Hermes common stock. Of the amount paid in 2020, $99.3 million represented a $1.00 per
share special dividend paid in the fourth quarter. All dividends were considered ordinary dividends for tax purposes.
Contractual Obligations. As of December 31, 2021, Federated Hermes has material future cash requirements from contractual
and other obligations relating primarily to long-term debt and operating lease obligations. Further discussion of the nature of
each obligation is included below.
Long-Term Debt Obligations. Outstanding principal is to be paid no later than the expiration date of the Credit Agreement. The
LIBOR
interest is variable, based on
the Consolidated Financial Statements for additional information.
plus a 100 basis point spread, in accordance with the Credit Agreement. See Note (11) to
Federated Hermes continues to monitor the debt financing market, and may pursue longer term financing arrangements to
supplement its cash flow from operations to fund share repurchases, potential acquisitions, the full or partial repayment of
existing debt and for other general corporate purposes. Based upon market conditions and other factors, Federated Hermes is
considering longer-term (e.g. ten-year) financing of approximately $300 million during 2022.
Operating Lease Obligations. See Note (17) to the Consolidated Financial Statements for additional information.
Purchase Obligations. Federated Hermes 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. Costs for such services are expensed as incurred. As of
December 31, 2021, Federated Hermes had purchase obligations of approximately $42 million payable within 12 months and
an additional $44 million thereafter.
Future Cash Needs. In addition to the contractual obligations described above, 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 Hermes' 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 27, 2022, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 8, 2022, resulting in $25.0 million being paid on February 15, 2022.
After evaluating Federated Hermes' 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 both its short-term and reasonably foreseeable long-term cash
needs.
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.
Investments—Consolidated Investment Companies at December 31, 2021 increased $14.2 million from December 31, 2020
primarily due to an increase of $90.7 million related to the consolidation of three voting rights entities (
VIE
2021, partially offset by a $77.9 million decrease due to the deconsolidation of four
VRE
) and a
during 2021.
and one
VREs
VIE
in
Investments—Affiliates and Other at December 31, 2021 increased $42.2 million from December 31, 2020 primarily due to the
deconsolidation of two
Affiliates and Other.
in 2021 which reclassified Federated Hermes' investment of $42.2 million into Investments—
VREs
67
Right-of-Use Assets, net at December 31, 2021 decreased $13.8 million from December 31, 2020 due primarily to annual
amortization and Long-Term Lease Liabilities at December 31, 2021 decreased $16.7 million from December 31, 2020
primarily due to payments made on leases during 2021.
Long-Term Deferred Tax Liability, net at December 31, 2021 increased $17.3 million from December 31, 2020 primarily due
to the revaluation of the foreign net deferred tax liability associated with the change in the
effective April 1, 2023.
tax rate from 19% to 25%
UK
Variable Interest Entities
Federated Hermes is involved with various entities in the normal course of business that may be deemed to be
Hermes determined that it was the primary beneficiary of certain Federated Hermes Fund
assets, liabilities and operations of these
Financial Statements for more information.
in its Consolidated Financial Statements. See Note (5) to the Consolidated
VIEs
and, as a result, consolidated the
. Federated
VIEs
VIEs
Critical Accounting Policies
GAAP
). In preparing the financial statements, management is required to make estimates and
Federated Hermes' Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted
accounting principles (
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
indefinite-lived intangible assets included in its Goodwill and Intangible Assets policy involves a higher degree of judgment
and complexity.
The process of determining the fair value of identifiable indefinite-lived 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 indefinite-lived intangible asset amounts recorded in the financial statements could be subject to
possible impairment. An impairment could have a material adverse effect on Federated Hermes' business, results of operations
and financial condition.
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. Federated Hermes has combined certain indefinite-lived assets into three distinct
units of accounting for impairment testing purposes. The factors considered in determining the asset grouping include, among
others, the highest and best use of the assets and the inseparable nature of the cash flows. Such asset grouping determination is
reconsidered annually and may change depending on the facts and circumstances. Federated Hermes' current indefinite-lived
trade name; and (3) all other rights
intangible assets' units of accounting are: (1)
to manage fund assets. 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 2021, management used both a quantitative and qualitative
approach. Management considers macroeconomic and entity-specific factors, including projected
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.
rights to manage fund assets; (2)
, projected revenue
HFML
HFML
AUM
The continued uncertainty caused by the Pandemic resulted in management determining that an indicator of potential
rights to manage fund assets totaling £150.3 million ($203.4
impairment existed as of each quarter end in 2021 for the
million as of December 31, 2021) acquired in connection with the 2018
Acquisition. A discounted cash flow analysis
resulted in no impairment for the first three quarters of 2021 since the estimated fair value of these intangible assets exceeded
the carrying value by less than 10% each quarter. The discounted cash flow analysis prepared as of December 31, 2021 resulted
in the estimated fair value exceeding the carrying value by less than 10%. The key assumptions in the discounted cash flow
HFML
HFML
68
analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows. The risk
of future impairment increases with a decrease in projected cash flows and/or an increase in the discount rate. As of
December 31, 2021, assuming all other assumptions remain static, an increase or decrease of 10% in projected revenue growth
rates would result in a corresponding change to estimated fair value of approximately 6%. An increase or decrease of 10% in
pre-tax profit margins would result in a corresponding change to estimated fair value of approximately 12%. An increase or
decrease in the discount rate of 25 basis points would result in an inverse change to estimated fair value of approximately 3%.
The market volatility and other events related to the Pandemic could further reduce the
with these intangible assets and may result in subsequent impairment tests being based upon updated assumptions and future
cash flow projections, which may result in an impairment. For additional information on risks related to the Pandemic, see Item
1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or
Consequences (including the Pandemic).
, revenues and earnings associated
AUM
At December 31, 2021, Federated Hermes had $400.9 million in indefinite-lived intangible assets recorded on its Consolidated
Balance Sheets. No impairments were recorded during the years ended December 31, 2021, 2020 or 2019.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of its business, Federated Hermes is exposed to fluctuations in the securities markets and general
economy. As an investment manager, Federated Hermes' business requires that it continuously identify, assess, monitor and
manage market and other risks including those risks affecting its own investment portfolio. Federated Hermes invests in
Federated Hermes Funds for the primary purpose of generating returns from capital appreciation, investment income, or both,
or, in the case of newly launched Federated Hermes Funds or new Separate Account strategies, to provide the product or
strategy with investable cash to establish a performance history. These investments expose Federated Hermes to various market
risks. A single investment can expose Federated Hermes to multiple risks arising from changes in interest rates, credit ratings,
equity prices and foreign currency exchange rates. Federated Hermes 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 Hermes 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, 2021, Federated Hermes was exposed to
interest-rate risk as a result of investments in debt securities held by certain consolidated investment companies and strategies
($72.8 million) and holding investments in fixed-income Federated Hermes Funds ($26.5 million). At December 31, 2021,
management considered a hypothetical 300-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 Hermes' financial condition or results of
operations. At December 31, 2021, these investments and additional investments in money market accounts ($173.1 million)
exposed Federated Hermes to credit risk. At December 31, 2021, management considered a hypothetical 300-basis-point
fluctuation in credit spreads. Management determined that such a fluctuation could impact Federated Hermes' financial
condition and results of operations by approximately $13 million.
LIBOR
Federated Hermes was also exposed to interest-rate risk in connection with the Credit Agreement. The Credit Agreement bears
interest based on
plus a 100 basis point spread. At December 31, 2021, the balance of the Credit Agreement was $223.4
million. Management considered a hypothetical 300-basis-point fluctuation in
interest rates running through the Credit
Agreement's expiration in 2026 and determined that the impact of such a fluctuation could impact Federated Hermes' financial
condition and results of operations by approximately $19 million. The Credit Agreement also exposed Federated Hermes to
credit risk at December 31, 2021. If Federated Hermes' credit rating were to be downgraded, Federated Hermes 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 Hermes' financial
condition or results of operations.
LIBOR
Price risk is the risk that the market price of an investment will decline and ultimately result in the recognition of a loss.
Federated Hermes was exposed to price risk as a result of its $77.5 million investment in equity Federated Hermes Funds and
Separate Accounts at December 31, 2021. Federated Hermes' investment in these products and strategies represents its
maximum exposure to loss. At December 31, 2021, management considered a hypothetical 20% fluctuation in fair value and
determined that such a fluctuation on these investments could impact Federated Hermes' financial condition and results of
operations by approximately $16 million.
Foreign exchange risk is the risk that an investment's value will change due to changes in currency exchange rates. As of
December 31, 2021, Federated Hermes was exposed to foreign exchange risk as a result of its investments in Federated Hermes
69
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 Hermes ($61.5 million). Of these investments, cash accounts and receivables held at
December 31, 2021, management considered a hypothetical 20% fluctuation and determined that such a fluctuation could
impact Federated Hermes' financial condition and results of operations by approximately $12 million.
Federated Hermes 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 2021, a British Pound Sterling-denominated,
majority-owned subsidiary of Federated Hermes entered into foreign currency forward transactions in order to hedge against
foreign exchange rate fluctuations in the U.S. Dollar (combined notional amount of £69.6 million). This subsidiary is exposed
to 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 such a fluctuation could impact Federated
Hermes' financial condition and results of operations by approximately $11 million.
AUM.
In addition to market risks attributable to Federated Hermes' investments, nearly all of Federated Hermes' revenue is calculated
Accordingly, changes in the market value of managed assets have a direct impact on Federated Hermes'
based on
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
for 2021 remained
unchanged, a 20% decline in the average
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 Hermes' revenue, see Item 1A - Risk Factors and sections included in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - General and Asset Highlights.
would result in a corresponding 20% decline in revenue. Certain expenses,
AUM
AUM
70
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Inc.
's (including its consolidated subsidiaries, Federated Hermes) management is responsible for the
Federated Hermes,
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 Hermes' 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 Hermes' internal control over financial reporting as of December 31, 2021,
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, 2021, Federated Hermes' internal controls over financial
reporting were effective. Ernst & Young
, 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.
LLP
Federated Hermes,
Inc
.
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
February 25, 2022
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
71
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,
2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting
principles.
. (the Company) as of December 31,
Inc
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, 2021, 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 25, 2022 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
and are
the Company's financial statements based on our audits. We are a public accounting firm registered with the
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
.
PCAOB
We conducted our audits in accordance with the standards of 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.
. Those standards require that we plan and perform the
PCAOB
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit
matter or on the account or disclosure to which it relates.
72
Valuation of Indefinite-Lived Intangible Assets
Description of
the Matter
HFML
At December 31, 2021, the Company had $203.4 million of indefinite-lived intangible assets related to the
HFML
)
rights to manage fund assets acquired in connection with the 2018 Hermes Fund Managers Limited (
acquisition (
indefinite-lived intangible asset). As described in Note 1(j) to the consolidated financial
statements, indefinite-lived intangible assets are tested for impairment at the accounting unit level annually, or
when indicators of potential impairment exist, to determine whether it is more likely than not that the
accounting unit is impaired. 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 asset was complex
and judgmental due to the significant estimation uncertainty in determining the fair value of this accounting
unit. The significant assumptions used to estimate the fair value of the
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.
indefinite-lived intangible asset
HFML
HFML
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 significant assumptions described above.
HFML
indefinite-lived intangible asset
Our audit procedures to test the estimated fair value of the Company's
included, among others evaluating management's significant assumptions described above and testing the
completeness and accuracy of the underlying data. With the assistance of our valuation specialists, we
evaluated the reasonableness of the Company's valuation methodology and significant assumptions. Our
procedures included, among others, evaluating the selection of the discount rate by comparing the selected
discount rate to the Company's weighted average cost of capital, testing the objective source information
underlying the determination of the discount rate, and comparing management's discount rate to an
independently developed range. We also compared the significant assumptions to current industry, market and
economic data, historical results and other relevant information. We evaluated management's ability to
accurately project revenues and pre-tax profit margins by comparing actual results to management’s historical
forecasts. Additionally, we performed sensitivity analyses of certain significant assumptions described above
to evaluate the changes in the fair value of the
indefinite-lived intangible asset that would result from
reasonably expected changes in the significant assumptions.
HFML
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1996.
Pittsburgh, Pennsylvania
February 25, 2022
73
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,
.'s internal control over financial reporting as of December 31, 2021, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the
. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2021, based on the
criteria). In our opinion, Federated Hermes,
criteria.
COSO
COSO
Inc
Inc
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
PCAOB
(
statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended
December 31, 2021, and the related notes and our report dated February 25, 2022 expressed an unqualified opinion thereon.
), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated
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
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
PCAOB
.
and are
We conducted our audit in accordance with the standards of the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
. Those standards require that we plan and perform the
PCAOB
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 25, 2022
74
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 $21 and $16, 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 (20))
TEMPORARY EQUITY
Redeemable Noncontrolling Interests in Subsidiaries
PERMANENT EQUITY
Federated Hermes, Inc. Shareholders' Equity
Common Stock:
2021
2020
$ 233,327
105,542
87,805
65,317
30,956
29,322
7,178
559,447
798,871
471,209
46,965
108,306
33,389
1,458,740
$ 2,018,187
$
64,019
162,203
17,447
27,038
270,707
223,350
205,206
105,270
36,435
570,261
840,968
$ 301,819
91,359
45,593
64,857
41,107
22,130
8,478
575,343
800,267
481,753
52,610
122,078
28,788
1,485,496
$ 2,060,839
$
61,736
170,646
15,845
17,219
265,446
75,000
187,937
121,922
36,550
421,409
686,855
63,202
236,987
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, 16,094,488 and 10,174,013 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
448,929
1,187,001
189
418,669
1,027,699
(538,464)
16,362
1,114,017
$ 2,018,187
(324,731)
15,171
1,136,997
$ 2,060,839
75
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
Professional Service Fees
Office and Occupancy
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,
Earnings Per Common Share—Basic
Earnings Per Common Share—Diluted
Cash Dividends Per Share
Inc
.
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
2021
2020
2019
$ 656,958
259,026
306,639
61,326
16,498
1,300,447
$ 769,836
241,631
318,152
103,862
14,787
1,448,268
$ 685,849
221,756
245,887
161,421
11,981
1,326,894
532,492
160,884
75,429
60,331
44,573
21,600
5,337
33,529
934,175
366,272
3,171
9,532
(1,785)
(900)
10,018
376,290
103,982
272,308
503,400
318,343
64,698
55,123
38,975
15,834
4,566
29,178
1,030,117
418,151
4,119
18,067
(2,678
)
8,398
27,906
446,057
110,035
336,022
442,147
340,663
52,988
43,714
44,926
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
2,015
$ 270,293
9,658
$ 326,364
4,786
$ 272,339
$
$
$
2.77
2.75
1.08
$
$
$
3.25
3.23
2.08
$
$
$
2.69
2.69
1.08
76
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31,
Net Income Including the Noncontrolling Interests in Subsidiaries
2021
$ 272,308
2020
$ 336,022
2019
$ 277,125
Other Comprehensive Income (Loss), net of tax
Permanent Equity
Foreign Currency Translation Gain (Loss)
Temporary Equity
1,191
15,420
14,368
Foreign Currency Translation Gain (Loss)
Other Comprehensive Income (Loss), net of tax
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries
(7,443)
(6,252)
266,056
6,593
22,013
358,035
6,907
21,275
298,400
Less: Comprehensive Income (Loss) Attributable to Redeemable
Noncontrolling Interest in Subsidiaries
Comprehensive Income Attributable to Federated Hermes,
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Inc
.
(5,428)
$ 271,484
16,251
$ 341,784
11,693
$ 286,707
77
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Balance at January 1, 2019
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions – Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Dividends Declared
Distributions to Noncontrolling Interests in Subsidiaries
Business Acquisition
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Purchase of Treasury Stock
Balance at December 31, 2019
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions – Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Dividends Declared
Distributions to Noncontrolling Interests in Subsidiaries
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Purchase of Treasury Stock
Balance at December 31, 2020
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions – Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Dividends Declared
Distributions to Noncontrolling Interests in Subsidiaries
Acquisition of Additional Equity of HFML
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Purchase of Treasury Stock
Balance at December 31, 2021
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Class A
9,000
0
0
0
0
0
0
0
0
0
0
9,000
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
100,803,382
0
0
0
0
941,074
0
0
0
0
(614,077)
101,130,379
0
0
0
0
1,141,331
0
0
0
(2,940,267)
99,331,443
0
0
0
0
1,225,363
0
0
0
0
(7,145,838)
93,410,968
Treasury
8,702,074
0
0
0
0
(941,074)
0
0
0
0
614,077
8,375,077
0
0
0
0
(1,141,331)
0
0
0
2,940,267
10,174,013
0
0
0
0
(1,225,363)
0
0
0
0
7,145,838
16,094,488
78
Federated Hermes,
Inc
. Shareholders' Equity
Common Stock
Retained
Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
Total
Permanent
Equity
Redeemable
Noncontrolling
Interests in
Subsidiaries/
Temporary
Equity
$
$
$
$
367,252
0
0
0
0
24,958
0
0
0
0
0
392,210
0
0
0
0
26,648
0
0
0
0
418,858
0
0
0
0
30,260
0
0
0
0
0
449,118
$
$
$
$
791,823
272,339
0
0
0
(20,614)
(109,049)
0
0
(4,148)
0
930,351
326,364
0
0
0
(22,751)
(207,744)
0
1,479
0
1,027,699
270,293
0
0
0
(24,518)
(105,729)
0
0
19,256
0
1,187,001
$
$
$
$
(287,337)
0
0
0
0
22,045
0
0
0
0
(15,740)
(281,032)
0
0
0
0
24,206
0
0
0
(67,905)
(324,731)
0
0
0
0
25,995
0
0
0
0
(239,728)
(538,464)
$
$
$
$
(14,617)
0
14,368
0
0
0
0
0
0
0
0
(249)
0
15,420
0
0
0
0
0
0
0
15,171
0
1,191
0
0
0
0
0
0
0
0
16,362
$
$
$
$
857,121
272,339
14,368
0
0
26,389
(109,049)
0
0
(4,148)
(15,740)
1,041,280
326,364
15,420
0
0
28,103
(207,744)
0
1,479
(67,905)
1,136,997
270,293
1,191
0
0
31,737
(105,729)
0
0
19,256
(239,728)
1,114,017
$
$
$
$
182,513
4,786
6,907
9,356
454
7,888
0
(3,580)
(386)
4,148
0
212,086
9,658
6,593
20,985
(3,424)
8,786
0
(16,218)
(1,479)
0
236,987
2,015
(7,443)
998,965
(985,248)
9,410
0
(4,926)
(167,302)
(19,256)
0
63,202
79
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
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
Consolidation/(Deconsolidation) of 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
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
Payments to Acquire Additional Equity in HFML
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 Recorded in Other Current Assets
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.)
2021
2020
2019
$ 272,308
$ 336,022
$ 277,125
30,010
30,294
9,411
(6,964)
19,033
(1,965)
(179,419)
10,379
6,662
10,275
(6,365)
(23,276)
170,383
(9,429)
0
(5,324)
35,990
(10,421)
10,816
(105,764)
(228,349)
(4,926)
107,635
(165,886)
295,650
(147,300)
(532)
(249,472)
29,932
26,669
8,786
1,382
18,169
(19,403)
(12,978)
(3,051)
11,654
(33,588)
695
8,952
373,241
(25,513)
2,697
0
11,493
(13,500)
(24,823)
(207,765)
(66,759)
(16,218)
20,985
0
100,000
(125,000)
(379)
(295,136)
27,999
25,057
7,888
(1,085)
7,452
(6,915)
(26,434)
0
(7,250)
7,411
30,912
(7,220)
334,940
(103,445)
785
(58,046)
81,068
(15,045)
(94,683)
(109,147)
(15,740)
(3,580)
9,356
0
8,800
(43,800)
1,431
(152,680)
(2,311)
5,842
4,508
(70,584)
308,635
238,051
4,419
305
$ 233,327
59,124
249,511
308,635
6,455
361
$ 301,819
92,085
157,426
249,511
0
337
$ 249,174
$ 91,925
$ 1,133
$ 98,730
$ 2,393
$ 72,612
$ 4,606
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2021, 2020 and 2019)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Federated Hermes provides investment advisory, administrative, distribution and other services to the Federated Hermes Funds
and Separate Accounts in both domestic and international markets. In addition, Federated Hermes markets and provides
stewardship and real estate development services to various domestic and international companies. For presentation purposes in
the Consolidated Financial Statements, the Federated Hermes Funds are considered to be affiliates of Federated Hermes.
The majority of Federated Hermes' revenue is derived from investment advisory services provided to the Federated Hermes
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 Hermes 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 Hermes Funds are generally distributed by
subsidiaries and third-party distribution firms which are registered under applicable jurisdictional law. Federated Hermes'
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 Hermes' 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 Hermes expects to be entitled in exchange for
providing its services. This amount may be reduced by Fee Waivers. See Note (5) 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 Hermes 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 Hermes. 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 Hermes' 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 (3) for
information about expected future revenue.
For certain revenue, primarily related to distribution and performance fees, including carried interest, Federated Hermes 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. For the distribution performance obligation, control is
transferred to the customer at the point in time of investor subscription and/or redemption. Measurement of distribution revenue
is based on contractual fee rates and the fair value of AUM over the time period the investor remains in the fund. The revenue
for these services is accounted for as variable consideration, and is subject to factors outside of Federated Hermes' control,
including investor activity and preferences and market volatility, and is recognized as these uncertainties are resolved.
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Performance fees, including carried interest, are received from certain Federated Hermes Funds and Separate Accounts and are
dependent upon meeting certain performance hurdles which typically arise from investment management services that began in
prior periods. Because each fee arrangement is unique, contracts are evaluated on an individual basis for each reporting period.
Performance fees are forms of variable consideration which are recognized only to the extent that it is probable that a
significant reversal in the amount of cumulative revenue recognized will not occur, which involves significant judgement.
Potential constraints impacting the amount of variable consideration recognized include factors outside of management's
influence, such as market conditions and situations where the contract has a large number and broad range of possible amounts
and, in the case of carried interest, certain clawback provisions which may require the return of previously received carried
interest based on future fund performance. Federated Hermes records a contract liability for deferred carried interest to the
extent it receives cash prior to meeting the revenue recognition criteria.
The fair value of AUM managed by Federated Hermes 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 Hermes
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 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 Hermes has contractual arrangements with third parties to provide certain fund-related services. Management
considers whether Federated Hermes 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 Hermes' payments to third-party
service providers. Federated Hermes 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 Hermes is acting as the
principal in these transactions and should therefore report revenues on a gross basis. All of Federated Hermes' 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 Hermes is the principal or agent; (2) a contract has multiple performance obligations when Federated
Hermes is paid a single fee; and (3) two or more contracts should be combined. A change in the conclusion of whether
Federated Hermes 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.
(e) Principles of Consolidation
Federated Hermes performs an analysis for each Federated Hermes Fund or other entity in which Federated Hermes holds a
financial interest to determine if it is a VIE or 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 Hermes' involvement with the entity. Entities that are determined to be VIEs are
consolidated if Federated Hermes is deemed to be the primary beneficiary. Entities that are determined to be VREs are
generally consolidated if Federated Hermes holds the majority voting interest. Federated Hermes' conclusion to consolidate a
Federated Hermes 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 Hermes 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.
Financial information for certain entities, whose primary purpose is to collect and distribute carried interest paid by foreign
82
private equity and infrastructure funds, is not available timely and is therefore consolidated on a one quarter lag, adjusted for
any known material carried interest revenue and compensation transactions occurring through the balance sheet date.
Consolidation of Voting Rights Entities
Federated Hermes 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 Hermes 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 Hermes' 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 Hermes as a result of consolidating certain Federated Hermes Funds. Investments—Affiliates and
Other represent Federated Hermes' investments in fluctuating-value Federated Hermes Funds and investments held in Separate
Accounts for which Federated Hermes 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.
The fair value of Federated Hermes' 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 (7) for additional information regarding the
fair value of investments held as of December 31, 2021 and 2020.
(h) Derivatives and Hedging Instruments
From time to time, Federated Hermes may consolidate an investment product that holds freestanding derivative financial
instruments for trading purposes. Federated Hermes 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 Hermes may also enter into derivative financial instruments to hedge against the risk of
movement in foreign exchange rates. Federated Hermes records all derivative financial instruments as either assets or liabilities
on its Consolidated Balance Sheets and measures these instruments at fair value. Federated Hermes has not designated any
derivative financial instrument as a hedging instrument for accounting purposes. In 2021, 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 Hermes 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
83
sum of the acquisition date fair values of the assets transferred by Federated Hermes, the liabilities incurred by Federated
Hermes from the seller and any equity interests issued by Federated Hermes. Direct transaction costs are expensed as incurred
in a business combination. Results of operations of an acquired business are included in Federated Hermes' 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 Hermes tests goodwill for impairment at least annually on June 30 or when indicators of potential impairment exist.
Goodwill is evaluated at the reporting unit level. Federated Hermes has determined that it has a single reporting unit consistent
with its single operating segment based on the management of Federated Hermes' operations as a single business: investment
management. Federated Hermes 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 compares the fair value of its reporting unit, including consideration of Federated Hermes'
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 Hermes 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 Hermes has
identified 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 2021, management used
a quantitative approach for two units of account and a qualitative approach for the remaining unit of account. 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 Hermes' 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 Hermes 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
84
Hermes 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 Hermes 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.
On an annual basis, 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 Hermes 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
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.
Certain internal and external costs incurred in connection with implementation costs related to a software hosting arrangement
that is a service contract are capitalized in accordance with the applicable accounting guidance relating to Intangibles -
Goodwill and Other - Internal-Use Software. These capitalized costs are included in Prepaid Expenses and Other Long-Term
Assets on the Consolidated Balance Sheets and are amortized using the straight-line method over the term of the software
license.
(m) Leases
Federated Hermes classifies leases as either operating or financing, and records a right-of-use (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 Hermes 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 Hermes'
leases based on the information available at the commencement date, therefore, management calculated an IBR for each lease.
85
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) Loss Contingencies
Federated Hermes 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 Hermes' results of operations, financial position and/or cash flows. Recoveries of losses are
recognized on the Consolidated Statements of Income when receipt is deemed probable, or when final approval is received by
the insurance carrier.
(o) Noncontrolling Interests
To the extent Federated Hermes' interest in a consolidated entity represents less than 100% of the entity's equity, Federated
Hermes recognizes noncontrolling interests in subsidiaries. These noncontrolling interests are deemed to represent temporary
equity and are classified as Redeemable Noncontrolling Interests 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 HFML, the noncontrolling interests primarily represent equity which is subject to put and call rights under a long-
term incentive plan and award agreements with current and former employees, redeemable at the option of either the
noncontrolling party or Federated Hermes at future predetermined dates, and therefore, not entirely within Federated Hermes'
control. The subsidiary's net income or loss and related dividends are allocated to Federated Hermes and the noncontrolling
interest holder based on their relative ownership percentages. The noncontrolling interests 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.
(p) Treasury Stock
Federated Hermes 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 Hermes reissues treasury stock for more than the cost of the shares. If Federated
Hermes 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.
(q) 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.
(r) Foreign Currency Translation
The balance sheets of certain foreign subsidiaries of Federated Hermes, 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
86
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.
(s) Share-Based Compensation
Federated Hermes issues shares for share-based awards from treasury stock. Federated Hermes 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 Hermes' Class B common stock on the date of grant and
the purchase price paid by the employee, if any. Federated Hermes' 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 Hermes recognizes 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 Hermes established a non-public subsidiary share-based compensation plan for certain
employees of one of its subsidiaries. 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 Interests in Subsidiaries in the Consolidated Balance Sheets.
(t) Advertising Costs
Federated Hermes 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.
(u) Income Taxes
Federated Hermes 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 Hermes 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.
Following its review, management has determined that the investment in certain non-U.S. subsidiaries will be reinvested for an
indefinite period of time. Federated Hermes has the ability and the intent to do this. In addition, under the various directives and
protocols in the jurisdictions where these entities are located, management believes that any dividend from these non-U.S.
subsidiaries would not be subject to a withholding tax. Additionally, Federated Hermes 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. As of December 31, 2021, the unrecognized
deferred tax liability associated with these subsidiaries is $9.1 million.
(v) 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 Hermes' 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.
87
(w) 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
Hermes' Chief Executive Officer (CEO), who is the chief operating decision maker, in deciding how to allocate resources and
assess performance. Federated Hermes operates in one operating segment, the investment management business, which is
primarily conducted within the U.S. Federated Hermes' CEO utilizes a consolidated approach to assess performance and
allocate resources.
(2) Equity Acquisition and Business Combination
2021 Acquisition of HFML Noncontrolling Interests
On August 31, 2021, Federated Hermes completed the 2021 Acquisition of HFML Noncontrolling Interests to acquire 29.5%
noncontrolling interests in HFML from BTPS for £116.5 million ($160.2 million) pursuant to the terms of a certain Put and Call
Option Deed, dated July 2, 2018 (the Option Deed), between BTPS and Federated Hermes (2021 Acquisition of HFML
Noncontrolling Interests). Because Federated Hermes had previously acquired a 60% controlling interest in HFML from BTPS
as of July 1, 2018 with the 2018 HFML Acquisition, the 2021 Acquisition of HFML Noncontrolling Interests was accounted for
as an acquisition of additional equity. The difference between the carrying value of the BTPS noncontrolling interests and the
purchase price was reclassified from temporary equity to permanent equity. The remaining approximate 10% of the equity
interests of HFML is held in an employee benefit trust for the benefit of certain members of HFML's management and other
key employees under a long-term incentive plan established in connection with the 2018 HFML Acquisition.
Pursuant to the Option Deed, Federated Hermes and BTPS agreed upon a third-party valuation company, which determined the
fair value of HFML for purposes of the Option Deed. The Option Deed provided that the consideration to be paid for BTPS'
remaining interest in HFML would be based on BTPS' equity proportion of the fair value of HFML as determined in
accordance with the terms of the Option Deed. Federated Hermes paid the purchase price by using a combination of cash on
hand and borrowings under its corporate credit facility. Upon completion of the 2021 Acquisition of HFML Noncontrolling
Interests, BTPS no longer has any ownership interest in HFML nor any representation on HFML's board of directors.
HCL Acquisition
On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of HGPE Capital Limited
(HCL Acquisition) for £15.9 million ($20.4 million). The principal activity of HGPE Capital Limited is that of a holding
company for an infrastructure and private equity investment management business. As a result of the HCL Acquisition,
Federated Hermes gained control of Hermes GPE LLP (HGPE) (collectively with HGPE Capital Limited, HCL). The addition
of London-based HCL provides the opportunity to further accelerate and broaden Federated Hermes' global growth.
The HCL Acquisition included upfront cash payments that totaled £11.2 million ($14.3 million). The transaction also includes
contingent purchase price payments payable through December 2024 that were deposited into escrow. The maximum
contingent purchase price payments, recorded in Other Long-Term Liabilities, totaled £3.5 million ($4.5 million as of March 1,
2020), which represents the payment of certain future carried interest.
Prior to March 1, 2020, Federated Hermes accounted for its partial ownership interest in HGPE (through its ownership of
HFML) as an equity-method investment recorded in Other Long-Term Assets on the Consolidated Balance Sheets.
Management used an independent valuation expert to assist in estimating the fair value of this equity interest in HGPE using
primarily the discounted cash flow methodology under the income approach. The acquisition-date fair value of this previous
equity interest was $34.5 million. In the first quarter 2020, Federated Hermes recognized a gain of $7.5 million as a result of
remeasuring the prior equity interest in HGPE held before the business combination and the consolidation of HGPE. This gain
is included in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income.
Federated Hermes performed a valuation of the fair market value of acquired assets and assumed liabilities of the HCL
Acquisition. The accounting for this acquisition was finalized in the first quarter 2021. During the first quarter 2021, Federated
Hermes recorded adjustments that primarily resulted from the consolidation of certain foreign subsidiaries not previously
consolidated. The provisional amounts recognized for certain acquired assets and incurred liabilities were adjusted by $25.8
million and $17.2 million, respectively, with the net offset of $8.6 million recorded to the related redeemable noncontrolling
interests in subsidiaries. This adjustment reflected facts and circumstances that existed as of the acquisition date. As a result of
the consolidation of these subsidiaries, Federated Hermes recorded revenue of $6.9 million offset by $6.9 million of
Compensation and Related expense, which represented the income and expense that would have been recorded had these
88
entities been consolidated on March 1, 2020. There was no change to net income or earnings per share for the three-month
period ended March 31, 2021 as a result of these adjustments.
The following table summarizes the final purchase price allocation determined as of the purchase date:
1
(in millions)
Cash and Cash Equivalents
Other Current Assets
Goodwill2
3
Intangible Assets
Other Long-Term Assets
Less: Liabilities Acquired
Less: Fair Value of Redeemable Noncontrolling Interests in Subsidiaries
Total Purchase Price Consideration
1
2
$
$
32.7
11.8
19.1
27.6
16.4
(44.1)
(43.1)
20.4
4
Includes $5.0 million of accounts receivable.
The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled
workforce of HGPE. In this instance, goodwill is not deductible for tax purposes.
Includes $20.3 million for rights to manage fund assets for private equity funds with a weighted-average useful life of 9.0 years and $6.9
million for rights to manage fund assets for infrastructure funds with a weighted-average useful life of 11.0 years, all of which are
recorded in Intangible Assets, net on the Consolidated Balance Sheets.
The fair value of the noncontrolling interests was determined utilizing primarily the discounted cash flow methodology under the income
approach.
3
4
(3) Revenue from Contracts with Customers
The following table presents Federated Hermes' revenue disaggregated by asset class:
(in thousands)
Equity
Money market
Fixed-income
1
Other
2019
$ 533,749
529,340
179,102
84,703
$ 1,326,894
Primarily includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), multi-asset
and stewardship services revenue.
2020
$ 551,028
570,815
193,649
132,776
$ 1,448,268
2021
$ 677,917
239,318
237,702
145,510
$ 1,300,447
Total Revenue
1
The following table presents Federated Hermes' revenue disaggregated by performance obligation:
(in thousands)
Asset Management1
Administrative Services
2
Distribution
3
Other
Total Revenue
2021
$ 915,984
306,639
49,600
28,224
$ 1,300,447
2020
$ 1,011,467
318,152
92,922
25,727
$ 1,448,268
2019
$ 907,605
245,887
151,106
22,296
$ 1,326,894
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.
Primarily includes shareholder service fees and stewardship services revenue.
89
The following table presents Federated Hermes' revenue disaggregated by product type:
(in thousands)
Federated Hermes Funds
Separate Accounts
Other1
Total Revenue
1
Primarily includes stewardship services revenue.
2021
$ 1,024,922
259,026
16,499
$ 1,300,447
2020
$ 1,191,851
241,631
14,786
$ 1,448,268
2019
$ 1,093,157
221,756
11,981
$ 1,326,894
For nearly all revenue, Federated Hermes 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.
Federated Hermes expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services and
real estate development performance obligations at December 31, 2021. 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 notice, generally from three to
twelve months. Based on existing contracts and the exchange rates as of December 31, 2021, Federated Hermes may recognize
future fixed revenue from these services as presented in the following table:
(in thousands)
2022
2023
2024
2025 and Thereafter
Total Remaining Unsatisfied Performance Obligations
(4) Concentration Risk
$
$
11,404
4,714
2,365
553
19,036
The following information summarizes Federated Hermes' revenue concentrations. See additional information on the risks
related to such concentrations in Item 1A - Risk Factors (unaudited).
(a) Revenue Concentration by Asset Class
The following table presents Federated Hermes' significant revenue concentration by asset class over the last three years:
Equity Assets
Money Market Assets
Fixed-Income Assets
2021
52 %
19 %
18 %
2020
38 %
40 %
13 %
2019
40 %
40 %
14 %
The change in the relative proportion of Federated Hermes' revenue attributable to equity and fixed-income assets in 2021, as
compared to the same period in 2020, was primarily the result of decreased money market revenue and higher average equity
and fixed-income assets in 2021.
The change in the relative proportion of Federated Hermes' revenue attributable to money market assets in 2021, as compared to
the same period in 2020, was primarily the result of an increase in Voluntary Yield-related Fee Waivers. See section below
entitled Low Short-Term Interest Rates.
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the Pandemic, FOMC decreased the federal funds
target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. As a result of the near-zero
interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's
operating expenses. Beginning in the first quarter 2020, Federated Hermes began to implement Voluntary Yield-related Fee
Waivers in order for certain money market funds to maintain positive or zero net yields. These Voluntary Yield-related Fee
90
Waivers have been partially offset by related reductions in distribution expense as a result of Federated Hermes' mutual
understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers.
For the year ended December 31, 2021, Voluntary Yield-related Fee Waivers totaled $420.3 million. These fee waivers were
partially offset by related reductions in distribution expenses of $277.1 million, such that the net negative pre-tax impact to
Federated Hermes was $143.2 million. See Management's Discussion and Analysis - Business Developments - Low Short-Term
Interest Rates for additional information on management's expectations regarding Voluntary Yield-related Fee Waivers
(unaudited).
(b) Revenue Concentration by Investment Fund Strategy
The following table presents Federated Hermes' revenue concentration by investment fund strategy over the last three years:
Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II
Federated Hermes Strategic Value Dividend strategy
Federated Hermes Government Obligations Fund
1
Strategy includes Federated Hermes Funds and Separate Accounts.
1
2021
11 %
9 %
5 %
2020
9 %
8 %
13 %
2019
9 %
11 %
10 %
A significant and prolonged decline in the AUM in these funds could have a material adverse effect on Federated Hermes'
future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with these
funds.
(c) Revenue Concentration by Intermediary
Approximately 3%, 7% and 11% of Federated Hermes' total revenue for 2021, 2020 and 2019, respectively, was derived from
services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary. The
decrease in 2021 was primarily due to an increase in Voluntary Yield-related Fee Waivers. Continued Voluntary Yield-related
Fee Waivers or a negative change in Federated Hermes' relationship with this intermediary may have a material adverse effect
on Federated Hermes' future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses
associated with this intermediary.
(5) Consolidation
The Consolidated Financial Statements include the accounts of Federated Hermes, certain Federated Hermes Funds and other
entities in which Federated Hermes holds a controlling financial interest. Federated Hermes 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 Hermes invests in
Federated Hermes 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 Hermes' investment in, and/or receivables from, these
Federated Hermes Funds represents its maximum exposure to loss. The assets of each consolidated Federated Hermes Fund are
restricted for use by that Federated Hermes Fund. Generally, neither creditors of, nor equity investors in, the Federated Hermes
Funds have any recourse to Federated Hermes' general credit. Given that the entities consolidated by Federated Hermes
generally follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not
result in the recognition of gains or losses for Federated Hermes.
In the ordinary course of business, Federated Hermes may implement fee waivers for various Federated Hermes Funds for
competitive reasons (such as Voluntary Yield-related Fee Waivers or to maintain certain fund ratios/yields), to meet regulatory
requirements or to meet contractual requirements (collectively, Fee Waivers). For the years ended December 31, 2021, 2020
and 2019, Fee Waivers totaled $917.9 million, $675.3 million and $427.3 million, respectively, of which $775.6 million, $537.8
million and $311.6 million, respectively, related to money market funds which meet the scope exception of the consolidation
guidance.
Like other sponsors of investment companies, Federated Hermes in the ordinary course of business may make capital
contributions to certain affiliated money market Federated Hermes Funds in connection with the reorganization of such funds
into certain other affiliated money market Federated Hermes Funds or in connection with the liquidation of a money market
Federated Hermes 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
91
liquidation. Under current money market fund regulations and SEC guidance, Federated Hermes 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 material contributions for the year ended December 31, 2021. There were
no contributions for the years ended December 31, 2020 and 2019.
In accordance with Federated Hermes' consolidation accounting policy, Federated Hermes first determines whether the entity
being evaluated is a VRE or a VIE. Once this determination is made, Federated Hermes proceeds with its evaluation of whether
to consolidate the entity. The disclosures below represent the results of such evaluations as of December 31, 2021 and 2020.
(a) Consolidated Voting Rights Entities
Although most of the Federated Hermes Funds meet the definition of a VRE, Federated Hermes consolidates VREs only when
it is deemed to have control. Consolidated VREs are reported on Federated Hermes' Consolidated Balance Sheets primarily in
Investments—Consolidated Investment Companies and Redeemable Noncontrolling Interests in Subsidiaries.
(b) Consolidated Variable Interest Entities
As of December 31, 2021 and 2020, Federated Hermes was deemed to be the primary beneficiary of, and therefore
consolidated, certain entities as a result of its controlling financial interest. The following table presents the balances related to
the consolidated VIEs that were included on the Consolidated Balance Sheets as well as Federated Hermes' net interest in the
consolidated VIEs at December 31:
(in millions)
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Other Assets
Long-Term Investments
Less: Liabilities
Less: Redeemable Noncontrolling Interests in Subsidiaries
Federated Hermes' Net Interest in VIEs
2021
3.0
35.9
0.1
13.8
1.4
33.3
18.1
$
$
2020
0.2
12.1
0.1
0.0
0.1
0.0
12.3
$
$
Federated Hermes' net interest in the consolidated VIEs represents the value of Federated Hermes' economic ownership interest
in that VIE.
During the year ended December 31, 2021, as a result of the HCL Acquisition, Federated Hermes consolidated certain VIEs not
previously consolidated. See Note (2) for additional information. In addition, Federated Hermes consolidated a Federated
Hermes Fund VIE in which it was the primary beneficiary. There was no material impact to the Consolidated Statements of
Income as a result of these consolidations. During the quarter ended December 31, 2021, Federated Hermes liquidated its
investment in one consolidated VIE in which it was the only remaining shareholder. Accordingly, Federated Hermes redeemed
$5.0 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, 2021.
(c) Non-Consolidated Variable Interest Entities
Federated Hermes' involvement with certain Federated Hermes Funds that are deemed to be VIEs includes serving as
investment manager, or at times, holding a minority interest or both. Federated Hermes' variable interest is not deemed to
absorb losses or receive benefits that could potentially be significant to the VIE. Therefore, Federated Hermes is not the primary
beneficiary of these VIEs and has not consolidated these entities.
At December 31, 2021 and 2020, Federated Hermes' maximum risk of loss related to investments in variable interests in non-
consolidated VIEs was $170.6 million and $106.0 million, respectively, (primarily recorded in Cash and Cash Equivalents on
the Consolidated Balance Sheets) and was entirely related to Federated Hermes Funds. AUM for these non-consolidated
Federated Hermes Funds totaled $8.0 billion and $9.1 billion at December 31, 2021 and 2020, respectively. Of the Receivables
—Affiliates at December 31, 2021 and 2020, $0.7 million and $0.4 million, respectively, related to non-consolidated VIEs and
represented Federated Hermes' maximum risk of loss from non-consolidated VIE receivables.
92
(6) Investments
At December 31, 2021 and 2020, Federated Hermes held investments in non-consolidated fluctuating-value Federated Hermes
Funds of $77.6 million and $36.0 million, respectively, primarily in mutual funds which invest in equity securities and held
investments in Separate Accounts of $10.2 million and $9.6 million at December 31, 2021 and 2020, respectively, that were
included in Investments—Affiliates and Other on the Consolidated Balance Sheets. Federated Hermes' investments held in
Separate Accounts as of December 31, 2021 and 2020, were primarily composed of domestic debt securities ($5.2 million for
both periods) and stocks of large domestic and foreign companies ($3.4 million and $3.1 million, respectively).
Federated Hermes consolidates certain Federated Hermes Funds into its Consolidated Financial Statements as a result of its
controlling financial interest in these Federated Hermes Funds (see Note (5)). All investments held by these consolidated
Federated Hermes Funds were included in Investments—Consolidated Investment Companies on Federated Hermes'
Consolidated Balance Sheets.
The investments held by consolidated Federated Hermes Funds as of December 31, 2021 and 2020, were primarily composed
of domestic and foreign debt securities ($65.2 million and $48.6 million, respectively), stocks of large domestic and foreign
companies ($28.5 million and $35.2 million, respectively) and stocks of small and mid-sized domestic and foreign companies
($7.4 million and $6.4 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 Hermes' investments:
(in thousands)
Investments—Consolidated Investment Companies
Net Unrealized Gains (Losses)
Net Realized Gains (Losses)1
Net Gains (Losses) on Investments—Consolidated Investment Companies
Investments—Affiliates and Other
Net 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.
(7) Fair Value Measurements
2021
2020
2019
$
$
642
1,609
2,251
1,323
5,958
7,281
9,532
$
$
13,862
(1,352)
12,510
5,541
16
5,557
18,067
$
$
4,759
(1,243)
3,516
2,156
(706)
1,450
4,966
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-
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.
93
(a) Fair Value Measurements on a Recurring Basis
The following table presents fair value measurements for classes of Federated Hermes' financial assets and liabilities measured
at fair value on a recurring basis at December 31:
(in thousands)
2021
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Investments—Affiliates and Other
1
Other
Total Financial Assets
Total Financial Liabilities
2
2020
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Investments—Affiliates and Other
1
Other
Total Financial Assets
Level 1
Level 2
Level 3
Total
$ 233,327
38,799
82,594
7,105
$ 361,825
$
0
$ 301,819
13,622
40,010
9,188
$ 364,639
$
$
$
$
$
0
66,743
5,165
0
71,908
1,644
0
77,737
5,247
5,143
88,127
$
$
$
$
$
0
0
46
0
46
$ 233,327
105,542
87,805
7,105
$ 433,779
11,652
$
13,296
0
0
336
0
336
$ 301,819
91,359
45,593
14,331
$ 453,102
2
Total Financial Liabilities
1
12,985
Amounts primarily consist of restricted cash and security deposits as of December 31, 2021 and restricted cash, security deposits and a
derivative asset as of December 31, 2020.
Amounts primarily consist of acquisition-related future contingent consideration liabilities and a derivative liability as of December 31,
2021 and acquisition-related future contingent consideration liabilities as of December 31, 2020.
12,896
89
$
$
0
$
$
2
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a
recurring basis. Federated Hermes did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis
at December 31, 2021 or 2020.
Cash and Cash Equivalents
Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market
funds totaled $183.4 million and $244.3 million at December 31, 2021 and 2020, 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
Investments—Consolidated Investment Companies represent securities held by consolidated Federated Hermes Funds. For
publicly traded 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. The fair value of certain securities held by consolidated Federated Hermes Funds are
determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2).
Investments—Affiliates and Other
Investments—Affiliates and Other primarily represent investments in fluctuating-value Federated Hermes Funds, as well as
investments held in Separate Accounts. For investments in fluctuating-value Federated Hermes 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. For publicly traded
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. The fair value of certain securities are determined by third-party pricing services which utilize observable
market inputs of comparable investments (Level 2).
94
Acquisition-related future contingent consideration liabilities
From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions,
Federated Hermes may be required to make future consideration payments if certain contingencies are met. In connection with
certain business combinations, Federated Hermes records a liability representing the estimated fair value of future consideration
payments as of the acquisition date. The liability is subsequently re-measured at fair value on a recurring basis with changes in
fair value recorded in earnings. As of December 31, 2021, acquisition-related future consideration liabilities of $11.7 million
were primarily related to business combinations made in the first quarter of 2020 and were recorded in Other Current Liabilities
($7.2 million) and Other Long-Term Liabilities ($4.5 million) on the Consolidated Balance Sheets. Management estimated the
fair value of future consideration payments based primarily upon expected future cash flows using an income approach
valuation methodology with unobservable market data inputs (Level 3).
The following table presents a reconciliation of the beginning and ending balances for Federated Hermes' liability for future
consideration payments related to these business combinations/asset acquisitions:
(in thousands)
Balance at December 31, 2020
Changes in Fair Value
Contingent Consideration Payments
Balance at December 31, 2021
Investments using Practical Expedients
$
12,896
1,051
(2,295)
11,652
$
For investments in mutual funds that are not publicly available but for which the NAV is calculated monthly and for which
there are redemption restrictions, the investments are valued using NAV as a practical expedient and are excluded from the fair
value hierarchy. As of December 31, 2021 and December 31, 2020, these investments totaled $17.5 million and $6.9 million,
respectively, and were recorded in Other Long-Term Assets.
(b) Fair Value Measurements on a Nonrecurring Basis
Federated Hermes did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2021.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated Hermes' 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.
(8) Derivatives
During the third quarter of 2021, Federated Hermes entered into a foreign currency forward transaction in order to hedge
against foreign exchange rate fluctuations associated with the payment for the 2021 Acquisition of HFML Noncontrolling
Interests. The forward was not designated as a hedging instrument for accounting purposes. The forward transaction settled in
the third quarter of 2021 and Federated Hermes recorded $1.3 million of expense in Nonoperating Income (Expenses) - Other,
net on the Consolidated Statements of Income as a result of the change in fair value of this derivative.
HFML, a British Pound Sterling-denominated, majority-owned subsidiary of Federated Hermes, 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, 2021, this subsidiary held foreign
currency forward derivative instruments with a combined notional amount of £69.6 million and expiration dates ranging from
March 2022 through September 2022. Federated Hermes recorded $1.6 million in Other Current Liabilities on the Consolidated
Balance Sheets, which represented the fair value of these derivative instruments as of December 31, 2021.
As of December 31, 2020, HFML held foreign currency forward derivative instruments with a combined notional amount of
£47.3 million and expiration dates ranging from March 2021 through September 2021. Federated Hermes recorded $5.1 million
in Receivables on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of
December 31, 2020.
95
(9) 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 ($347.8 million and $343.5 million at December 31, 2021 and 2020, respectively) and trade names ($53.1
million and $53.6 million at December 31, 2021 and 2020, respectively). The increase in indefinite-lived intangible assets at
December 31, 2021 as compared to December 31, 2020 is primarily due to $5.3 million of intangible assets recorded in
connection with an asset purchase during 2021, partially offset by a $2.6 million decrease in the value of intangible assets
denominated in a foreign currency as a result of foreign exchange rate fluctuations.
(b) Finite-lived intangible assets
Finite-lived intangible assets primarily represent customer relationships and consist of the following at December 31:
(in thousands)
Cost
Accumulated Amortization
Carrying Value
2021
109,904
(39,618)
70,286
$
$
$
$
2020
111,041
(26,372)
84,669
The decrease in finite-lived intangible assets at December 31, 2021 as compared to December 31, 2020 primarily relates to
amortization expense.
Amortization expense for finite-lived intangible assets was $13.8 million, $13.8 million and $7.5 million in 2021, 2020 and
2019, 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 is shown in the table below:
(in thousands)
2022
2023
2024
2025
2026
13,347
13,314
12,366
12,285
8,275
$
(c) Goodwill
Goodwill at December 31, 2021 decreased $1.4 million from December 31, 2020 primarily as a result of foreign exchange rate
fluctuations on goodwill denominated in a foreign currency.
(10) 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
Up
4
to
of lease
to 7 years
term
14 years
to
15 years
2021
94,230
41,826
17,851
6,682
160,589
(113,624)
46,965
$
$
2020
94,662
39,546
17,851
6,868
158,927
(106,317)
52,610
$
$
Depreciation expense was $15.4 million, $16.0 million and $16.5 million for the years ended December 31, 2021, 2020 and
2019, respectively, and was recorded in Office and Occupancy expense on the Consolidated Statements of Income.
96
(11) Debt
On July 30, 2021, Federated Hermes entered into an unsecured Fourth Amended and Restated Credit Agreement by and among
Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of eleven 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 Toronto-Dominion
Bank, New York Branch as documentation agent (Credit Agreement). The Credit Agreement amended and restated Federated
Hermes' Third Amended and Restated Credit Agreement, which was dated June 5, 2017 and scheduled to mature on June 5,
2022 (Prior Credit Agreement).
The Credit Agreement consists of a $350 million revolving credit facility with an additional $200 million available via an
optional increase (or accordion) feature. The interest on the borrowings from the revolving credit facility is calculated at the
monthly London Interbank Offering Rate (LIBOR) plus a spread unless a base rate option is elected. The borrowings under the
revolving credit facility may include up to $50 million for which interest is calculated at the daily LIBOR plus a spread unless a
base rate option is elected (Swing Line). The Credit Agreement provides for a replacement reference interest rate index upon
the eventual discontinuation of LIBOR, which can be either the term Secured Overnight Financing Rate (SOFR) plus a spread
or daily simple SOFR plus a spread, each having a benchmark adjustment applied based on its historical relationship to LIBOR,
or another alternative interest rate index (selected by the administrative agent and Federated Hermes) plus a spread.
The Credit Agreement, which expires on July 30, 2026, has no principal payment schedule, but instead requires that any
outstanding principal be repaid by the expiration date. Federated Hermes, however, may elect to make discretionary principal
payments. During 2021, Federated Hermes borrowed $295.7 million and repaid $147.3 million from the revolving credit
facility under the Credit Agreement and Prior Credit Agreement.
As of December 31, 2021 and 2020, the amounts outstanding under the revolving credit facility were $223.4 million and $75.0
million, respectively, and were recorded as Long-Term Debt on the Consolidated Balance Sheets. The interest rate was 1.161%
and 1.277% as of December 31, 2021 and 2020, respectively, which was calculated at LIBOR plus a spread. The commitment
fee under the Credit Agreement is 0.10% per annum on the daily unused portion of each Lender's commitment. As of
December 31, 2021, Federated Hermes has $126.6 million available for borrowings under the revolving credit facility and an
additional $200 million available via its optional accordion feature.
The Credit Agreement, similar to the Prior 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 Hermes was in compliance with all covenants at and during the year ended
December 31, 2021. See the Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations (unaudited) 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 Third Amended and Restated Continuing Agreement of Guaranty and
Suretyship to guarantee payment of all obligations incurred through the Credit Agreement.
(12) Employee Benefit Plans
Federated Hermes offers defined contribution plans to its employees. The total expense for these plans recognized in
Compensation and Related expense amounted to $14.4 million, $13.4 million and $12.3 million for 2021, 2020 and 2019,
respectively.
(13) Share-Based Compensation
(a) Restricted Stock
Federated Hermes' 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 Hermes'
employees and non-management directors who have contributed to the success of Federated Hermes and to provide incentive to
increase their efforts on behalf of Federated Hermes. Since the Plan's inception, a total of 30.6 million shares of Class B
97
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, 2021, 1.3 million shares are available under the Plan.
On December 15, 2021, the compensation committee and board of directors of Federated Hermes approved, subject to the
consent of the holder of its Class A common stock (Class A Shareholder), amendments to the Plan, including to increase the
number of shares of Federated Hermes' Class B common stock authorized under the Plan by 5.5 million shares from 30.6
million shares to 36.1 million shares. The Class A Shareholder was the only shareholder of Federated Hermes entitled to
approve the amendments to the Plan. See Note (22) for additional information on the approval of the Plan.
Share-based compensation expense was $30.3 million, $26.7 million and $25.1 million for the years ended December 31, 2021,
2020 and 2019, respectively. The associated tax benefits recorded in connection with share-based compensation expense were
$7.1 million, $6.4 million and $6.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. At
December 31, 2021, the maximum remaining unrecognized compensation expense related to share-based awards approximated
$81.5 million which is expected to be recognized over a weighted-average period of approximately 6 years.
Federated Hermes' restricted stock awards represent shares of Federated Hermes Class B common stock that may be sold by the
awardee only once 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 ten 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, 2021:
Non-vested at January 1, 2021
Granted1
Vested
Forfeited
Non-vested at December 31, 2021
Restricted
Shares
3,961,392
1,218,613
(957,840)
(49,083)
4,173,082
$
Weighted-
Average Grant-
Date Fair Value
26.17
30.07
26.01
26.65
27.33
$
1 During 2021, Federated Hermes awarded 726,613 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 bonus restricted stock,
which was granted on the bonus payment dates and issued out of treasury, generally vests over a three-year period. In addition,
Federated Hermes awarded 492,000 shares of restricted Class B common stock under this same Plan that generally vests over a ten-
year period.
Federated Hermes awarded 1,218,613 shares of restricted Class B common stock with a weighted-average grant-date fair value
of $30.07 to employees during 2021; awarded 1,134,581 shares of restricted Class B common stock with a weighted-average
grant-date fair value of $25.98 to employees during 2020; and 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.
The total fair value of restricted stock vested during 2021, 2020 and 2019 was $29.9 million, $23.2 million and $28.4 million,
respectively.
(b) Subsidiary Stock Plan
Effective July 2, 2018, Federated Hermes established a non-public subsidiary share-based compensation plan for certain
employees of one of its subsidiaries. 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 Hermes at fair value and Federated Hermes has a right to exercise a call
option to acquire shares at fair value. Federated Hermes recognized compensation expense for this plan of $9.4 million, $8.8
million and $7.9 million in Compensation and Related expense on the Consolidated Statements of Income for the years ended
December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, the remaining unrecognized compensation expense
related to these plan awards approximated $16 million which is expected to be recognized over a weighted-average period of
approximately 2 years. See Note (22) for information on a tender offer.
98
(14) Common Stock
The Class A Shareholder has the entire voting rights of Federated Hermes; however, without the consent of the majority of the
holders of Class B common stock, the Class A Shareholder cannot alter Federated Hermes' 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 Hermes. 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 $105.8 million, $207.8 million and $109.1 million were paid in 2021, 2020 and 2019, respectively, to holders
of Federated Hermes common stock. Of the amount paid in 2020, $99.3 million represented a $1.00 per share special dividend
paid in the fourth quarter. 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. This program was fulfilled in March 2020. In March 2020, the board
of directors authorized a share repurchase program with no stated expiration date that allows the buy back of up to 500
thousand shares of Class B common stock. This program was fulfilled in May 2020. In April 2020, the board of directors
authorized a share repurchase program with no stated expiration date that allows the buy back of up to 3.5 million shares of
Class B common stock. This program was fulfilled in May 2021. In April and December 2021, the board of directors authorized
share repurchase programs with no stated expiration dates that allow the repurchase of up to 4 million and 7.5 million shares,
respectively, of Class B common stock. The April 2021 program was fulfilled in December 2021. No other program existed as
of December 31, 2021. 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 Hermes' 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, 2021, Federated Hermes repurchased 7.1 million shares of its Class B common stock for $239.7
million ($12.5 million of which was accrued in Other Current Liabilities as of December 31, 2021), nearly all of which were
repurchased in the open market. At December 31, 2021, 6.1 million shares remained available to be repurchased under this
share repurchase program.
(15) Income Taxes
Federated Hermes 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
2021
2020
2019
$
73,351
8,628
2,970
84,949
3,457
1,421
14,155
19,033
$ 103,982
$
76,936
11,759
3,171
91,866
9,991
2,365
5,813
18,169
$ 110,035
$
$
67,745
10,158
2,791
80,694
6,395
1,427
(370)
7,452
88,146
99
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
Foreign Income Taxes
Non-Deductible Executive Compensation
Other
Effective Tax Rate
2021
21.0 %
1.9
3.6
1.2
(0.1)
27.6 %
2020
21.0 %
2.4
0.8
0.8
(0.3)
24.7 %
2019
21.0 %
2.4
(0.1)
0.9
(0.1)
24.1 %
The effective tax rate for 2021 increased to 27.6% as compared to the effective tax rate for 2020 of 24.7% primarily due to an
increase in foreign deferred tax expense in connection with the revaluation of net foreign deferred tax liabilities resulting from
recent UK legislation that increases the UK corporate income tax rate from 19% to 25% effective April 1, 2023.
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
Lease liability
Compensation related
Other
Total Deferred Tax Assets
Valuation Allowance
Total Deferred Tax Asset, net of Valuation Allowance
Deferred Tax Liabilities
Intangible Assets
Right-of-use asset
Property and equipment
Other
Total Gross Deferred Tax Liability
Net Deferred Tax Liability
2021
2020
$
$
71,492
28,160
21,457
1,125
122,234
(59,250)
62,984
$ 232,702
25,854
3,783
5,851
$ 268,190
$ 205,206
$
$
74,274
30,931
18,033
871
124,109
(61,089)
63,020
$ 211,127
28,981
5,121
5,728
$ 250,957
$ 187,937
Long-Term Deferred Tax Liability, net at December 31, 2021 increased $17.3 million from December 31, 2020 primarily due
to recent UK legislation that increases the UK corporate income tax rate from 19% to 25% effective April 1, 2023.
At December 31, 2021, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss
carryforwards in certain taxing jurisdictions in the aggregate of $71.5 million. The state net operating losses will expire through
2041, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $49.5 million
(or 99%) of the deferred tax asset for state tax net operating losses, and for $9.8 million (or 45%) 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 Hermes 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, 2020, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss
carryforwards in certain taxing jurisdictions in the aggregate of $74.3 million. The state net operating losses will expire through
2040, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $51.6 million
(or 100%) of the deferred tax asset for state tax net operating losses, and for $9.5 million (or 42%) 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 Hermes will not realize the full benefit of these net operating losses. For the deferred tax asset, net of
100
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 Hermes' remaining deferred tax assets as of December 31, 2021 and 2020 primarily related to lease liabilities
reported pursuant to ASC 842 and 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 Hermes will receive the full
benefit of these deferred tax assets due to the expectation that Federated Hermes will generate taxable income well in excess of
these amounts in the years they become deductible.
Federated Hermes 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, 2021 or 2020. Therefore, there were no material changes during 2021, and no reasonable
possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months. Federated Hermes'
U.S. federal tax returns for tax years 2018 to 2021 remain open to examination, while filings in its major state tax jurisdictions
from tax years 2017 to 2021 generally remain open to examination.
(16) 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 Hermes for the years ended December 31:
(in thousands, except per share data)
Numerator
Net Income Attributable to Federated Hermes, Inc.
Less: Total Net Income Available to Participating Unvested Restricted
Shareholders1
Total Net Income Attributable to Federated Hermes Common Stock - Basic
Less: Total Net Income Available to Unvested Restricted Shareholders of a
Nonpublic Consolidated Subsidiary
Total Net Income Attributable to Federated Hermes Common Stock - Diluted
Denominator
Basic and Diluted Weighted-Average Federated Hermes Common Stock2
Earnings Per Share
2
Net Income Attributable to Federated Hermes Common Stock - Basic
Net Income Attributable to Federated Hermes Common Stock - Diluted2
1
2021
2020
2019
$ 270,293
$ 326,364
$ 272,339
(11,277)
$ 259,016
(12,794)
$ 313,570
(10,234)
$ 262,105
(1,580)
$ 257,436
(2,439)
$ 311,131
(872)
$ 261,233
93,597
96,419
97,259
2.69
2.69
Includes dividends paid on unvested restricted Federated Hermes Class B common stock and their proportionate share of undistributed
earnings attributable to Federated Hermes shareholders.
Federated Hermes common stock excludes unvested restricted stock which are deemed participating securities in accordance with the
two-class method of computing earnings per share.
2.77
2.75
3.25
3.23
$
$
$
$
$
$
2
(17) Leases
Federated Hermes 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 Hermes has various
other operating lease agreements primarily for additional facilities. These leases are noncancelable and expire on various dates
through the year 2030. 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, 2021, 2020, and 2019, Federated Hermes recorded $19.0 million, $13.0 million and
$17.7 million, respectively, in operating lease costs to Office and Occupancy expense on the Consolidated Statements of
Income.
101
The following table reconciles future minimum undiscounted payments to the operating lease liabilities recorded on the
Consolidated Balance Sheets as of December 31, 2021:
(in millions)
2022
2023
2024
2025
2026
2027 and Thereafter
Total Undiscounted Lease Payments
Present Value Adjustment1
Net Operating Lease Liabilities
1 Calculated using the IBR for each lease.
$
$
$
20.9
20.5
19.2
14.5
13.2
49.7
138.0
(15.3)
122.7
The following information relates to the operating leases recorded on the Consolidated Balance Sheets as of December 31,
2021:
Weighted-average remaining lease term (in years)
Weighted-average discount rate (
Year-to-date cash paid for the amounts included in the measurement of lease liabilities (in millions)
IBR
)
7.8
3.03 %
$ 19.9
(18) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders
Accumulated Other Comprehensive Income (Loss), net of tax attributable to Federated Hermes shareholders resulted from
foreign currency translation gain (loss):
(in thousands)
Balance at December 31, 2018
Other Comprehensive Income (Loss)
Balance at December 31, 2019
Other Comprehensive Income (Loss)
Balance at December 31, 2020
Other Comprehensive Income (Loss)
Balance at December 31, 2021
$
(14,617)
14,368
$
(249)
15,420
$
15,171
1,191
$
16,362
102
(19) Redeemable Noncontrolling Interests in Subsidiaries
The following table presents the changes in Redeemable Noncontrolling Interests in Subsidiaries:
(in thousands)
Balance at January 1, 2019
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions—Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Distributions to Noncontrolling Interests in Subsidiaries
Business Acquisition
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Balance at December 31, 2019
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions—Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Distributions to Noncontrolling Interests in Subsidiaries
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Balance at December 31, 2020
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions—Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Distributions to Noncontrolling Interests in Subsidiaries
Acquisition of Additional Equity of HFML
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Balance at December 31, 2021
$
$
Consolidated
Investment
Companies
11,626
2,016
0
9,356
454
0
(3,580)
0
0
19,872
3,626
0
20,985
(4,019)
0
(16,218)
0
24,246
304
0
997,556
(994,430)
0
(3,017)
0
0
24,659
$
$
HFML and
other entities
$ 170,887
2,770
6,907
0
0
7,888
0
(386)
4,148
$ 192,214
6,032
6,593
0
595
8,786
0
(1,479)
$ 212,741
1,711
(7,443)
1,409
9,182
9,410
(1,909)
(167,302)
(19,256)
38,543
$
Total
$ 182,513
4,786
6,907
9,356
454
7,888
(3,580)
(386)
4,148
$ 212,086
9,658
6,593
20,985
(3,424)
8,786
(16,218)
(1,479)
$ 236,987
2,015
(7,443)
998,965
(985,248)
9,410
(4,926)
(167,302)
(19,256)
63,202
$
The activity in 2021 includes $892.1 million of contributions from noncontrolling interests in subsidiaries as a result of a
purchase-in-kind investment into a previously consolidated VRE. This was a noncash transaction and was therefore excluded
from the Consolidated Statements of Cash Flows.
During 2021, 2020 and 2019, the HFML Redeemable Noncontrolling Interests in Subsidiaries carrying value was adjusted by
$19.3 million, $1.5 million and $4.1 million, respectively, to the current redemption value, assuming the HFML noncontrolling
interests was redeemable at the balance sheet date. The noncontrolling interests was adjusted through a corresponding
adjustment to retained earnings.
103
(20) Commitments and Contingencies
(a) Contractual
From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions,
Federated Hermes is obligated to make future payments under various agreements to which it is a party. See Note (7) for
additional information regarding these payments.
(b) Contingencies
Federated Hermes previously recorded as revenue certain carried interest, subject to clawback provisions, from certain funds
(Carried Interest). As of December 31, 2021, approximately $11 million of Carried Interest is subject to clawback. As a result
of the impact of the Pandemic on certain markets during 2021, management concluded it was reasonably possible that the
market value of the assets held by these funds could be reduced at future valuation dates, which could result in a portion or all
of this Carried Interest being repaid. As of December 31, 2021, management estimates that clawbacks will not occur based on
the current valuation of the assets held by these funds. Future reductions in the valuation of the assets held by these funds may
result in a clawback of a portion or all of this Carried Interest.
(c) Guarantees and Indemnifications
On an intercompany basis, various subsidiaries of Federated Hermes guarantee certain financial obligations of Federated
Hermes, Inc., and of other consolidated subsidiaries, and Federated Hermes, Inc. guarantees certain financial and performance-
related obligations of various wholly owned subsidiaries. In addition, in the normal course of business, Federated Hermes 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 Hermes, under which Federated Hermes 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 Hermes is contingent on the other party making a claim
for indemnity, subject to Federated Hermes' right to challenge the claim. Further, Federated Hermes' 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 Hermes' obligations and the unique facts
and circumstances involved in each particular agreement. As of December 31, 2021, management does not believe that a
material loss related to any of these matters is reasonably possible.
(d) Legal Proceedings
Like other companies, Federated Hermes has claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2021, Federated Hermes does not believe that a material loss related to these claims is reasonably possible.
(21) Segment and Geographic Information
Federated Hermes operates in one operating segment, the investment management business.
Federated Hermes' 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
2021
$ 953,620
346,827
$ 1,300,447
2020
$ 1,168,018
280,250
$ 1,448,268
2019
$ 1,098,975
227,919
$ 1,326,894
1
This represents revenue earned by non-U.S. domiciled subsidiaries, primarily in the UK.
Federated Hermes' Right-of-Use Assets, net and Property and Equipment, net for U.S. and non-U.S. operations were as follows
at December 31:
(in thousands)
U.S.
Non-U.S.1
Total Right-of-Use Assets, net and Property and Equipment, net1
1
This represents net assets of non-U.S. domiciled subsidiaries, primarily in the UK.
2021
$ 105,558
49,713
$ 155,271
2020
$ 118,912
55,776
$ 174,688
104
(22) Subsequent Events
On January 7, 2022, the Class A Shareholder signed and delivered a unanimous written consent in lieu of a special meeting of
shareholders to approve the amendments to the Plan described in Note (13).
On January 27, 2022, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 8, 2022, resulting in $25.0 million being paid on February 15, 2022.
On February 7, 2022, Federated Hermes commenced a tender offer to acquire the remaining approximately 10% interest in
HFML not owned by Federated Hermes by issuing awards of restricted Class B common stock under the Plan in exchange for
the beneficial interests in shares of HFML held by certain HFML employees pursuant to the Subsidiary Stock Plan, and treasury
shares (outside the Plan) in exchange for the beneficial interests in shares of HFML held by a former employee of HFML and
the trustee of an employee benefit trust created in connection with the Subsidiary Stock Plan at the time of the 2018 HFML
Acquisition. The tender offer is scheduled to expire on March 11, 2022 and be consummated on March 14, 2022 unless
extended by Federated Hermes in its sole discretion. Federated Hermes estimates that approximately 1.5 million shares of
Federated Hermes Class B common stock will be exchanged for the beneficial interests in shares of HFML.
105
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 Hermes carried out an evaluation, under the supervision and with the participation of management, including
Federated Hermes' President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of Federated
Hermes' disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,
2021. Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that
Federated Hermes' disclosure controls and procedures were effective at December 31, 2021.
Management's Report on Internal Control Over Financial Reporting
See Item 8 – Financial Statements and Supplementary Data – 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 – 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 have been no changes in Federated Hermes' internal control over financial reporting that occurred during the fourth
quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, Federated Hermes'
internal control over financial reporting.
ITEM 9B – OTHER INFORMATION
None.
ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
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 Hermes'
Information Statement for the 2022 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 Hermes' 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 Hermes 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(b) of this Form 10-K as Exhibit 14.03. The code of ethics is available at www.FederatedHermes.com. In the event that
Federated Hermes 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 Hermes would post such information
on its website.
106
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this Item is contained in Federated Hermes' Information Statement for the 2022 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 (13) to the Consolidated Financial Statements for information regarding Federated Hermes' share-based compensation
plan as of December 31, 2021. Federated Hermes had no other plans to grant shares of Class B common stock to employees not
approved by shareholders.
All other information required by this Item is contained in Federated Hermes' Information Statement for the 2022 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 Hermes' Information Statement for the 2022 Annual Meeting of
Shareholders under the captions Transactions with Related Persons, 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
Our independent registered public accounting firm is Ernst & Young LLP, Pittsburgh, PA, Auditor Firm ID: 42. The
information required by this Item is contained in Federated Hermes' Information Statement for the 2022 Annual Meeting of
Shareholders under the caption Independent Registered Public Accounting Firm and is incorporated herein by reference.
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(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
2.01
2.02
2.03
Description
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))
107
2.09
2.10
3.04
3.05
3.06
3.07
4.01
4.02
4.05
4.06
4.07
4.08
9.01
10.15
10.16
10.19
10.41
10.67
10.68
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 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))
Amendment to Section 3.01 of the Federated Hermes, Inc. Restated Bylaw (incorporated by reference to Exhibit
3.1 to the Form 8-K dated April 2, 2020 (File No. 001-14818))
Restated Bylaws of Federated Hermes, Inc. (incorporated by reference to Exhibit 3.1 to the March 31. 2020
Quarterly Report on Form 10-Q (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))
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 (incorporated
by reference to Exhibit 4.06 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019
(File No. 001-14818))
Form of Federated Hermes, Inc. Class B Common Stock certificate, as amended January 31, 2020 (incorporated
by reference to Exhibit 4.07 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019
(File No. 001-14818))
Description of Federated Hermes, Inc. Securities (incorporated by reference to Exhibit 4.08 to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2019 (File No. 001-14818))
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))
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))
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))
108
10.69
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))
10.70
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))
10.72
10.76
10.78
10.80
10.82
10.83
10.85
10.86
10.87
10.88
10.89
10.90
10.91
10.92
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))
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))
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))
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))
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))
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))
109
10.93
10.116
10.117
10.118
10.119
10.120
10.121
10.122
10.123
10.124
10.125
10.126
10.127
10.128
10.129
10.130
10.131
10.132
10.133
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))
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))
Federated Hermes, Inc. Employee Stock Purchase Plan, amended as of January 31, 2020 (incorporated by
reference to Exhibit 10.123 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File
No. 001-14818))
Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.124 to the Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 (File No. 001-14818))
Form of Restricted Stock Award Agreement for UK Sub-Plan (incorporated by reference to Exhibit 10.125 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No. 001-14818))
Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.126 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No. 001-14818))
Form of Bonus Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
(incorporated by reference to Exhibit 10.127 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (File No. 001-14818))
Federated Hermes, Inc. Annual Incentive Plan, as amended as of January 31, 2020 (incorporated by reference to
Exhibit 10.128 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No.
001-14818))
Federated Hermes, Inc. Stock Incentive Plan, as amended as of January 31, 2020 (incorporated by reference to
Exhibit 10.129 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No.
001-14818))
UK Sub-Plan to the Federated Hermes, Inc. Stock Incentive Plan, as amended as of January 31, 2020
(incorporated by reference to Exhibit 10.130 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (File No. 001-14818))
Amendment No. 10 to Federated Hermes Tower Lease dated as of February 21, 2020 (incorporated by reference
to Exhibit 10.131 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (File No.
001-14818))
Hermes Fund Managers Limited Co-investment Scheme Rules - Addendum (incorporated by reference to Exhibit
10.132 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (File No. 001-14818))
The Fourth Amended and Restated Credit Agreement, dated as of July 30, 2021, by and among Federated
Hermes, 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 Toronto-
Dominion Bank, New York Branch (incorporated by reference to Exhibit 10.1 to the June 30, 2021 Quarterly
Report on Form 10-Q (File No. 001-14818))
110
10.134
10.135
Federated Hermes, Inc. Stock Incentive Plan, amended as of January 7, 2022 (incorporated by reference to
Exhibit 10.1 of the Current Report on Form 8-K dated January 7, 2022 (File No. 001-14818))
UK Sub-Plan to the Federated Hermes, Inc. Stock Incentive Plan, as amended as of January 27, 2022 (filed
herewith)
10.136
Form of Restricted Stock Award Agreement (Pool A and Pool B) for UK Sub-Plan (filed herewith)
10.137
Form of Restricted Stock Award Agreement (Pool A) for UK Sub-Plan (filed herewith)
10.138
Form of Restricted Stock Award Agreement (Pool A) for Singapore (filed herewith)
10.139
Form of Restricted Stock Award Agreement (Retiring Employee) for UK Sub-Plan (filed herewith)
14.03
Federated Hermes, Inc. Code of Ethics for Senior Financial Officers, as amended as of January 31, 2020
(incorporated by reference to Exhibit 14.03 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (File No. 001-14818))
21.01
Subsidiaries of the Registrant (filed herewith)
23.01
31.01
31.02
32.01
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:
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111
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 25, 2022
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 25, 2022
February 25, 2022
/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 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
Director
Director
Director
Director
112
EXHIBIT INDEX
Exhibit
Number
10.135
10.136
10.137
10.138
10.139
21.01
23.01
31.01
31.02
32.01
UK Sub-Plan to the Federated Hermes, Inc. Stock Incentive Plan, as amended as of January 27, 2022
Form of Restricted Stock Award Agreement (Pool A and Pool B) for UK Sub-Plan
Description
Form of Restricted Stock Award Agreement (Pool A) for UK Sub-Plan
Form of Restricted Stock Award Agreement (Pool A) for Singapore
Form of Restricted Stock Award Agreement (Retiring Employee) for UK Sub-Plan
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
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113
Corporate information
Corporate off ces
Annual meeting
Federated Hermes, Inc.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone: 412-288-1900
Email: Investors@FederatedHermes.com
FederatedHermes.com
Federated Hermes’ Annual Shareholder Meeting
will take place by teleconference at 4 p.m. ET on
Thursday, April 28, 2022. Shareholders interested
in joining the annual meeting should do so by
calling 888-506-0062 (domestic) or 973-528-0011
(international).
Worldwide operations
Transfer agent
London, U.K.
Boston, Mass.
Cleveland, Ohio
Copenhagen, Denmark
Dublin, Ireland
Frankfurt, Germany
Houston, Texas
Madrid, Spain
New York, N.Y.
Singapore
Sydney, Australia
Tokyo, Japan
Toronto, Canada
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@FederatedHermes.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 f led or furnished
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as soon as reasonably
practicable after such information is electronically
f led with or furnished to the SEC.
Shareholders of record with questions concerning
account information, certif 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 f rm
Ernst & Young LLP, Pittsburgh, Pa.
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Federated Hermes, Inc.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Contact us at FederatedHermes.com
or call 1-800-341-7400.
0030705 (3/22)
© 2022 Federated Hermes, Inc.
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