2 0 2 2
l
A
t
R
n
e
u
o
n
p
a
r
Federated Hermes, Inc.
2022 at a glance…
(as of Dec. 31, 2022)
$668.9 billion in assets under management
65+ years managing assets
$28.9 billion gain in money market assets
100 consecutive quarterly dividends
11% increase in total revenue
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
Managed assets (in millions)
Total long-term assets
Fixed-income
Equity
Alternative/private markets
Multi-asset
Money market
Total managed assets
2022
2021
$
$
$
$
$
1,445,814
336,796
239,496
2.65
2.65
1.08
192,057
86,743
81,523
20,802
2,989
476,844
668,901
$
$
$
$
$
1,300,447
366,272
270,293
2.77
2.75
1.08
220,966
97,550
96,716
22,920
3,780
447,907
668,873
Total
managed assets
(in billions)
Quarterly
dividend history
(per share)
2018
$459.9
2019
2022
$575.9 $619.4 $668.9 $668.9
2020
2021
$1.00
$1.08
2018
$1.06
2021
2020
2019
$1.08
$2.08
$1.08
■ Special ■ Quarterly
2022
$1.08
2022 Federated Hermes Annual Report
1
Dear fellow shareholders:
For more than 65 years and throughout various market conditions, Federated Hermes has always
put its clients first. W
ith our active, responsible approach and experience across asset classes, we
have weathered uncertainty in the markets and remained focused on preserving capital, generating
income and growing wealth over the long term.
Today, Federated Hermes is among the world’s foremost providers of
actively managed investment strategies, offering products through an
extensive and growing global network of financial intermediaries and
institutions. Our more than 370 investment professionals continue to
collaboratively evaluate risk and seek opportunities throughout the
investment process, allowing Federated Hermes to offer a range of
solutions aligned with varied client goals.
As market volatility and an inflationary global economy presented
challenges in 2022, investors continued to value our investment
perspective, as Federated Hermes’ strategic business mix proved to be
well-positioned. Overall assets under management achieved a record
high $668.9 billion at year-end, driven by increased assets in money
market funds and separate accounts, sales in our fl agship Federated
Hermes Total Return Bond Fund and related fi xed-income separate
accounts, and continued demand for our popular dividend income
equity products. Investors also sought haven in our low-duration
fixed-income options and alternatives such as market-neutral and
bear-market strategies.
Federated Hermes’ money market assets reached a record $476.8
billion at year-end, up 6% from the previous year. Long-term asset
categories—which comprise equity, fixed income, alternative/private
markets and multi-asset—drove 59% of the firm’s $1.4 billion in total
revenue. Diluted earnings per share was $2.65 on net income of
$239.5 million in 2022.
Federated Hermes continued to employ capital to benefi t shareholders
in 2022. The company repurchased 6,456,625 shares of Class B
common stock and, through year-end, paid quarterly dividends to
our shareholders for the 100th consecutive quarter. Four quarterly
dividends of $0.27 each brought dividends to a total of $1.08 per share
in 2022. Since the company’s initial public offering in 1998, Federated
Hermes’ use of cash has included $2.7 billion for dividends, $1.8 billion
for share repurchases and $1.3 billion for acquisitions.
2
Federated Hermes, Inc.
2022 Highlights
Increased money market assets
by $28.9 billion from 2021.
Acquired substantially all of the assets
of Chicago-based C.W. Henderson &
Associates, Inc., a specialist in municipal-
bond separately managed account
products, which at the time of acquisition
had approximately $3.5 billion in assets
under management.
Launched the active, transparent
Federated Hermes U.S. Strategic Dividend
ETF, which seeks income and long-term
capital appreciation by investing primarily
in high dividend-paying U.S. stocks with
dividend growth potential.
Reached a record $231 billion in separate
account assets under management.
Launched two UCITS funds for non-U.S.
investors—the Federated Hermes
Biodiversity Equity Fund and the
Federated Hermes Global Emerging
Markets ex-China Fund.
Earned a $1 billion private equity mandate
from one of the U.K.’s largest occupational
pension schemes.
Revenue
by source
$1.4 billion
● Long-term assets 59%
● Equity 36%
● Fixed-income 14%
● Alternative/private markets
and multi-asset 9%
● Money market 40%
● Other 1%
Offering timely solutions
Our more than 11,000 customer firms represent many of the world’s largest
banks, broker/dealers, registered investment advisors, government entities,
corporations, insurance companies, foundations and endowments. They
place their trust in Federated Hermes to manage their own assets, as well as
the assets of their customers.
In a year marked by rising inflation and deep selloffs in both equity and
fixed-income products, Federated Hermes’ team of 217 regional consultants
successfully managed client relationships. In 2022’s volatile environment,
Federated Hermes’ liquidity solutions offered a haven and an attractive asset
class, as yields rose along with interest rate increases by the Federal Reserve.
Assets in Federated Hermes’ prime money market funds, which invest
primarily in corporate debt securities, rose by 37% in 2022.
The Federated Hermes Strategic Value Dividend Fund led our equity funds in
2022 sales. The fund invests in lower volatility, income-producing companies
that are believed to be in strong financial positions and have demonstrated
resilience through business and economic cycles. In fixed income, our
flagship strategy, Federated Hermes Total Return Bond Fund, had 2022 net
sales of approximately $896 million, benefitting from a solid long-term
performance record. In alternative/private markets, Federated Hermes
Prudent Bear Fund had net sales of approximately $398 million for the year.
Financial advisors and asset allocators continue to seek guidance on
investment-related topics, such as when the Federal Reserve will reach its
longer-term target interest rate (the point at which prices are stable and full
employment is achieved), when infl ation will peak and whether a recession will
occur. Our regional consultants regularly share Federated Hermes’ website
commentaries and thought leadership materials to help intermediaries in their
decision-making process. To continue to manage these relationships most
effectively, in 2022, Federated Hermes made signifi cant investments in
technology, including customer relationship management tools, enterprise
data and communications.
Monitoring the regulatory environment
The pace of new proposed and final laws, rules and regulations and
other regulatory activity increased in 2022 and is expected to continue at
a rapid pace in 2023, and we continue to closely monitor and comment
on regulatory proposals from the U.S. Securities and Exchange Commission
and other regulators in relevant jurisdictions around the world. As a leading
global investment manager, Federated Hermes has, and will continue to,
actively participate in the debate, especially surrounding mutual fund and
money market fund reforms, ensuring that investors have the benefi ts of
professional management, diversification and access to the capital markets
to help them meet their fi nancial goals.
2022 Federated Hermes Annual Report
3
Equity
$81.5 billion
● Value and income $37.4
● International/global $27.1
● Growth $12.9
● Blend $4.1
Fixed
income
$86.7 billion
● Multisector $55.6
● High-yield $13.8
● Municipal $7.4
● U.S. Corporate $4.4
● U.S. Government $3.9
● International/global $1.1
● Mortgage-backed $0.5
Continuing to diversify
Federated Hermes’ solid performance in 2022 results from the fi rm’s diverse
investment capabilities, which have expanded across asset classes over
decades. We continue to broaden our business by investing in organic
product development and strategic acquisitions that drive growth by offering
a diverse range of investment vehicles for our clients and fund shareholders.
In 2022, we launched the Federated Hermes U.S. Strategic Dividend ETF,
which benefits from our time-tested approach to managing dividend equity
strategies combined with the advantages of an ETF structure—tax effi ciency,
lower costs and intraday trading. This launch marks Federated Hermes’ third
ETF product, following the 2021 introduction of two active, fi xed-income ETF
products—Federated Hermes Short Duration High Yield ETF and Federated
Hermes Short Duration Corporate ETF.
We continued to build on our strengths in offering our clients and fund
shareholders choices across a variety of investment vehicles, including
our $230.5 billion in separate account assets, of which $32.1 billion are in
separately managed accounts (SMAs). With growing demand for SMAs, we
enhanced our position in 2022 with the acquisition of substantially all of the
assets of C.W. Henderson & Associates, Inc., a Chicago-based registered
investment advisor specializing in the management of SMAs that invest in
tax-exempt municipal securities. We are pleased to now offer the C.W.
Henderson products to our clients as complements to our existing range of
municipal bond and SMA offerings. In total, our SMAs are currently available
in 21 equity, 17 fixed-income and one multi-asset category. Federated
Hermes also ranked as the fourth-largest manager of model-delivered SMAs.1
We have also added two new UCITS funds for our non-U.S. investors, both
managed by Hermes Investment Management Limited, a subsidiary of
Federated Hermes Limited in London. The Federated Hermes Global
Emerging Markets ex-China Fund offers exposure to consumption, resource
and technology themes by investing across emerging markets with the
exception of China. The Federated Hermes Biodiversity Equity Fund
incorporates insights from London’s Natural History Museum and aims
to achieve long-term capital appreciation by investing in a concentrated
portfolio of companies that seek to preserve and restore biodiversity.
We have also further diversified our product mix by growing assets in
private markets, which include private equity, real estate, infrastructure
and private credit. Private markets represent nearly $20 billion of assets
under management.
In 2022, our private markets business wins included a $1 billion private equity
mandate from one of the U.K.’s largest occupational pension schemes. We
also announced a new partnership with one of the world’s largest pension
schemes to develop Silverstone Park, an engineering and technology
business development located in the Oxford-Cambridge Innovation Arc, one
of the fastest growing areas of the U.K. Our leading and wholly owned U.K.
commercial real estate development and asset management business,
MEPC Limited, will continue in its role as development and asset manager.
MEPC established Silverstone Park eight years ago and has built a strong
management team and community relationships.
4
Federated Hermes, Inc.
Through our private equity manager, Hermes GPE LLP, we are fundraising
for the fifth vintage of our private equity Co-Investment Fund, PEC V, and
the third vintage of the Horizon Private Equity Fund. PEC V has raised more
than $400 million through 2022, and the Horizon Private Equity Fund had
commitments of more than $1 billion through year-end. We had a successful
closing of fundraising for our first vintage of the Innovation Fund, which
raised more than $160 million. In 2022, we also had a successful closing of
fundraising for the second vintage of our European Direct Lending strategy,
raising more than $600 million and bringing our direct lending committed
assets to more than $1 billion. The mandates demonstrate continued
confidence in Federated Hermes’ ability to deliver on its investment
objectives in a highly competitive market.
Leading on stewardship
At Federated Hermes, responsibility is central to our client and customer
relationships, our long-term perspective and our fiduciary mindset. We
build our strategies on high-quality fundamental analysis, including
forward-looking insights from direct company engagement and authentic,
strategy-appropriate ESG-factor integration intended to support our efforts
to produce investment performance for our clients over the long term.
Known as an industry leader, our stewardship service provider, EOS at
Federated Hermes, had $1.3 trillion in assets under advisement and
completed more than 1,100 company engagements in 2022. EOS at
Federated Hermes has two decades of corporate engagement experience.
These engagements are aimed at supporting stronger fi nancial performance
and better outcomes related to a company’s long-term business strategy.
Focusing on the future
None of these accomplishments would be possible without the hard work
and dedication of our 1,961 employees. I would like to thank them for their
tireless efforts to build a strong, vibrant and resilient company. They have
helped our business thrive for nearly seven decades, and their continued
efforts position us for future growth opportunities.
On behalf our board of directors, I thank you—our shareholders—for the
trust and continued confidence you place in Federated Hermes.
J. Christopher Donahue
President, Chief Executive Offi cer
and Chairman
Alternative/
private markets
and multi-asset
$23.8 billion
● Real estate $7.8
● Private equity $4.6
● Other alternative $3.9
● Infrastructure $3.7
● Multi-asset $3.0
● Bear $0.6
● Market neutral $0.2
Money
market
$476.8 billion
● Government $322.3
● Prime $145.6
● Tax-free $8.9
1 Money Management Institute/Cerulli Associates, Q3 2022.
2022 Federated Hermes Annual Report
5
Directors
Executives
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
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman,
Federated Hermes, Inc.
Gordon J. Ceresino
Vice Chairman, Federated Hermes, Inc.
Chairman, Director and President
of Federated International Securities Corp.
and Vice Chairman of Federated MDTA, LLC
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Hermes, Inc.
President, FII Holdings, Inc.
Committee: Executive
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Hermes, Inc.
President, FII Holdings, Inc.
John B. Fisher
Vice President, Federated Hermes, Inc.
President and Chief Executive Offi cer,
Federated Advisory Companies
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,
Federated Hermes 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.
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, 2022
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
x
☐
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
☐
☐
☐
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2022 was approximately $2.7
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 17,
2023, was 9,000 and 89,275,935, respectively.
Accelerated filer
Smaller reporting company
Emerging growth company
Documents incorporated by reference:
Part III of this Form 10-K incorporates by reference certain information from the registrant’s 2023 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
32
47
47
47
47
47
48
49
65
67
102
102
102
102
102
103
103
103
103
103
108
109
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 can 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 could 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 could 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; and various
other items set forth under Item 1A - Risk Factors. Among other risks and uncertainties, market conditions could change
significantly and impact Federated Hermes’ business and results, including by changing Federated Hermes’ asset flows, levels,
and mix, and business mix, which could 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 could 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 could 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) is a global leader in active, responsible investing with $668.9 billion in assets under management (AUM or
managed assets) at December 31, 2022. 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.). Federated Hermes also provides stewardship services
to customers seeking a range of solutions for engagement, advocacy, active ownership and impact. In seeking to enhance
long-term investment performance for its customers and clients, Federated Hermes has taken steps to integrate the
proprietary insights from fundamental environmental, social and governance (ESG) factors and engagement research into
nearly all of its investment strategies.
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
(SMAs), 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 AUM of the
investment products and strategies. Domestic advisory subsidiaries are registered as investment advisors under the
Investment Advisers Act of 1940 (Advisers Act), while foreign advisory subsidiaries are registered in the U.S. and/or with
foreign regulators.
Federated Hermes provides investment advisory services to 174 Federated Hermes Funds as of December 31, 2022.
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, the United Kingdom (UK), Luxembourg, Guernsey, Jersey and the Cayman
Islands. Most of Federated Hermes’ U.S.-domiciled funds are registered under the Investment Company Act of 1940 (1940
Act) and under other applicable federal laws. Each U.S.-domiciled registered fund enters into an advisory agreement that is
subject to annual approval by the fund’s board of directors or trustees, a majority of whom are not interested persons, as
defined under the 1940 Act, of either the funds or Federated 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 174 Federated Hermes Funds, Federated Hermes’ investment advisory subsidiaries managed 23 money market
funds with $335.9 billion in AUM, 45 equity funds with $43.3 billion in AUM, 55 fixed-income funds with $43.2 billion in
AUM, 46 alternative/private markets funds with $13.1 billion in AUM and five multi-asset funds with $2.9 billion in
AUM.
As of December 31, 2022, Federated Hermes provided investment advisory services to $230.5 billion in Separate Account
assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other
employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products
owned or sponsored by third parties. Fees for Separate Accounts are typically based on AUM pursuant to investment
advisory agreements that are generally terminable upon notice to Federated Hermes (or, in certain cases, after a 30-day, 60-
day or similar notice period).
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.
Assets Under Management
Total AUM are composed of Federated Hermes Funds and Separate Accounts and represent the balance of AUM at a point
in time. Total managed assets for the past two years were as follows:
dollars in millions
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
As of December 31,
$
2022
81,523
86,743
20,802
2,989
192,057
476,844
$ 668,901
$
2021
96,716
97,550
22,920
3,780
220,966
447,907
$ 668,873
2022
vs. 2021
(16)%
(11)
(9)
(21)
(13)
6
0 %
Average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue
and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed
assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
Average managed assets for the past three years were as follows:
dollars in millions
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Managed Assets
Year Ended December 31,
$
2022
84,793
89,776
21,799
3,273
199,641
432,992
$ 632,633
$
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
2022
vs. 2021
(14)%
(2)
5
(16)
(7)
3
0 %
2021
vs. 2020
22 %
23
14
2
21
(4)
3 %
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 multi-asset and equity products and strategies are higher than advisory fees charged to
alternative/private markets and fixed-income 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.
5
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,
2022
$ 1,011,631
294,557
139,626
$ 1,445,814
2021
$ 915,984
306,639
77,824
$ 1,300,447
2020
$ 1,011,467
318,152
118,649
$ 1,448,268
2022
vs. 2021
10 %
(4)
79
11 %
2021
vs. 2020
(9)%
(4)
(34)
(10)%
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 $476.8 billion in AUM at December 31, 2022. Federated Hermes has developed
expertise 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, 2022, Federated Hermes managed money market assets across a wide
range of categories: government ($322.3 billion); prime ($145.6 billion); and municipal (or tax-exempt) ($8.9 billion).
Federated Hermes’ equity assets totaled $81.5 billion at December 31, 2022 and are managed across a wide range of
categories including: value and income ($37.4 billion); international/global ($27.1 billion); growth ($12.9 billion); and
blended ($4.1 billion).
Federated Hermes’ fixed-income assets totaled $86.7 billion at December 31, 2022 and are managed across a wide range of
categories including: multisector ($55.6 billion); high-yield ($13.8 billion); municipal (or tax-exempt) ($7.4 billion); U.S.
corporate ($4.4 billion); U.S. government ($3.9 billion); international/global ($1.1 billion); and mortgage-backed ($0.5
billion).
Federated Hermes’ alternative/private markets and multi-asset investments totaled $20.8 billion and $3.0 billion,
respectively, at December 31, 2022. Federated Hermes’ alternative/private markets assets are managed across a wide range
of categories including: real estate ($7.8 billion); private equity ($4.6 billion); other alternative ($3.9 billion); infrastructure
($3.7 billion); bear market ($0.6 billion); and market neutral ($0.2 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; ESG integrated investment strategies; quantitative
research models; style-consistent and disciplined portfolio construction and management; performance attribution; and
trading.
See Note (4) to the Consolidated Financial Statements for information on revenue concentration risk.
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 200 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.
6
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, 2022 attributable to such markets, are as follows: U.S. financial
intermediary (63%); U.S. institutional (28%); and international (9%).
U.S. Financial Intermediary Federated Hermes offers and distributes its products and strategies in this market through a
large, diversified group of over 6,500 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
and Separate Accounts (including private funds). As of December 31, 2022, managed assets in the U.S. financial
intermediary market included $317.9 billion in money market assets, $55.1 billion in equity assets, $39.8 billion in fixed-
income assets, $2.6 billion in multi-asset and $0.8 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, 2022, managed assets in the U.S. institutional market included $144.0 billion in money market assets, $42.5
billion in fixed-income assets, $2.9 billion in equity assets, $0.6 billion in alternative/private markets assets and $0.4 billion
in multi-asset.
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, 2022, managed assets in the international market included $23.5 billion in equity assets, $19.4 billion in
alternative/private markets assets, $15.0 billion in money market assets and $4.5 billion in fixed-income assets.
Competition
As of December 31, 2022, Federated Hermes had $438.4 billion of Federated Hermes Fund AUM and $230.5 billion of
Separate Account AUM. Of the Separate Account AUM, $32.1 billion related to SMAs.
The investment management business is highly competitive across all types of investment products and strategies,
including mutual funds, exchange traded funds (ETFs), SMAs, institutional accounts, sub-advised funds and other
managed products and strategies. Competition is particularly intense among mutual fund and ETF providers. According to
the Investment Company Institute (ICI), at the end of 2022, there were over 7,000 open-end mutual funds and over 2,800
ETFs of varying sizes and investment objectives whose shares are currently being offered.
In addition to competition from other mutual fund managers, ETF providers and investment advisors, Federated Hermes
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 ETFs -
two fixed-income, fully transparent ETFs - in December 2021 and a dividend income equity ETF in November 2022.
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: various federal
securities laws, such as the Securities Act of 1933 (1933 Act), the Securities Act of 1934 (1934 Act), 1940 Act, and
Advisers Act; state laws regarding securities fraud and registration; regulations or other rules promulgated by various
regulatory authorities, or other authorities. Various 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, regulations and directives or
consultations (collectively, both domestically and internationally, as applicable, Regulatory Developments) continue to
impact the investment management industry generally, and will continue to impact, to various degrees, Federated Hermes’
business, results of operations, financial condition, cash flows and/or stock price (collectively, Financial Condition). 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
The pace of new proposed and final laws, rules and regulations and other regulatory activity increased in 2022 and is
expected to continue at a rapid pace in 2023. Despite receiving criticism for the expedited pace of new regulation, the
Securities and Exchange Commission (SEC) (among other regulatory authorities, self-regulatory organizations, or
exchanges) has continued to advance its robust rulemaking initiatives. The SEC’s Fall 2022 Unified Agenda of Regulatory
and Declaratory Actions (SEC Fall Reg Flex Agenda) identified 52 rulemaking initiatives. Within it the SEC indicated that
it expects to issue 21 final rules and an additional 13 proposed rules by April 2023, and another eight final rules and nine
proposed rules by October 2023. These final and proposed rules are expected to impose significant new requirements in
important areas on the investment management industry, including Federated Hermes. Examples of final rules that are
expected to be issued in 2023 include money market fund reform, climate change disclosure, cybersecurity risk
governance, investment company names, and loan or borrowing of securities, among other topics. Examples of proposed
rules expected to be issued in 2023 include human capital management disclosure, corporate board diversity, amendments
to the custody rule for investment advisors, open-end fund liquidity and dilution management, outsourcing by investment
advisors, exchange-traded products, and cybersecurity, among other topics. The SEC Fall Reg Flex Agenda follows an
active fourth quarter 2022 that saw the
below.
issue seven final rules and seven proposed rules, some of which are discussed
SEC
ETF
The SEC and other regulators also continued in 2022, and are expected to continue in 2023, to conduct risk-based, for
cause and sweep examinations, bring enforcement actions, and review and comment on issuer and fund filings. In addition
to routine and for cause examinations conducted on individual firms, SEC sweep exams have included, or are expected to
include examinations regarding the investment advisor marketing rule,
revenue sharing payments, ESG practices and
disclosures, and approval of registered investment company advisory fees, among others. It has been reported that the
SEC’s examination priorities in 2023 are anticipated to include private funds, ESG investing, Regulation Best Interest (Reg
BI), information security and operational resiliency, cryptocurrency, recordkeeping, financial reporting and disclosure
violations, investment fraud, insider trading, and emerging technologies and digital assets, among others. In its February 7,
2023, Press Release announcing the publication of its 2023 Examination Priorities, the SEC’s Division of Enforcement
(DOE) specifically identified as areas of examination focus, among others: (1) compliance with new investment advisor
and investment company rules, including the marketing rule (Advisers Act Rule 206(4)-1), the derivatives rule (1940 Act
Rule 18f-4), and the fair valuation rule (1940 Act Rule 2a-5); (2) investment advisors to private funds; (3) Reg BI and the
Advisers Act fiduciary standard to act in the best interests of retail investors and not to place the investment advisor’s own
interests ahead of retail investors' interests; (4) information security and operational resiliency, including registrant
visibility into the security and integrity of third-party service providers, and their products and services, and whether there
has been an unauthorized use of third-party service providers; and (5) emerging technologies and crypto-assets. including
whether a firm met and followed applicable standards of care when making recommendations, referrals, or providing
investment advice, and whether a firm routinely reviewed, updated, and enhanced their compliance, disclosure, and risk
management practices.
SEC
filed 760 enforcement actions, a nine percent increase over 2021. These enforcement actions included
In 2022, the
462 new, or “stand alone,” enforcement actions, 129 actions against issuers who were allegedly delinquent in making
required filings with the SEC; and 169 “follow-on” administrative proceedings seeking to bar or suspend individuals from
certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. Civil money
penalties, disgorgement, and pre-judgment interest from these enforcement actions totaled approximately $6.4 billion, the
most on record in SEC history and up from approximately $3.9 billion in 2021. In addition to the SEC’s aggressive
“regulation by enforcement” posture in 2022, the SEC staff has become more aggressive in commenting on issuer and fund
filings, imposing new interpretations of certain requirements and taking firm positions, resulting in “regulation by the
comment process.”
After nearly three years of analysis and debate, regulators maintain their 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. For example, like other regulatory or government bodies, in its November 2022 “Financial Stability Report,”
the Board of Governors of the Federal Reserve System (Governors) reported that certain money market funds have
structural vulnerabilities that make them prone to “runs,” an apparent reference to the withdrawal of assets and redemption
risks. The Financial Stability Oversight Council (FSOC) also discussed money market and other open-end funds at its
November 4, 2022 meeting. Chairperson Yellen, in discussing vulnerabilities in money market funds, open-end funds, and
hedge funds, stated that these funds continue to pose risks to financial stability and can amplify shocks, transmitting stress
to important counterparties and markets. She further stated that member agencies should act to address these concerns. The
comment period for the SEC’s proposed money market fund reforms ended on November 1, 2022, and as noted above, the
8
SEC indicated in the SEC Fall Reg Flex Agenda that it intended to finalize its proposed money market fund reforms by
April 2023.
Federated Hermes has continued, and will continue, to actively participate in the debate surrounding money market fund
reforms. Consistent with prior comment letters and meetings with SEC Commissioners and SEC staff, Federated Hermes
maintains its position that: (1) swing pricing will regulate institutional prime money market funds out of existence;
(2) discretionary fees and gates administered by fund boards through the exercise of their fiduciary duty are the best
alternatives for money market funds; (3) eliminating the link between mandatory fees and gates and a 30% liquid asset
requirement is most appropriate; and (4) a four-digit Net Asset Value (NAV) for government money market funds to deal
with the possibility of negative interest rates is not a better solution than allowing the use of a reverse distribution
mechanism (RDM). Federated Hermes expressed these views in its letters to the SEC and to SEC Commissioners,
including those letters dated June 9, 2022, June 14, 2022, August 10, 2022, and September 22, 2022, which were submitted
to SEC Commissioners Peirce, Crenshaw, Uyeda, and Lizárraga after meetings with them on June 3, 2022, June 7, 2022,
August 2, 2022, and September 20, 2022, respectively. In a November 1, 2022 comment letter, among other comments,
Federated Hermes reiterated its concerns that: (1) the SEC’s proposed amendments to Form N-MFP, stress testing
requirements, and four-digit NAV will further harm money market funds and their investors and intermediaries without
corresponding benefits; (2) the SEC has not developed and put forward data to support the more radical aspects of its
proposal, in particular swing pricing; and (3) swing pricing tied to a specific metric could itself trigger mass redemptions or
serve as an opening for market timers to game the rule.
NAVs
of government money market funds because,
Federated Hermes believes that, once unencumbered from the perils of an inappropriate linkage between liquidity levels
and liquidity fees and redemption gates, money market funds have sufficient liquidity levels currently to protect investors
from dilution. Federated Hermes supports the use of a RDM in a negative rate environment. Federated Hermes has opposed
the SEC’s prohibition on the use of a RDM to maintain the stable
among other reasons, the SEC’s prohibition on the use of a RDM: (1) does not reflect any formal investment management
industry feedback; and (2) will eliminate the use of government money market funds as sweep investments. Federated
Hermes also has asserted that, due to the significant technology investments that would be necessary for market
participants to modify transaction systems to process transactions in a hypothetical negative yield scenario without using a
RDM, the absence of a RDM could lead to material outflows in U.S. government money market funds to bank deposits or
non-regulated investment products, consistent with the notion of regulating government money market funds out of
existence. Federated Hermes has argued that the use of a RDM is the clear investor preference and would preserve money
market funds as an investment product for all stakeholders, and that the SEC’s concerns over investor confusion regarding
the operation of a RDM can be adequately addressed through disclosure. In a letter dated November 4, 2022, Federated
Hermes commented that providing fund boards with the option to utilize either a RDM or a four-digit NAV is the right
solution. In a letter to SEC Commissioner Crenshaw dated December 16, 2022, Federated Hermes also expressed its
concern that the SEC’s proposal to mandate U.S. government money market funds move to a four-digit NAV in a negative
rate environment did not properly consider the use of a
RDM
government money market assets that are invested via traditional sweep accounts and up to an additional $1 trillion in
assets invested into U.S. government money market funds which are made as position trades entered into the cash sweep
system manually at the end of the day.
and could lead to a loss of at least $1 trillion in U.S.
Management believes money market funds provide a more attractive investment opportunity compared to 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. While Federated Hermes agrees that certain 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 also supports efforts to permit the use of amortized cost valuation by, and override
the floating NAV and certain other requirements imposed under the money market fund reforms adopted through
amendments to Rule 2a-7, and certain other regulations on July 23, 2014, and related guidance, for institutional and
municipal (or tax-exempt) money market funds. Legislation is being re-introduced in both the Senate and the House of
Representatives in a continuing effort to get these money market fund reform revisions regarding the use of amortized cost
passed and signed into law.
On November 2, 2022, the SEC issued a proposing release in which it proposes amendments to Rule 22c-1 (the voluntary
swing pricing rule) and Rule 22e-4 (the liquidity rule) under the 1940 Act and certain disclosure forms under the 1940 Act
for open-end management investment companies, other than money market funds and exchange-traded funds. The
amendments outlined in the proposing release include, among others: (1) mandating swing pricing for such funds during
times of stressed market conditions; (2) implementing a “hard close” for such funds, whereby purchase and redemption
orders must be received by a fund, its transfer agent or a registered clearing agency by an established cut-off time to receive
9
the applicable day’s price; (3) eliminating the “less liquid” investment category from the existing four category liquidity
classification framework under Rule 22e-4 of the 1940 Act, and thereby broadening the “illiquid” investment category;
(4) requiring such funds to classify all portfolio investments daily instead of monthly; (5) mandating such funds to
determine and maintain a highly liquid investment minimum (HLIM) equal to at least 10% of net assets; and (6) imposing
expanded Form N-PORT reporting and disclosure obligations on such funds. In the proposing release the SEC contends
that the proposed amendments would “enhance funds’ liquidity risk management to help better prepare them for stressed
market conditions and to require the use of swing pricing for certain funds in certain circumstances to limit dilution” and
also “enhance open-end fund resilience in periods of market stress by promoting funds’ ability to meet redemptions in a
timely manner while limiting dilution of remaining shareholders’ interests in the fund.” In its comment letter dated
February 14, 2023, Federated Hermes supported the comments and recommendations of the Investment Company Institute
(ICI) and the Securities Industry and Financial Markets Association (SIFMA) on the proposal, including strongly opposing
the use of swing pricing because the implementation of swing pricing is unnecessary to achieve the SEC’s desired
objective, would be extremely costly, would be very difficult for the industry to implement, would be difficult for investors
to understand and would represent an unwarranted change in the character of a hugely popular investment vehicle which
provides investors with the benefits of professional management, diversification and access to the capital markets to help
them meet their financial goals. Federated Hermes noted that there are less onerous alternatives to mandating swing pricing
in those limited circumstances where material dilution is a real concern, such as discretionary liquidity fees to be applied at
a fund’s board’s discretion in the exercise of its fiduciary duty to a fund and its shareholders. Federated Hermes strongly
opposes a hard close concept, which was proposed to ensure fund managers have the appropriate data necessary to
determine whether a fund’s NAV should be adjusted via swing pricing, but which would result in unintended consequences
to third-party intermediaries and underlying investors and would be particularly detrimental to retirement plan participants
in 401(k) plans using open-end mutual funds on their menu. Federated Hermes strongly opposes eliminating the “less
liquid” investment category from the existing four category liquidity classification framework under the liquidity rule
because funds investing primarily in bank loans will not be able to comply with the 15% limit on illiquid investments under
the 1940 Act, subjecting these funds to undeserving harm. The comment period for this proposal ended on February 14,
2023.
As indicated in the SEC Fall Reg Flex Agenda discussed above, the SEC has increased its focus on ESG-related
disclosures. In an October 17, 2022, speech, SEC Commissioner Lizárraga discussed the SEC’s proposals regarding
enhanced climate risk disclosures by issuers, enhanced ESG disclosures by registered funds and investment advisors and
modernized rules governing ESG-related fund names (i.e., Rule 35d-1 under the 1940 Act (Names Rule)), noting that the
SEC is seeking to ensure that investors receive the information they need to make the most informed investment decisions.
He explained that the corporate issuer proposed rule would require public companies to disclose climate-related risks that
have a material impact on their business, operations, and financial condition and to disclose certain related quantitative
information. He explained that the SEC’s proposal for registered funds and investment advisors is designed to provide
investors with decision-useful qualitative and quantitative information on how funds and investment advisors consider ESG
factors in decision-making. He also explained that the proposal regarding ESG-related fund names focuses on how funds
label themselves and would prohibit funds that consider ESG factors alongside other non-ESG factors from using ESG-
related terms in their name.
Specifically, the corporate issuer proposal mandates, among other things, certain climate risk disclosures by public
companies, such as Federated Hermes, including on Form 10-K, about a company’s governance, risk management, and
strategy with respect to climate-related risks. The proposal incorporates certain concepts and vocabulary from the Task
Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol) as part of the
proposed disclosure regime. For example, the proposal would require disclosure of quantitative metrics to assess a
company’s exposure to greenhouse gas emissions. A company would be required to disclose its Scope 1 and Scope 2
greenhouse gas emissions, which would be emissions under the GHG Protocol that “result directly or indirectly from
facilities owned or activities controlled by a registrant.” Certain registrants also would be required to disclose Scope 3
emissions, which would be the emissions from upstream and downstream activities in a company’s value chain, if such
emissions were material to investors or if the company had made a commitment that included reference to Scope 3
emissions. Consistent with its previously submitted comment letter, Federated Hermes continues to support the ICI’s
comments to the SEC on the proposal, including, among others, that: (1) any final rule should only require companies to
provide material climate risk-related information in a company’s Form 10-K, with any non-material information required
by any amendments to Regulation S-K to be provided in a new climate report; (2) the SEC not amend Regulation S-X to
require a company to provide material financial metrics in footnotes to its financial statements; and (3) it is premature to
require disclosure of Scope 3 emissions data.
10
Federated Hermes also continues to support the retention of the current approach under the Names Rule for the 80%
investment policy requirement and temporary investment exceptions.
On October 3, 2022, the FSOC established the Climate-related Financial Risk Advisory Committee to aid in the assessment
of climate-related financial risk. This followed FSOC Chairperson Yellen’s praise for the SEC’s climate risk disclosure
proposal on March 21, 2022: “The SEC’s proposal is an important step to protect investors and strengthen the overall
resilience of the financial system. Investors and businesses have for years asked for reliable information that can be used to
assess climate-related risks and opportunities. I commend Chair Gensler and the SEC for their work on this critical issue.”
On April 5, 2022, certain Republican senators, including members of the Senate Banking and Environment and Public
Works Committees, issued a letter to SEC Chair Gensler calling on the SEC to withdraw the climate risk disclosure
proposal. Consistent with its June 14, 2021 comment letter submitted in response to then acting SEC Chair Allison Herren
Lee’s request for public comment on the SEC’s disclosure rules and guidance as they apply to climate change and other
ESG-related disclosures, Federated Hermes believes that any SEC rule on climate disclosure should: (1) supplement its
principles-based disclosure regime, not replace it with prescriptive metrics; (2) focus on material disclosures; and
(3) maintain the global competitiveness of U.S. capital markets.
The SEC’s aggressive rulemaking, particularly regarding money market fund reform and climate/ESG disclosure, could be
challenged by legislators and in the courts by investment management industry participants and other industry groups.
Particularly in the context of climate/ESG disclosures, the likely success of any challenge could be bolstered in light of the
U.S. Supreme Court’s recent decision in West Virginia vs. Environmental Protection Agency, in which the Supreme Court
weakened the deference given to an administrative agency’s regulatory authority by applying the “Major Questions
Doctrine,” which the Supreme Court has used to require courts to defer to Congress rather than administrative agencies
regarding matters that it concludes have significant economic and/or political impact if it believes that Congress did not
specifically grant such powers to an agency.
Federated Hermes, like other investment managers, is complying with Rule 2a-5 under the 1940 Act. Rule 2a-5 establishes
an updated regulatory framework for fund valuation practices by establishing requirements for determining fair value in
good faith for purposes of the 1940 Act. The rule expressly permits boards, subject to continued board oversight and
certain other conditions, to designate certain parties, such as fund investment advisors, to perform fair value
determinations. The rule also defines when market quotations are “readily available” for purposes of the 1940 Act, the
threshold under Rule 2a-4 under the 1940 Act for determining whether a fund must fair value a security. Under Rule 2a-5,
a market quotation is “readily available” only when that quotation is a quoted price (unadjusted) in active markets for
identical investments that the fund can access at the measurement date. The rule further provides that a quotation will not
be readily available if it is not reliable. This definition contradicts common practices for cross-trades between affiliated
funds under Rule 17a-7 under the 1940 Act. Rule 17a-7 permits cross trades of securities for which market quotations are
readily available between affiliated funds, which allows funds to transfer such securities without incurring trading costs.
The definition of “readily available” in Rule 2a-5 essentially limits Rule 17a-7 to equity securities because fixed-income
securities are not traded on an exchange and would not have a “quoted price (unadjusted) in active markets.” Federated
Hermes is relying on previously issued SEC no-action letters to continue to conduct cross trades in its fixed-income funds
(unless and until the SEC rescinds those no-action letters). The inability to conduct cross-trades between Federated Hermes
fixed-income funds can increase trading expenses and have a negative impact on fund performance.
In addition to the SEC and the FSOC, regulations proposed or adopted, and actions taken, by the Department of Labor
(DOL) impact the investment management industry, including Federated Hermes. In its Fall 2022 Agency Rule List (DOL
Fall Agency Rule List), the DOL indicated that it would be proposing another new fiduciary rule by December 2022,
however, the new fiduciary rule has not yet been issued and it has been reported that a proposed new fiduciary rule will not
be forwarded to the Office of Management and Budget (OMB) for consideration until the first quarter 2023. According to
the DOL Fall Agency Rule List, the new proposed fiduciary rule will amend the regulatory definition of the term
“fiduciary” to more appropriately define when persons who render investment advice for a fee to employee benefit plans
and individual retirement accounts (IRA) are fiduciaries for purposes of the Employee Retirement Income Security Act of
1974 (ERISA) and the Internal Revenue Code of 1986, as amended. The DOL also has indicated that, in conjunction with
this rulemaking, the Employee Benefits Security Administration (EBSA) will evaluate available prohibited transaction
class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and
IRA investors.
On November 22, 2022, the DOL issued its “Final Rule on Prudence and Loyalty in Selecting Plan Investments and
Exercising Shareholder Rights” (New
The chief clarification sought by the DOL, as evinced in the new preamble and by the removal of various examples, is that
ESG/Proxy Voting Rule) substantially as proposed with a few clarifications.
DOL
11
the New DOL ESG/Proxy Voting Rule is intended to ensure that “plan fiduciaries do not misinterpret the final rule as a
mandate to consider the economic effects of climate change and other ESG factors under all circumstances.” The New
DOL ESG/Proxy Voting Rule replaces the DOL’s final proxy voting and shareholder rights rule (Final DOL Proxy Voting
Rule), which was issued on December 11, 2020, and its final rule restricting fiduciaries from selecting plan investments
based on non-pecuniary factors, such as ESG factors (Final DOL ESG Rule), which was issued on October 30, 2020. The
New DOL ESG/Proxy Voting Rule: (1) amends the “Investment Duties” regulation, which addresses the duties of prudence
and loyalty in selecting plan investments and exercising of shareholder rights, including proxy voting; (2) retains the core
principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on 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 clarifies that, when considering investment returns, a fiduciary’s duty of prudence can require an evaluation of the
economic effects of climate change and other ESG factors on a particular investment or investment course of action; and
(3) applies the same standards to qualified default investment alternatives as apply to other investments. In a change from
the Final DOL ESG Rule, the New DOL ESG/Proxy Voting Rule also: (1) amends the “tie-breaker” standard by:
(a) 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
(b) permitting a fiduciary to select an investment, or an investment course of action, based on economic or non-economic
benefits other than investment returns; and (2) adjusts the Final DOL Proxy Voting Rule’s requirements for the exercise of
shareholder rights, including proxy voting, by: (a) 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;” (b) removing from the current regulation safe harbors relating to proxy voting that permit (i) 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 (ii) 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 (c) eliminating 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. On January 26, 2023, Attorneys General from 25 states filed a
lawsuit against the DOL seeking to postpone the January 30, 2023 effective date for the New DOL ESG/Proxy Voting Rule
and to have it declared unlawful on the basis that it violates ERISA and runs afoul of the Administrative Procedures Act
because it is allegedly arbitrary and capricious. Federated Hermes is monitoring this lawsuit.
On January 6, 2023, Federated Hermes filed a comment letter to the DOL’s July 26, 2022, proposed amendments to the
Class Prohibited Transaction Exemption 84-14, also known as the Qualified Professional Asset Manager (QPAM)
Exemption. The DOL proposed the amendments to purportedly ensure the exemption continues to protect plans,
participants and beneficiaries, individual retirement account owners and their interests. The QPAM Exemption, which is
commonly relied upon by investment advisors, including Federated Hermes, permits various parties who are related to
ERISA plans to engage in transactions involving plan and individual retirement account assets if, among other conditions,
the assets are managed by QPAMs that are independent of the parties in interest and that meet specified financial standards.
Federated Hermes opposed a proposed amendment that would require a QPAM to have “sole” responsibility for
transactions as being contrary to SEC and Office of the Comptroller of the Currency guidance that allows delegation of
investment management authority and only requires the trustee of an ERISA plan to maintain substantial investment
responsibility over a collective investment trust, a common investment vehicle for ERISA plans. Federated Hermes also
proposed: (1) removing the proposed registration requirement, where each QPAM must report its reliance to the DOL;
(2) reducing the scope of the proposed expansions to disqualification from the QPAM Exemption; and (3) removing the
proposal’s requirement for certain contract provisions in every investment management agreement.
Since the beginning of the fourth quarter 2022, 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 15, 2023, the SEC proposed to exercise its authority under section 411 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) by amending and redesignating Rule 206(4)-2 under the
Advisers Act (Custody Rule) to enhance investor protections relating to custody of advisory client assets. The
proposed amendments, if adopted as proposed, would, among other things: (1) explicitly include an investment
advisor’s discretionary authority to trade client assets and the ability to transfer client assets within the definition of
“custody” under the Custody Rule; (2) expand the Custody Rule to cover a broader array of advisory activities and
client assets beyond “client funds and securities”, which would include digital assets; (3) require investment advisors
to enter into written agreements with each qualified custodian that maintains possession or control of client assets and
obtain reasonable assurances in writing that the custodian will take certain actions, including responding to SEC
12
information requests; and (4) update related recordkeeping and reporting requirements for investment advisors.
Federated Hermes is reviewing the proposed rule and its impact on Federated Hermes’ business. The comment period
for the proposed rule will end 60 days following publication of the proposing release in the Federal Register.
• On February 15, 2023, the SEC adopted rule amendments and new rules to, among other things: (1) shorten the
standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1);
(2) shorten the separate standard settlement cycle for firm commitment offerings priced after 4:30 p.m. from four
business days after trade date (T+4) to T+2; (3) purportedly improve the processing of institutional trades through new
requirements for broker-dealers and registered investment advisors related to same-day affirmations; and (4) facilitate
straight-through processing via new requirements applicable to clearing agencies that are central matching service
providers. The final amendments and new rules will become effective 60 days following the date of publication of the
adopting release in the Federal Register, and the compliance date for each is May 28, 2024. Federated Hermes is
currently reviewing the final amendments and new rules and their impact on its business.
• On January 25, 2023, the SEC issued a proposed rule to prohibit conflicts of interest in certain securitization
transactions as required by Congress in the Dodd-Frank Act. The proposed rule would prohibit securitization
participants from engaging in certain transactions that could incentivize a securitization participant to structure an
asset-backed security (ABS) in a way that would put the securitization participant’s interests ahead of those of ABS
investors. Federated Hermes is reviewing the proposed rule and its impact on Federated Hermes’ business. The public
comment period ends on March 27, 2023.
• On January 5, 2023, the Federal Trade Commission (FTC) released a proposed rule that, if adopted, would ban
employers from using noncompetition agreements to restrict the mobility of paid or unpaid employees, independent
contractors, interns, volunteers, and apprentices. The proposed rule broadly defines a “non-compete clause” as “a
contractual term between an employer and a worker that prevents the worker from seeking or accepting employment
with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The
proposed rule would apply to explicit noncompetition agreements as well as “de facto” noncompetition agreements
which have the effect of prohibiting workers from seeking or accepting new employment. The FTC maintains that the
proposed rule is not intended to prohibit reasonably tailored non-solicitation agreements. As support for its proposed
rule, the FTC maintains that noncompetition agreements suppress wages, stifle innovation, and make it harder for
entrepreneurs to start new businesses. The only exception is for noncompetition agreements used as part of a sale-of-
business contract with a 25% or more owner of the business being sold. Federated Hermes is reviewing the proposed
rule and its impact on its business. The public comment period ends on March 10, 2023.
• On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the 1934 Act. Rule 10b5-1 allows issuers
and company insiders to set up predetermined plans to transact in the issuer’s stock in compliance with insider trading
laws. The amendments: (1) add new conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1),
including cooling-off periods for directors, officers, and persons other than issuers; (2) create new disclosure
requirements regarding issuers’ insider trading policies and procedures and the adoption and termination (including
modification) of Rule 10b5-1 and certain other trading arrangements by directors and officers; (3) create new
disclosure requirements for executive and director compensation regarding certain equity compensation awards made
close in time to the issuer’s disclosure of material nonpublic information; and (4) update Forms 4 and 5 to require
filers subject to Section 16 of the 1934 Act to identify transactions made pursuant to a plan that is intended to satisfy
the affirmative defense conditions of Rule 10b5-1(c) and to disclose all bona fide gifts of securities on Form 4. The
final amendments will become effective on February 27, 2023. Section 16 reporting persons will be required to
comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers
will be required to comply with the new disclosure requirements in 1934 Act periodic reports on Forms 10-Q, 10-K,
and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins
on or after April 1, 2023. The final amendments also defer by six months the date of compliance with the additional
disclosure requirements for smaller reporting companies. Federated Hermes is currently reviewing the final
amendments and their impact on its business.
• On December 14, 2022, the SEC proposed to create the first SEC-established rule concerning best execution for
brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers
(collectively, broker-dealers). This proposed Regulation Best Execution would require broker-dealers to establish,
maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution
standard. Further, the proposal would require these policies and procedures to address how broker-dealers will comply
with the best execution standard and how they will determine the best market and make routing or execution decisions
13
for customer orders. The policies and procedures would also be required to address additional factors for conflicted
transactions with retail customers. Moreover, the proposal would require broker-dealers to review the execution
quality of customer orders at least quarterly and their best execution policies and procedures at least annually. Broker-
dealers would need to document such reviews and present written reports detailing the results of such reviews to their
boards of directors or equivalent governing bodies. Federated Hermes is reviewing the proposed Regulation Best
Execution and its impact on its business. The public comment period ends on March 31, 2023.
• On December 14, 2022, the SEC proposed a rule that would require certain orders of individual investors to be
exposed to competition in fair and open auctions before such orders could be executed internally by any trading center
that restricts order-by-order competition. On December 14, 2022, the SEC also proposed amendments that would
update the disclosure required under Rule 605 of Regulation NMS for order executions in national market system
stocks, which are stocks listed on a national securities exchange. The proposed amendments would expand the scope
of entities subject to Rule 605, modify the information required to be reported under the rule, and change how orders
are categorized for the purposes of the rule. Among other things, the proposal would expand the scope of entities that
must produce monthly execution quality reports to include broker-dealers with a larger number of customers. In
addition, the proposal would modify the definition of “covered order” to include certain orders submitted outside of
regular trading hours and certain orders submitted with stop prices. The proposed amendments would capture more
relevant execution quality information for these orders by requiring statistics to be reported from the time such orders
become “executable.” The proposed amendments to how orders are categorized would require the reporting of
execution quality information for fractional share orders, odd-lot orders, and larger-sized orders. Further, the proposal
would require that the time of order receipt and time of order execution be measured in increments of a millisecond or
finer and that realized spread be calculated at both 15 seconds and one minute. The proposal would also require new
statistical measures of execution quality, such as average effective over quoted spread (a percentage-based metric that
represents how much price improvement orders received) and a size improvement benchmark. Finally, the proposal
would enhance the accessibility of the required reports by requiring all entities subject to the rule to make a summary
report available to the public. Federated Hermes is reviewing the proposed rule and its impact on its business. The
public comment periods end on March 31, 2023.
• On December 7, 2022, the SEC reopened the comment period for its proposal, “Share Repurchase Disclosure
Modernization,” until January 11, 2023, to give interested persons the opportunity to analyze and comment on the
effect of the new excise tax on share repurchases that was signed into law in December 2022. The proposed
amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its
equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments
purportedly would also enhance the existing periodic disclosure requirements about these purchases.
• On November 2, 2022, the SEC adopted amendments to Form N-PX to: (1) enhance the information registered funds
currently report on Form N-PX about their proxy votes; and (2) require institutional investment managers to report on
Form N-PX how they voted proxies relating to certain executive compensation matters, or “say-on-pay” votes, as
required by the Dodd-Frank Act. The final amendments will be effective for votes occurring on or after July 1, 2023,
with the first filings subject to the amendments due in 2024. Federated Hermes is reviewing the final amendments and
their impact on its business.
• On October 26, 2022, the SEC adopted final rules requiring the recovery of erroneously-awarded compensation as
required by Congress in the Dodd-Frank Act. The rules will, among other things, require national securities exchanges
to establish listing standards that would require listed issuers to adopt and comply with a compensation recovery
policy, often known as a clawback policy, and require listed issuers to provide disclosure about such policies and how
they are being implemented. The rules and amendments will become effective on January 27, 2023. Exchanges will be
required to file proposed listing standards no later than February 26, 2023, and the listing standards must be effective
no later than one year following such publication. Issuers subject to such listing standards will be required to adopt a
recovery policy no later than 60 days following the date on which the applicable listing standards become effective and
must begin to comply with these disclosure requirements in proxy and information statements and the issuer’s annual
report filed on or after the issuer adopts its recovery policy. On January 27, 2023, the SEC posted four Compliance and
Disclosure Interpretations that address certain disclosure form, named executed officer identification and scope
questions concerning this new rule. Federated Hermes is reviewing the final rules, and will review the final listing
standards when issued, and their impact on its business.
• On October 26, 2022, the SEC adopted amendments to the requirements for annual and semi-annual shareholder
reports provided by mutual funds and ETFs to highlight key information for investors. The amendments require open-
14
end management investment companies to transmit concise and visually engaging annual and semi-annual reports
directly to shareholders that highlight key information for investors and amend certain advertising rules for registered
investment companies and business development companies. The
SEC adopted the rule largely as proposed although
with some changes from the proposal, most notably the SEC did not adopt proposed amendments to registration
statement disclosures. The SEC adopted a “layered approach” to disclosure, whereby registered funds are required to
make available summary information to retail shareholders directly, while providing more detailed information online
(e.g., schedule of investments, other financial statement elements) that can be more relevant to investors and financial
professionals who desire more in-depth information. These amendments fundamentally change the annual and semi-
annual reporting process and reports and will require extensive efforts to comply. Federated Hermes is reviewing the
final amendments and their impact on its business.
• On October 26, 2022, the SEC proposed a new rule and related amendments to prohibit SEC-registered investment
advisors from outsourcing certain services or functions to service providers without meeting certain minimum
requirements. The proposal includes: (1) new requirements for advisors to conduct due diligence before outsourcing
and to periodically monitor service providers’ performance and reassess whether to retain them; (2) related
requirements for advisors to make and/or keep books and records related to the due diligence and monitoring
requirements; (3) amendments to the investment advisor registration form, Form ADV, to collect census-type
information about advisors’ use of service providers; and (4) a requirement for advisors to conduct due diligence and
monitoring for third-party recordkeepers, along with a requirement to obtain reasonable assurances that the third-party
will meet certain standards. In its December 27, 2022 comment letter, Federated Hermes generally supported the
comments of the ICI and SIFMA on the proposal, particularly with respect to (1) the SEC’s failure to provide any
evidence that the proposal is required or that harm is being caused to investors given that an investment advisor’s
fiduciary duties and obligations sufficiently govern their use of service providers; (2) the definition of “covered
function” being overly broad and too subjective; and (3) the proposal’s attempt to legislate contractual relationships
with service providers that, in many cases, are outside of the regulatory remit of the SEC. The public comment period
ended on December 27, 2022.
• On October 13, 2022, the SEC staff issued a Frequently Asked Questions (FAQ) relating to investment advisor
consideration of diversity, equity, and inclusion (DEI) factors when recommending or selecting other investment
advisors for clients. The FAQ states that an advisor can consider
the use of such factors is consistent with a client’s objectives, the scope of the relationship, and the advisor’s
disclosures. The SEC staff also stated that advisors are not required to pre-qualify consideration of DEI factors based
on minimum AUM or length of track record.
factors among a variety of factors, provided that
DEI
• On October 12, 2022, the SEC adopted amendments to the electronic recordkeeping requirements for broker-dealers,
security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs) purportedly to modernize
recordkeeping requirements and make the requirements adaptable to new technologies in electronic recordkeeping.
The amendments are also intended to facilitate examinations of broker-dealers, SBSDs, and MSBSPs. The final
amendments became effective on January 1, 2023. The compliance dates for the new requirements will be May 3,
2023, in the case of broker-dealers, and November 3, 2023, in the case of SBSDs and MSBSPs. Federated Hermes is
reviewing the final amendments and their impact on its business.
Federated Hermes continues to monitor developments regarding previously issued regulatory proposals and developments,
including, among others: (1) the SEC’s proposed rule on “Enhanced Disclosures by Certain Investment Advisers and
Investment Companies about Environmental, Social, and Governance Investment Practices” (SEC ESG Disclosure Rule);
(2) as discussed above, the SEC’s proposed amendments to the Names Rule; (3) the SEC’s request for comment on certain
information providers acting as investment advisors; (4) guidance from the SEC’s DOE regarding upcoming review areas
during examinations focused on amended Advisers Act Rule 206(4)-1 (Marketing Rule), which came into effect on
November 4, 2022; (5) the SEC's proposed amendments to the standards applicable to covered clearing agencies for U.S.
Treasury securities; (6) the SEC's recently adopted rules amending Item 402 of Regulation S-K to implement the “pay
versus performance” requirement; (7) the SEC and Commodity Futures Trading Commission’s (CFTC) joint proposed
amendments to Form PF; (8) the DOL's proposed amendments to the QPAM Exemption; (9) the SEC's recently adopted
amendments to the proxy rules governing proxy voting advice; and (10) the SEC staff's proposed amendments to Exchange
Act Rule 14a-8 (the shareholder proposal rule). Federated Hermes submitted comment letters on many of these prior
proposals. Please refer to our prior quarterly reports on Form 10-Q and annual reports on Form 10-K for further
information regarding other Regulatory Developments that can affect Federated Hermes’ Financial Condition.
15
In addition to the above Regulatory Developments, as noted above, the SEC staff continues to engage in a series of
investigations, enforcement actions and/or examinations involving investment management industry participants, including
investment advisors and investment management companies such as Federated Hermes’ investment advisory subsidiaries
and the Federated Hermes Funds. The FINRA staff also continues to engage in such investigations, enforcement actions
and examinations of registered broker-dealers. In October 2022, shortly after the SEC filed its first Reg BI enforcement
action, FINRA filed its first disciplinary action under Reg BI, where it fined a broker $5,000 and issued a six-month
suspension arising from allegations that the broker engaged in excessive trading that resulted in outsized commissions to
the broker. In November 2022, FINRA announced a targeted sweep exam of crypto-related communications. According to
its “2023 Report on FINRA’s Examination and Risk Monitoring Program,” FINRA’s examination priorities for 2023
include, among others: (1) manipulative trading practices; (2) fixed income fair pricing; (3) ESG terminology in
communications with the public; (4) off-channel communications; (5) anti-money laundering; (6) Reg BI;
(7) cybersecurity; (8) complex products and options; (9) order handling, best execution and conflicts of interest; and
(10) liquidity risk management. 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.
Regulation or potential regulation by regulators other than the SEC and DOL, as well as state or federal lawmakers, also
continued, and can continue, to affect investment management industry participants, including Federated Hermes. For
example, various state legislatures or regulators have adopted or are beginning to adopt state-specific cybersecurity and/or
privacy requirements that can apply to varying degrees to investment management industry participants, including
Federated Hermes. Large index asset managers are garnering attention from the Senate Banking Committee, with certain
members of the Committee asserting that these asset managers exercise outsized influence over the market (via proxy
voting power) and use that influence to advance ESG and diversity, equity, and inclusion goals that are not connected to
financial performance. Recent actions taken by federal and state political representatives have suggested that asset
managers participating in certain ESG initiatives could violate antitrust laws. For example, on August 4, 2022, 19
Republican Attorneys General published a letter stating that, among other things, a large asset manager’s “coordinated
conduct with other financial institutions” because of its membership in certain ESG initiatives, among others, raises
antitrust concerns because it “appear[s] to intentionally restrain and harm the competitiveness of the energy markets.” On
November 21, 2022, 15 Democratic Attorneys General published a response supporting fund managers’ consideration of
ESG factors. The response letter states that the claim that asset managers that consider ESG factors could be violating
antitrust and competition laws is unsupported. In November 2022, House Judiciary Committee Republicans launched an
investigation aimed at assessing whether major climate groups that spearhead ESG initiatives are violating antitrust laws
when they coordinate groups to achieve ESG-related policy goals, which aids anticompetitive and unlawful agreements and
behavior (e.g., withdrawing investment from the oil and gas industry (or particular companies) or mandating that
companies adhere to certain ESG related principles (through the proxy voting process)).
While a U.S. financial transactions tax (FTT), an increase to a 28% corporate income tax, and a wealth tax on unrealized
investment income on individuals with net wealth over $100 million continue to be discussed to varying degrees, as of
December 31, 2022, none of these proposed tax changes have been enacted. As part of the Inflation Reduction Act of 2022,
however, among other tax reforms, a 15 percent minimum tax on corporate book income for corporations with average
annual adjusted financial statement income that exceeds $1 billion for any three consecutive prior tax years and a one
percent tax on corporate share repurchases have been enacted. These taxes will apply beginning in 2023. The law also
includes a large expansion and modernization effort for the Internal Revenue Service (IRS). On December 27, 2022, the
IRS and Treasury issued Notice 2023-2, which provides guidance relating to the application of the new excise tax on
repurchases of corporate stock. Among other things, the notice provides detailed rules for calculating the amount of the
excise tax as well as rules relating to the reporting and payment of the tax. Under the notice, the excise tax applies broadly
to stock repurchases (including repurchases of preferred stock) of corporate stock by publicly traded U.S. corporations
(covered corporations), or certain of their affiliates, after December 31, 2022, and to certain “economically similar”
transactions. The term “repurchase” is defined broadly and generally includes any acquisition of stock by a corporation in
exchange for cash or property other than its own stock or stock rights. The notice defines certain “economically similar”
transactions to include only (i) certain types of reorganization transactions, (ii) split-off transactions (as opposed to pro rata
“spin-off” transactions), and (iii) certain complete liquidations.
Current Regulatory Environment - International
Like the U.S., the pace of regulation in the EU and UK increased in 2022 and is expected to maintain an increased pace in
2023. In the fourth quarter 2022 alone, the UK Financial Conduct Authority (FCA) issued 14 consultation papers and
discussion papers, the Central Bank of Ireland (CBI) issued one consultation paper, and the European Securities and
16
FSB
ESMA
IOSCO
) issued six consultation papers and final reports in the fourth quarter
) issued three consultation papers, among other calls for input, guidance, handbook changes and
) also issued five consultation papers and the International
Markets Authority (
other regulatory publications. The Financial Stability Board (
Organization of Securities Commissions (
2022. Investment management-related topics covered by these consultation papers and other publications included, among
UK
others: the future disclosure framework in the
;
own funds requirements for Irish management companies and Undertakings for the Collective Investment in Transferable
Securities (
EU
sustainability-related terms in the
in Financial Instruments Directive II (
evidence on the implementation of the Shareholders Rights Directive 2; achieving greater convergence on cyber incident
reporting; supervisory and regulatory approaches to climate-related risks; regulation, supervision, and oversight of crypto-
asset activities and markets; and a thematic review on liquidity risk management recommendations. These regulators and
supervisory authorities are expected to continue to address these topics, and publish additional consultation papers and
other regulatory documents, in 2023.
) authorized for discretionary investment management; guidelines on fund names using
; amendments to the regulatory technical standards (
MiFID
II) (relating to passporting); call for evidence on greenwashing; call for
; sustainability disclosure requirements and investment labels in the
ESG
) under Article 34 of Markets
UCITS
RTS
UK
or
CBI
FCA
and
FCA
compliance priorities in 2023 will
published its multi-form review of Consumer Duty implementation plans, in which the
, and other international regulatory authorities, also continue to conduct regulatory investigations,
The
enforcement actions, and examinations and inquiries. It has been reported that
likely include, among others, implementation of the new Consumer Duty, reviews of financial promotion activities, fraud
risk, maintenance of systems and controls to mitigate financial crime, and financial resilience. On January 25, 2023, the
FCA
identified many examples of good practice, but believes more work is required in the areas of effective risk-based
prioritization of components of implementation plans, embedding detailed substantive requirements into implementation
plans, and sharing of information with other firms in the distribution chain in order to implement the consumer duty on a
timely basis. The
key areas above before the implementation deadline on July 31, 2023, and that it will be sending a survey to a sample of
firms to understand the progress they are making in implementing the Consumer Duty. The
proactive in recent years, including in 2022, in examining and submitting inquiries to firms it regulates, including
Federated Hermes. It also has been reported that
2023, and beyond, will include, among others, financial stability,
investment and insurance-based products (
regulatory authorities’, including
ESG
indicated that it expects boards and management bodies to focus and provide challenges in the three
developments, sustainable finance, packaged retail
) regulation, and the continuing impact of Brexit.
, regulatory priorities in
indicated that it had
also has been more
ESMA’s
PRIIPS
FCA
FCA
CBI
EU
EU
EU
EU
UK
EU
UK
FSM
UK. Among other things, under the Brexit Freedoms Bill, if
legislation and regulatory requirements that were quickly “on-shored” upon
legislation will be amended, repealed or replaced, which will end the special status of all
law and re-categorize all remaining retained EU law as “assimilated law” by December 31, 2023, and enable
Law (Revocation and Reform) Bill (i.e., the Brexit
Parliament. The Brexit Freedoms Bill is
government to create regulations to fit the UK’s needs, cut administrative obstacles to support business investment
economy. The December 31, 2023, deadline, which has been subject to political criticism as being
law, including
UK regulators continue to rationalize the
Brexit taking effect. As of December 31, 2022, the Retained
Freedoms Bill), among other legislation, continued to progress through
intended to implement a renewed regulatory framework in the
enacted as proposed, all
retained
UK
the
and stimulate the
arbitrary and nonsensical, can be extended until June 23, 2026. The Brexit Freedoms Bill applies to all
certain areas impacting financial services, with exceptions that exclude certain legislation identified in the 2022-23
Financial Services and Markets Bill (
deadline. The revocation deadline also will not apply to any rules of the Prudential Regulation Authority (
Bank of England (
general application. The Brexit Freedoms Bill will ensure that it is no longer possible for
legislation, subject to a relevant national authority’s right to reinstate certain rights, powers, or obligations, including to
apply interpretative principles to produce an effect that is equivalent to the effects of
Freedoms Bill also grants relevant national authorities the power until June 23, 2026, to specify that certain
EU
be read in a way which is “compatible” with retained
Absent any use of the power to require compatibility with retained
a new priority rule under which standard
UK
will end free movement between the
UK
restoring democratic control over law making within the
arbiter of the law that applies to the
reforms. The Brexit Freedoms Bill also prescribes a new test to be applied by higher courts when considering whether to
case law, establishes a new reference procedure
depart from retained
UK
and other European nations. The Brexit Freedoms Bill will maintain all of the
government’s progress post-Brexit, which include, among others,
UK
interpretive principles. The Brexit
laws are to
law to the extent “incompatible.”
legislation, the Brexit Freedoms Bill would impose
legislation. The Brexit Freedoms Bill also
or
) or to any Payment Systems Regulator that are generally applicable requirements or directions of
Bill) and certain amendments to revoked instruments from the revocation
FCA
, striking new trade agreements with over 70 countries, and certain value-added-tax
’s international commitments and build on the
case law or whether to depart from retained
legislation will trump retained
Supreme Court as the final
law and subject to retained
Parliament, restoring the
case law to override
PRA
BoE
UK
UK
UK
UK
EU
EU
UK
UK
EU
EU
EU
EU
EU
),
17
enabling a lower court which is bound by retained case law to refer a point of law to a higher court (which is not so bound)
government or the devolved administrations to refer
to decide, and establishes a new procedure for a law officer of the
a point of retained case law to a relevant higher court and certain rights of intervention.
UK
FSM
Bill also continued to progress through the
As of December 31, 2022, the previously introduced
it has been reported that it is expected to receive Royal Assent in Spring 2023. The
law relating to financial services and empower His Majesty’s Treasury (
financial service regulators, such as the
prepare new transitional amendments to bring about a new
Bill is intended to: (1) implement the outcomes of the Future Regulatory Framework (
consultations that concluded on February 9, 2022, (2) maintain the
(3) harness the opportunities of innovative technologies in financial services, and (4) bolster the competitiveness of
markets and promote the effective use of capital.
to modify or replace existing retained
-specific regulatory regime. Among other things, the
FRF
Treasury), relevant national authorities (i.e.,
laws or to
FSM
’s position as an open and global financial hub,
UK
Bill would revoke retained
) Review, which included
), and the
UK
Parliament, and
FCA
BoE
FSM
and
PRA
HM
UK
UK
EU
EU
FCA
to allow certain Irish-domiciled
funds and Luxembourg-
under the temporary permissions regime, which remains
Federated Hermes has received permission from the
based direct lending funds to continue to be marketed in the
UK
effective through December 31, 2025. The overseas funds regime (OFR) also has been established. The OFR is targeted at
and is a long-term replacement to the temporary permissions regime which enables Federated Hermes’ Irish
UCITS
funds to continue to be marketed in the UK post-Brexit. HM Treasury is working with the FCA to undertake equivalence
assessments for different countries and different fund types to identify those that can take advantage of the
assessment of the European Economic Area’s (
HM
FCA
to put in place some form of value assessment process.
Treasury on the disclosure requirements that would apply in the event of an equivalence decision on the
also is continuing to consider the other requirements that will apply under the
) assessment commenced in October 2022. The
. An
is engaging with
and whether those funds will need
UCITS
. The
FCA
OFR
OFR
OFR
EEA
UCITS
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 UK and EU, increasing regulatory burdens and compliance and other costs for UK funds
being distributed in the EU and EU funds (such as Irish-domiciled funds) being distributed in the UK. The ability to engage
investment managers for EU funds and UK funds also could be impacted, resulting in structural and other changes for UK-
and EU-domiciled funds. The impact of Brexit on Federated Hermes’ UK domiciled funds is difficult to quantify and
remains uncertain given the overlap with the coronavirus pandemic (Pandemic) and recent surge in the number of ESG-
related money market funds in both the EU and UK. As of December 31, 2022, EU-resident shareholders in Federated
Hermes’ UK domiciled funds and the UK-resident shareholders in Federated Hermes’ Irish-domiciled funds were
permitted to remain in the funds. Subscriptions also can continue as long as there is not a proactive sales effort.
EU
EU
EU
UK
UK
IMF
and
and
and the
ESRB
post-Brexit.
UK
), the European Banking Authority (
UK
in 2020, 2021 and 2022, similar to the
-based funds can still use passports to sell to
FSB
), among other regulators, have been re-examining existing money market fund regulation, soliciting public
EU
regulatory requirements. As a
investors. However, following various consultations, reports,
EU
-domiciled money market funds currently remain on par with current
is another example of potential divergence between the
money market fund regulation is considered “equivalent” until December 31, 2025.
The regulation of money market funds in the
UK
and
Accordingly,
result,
IOSCO
and speeches by representatives of
BoE, the European Systemic Risk Board (
Fund (
comment on proposed money market fund reforms, and issuing reports and recommendations. While money market fund
, new proposals for reform have not been promulgated. It has been
reform continues to be discussed in the
reported that, in late January 2023, Andrew Bailey, a governor of the
, expressed concerns
regarding money market funds given their perceived impact during the recent financial crisis and the “mini budget” crisis
will come out with their own money market fund
in the
has indicated that it will not be able to work on money
reform proposals in 2023. It also has been reported that the
market reform proposals until the next European Commission mandate in 2025. Given the above, it is possible that the
or
regulations that could be adopted in the future. Management believes that a final
could influence the
could deviate from, or simply not adopt, any new or amended
in September 2022, and indicated that the
, the
in the U.S.,
), and the International Monetary
rule on money market fund reforms
money market fund laws, rules or
and Chairman of the
regulators.
and the
ESMA
FSB
BoE
EBA
and
and
FCA
EU
SEC
SEC
BoE
UK
UK
UK
EU
UK
UK
or
EU
EU
EU
As discussed above, Federated Hermes believes that money market funds are investment products that have proven their
resiliency. Federated Hermes intends to continue to engage with
beyond, both individually and 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 2023 and
and
UK
EU
18
EU
EU
IFD
UK and the
) and Investment Firms Regulation (
post-Brexit. Such divergence has already begun in certain areas of financial services
The sweeping changes contemplated by the Brexit Freedoms Bill and FSM Bill heighten the risk of regulatory divergence
between the
regulation. For example, EU investment firms in
Directive (
prudential regime for Markets in Financial Instruments (
IFPR
has been established. The
represents a significant change for
FCA
alternative investment fund managers (
Quarterly Consultation Paper No. 36, issued on October 6, 2022, the FCA
MiFID
and accompanying guidance for
systems, and make certain corrections.
Member States are required to comply with the Investment Firms
UK
IFPR
, which became effective on January 1, 2022, introduced a single prudential regime, and
, and a new
) firms titled Investment Firms Prudential Regime (
-authorized investment firms in the
AIFMs
MiFID
firms to assist firms in completing the forms, fully conform the forms to the
top-up permissions. Following a prior consultation, in its
reporting forms
FCA
that are authorized under
proposed updates to its
do not bind the
); however, the
MiFID
MiFID
) with
IFPR
and
UK
IFD
IFR
IFR
UK
)
, including
’s
SFDR
EU regulators have previously issued or proposed directives, rules, and laws
) and the Taxonomy Regulation, as well as proposals on the use of ESG- or sustainability-
As another example of potential divergence,
regarding sustainable finance, including the Sustainability-Related Disclosures Regulation or Sustainable Finance
Disclosure Regulation (
related terms in fund names. 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.” Pursuant to the Sustainable Finance Package
issued by the European Commission, firms had a 12-month period that ended in October 2022 to implement certain
sustainability reporting requirements and investment advice and sustainability considerations in connection with product
governance and fiduciary duties. Among other regulatory guidance, the European Supervisory Authorities (ESAs)
recommended that national competent authorities (NCAs) and market participants utilize the period to January 1, 2023, to
prepare for the application of the European Commission’s delegated regulation. The European Commission has published
the final RTS supplementing the SFDR, specifying the mandatory website, pre-contractual, and periodic reporting
templates for financial market participants and in-scope financial products. The final RTS began to apply beginning on
January 1, 2023. Under the SFDR, in addition to various disclosure requirements, financial products must be classified into
separate categories, based on their investment into and their claims regarding sustainability, such that financial products
such as investment funds and ETFs must be classified as Article 6, Article 8 or Article 9 funds. An Article 6 SFDR fund
requires asset managers to disclose the level of integration of sustainability in their funds, regardless of how they are
labelled. Funds that have some form of ESG, green or sustainability labelling then go on to be classified as Article 8 or 9.
Article 8 funds are those that promote environmental or social characteristics but do not have them as a core investment
objective. Article 9 funds are those that have sustainability as their core investment objective and require comprehensive
and understandable related disclosures. There are also various delegated directives and regulations arising from SFDR with
which AIFMs and MiFID firms must comply. On November 17, 2022, the ESAs published a “Questions and Answers
(Q&A) on the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288)” that provides guidance
on various aspects of “principal adverse impact” reporting of the impact of investment decisions or advice that results in a
negative effect on sustainability factors, such as ESG, employee, human rights, anti-corruption and anti-bribery concerns or
matters.
On November 15, 2022, the ESAs published a “Call for evidence on better understanding greenwashing” to gather input on
how to understand the key features, drivers and risks associated with greenwashing and to collect examples of potential
greenwashing practices. The comment period ended on January 10, 2023. On November 18, 2022, ESMA published a
“Consultation on Guidelines on funds’ names using ESG or sustainability-related terms” in which ESMA proposes, and
seeks feedback on, among other fund name-related matters: (1) a quantitative 80% threshold for the use of ESG-related
words; (2) an additional 50% threshold for the use of “sustainable” or any sustainability-related term only, as part of the
80% threshold; (3) the application of minimum safeguards to all investments for funds using such terms (i.e., exclusion
criteria); and (4) certain additional considerations for specific types of funds (e.g., index and impact funds). The comment
period ended on February 20, 2023.
UK
, the
SFDR
TCFD
decided to align with the
. The
- and sustainability-related terms in fund names. Building on a prior consultation that closed on
TCFD
, on
-aligned product and entity-level disclosure rules previously introduced by the
published a Consultation Paper on “Sustainability Disclosure Requirements (
Rather than adopt the
ESG
regarding the use of
July 1, 2022, and upon the
FCA
October 25, 2022, the
investment labels” in which it proposed a package of measures aimed at clamping down on greenwashing, including
sustainable investment labels, consumer-facing disclosure requirements, broader disclosure requirements, restrictions on
the use of sustainability-related terms in product naming and marketing, requirements for distributors and a general “anti-
greenwashing” rule. In its January 25, 2022 comment letter to this Consultation Paper, among other comments, Federated
also has proposed its own guidelines
) and
SDR
FCA
FCA
19
FCA
to clarify and confirm that funds eligible for a “Sustainable Improver Label” include those
Hermes: (1) requested the
which are committed to delivering sustainable outcomes in 70% of the assets in a portfolio either through self-improvement
by the investee or through meaningful and outcome-achieving investor engagement; (2) encouraged the
FCA not to require
that funds sustainability objective be part of a fund’s investment objective, but rather to take a holistic approach that would
permit a fund to have its sustainability objective be part of either its investment objective, its investment policy or its
investment strategy; (3) commented that the term “responsible” should not be limited to those products with a sustainable
ESG
label, and should be able to be used for products that have
analytical capabilities and resources and
demonstrable stewardship; and (4) commented that the term “impact” should not be restricted to the “Sustainable Impact”
category. The comment period for this Consultation Paper ended on January 25, 2022.
integration,
ESG
In addition to potential divergence between UK and EU law and regulation, the possibility of divergence exists between the
laws of the EU, UK, U.S., and other jurisdictions, including, among others, in the areas of climate disclosures, ESG and
fund naming requirements and other reforms. For example, on December 12, 2022, the Australian Government published
its own consultation seeking views on key considerations for the design and implementation of the Government’s
commitment to standardized, internationally-aligned requirements for disclosure of climate-related financial risks and
opportunities in Australia. The consultation period ended on February 17, 2023.
The activities of the FSB and the IOSCO also continue to be monitored by the investment management industry, including
Federated Hermes. Building on consultations and other reports published from 2015 through 2022, the FSB and the IOSCO
continue to focus on, among other topics: (1) non-bank financial intermediation (NBFI); (2) financial stability, market and
product liquidity and liquidity risk management; (3) cyber incident reporting; (4) crypto-related risks and regulation,
including stablecoin arrangements; (5) retail distribution and digitalization; and (6) financial reporting and disclosure
during economic uncertainty. These activities by the FSB and the IOSCO are discussed below. Given the role of the FSB
and the IOSCO in making recommendations and setting standards for regulations globally for implementation by
regulatory authorities in individual jurisdictions, the activities of the FSB and the IOSCO provide insight into future or
additional current Regulatory Developments.
UK
Since the beginning of the fourth quarter 2022,
adopted other new consultations, directives, rules, laws, and guidance that impact or could impact
management industry participants, including Federated Hermes. For example:
and
EU
regulators and supervisory authorities issued, proposed, or
UK
and
EU
investment
• On January 27, 2023, the
published its “Guidelines on stress test scenarios under the
MMF
MMF Regulation.” In these new Guidelines, the
provides updated specifications on the types of money market fund stress tests and their calibration. Upon the
ESMA
Money Market Fund Regulation (
of its Final Report on “Guidelines on stress test scenarios under the
ESMA
new Guideline becoming effective on March 27, 2023, managers of money market funds will need to use them to
conduct stress tests and complete required reporting under Article 37 of the
reviewing these new Guidelines and their impact on its money market fund business.
Regulation)), which followed the
Regulation. Federated Hermes is
’s publication on November 30, 2022,
Regulation,” (i.e.,
ESMA
MMF
MMF
• On December 31, 2022, the
FCA
published a report on approaches to diversity and inclusion in financial services,
encouraging firms to use the data in developing their current diversity and inclusion strategies but did not indicate any
potential future rulemaking developments. Federated Hermes is reviewing this report and its impact on its business.
• On December 27, 2022, the
EU
Council adopted the Digital Operational Resilience Act (Regulation (
) 2022/2554)
DORA
). This regulation, which will apply beginning on January 17, 2025, sets uniform requirements for the security
(
of network and information systems of companies and organizations operating in the financial sector as well as critical
third parties which provide Information Communication Technologies (
)-related services, such as cloud platforms
or data analytics services. The
creates a regulatory framework on digital operational resilience whereby firms
DORA
will need to make sure they can withstand, respond to, and recover from all types of
threats. These requirements are homogenous across all
cyber threats. The
reviewing the
ICT
Member States with the core aim to prevent and mitigate
government is also looking to enact a similar
and its impact on its business.
-related disruptions and
. Federated Hermes is
-equivalent to the
UK
DORA
DORA
ICT
EU
UK
EU
• On December 21, 2022, the
ESMA
published a final report outlining the
and Implementing Technical Standards
) specifying the information to be provided, and the templates to be used, to inform competent authorities of the
ITS
(
cross-border marketing and management of investment funds and the cross-border provision of services by fund
managers. The
specify the information to be provided by management companies and
out their activities in host Member States, while the
ITS contain the templates to be used by management companies.
wishing to carry
AIFMs
RTS
RTS
20
, and
These standards will normalize the content and format of the information being provided by management companies,
UCITS
situated in the
only and look to support the process for notifying cross-border marketing and
management activities in relation to
and alternative investment funds as well the cross-border provision of
services by fund managers.
EU
UCITS
AIFMs
• On December 19, 2022, the European Commission issued two draft notices containing guidance on environmental
performance reporting under green taxonomy. The first notice contains responses to
criteria for the taxonomy’s first two environmental objectives of climate change mitigation and climate change
adaptation, and the second notice contains responses to
Taxonomy Regulation, the details of which are set out in the Disclosures Delegated Act.
FAQs on the disclosure obligation under Article 8 of the
FAQs
on the technical screening
• On December 16, 2022, the
AIFMD
Managers Directive (
II and the Markets in Financial Instruments Regulation market
structures topics. The topics include whether managers of special purpose acquisition companies are subject to
AIFMD
published an updated Q&A on the application of the Alternative Investment Fund
ESMA
) and on the
MiFID
.
• On December 14, 2022,
ESMA
published a final report on the Guidelines for reporting under European Market
EMIR
Infrastructure Regulation (
management requirements applicable under
derivatives contracts, (ii) central counterparties, and (iii) the trade repositories. The final report has been published
with new validation rules as well as outgoing and ingoing reporting instructions.
) Refit Regulation (the final report). The final report clarifies the reporting and data
Refit Regulation to (i) counterparties to over-the-counter
EMIR
• On December 14, 2022,
with respect
to the supervision of investment firms’ cross-border activities under
MiFID II. The supervisory briefing is relevant to
investment firms that provide cross-border services, particularly to retail clients, under the passporting regime set out
in Article 34 of
published a supervisory briefing on ensuring convergence across the
ESMA
MiFID
II.
EU
• On December 14, 2022, the
FSB
published an “Assessment of the Effectiveness of the
FSB
’s 2017 Recommendations
FSB
’s work program to enhance the
. The Assessment finds that regulatory authorities have made meaningful progress in implementing
NBFI
recommendations based on progress in four key areas: (1) reducing structural liquidity mismatch;
on Liquidity Mismatch in Open-End Funds” (Assessment), which is part of the
resilience of
FSB
the 2017
(2) reducing shock amplification and transmission using liquidity management tools; (3) enhancing regulatory
reporting, data availability and public disclosure; and (4) ensuring adequacy of stress testing. The Assessment
concludes that certain policy enhancements would strengthen the current framework and liquidity management
practices, including: (1) providing a clearer and more specific articulation of the intended outcome of policies to
reduce structural liquidity mismatch in open-end funds; (2) ensuring that investors bear the costs of liquidity associated
with fund subscriptions and redemptions, and enhancing the use, and consistency of use, of liquidity management tools
by fund managers; (3) requiring clearer public disclosures from fund managers on the availability and use of liquidity
management tools, including by enhancing their engagement with investors; (4) closing identified data gaps to
improve regulatory authorities’ ability to monitor liquidity mismatch in open-end funds and its management from a
financial stability perspective; and (5) further promoting the use of fund- and system-level stress testing. The
conjunction with
, will continue to follow-up on the Assessment’s findings, including by revising the
recommendations, and will monitor the progress of regulatory authorities in implementing the recommendations across
jurisdictions.
FSB
FSB
, in
’s
IOSCO
• On December 13, 2022, the
FCA
published a Discussion Paper regarding the “Future Disclosure Framework” in which
UK
HM
Treasury regarding PRIIPs and
. This Discussion Paper follows a December 9, 2022, Consultation Paper
it invites feedback on how it can design and deliver a good disclosure regime for retail investments, particularly
considering the Consumer Duty in the
issued by
in the UK. This Consultation Paper sets out the
remove the
disclosure regime with future disclosure requirements to sit only in the
reviewing the
business. The comment period on the Discussion Paper ended on February 7, 2023. The comment period on the
Consultation Paper ends on March 3, 2023.
will become responsible for establishing a future
Handbook. Federated Hermes is
Treasury’s Consultation Paper and their respective impacts on its
UK Government’s intentions to revoke the
disclosure requirements, so that the
Retail Disclosure, which also relates to the future of retail disclosure
Discussion Paper and
regulation and to
PRIIPs
UCITS
FCA’s
FCA
FCA
HM
UK
• On December 9, 2022, the
UK
Chancellor of the Exchequer announced a wide-ranging set of reforms for the financial
services sector, referred to as the “Edinburgh Reforms.” The package will include further proposals relating to the
21
Packaged Retail Investment and Insurance-Based Products Regulation (1286/2014), the Payment Account Regulations
2015 (SI 2015/2038), plans to establish a regulatory regime by 2024 that will support a consolidated tape for market
data, and plans to consult in the first quarter 2023 on bringing ESG ratings providers within regulatory oversight and
publish an updated Green Finance Strategy in early 2023 that includes an update on plans to make secondary
legislation under the UK Taxonomy Regulations.
• On December 2, 2022, the FCA published its Quarterly Consultation, which contains certain proposed changes and
clarifications with respect to the Consumer Duty, including the important clarification that with respect to occupational
pension schemes, the term “retail customer” will be amended to make clear that it includes any client of a firm who is
or would be a beneficiary of the scheme rather than a beneficiary of the underlying investments held in the scheme.
The comment period ended on January 9, 2023.
• On December 1, 2022, the CBI published a Consultation Paper regarding “Own Funds Requirements for UCITS
management companies and AIFMs authorized to perform discretionary portfolio management” in which the CBO
proposes to introduce bespoke own funds requirements for UCITS management companies and AIFMs authorized to
provide discretionary portfolio management and additional non-core services as a condition to authorization to
maintain a “level playing field” because such entities are not subject to own funds requirements at the EU level related
to the provision of such services. Under these proposed requirements, UCITS management companies and AIFMs
authorized to provide discretionary portfolio management services and non-core services that do not meet conditions to
be a “small and non-interconnected firm” (modelled on similar conditions under the IFR) will be required to apply the
higher of the own funds requirement under the UCITS Regulations/AIFM Regulations, as applicable, or, a Risk to
Client K-factor own fund requirement modeled on the Risk to Client K-Factor applicable to MiFID investment firms
under the IFR. UCITS management companies and AIFMs authorized to provide discretionary portfolio management
services will continue to be required to undertake an Internal Capital Adequacy and Assessment Program in line with a
similar requirement applicable to all MiFID investment firms. Federated Hermes is reviewing this Consultation Paper
and its impact on its business. The comment period ended on February 23, 2023.
• On November 30, 2022, the FCA published a Consultation Paper regarding “Broadening access to financial advice for
mainstream investments” in which it sets forth proposals for a new core investment advice regime that would allow
firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on
investment into mainstream products, specifically within stocks and share investment savings accounts (or ISAs).
Federated Hermes is reviewing this Consultation Paper and its impact on its business. The comment period ends on
February 28, 2023.
• On November 28, 2022, the Council of the European Union gave its final approval to the Corporate Sustainability
Reporting Directive (CSRD), and, on December 16, 2022, the CSRD was published in the Official Journal of the
CSRD
European Union. It entered into force on January 5, 2023, and Member States are required to transpose the
national law by July 6, 2024.
into
• On November 17, 2022, the
ESMA
published a Consultation Paper regarding “Review of the technical standards under
MiFID
II” in which it proposes amendments to the information requirements that investment firms
Article 34 of
applying to passport a product and provide cross-border services without the establishment of a branch in a particular
jurisdiction are required to satisfy. The proposed amendments would add the following to such information
requirements: (1) the marketing means the investment firm will use in host-Member States; (2) the language(s) for
which the investment firm has the necessary arrangements to deal with complaints from clients from each of the host
Member States in which it provides services; (3) the Member States in which the investment firm will actively use its
passport as well as the categories of clients targeted; and (4) the investment firm’s internal organization in relation to
the cross-border activities of the investment firm. Federated Hermes is reviewing this Consultation Paper and its
impact on its business. The consultation period ended on February 17, 2023.
• On November 16, 2022,
IOSCO
published a “Thematic Review on Liquidity Risk Management Recommendations” in
which it assesses the implementation of selected recommendations issued in 2018 to strengthen the liquidity risk
management practices for collective investment schemes globally. Among other things, this Review found that:
(1) larger jurisdictions show a high degree of implementation of regulatory requirements consistent with the objectives
of the recommendations; (2) challenges exist for collective investment schemes with respect to dealing frequency,
dealing arrangements and disclosure practices; (3) some jurisdictions need to improve the process of identification of a
liquidity shortage before it occurs and provide more guidance on aligning the investment strategy, liquidity profile and
redemption policy; (4) jurisdictions should further address the availability of liquidity management tools and
22
supplement the current rules and regulations to include requirements that are more specific regarding the use of such
tools; (5) asset managers have a high degree of implementation of the recommendations at the level of policies and
practices; and (6) weaknesses exist regarding operationalizing contingency plans and activation of liquidity risk
FSB
management tools. The findings from this Review informed the FSB’s assessment of the effectiveness of the
2017 policy recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds.
’s
• On November 15, 2022, the FSB published its “Climate Scenario Analysis by Jurisdictions: Initial findings and
lessons” in which the FSB synthesizes findings from climate scenario analysis exercises undertaken by financial
authorities at the individual firm level, at the financial sector level, and at the overall financial system level, with the
goal of drawing lessons for effective scenario analysis and sketching out a global approach. The publication also
attempts to evaluate the implications of climate change-related developments for financial systems with the goal of
advancing a common understanding of the impact of climate change on financial stability.
• On November 14, 2022, the
IOSCO
published a “Statement on Financial Reporting and Disclosure during Economic
Uncertainty” in which, among other things, it highlighted the importance of high quality and transparent disclosures
that clearly explain significant management judgments, key assumptions, the identification of known risks, and
explanations of how changes in these factors can affect the amounts and trends reported in historical financial
statements.
FSB
FSB
FSB
published a Progress Report on “Enhancing the resilience of Non-Bank Financial
reviews prior and planned work by it and other global regulators to enhance the
’s work program, which has involved money market funds, open-end funds,
• On November 10, 2022, the
Intermediation” in which the
resilience of NBFI under the
margining practices, bond market liquidity and fragilities in United States Dollar (
that focus on key amplifiers and seeks to:
Progress Report sets out policy proposals to address systemic risk in
(1) reduce liquidity demand spikes; (2) enhance the resilience of liquidity supply in times of stress; and (3) enhance
risk monitoring and the preparedness of regulatory authorities and market participants. According to the
, the main
focus of these proposals is to reduce excessive spikes in the demand for liquidity by addressing the vulnerabilities that
drove those spikes (e.g., by reducing liquidity mismatch or the build up of leverage) or by mitigating their financial
stability impact (e.g., by ensuring that redeeming investors pay the cost of liquidity (e.g., through swing pricing) and
by enhancing the liquidity preparedness of market participants to meet market calls).
) cross-border funding. The
NBFI
USD
FSB
• On October 20, 2022, the
FSB
published a “Report on Liquidity in Core Government Bond Markets,” which is part of
FSB
NBFI
’s work program to enhance the resilience of
the
and resilience of core government bond markets. Building on relevant analysis by
international bodies, the Report: (1) reviews recent changes in the structure and liquidity of core government bond
markets; (2) analyzes the changes in government bond market liquidity (and related repurchase agreement and futures
markets) in March 2020, including the behavior of various market participants (particularly dealers); (3) examines the
drivers of market participants’ behaviors; and (4) identifies factors that promote the resilience of government bond
markets.
analyzes the liquidity, structure,
member authorities and other
. In this Report, the
FSB
FSB
• On October 17, 2022, the
FSB
published a Consultative Document on “Achieving Greater Convergence in Cyber
Incident Reporting,” in which the
sets out recommendations to address impediments to achieving convergence
among regulators and jurisdictions, advances work on establishing common terminologies related to cyber incidents
and proposes the development of a common format for incident reporting exchange. The comment period ended on
December 31, 2022.
FSB
• On October 13, 2022, the
FSB
’s Task Force on Climate-Related Financial Disclosures issued its “2022 Status Report”
in which it provided an overview of current disclosure practices in terms of their alignment with the
TCFD
over the past
recommendations and highlights progress firms are making toward disclosures aligned with the
also published a Final Report on
five years. Based on a prior April 2022 consultation, on October 13, 2022, the
“Supervisory and Regulatory Approaches to Client-related Risks” in which the
seeks to assist global supervisory
and regulatory authorities in developing approaches to monitor, manage and mitigate risks arising from climate change
FSB
and promote consistent approaches across sectors and jurisdictions. In this Final Report, among other things, the
acknowledges that supervisory goals and approaches differ and that “climate change is likely to represent a systemic
risk for the financial sector.”
FSB
FSB
’s prior
TCFD
• On October 13, 2022, the
FSB published a “Progress Report on Climate-Related Disclosures” and a “Final Report on
supervisory and regulator approaches to client-related risks.” In the Progress Report, the
FSB
covers, among other
23
ISSB
IOSCO
IAASB
), and the work by
) in developing its global
topics: (1) the progress made by the International Sustainability Standards Board (
baseline climate reporting standard and the work of other international standard-setters on assurance over
sustainability-related reporting; (2) the progress made in the area of assurance, including the work of the International
Auditing and Assurance Standards Board (
IESBA
(
made by jurisdictions on climate-related disclosure practices, including implementing
as steps being taken by jurisdictions to prepare for adopting, applying or otherwise making use of the
related disclosure reporting standard; and (4) the progress made by firms on disclosure and reporting. In the Final
Report, the
from financial institutions; (2) system-wide supervisory and regulatory approaches and the extent to which supervisory
and regulatory tools and policies address climate-related risk; and (3) early considerations of other potential
macroprudential policies and tools relating to client risk and disclosure.
provides recommendations regarding, among other topics: (1) the collection of climate-related data
to support the work on both disclosure and assurance standards; (3) the progress
) and International Ethics Standards Board for Accountants
recommendations, as well
ISSB
climate-
FSB
FSB
• On October 12, 2022, the
IOSCO
IOSCO
published a Final Report entitled “Report on Retail Distribution and Digitalisation”
considered recent developments in online marketing and distribution to retail investors by financial
in which
firms, sets out examples of how some jurisdictions have addressed these issues, and, among other proposals, considers
proposals for firm level rules for online marketing and distribution. In the Final Report,
also recommends that
IOSCO
-member regulatory authorities should continue to monitor developments in online marketing, including social
media, and consider changes in their respective requirements.
IOSCO
• On October 11, 2022, the
ESMA
published a Call for Evidence regarding the “Implementation of [Shareholder Rights
Directive 2 (SRD2)] provisions on proxy advisors and the investment chain,” in which it seeks to gather information
2 provisions on
on how market participants perceive the appropriateness of the scope and the effectiveness of the
the identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights, as
well as on transparency of proxy advisors. The comment period ended on November 28, 2022.
SRD
• On October 11, 2022, the
FSB
published a Consultative Document regarding “Regulation, Supervision and Oversight
FSB
FSB
High-level
: (1) analyzes the interconnectedness of crypto-asset markets; (2) provides an
of Crypto-Asset Activities and Markets,” a Consultation Report regarding “Review of the
recommendations of the Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements,” and a related
request for comment regarding “International Regulation of Crypto-asset activities: A proposed framework – questions
for consultation,” in which the
overview of applicable international standards and regulatory and supervisory approaches; (3) identifies issues,
challenges and gaps, and provides high-level recommendations, relating to supervisory and oversight approaches to
FSB
crypto-asset activities; and (4) proposes revisions to the
arrangements to address financial stability risks more effectively. The FSB also invited comments on: (1) proposed
recommendations to promote the consistency and comprehensiveness of regulatory, supervisory and oversight
approaches to crypto-asset activities and markets and to strengthen international cooperation, coordination, and
information sharing; and (2) a review of the previous 10 FSB high-level recommendations from 2020 for the
regulation, supervision, and oversight of “global stablecoin” arrangements. The comment period ended on
December 15, 2022.
’s high-level recommendations regarding stablecoin
• On October 3, 2022, the
FCA
issued a Consultation Paper regarding “Creation of baseline financial resilience
regulatory return,” in which it seeks to rationalize and standardize baseline financial resilience data collection with a
view to increasing the quality and consistency of financial resilience data. The
seeks to reduce the burden of the
existing survey by changing the collection of financial resilience data from an ad-hoc survey to a specific (and
shortened) quarterly return within the
2022.
’s data collection system. The consultation period ended on December 2,
FCA
FCA
PRIIPs
UK climate-related disclosure regime based on
Federated Hermes continues to monitor developments regarding previously issued regulatory proposals and developments,
including, among others: (1) the
2023; and (2) the
with assets greater than £5 billion on January 1, 2023. Please refer to our prior quarterly reports on Form 10-Q and annual
reports on Form 10-K for further information regarding other international Regulatory Developments that can affect
Federated Hermes’ Financial Condition.
directive, which came into effect on January 1,
recommendations, which came into effect for firms
Regulation under the UCITs
TCFD
EU
FCA
In addition to the above Regulatory Developments, the
,
investment 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
and other global regulators continue to monitor
CBI
24
necessary. For example, the
to the detection of market abuse and financial crime controls.
FCA has recently fined broker-dealers and other investment-related firms for failures relating
An EU FTT also continues to be discussed, although it remains unclear if or when an agreement will be reached regarding
its adoption. The last proposal was to begin discussions at the EU level regarding the design of an EU FTT involving a
gradual implementation by Member States based on the FTTs already implemented in France and Italy. Member States that
would want to implement an FTT more quickly would have been permitted to do so. Member States were invited to
provide input on the proposed approach to the EU FTT design, whether the FTTs in France and Italy would be a solid basis
for an EU FTT, and whether an EU FTT should apply to equity derivative transactions. As attention continues on a post-
Pandemic economy and as the EU and EU Member States continue to look to fund their budgets and the Pandemic-related
measures that have been adopted, an EU FTT on securities transactions, or even bank account transactions, remains a
potential additional source of revenue. The Council of the EU has recognized that the European Commission has clarified
that, if there is no agreement by the end of 2022 (which there was not), the European Commission will, based on impact
assessments, propose a new resource for the EU budget based on a new FTT and that the European Commission will
endeavor to make those proposals by June 2024 with the FTT’s planned introduction by January 1, 2026. The Council also
has indicated that further work will be required before final policy choices are made and an agreement on a possible FTT
can be reached. The exact time needed to reach a final agreement on an EU FTT, implement any agreement and enact
legislation is not known at this time. The weakened economy in Europe can increase the risk that additional jurisdictions
propose to implement single-country FTTs.
LIBOR
LIBOR
LIBOR
LIBOR
LIBOR
transition and securing robust reference rates for the
is nearly complete, with publication of the few remaining tenors of
is the highest; (2) cautions that there could be residual risk arising from relatively
ceasing after June 30, 2023. On December 16, 2022, the FSB issued a “Progress Report on
As of December 31, 2022, the transition from
USD
Benchmarks Transition Issues: Reaching the finish line of
future” in which it, among other things: (1) acknowledges that significant progress was made especially among
jurisdictions where exposure to
low awareness of the transition among users of
(3) encourages market participants to use the most robust reference rates to achieve intended benefits and avoid the need to
repeat another reference rate transition. On November 23, 2022, the
USD
publish a synthetic version of 1-, 3-, and 6-month
2024; (2) its proposed methodology for building these synthetic
The
orderly transition of legacy contracts that are governed by
being amended by the time
ended on January 6, 2023.
FCA
22/11” to solicit views on: (1) its proposal to require the administrator of
LIBOR settings for a temporary period until the end of September
LIBOR settings; and (3) the permitted uses of them.
USD LIBOR
or other non-U.S. law and that have no realistic prospect of
is no longer published in its current form after June 30, 2023. The comment period
made clear that its primary purpose in requiring the publication of synthetic
released a further “Consultation on ‘synthetic’
LIBOR in jurisdictions where
LIBOR and feedback to
exposure is low; and
is to facilitate an
and Other
LIBOR
LIBOR
LIBOR
USD
USD
FSB
USD
FCA
UK
to
CP
Legislators and regulators in the U.S. and other countries are also working on the transition from LIBOR, with particular
emphasis on legacy financial agreements that lack sufficient “fallback” language to transition to a new reference rate in the
event of LIBOR’s cessation. Among other efforts, in the U.S., the Adjustable Interest Rate (LIBOR) Act of 2021 was the
first U.S. federal law addressing the cessation of LIBOR and is similar to New York legislation passed in 2021 that
implements fallback provisions that favor the transition to the Secured Overnight Financing Rate (SOFR)-plus a spread
adjustment for contracts without effective fallback provisions to provide for a smooth transition process to replace the
LIBOR reference rate in legacy contracts. The final Regulations Implementing the Adjustable Interest Rate (LIBOR) Act
were published in the Federal Register on January 26, 2023 and will become effective February 27, 2023.
The phase-out of LIBOR has caused, and can cause, the renegotiation or re-pricing of certain credit facilities, derivatives or
other financial transactions to which investment management industry participants, including Federated Hermes and its
products, customers or service providers, are parties, alter the accounting treatment of certain instruments or transactions,
or have other unintended consequences, which, among other effects, could require additional internal and external
resources, and 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 Alternate Reference Rates Committee and
ISDA). 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-linked securities or other
investments with maturities after the applicable LIBOR tenor cessation date, Federated Hermes has sought to proactively
25
address transition-related questions with 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 permanent cessation of LIBOR. Federated Hermes
will be continuing these efforts with respect to any remaining securities or other investments held by Federated Hermes’
products and strategies that continue to use a USD LIBOR tenor with a cessation date of June 30, 2023. For example,
Federated Hermes sent over 550 letters to issuers or lead arrangers setting forth its expectations regarding the transition
from LIBOR. 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 has an interest rate based on SOFR-plus a spread in its U.S.-registered
Federated Hermes Funds’ credit facility. While management believes that Federated Hermes’ LIBOR transition efforts are
substantially completed, Federated Hermes continues to monitor the impact that the transition from LIBOR will have on
Federated Hermes and Federated Hermes’ products and strategies, customers, and service providers.
EU,
UK and other global policymakers and regulators have also sought to establish a global corporate tax rate of 15
percent. It has been reported that legislation for a 15 percent minimum corporate tax is expected to be adopted in the UK
Spring 2023 and in many
Member States by no later than the end of 2024.
EU
in
With market conditions, including continuing market volatility and high inflation rates, regulators, and other government
bodies, including the BoE and the UK Government, have taken actions aimed at addressing market and economic concerns.
For example, on September 28, 2022, the BoE launched a market intervention plan aimed at restoring order to the UK’s
bond market by increasing its purchase of UK government bonds. These measures can be expected to remain in effect until
these regulators and governmental bodies determine that market conditions no longer warrant them.
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 continues to monitor and assess any lingering potential impact of the Pandemic generally, particularly on the
workforce, and the impact of the increasing interest rate environment on asset values and 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 internal and external 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
, 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.
AUM
Federated Hermes will continue to monitor 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. The difficulty in, and cost of, complying with applicable
Regulatory Developments increases with the number, complexity, and differing (and potentially conflicting) requirements
of new or amended laws, rules, regulations, directives, and other Regulatory Developments, among other factors.
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
26
As of December 31, 2022, given the regulatory environment, and the possibility of future additional Regulatory
Developments and oversight, Federated Hermes is unable to fully assess the impact of modified or new future 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
further material and adverse effects on Federated Hermes' Financial Condition.
Human Capital Resource Management
At December 31, 2022, Federated Hermes had 1,961 employees, with 1,181 employees in Pittsburgh, Pennsylvania, and
surrounding areas, 510 employees in London, England, 60 employees in New York, New York, 26 employees in Boston,
Massachusetts, 153 employees in other U.S. locations and 31 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 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 current 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 contributions, 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.
Generally, for employees directly managed from the U.S., Federated Hermes’ compensation programs are comprised of
competitive levels of cash compensation together with equity, a profit sharing/401(k) plan, and other corporate benefits/
components for certain positions. Compensation is structured in the form of: salary, which is competitively evaluated
annually; bonus; and, where appropriate, long-term incentives.
Generally, for employees directly managed from the UK, compensation is based on fixed and variable compensation. Fixed
compensation can include base salary, a retirement plan together with equity and other corporate benefits/components for
certain positions, 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.
Across Federated Hermes, the mix of overall salary, bonus, long-term incentives and other corporate benefits/components
for certain positions 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’s category, position and performance generally drive 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.
27
• 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 directly 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. 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. 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 and 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. Financial factors include, for example, Federated Hermes’ operating profits (as
), gross product sales, net
defined in Federated Hermes Stock Incentive Plan), assets under management (or
product sales, total revenue (including net revenues after taking into account the net pre-tax impact of voluntary yield-
related fee waivers), net income and net income per diluted share. Please refer to the Compensation Discussion and
Analysis section of Federated Hermes’ Information Statement for additional information regarding executive
compensation.
AUM
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 periods (e.g., for U.S. employees, over a ten-year period, and for non-U.S. employees, over a five-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, and for non-U.S. employees, generally the award’s sixth,
seventh and eighth anniversaries which extend beyond the five-year vesting period in an effort to continue to align the
employees’ and Federated Hermes’ interests during the restriction period). Additionally, for certain groups of 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.
For all employees directly managed from the
deferral. Under the deferred bonus scheme, a portion of the bonus is deferred, notionally tracks the performance of certain
Federated Hermes Funds and vests over three years. The Private Equity and Infrastructure businesses of Federated Hermes
also operate carried interest and share of performance fee programs typical in the management of such asset classes.
, discretionary bonus awards above a certain threshold are subject to
UK
For 2022, Federated Hermes’ total compensation expense was $512.7 million and included, among other items, 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, wellness
program focusing on employee mindfulness, health and well-being, disability, paid time off and retirement programs, the
company also offers flexible work arrangements which include hybrid work schedules, education assistance, paid parental
leave, adoption benefits, paid volunteer time, employee discounts and other programs and services. Effective January 1,
2023, Federated Hermes implemented additional paid time off in its vacation and paid parental leave programs.
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
28
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, 2022, across the company, approximately 40% of Federated Hermes’ employees are women.
Federated Hermes’ Board has approximately 17% women, and approximately 13% of Federated Hermes’ executives are
women. In the U.S., approximately 7% of Federated Hermes’ employees are minorities, 31% of business managers are
women and/or minorities, and 27% of investment professionals are women and/or minorities. As of December 31, 2022,
approximately 90% of AUM managed from the U.S. are in products that have at least one portfolio manager that is a
woman and/or a minority.
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 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,
onboarding of new employees, and employees’ ongoing education and training. In the U.S., the company implemented
several programs and initiatives to advance diversity and inclusion, which include (in addition to other previously
established programs and initiatives): launching a New Employee Buddy Program; expanding the list of diversity-focused
job advertisements, diverse colleges and affinity groups with whom we share our entry level job postings; expanding the
firm’s internship program with a local high school for underrepresented students; partnering with a Pittsburgh-based
college-prep school whose mission is to break the cycle of generational poverty to offer educational sessions and job
shadow opportunities; and expanding its partnership with a New York City based organization whose vision is to empower
students to overcome many of the structural barriers that typically limit upward social-economic mobility by providing
specialized training, paid internships or one-on-one mentorships. In London, a number of diversity and inclusion initiatives
have been launched, including (in addition to other previously established programs and initiatives): 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 resource 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.
29
Information about our Executive Officers
The following section sets forth certain information regarding the executive officers of Federated Hermes as of
February 24, 2023:
Name
J. Christopher Donahue President, Chief Executive Officer, Chairman and Director of Federated Hermes,
Position
Inc.
Age
73
Gordon J. Ceresino
Vice Chairman of Federated Hermes, Inc., Chairman, Director and President of Federated
International Securities
Corp. and Vice Chairman of Federated
MDTA, LLC
Thomas R. Donahue
Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc.
and President of FII Holdings, 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, Federated Hermes 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.
65
64
64
66
63
59
61
56
47
*
Federated Advisory Companies include the following: Federated Advisory Services Company, Federated Equity
Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment
Counseling, Federated Investment Management Company and Federated MDTA LLC, each wholly owned by
Federated Hermes.
Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer (CEO) 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 President of Federated
International Management Limited and Federated International Securities Corp. and Vice Chairman of Federated MDTA
LLC, each of which are wholly-owned subsidiaries of Federated Hermes. Mr. Ceresino also serves as a director, trustee,
President or CEO of certain other wholly-owned subsidiaries of Federated Hermes involved in Federated Hermes’ non-
U.S. operations.
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. He also serves as an Assistant Secretary of Federated Hermes and is a director and President of FII Holdings,
Inc., a wholly-owned subsidiary of Federated Hermes. He serves as a director of Federated Hermes Limited (FHL,
formerly 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, CEO, Chairman and director of
Federated Hermes.
Ms. Dolores D. Dudiak has served as Vice President of Federated Hermes since February 2021. She has served as 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, including Total Compensation Management, Employment Services/Employee
Relations, Organization Development, and Human Resources Information Management.
30
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 CEO of
Federated Advisory Companies since 2006 and serves as a board member for each of these wholly-owned subsidiaries of
Federated Hermes. 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
, a wholly-owned subsidiary of Federated Hermes.
Corp.
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 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 CEO of FHL, a wholly-owned subsidiary of Federated Hermes. He joined FHL in
2009 and was appointed
CEO in November 2011, having previously served as Chief Investment Officer from 2009 through
November 2011. He formerly served as Global Head of Equities at Fortis Investments USA
appointed as Head of Global Equities in 2005. He also serves as a director of FHL and as a director or officer of certain of
its subsidiaries.
, having initially been
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 served as Executive Vice President of Federated Securities Corp. from 2010 through June 2016.
Mr. Uhlman also held the position of National Sales Director, Institutional Sales, from 2007 through June 2016.
Mr. Stephen P. Van Meter has served as Vice President and Chief Compliance Officer of Federated 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. Between September 2003 and October 2007, Mr. Van Meter served as Senior Counsel in the
SEC’s
DOE.
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.
31
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/
EU
,
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
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
)-insured products, or certain exchange-
preferences for deposit products or other Federal Deposit Insurance Corporation (
traded 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.
due to Regulatory Developments, market changes, such as significant and
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
money market funds that seek to maintain a constant
falls outside of a 20-basis point collar. While stable or constant
of $1.00 per share, it is also possible to lose money by investing in these funds. Federated
Risk of Federated Hermes’ Money Market Products’ Ability to Maintain a Stable Net Asset Value. Approximately 40%
of Federated Hermes’ total revenue for 2022 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
NAV
move to a four-digit
market funds seek to maintain a
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 NAV non-U.S. money market fund. It is also possible to lose
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
fund
strategies. However, the
or, if the above described conditions are met, a low-volatility NAV money market fund, can fluctuate, and there is no guarantee
that a government/public debt or retail (i.e., stable or constant
NAV
fund, will be able to preserve a stable or constant
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
NAV
fund were to decline to less than $1.00 per share, such Federated Hermes money market fund would likely experience
significant redemptions, resulting in reductions in
could cause material adverse effects on Federated Hermes’ Financial Condition. If the fluctuating
of an institutional prime or municipal (or tax-exempt) money market fund, or variable
AUM, loss of shareholder confidence and reputational harm, all of which
in the future. Market conditions could lead to a limited supply of money
) money market fund, or a low-volatility money market
of a Federated Hermes stable or constant
and performance. If the
of an institutional prime
money market
, but will
money
NAVs
NAV
NAV
NAV
NAV
NAV
NAV
NAV
NAV
ESG
32
or municipal (or tax-exempt) money market fund, or variable NAV money market fund or low-volatility NAV money market
fund 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 AUM, loss of shareholder confidence and reputational harm, all
of which could cause material adverse effects on Federated Hermes’ Financial Condition. Similar material adverse effects could
result if certain SEC-proposed money market fund reforms, such as swing pricing or a four-digit NAV for certain money
market funds, are adopted as proposed.
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 ESG-related commitments and
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 FDIC-insured deposits, ESG versus non-ESG) and range of products and
strategies offered, fees charged, customer or shareholder preferences, political or other views surrounding ESG-related products
or ESG integration and investing, 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 additional ETFs and creating
additional philanthropic share classes), investment strategies, operational strategies, ESG strategies and human resource
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.
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 FDIC-insured deposit products or non-transparent, actively managed ETFs) 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. Certain customers or potential customers of Federated Hermes also could disfavor impact
oriented or other ESG products or services for political or other reasons. These factors 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.
A significant portion of Federated Hermes’ revenue is derived from providing products and strategies to the financial
intermediary market, comprising over 11,000 institutions and intermediaries worldwide. 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
ESG
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,
33
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
has experienced a decrease in the cost of distribution as a percentage of total fund revenue from 31% in 2021 to 30% in 2022.
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.
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 multi-asset and equity
products and strategies than on alternative/private market, fixed income, 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 AUM 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 AUM in a particular product, strategy or asset
class make it more difficult to trade efficiently in the market, can result in certain products, strategies, or asset classes being
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.
Impairment Risk. At December 31, 2022, Federated Hermes had intangible assets including goodwill totaling approximately
$1.2 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, increased projected expenses, higher discount rates or other changes
in interest rates, 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’ results
of operations and Financial Condition for the period.
Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements. A substantial majority of Federated
Hermes’ revenue is 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.
34
Federated Hermes’ investment advisory agreements for 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. The failure to obtain customer consents for an assignment,
actual or constructive, could adversely affect Federated Hermes’ ability to realize the value of these agreements. Regarding the
investment advisory agreements with non-U.S. registered or unregistered Federated Hermes Funds, shareholder notice or
consent can be required if, after an investment advisory agreement is entered into, there are changes to fees. 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. The terms of investment advisory agreements, including consent or Board, shareholder or other notice
or approval requirements for amending, renewing, or terminating them, can be negotiated and vary among types of Federated
Hermes Funds and Separate Accounts. The termination of, or failure to renew, or reduction in fees under, an investment
advisory agreement will reduce Federated Hermes’ revenue and the termination of, or failure to renew, or reduction in fees
under, an investment advisory agreement with a significant customer, or investment advisory agreements with a series of
customers, can negatively effect, potentially in a material way, Federated Hermes’ Financial Condition.
There are also unique requirements applicable when entering into or renewing investment advisory agreements with certain
management investment companies. Under the terms of a 2005 settlement agreement with the
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.
and New York State
SEC
Risks Related to Interest Rates and Investment Performance
Potential Adverse Effects of Rising Interest Rates. Increases in interest rates could 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) 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 the value of intangible or other assets held on
Federated Hermes’ financial records and contribute to financial impairment. 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.
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 was 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 were 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. In response to global economic activity and elevated inflation levels, the
federal funds target rate multiple times in 2022 and in February 2023. The range is currently 4.50% - 4.75% as of the
February 1, 2023
related Fee Waivers by the third quarter 2022. 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.
meeting. These rate increases eliminated the net negative pre-tax impact of the Voluntary Yield-
has raised the
FOMC
FOMC
35
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 is 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. Conversely, as an isolated variable, decreases in short-term
interest rates that result in lower or negative yields on securities purchased in money market funds generally would result in
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. Any increases in yields due to increases in interest rates and resulting decreases in
fee waivers, or any decreases in yields due to decreases in interest rates and resulting 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 to the level of government stimulus programs which
could result in the issuance of additional Treasury debt instruments, actions by the
SEC
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 implement, or, when applicable, continue, 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 can impact the amount of
Voluntary Yield-related Fee Waivers, if any. Given the variables involved, the actual amount and resulting negative impact of
future fee waivers, if any, could vary significantly from period to period.
, the U.S. Department of Treasury, the
and other governmental entities, changes in expenses of the money market funds, changes in the mix of money
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 inverse would also be true.
For the year ended December 31, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million. These fee waivers were
partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to
Federated Hermes was $18.8 million. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Business Developments - Low Short-Term Interest Rates, which indicates that these waivers have been
eliminated. The duration, level, and impact of a decline in interest rates and/or future Voluntary Yield-related Fee Waivers
could have a material adverse effect on Federated Hermes’ Financial Condition.
AUM
, resulting in additional revenues. Good performance can also result in performance fees or
Potential Adverse Effects of Poor Investment Performance. Success in the investment management business is largely
dependent on the investment performance of Federated Hermes Funds, Separate Accounts, or other portfolios relative to market
conditions and 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 can 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
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
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 others, 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
standards, carbon neutrality or climate change
ESG
36
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 materially adversely affect Federated Hermes’ Financial Condition.
Risk Related to Federated Hermes’ Corporate Structure
CEO
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
and Chairman of the Board, J. Christopher Donahue, his brother, Thomas
this trust are Federated Hermes’ President and
R. Donahue, Federated Hermes’ Vice President, Treasurer and Chief Financial Officer and a director, and Ann C. Donahue, the
wife of J. Christopher Donahue. Ann C. Donahue is a successor trustee to Rhodora J. Donahue, J. Christopher Donahue’s and
Thomas R. Donahue’s mother, who passed away in December 2022. Accordingly, Federated Hermes qualifies as a “controlled
NYSE
) Listed Company Manual. As a controlled company,
company” under Section 303A of the New York Stock Exchange (
Federated Hermes qualifies for and relies upon exemptions from several
NYSE
corporate governance requirements, including
requirements that: (1) a majority of the board of directors consists of independent directors; and (2) the entity maintains a
nominating/corporate governance committee that is composed entirely of independent directors with a written charter
addressing the committee’s purpose and responsibilities. As a result, Federated 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 its 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 (such as Russia’s invasion of Ukraine) 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 volatility, illiquidity, economic or market downturns, loss of value, market and supply-chain disruptions,
or other conditions and have potentially adverse effects. See also Item 1A – Risk Factors – General Risk Factors – Other
General Risks – Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic). For example,
37
Russia’s February 24, 2022, invasion of Ukraine and annexation of Ukrainian territory has generated substantial geopolitical
uncertainty in Europe that has disrupted the European and global energy and other markets. Russia’s aggression also has led to
sanctions being imposed against Russia, certain Russian nationals, and Belarus. Based on the Russian government’s aggression
in Ukraine, many countries around the world - including the U.S.,
UK, Canada, Germany, and France - reduced Russia’s access
to the world’s financial system through sanctions ranging from freezing assets to removing Russian banks from the
SWIFT
global transactions banking network, among others. Sanctions can result, among other effects, in the devaluation of Russian
currency, downgrades in the country’s credit rating, and/or a decline in the value and liquidity of Russian securities, property or
interests. These sanctions can also result in the freeze of Russian securities and/or funds invested in prohibited assets, impairing
the ability to buy, sell, receive, or deliver those securities and/or assets. These sanctions or the threat of additional sanctions
could also result in Russia taking counter measures or retaliatory actions, which could further impair the value and liquidity of
Russian securities. For example, the Russian invasion of Ukraine has increased, or created the possibility of increased,
cybersecurity attacks. Economic sanctions and other actions against Russian institutions, companies, and individuals resulting
from the ongoing conflict can also have a substantial negative impact on other economies and securities markets both regionally
and globally, as well as on companies with operations in the conflict region. Any further sanctions, actions or escalation of
cyber-attacks can exacerbate these risks. The impact of these geopolitical tensions and escalation, and resulting sanctions,
actions, and escalation of cyber-attacks, is uncertain and can vary, including in material ways.
In addition, Federated Hermes’ products and strategies, and their investments, can be adversely affected, potentially in a
EU or other markets, downgrades of U.S.,
,
material way, by changes in U.S.,
debt limit or other developments in the U.S., UK, 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.
UK
UK
NAV
At December 31, 2022, Federated Hermes’ liquid assets of $559.5 million included investments in certain money market and
fluctuating
Federated Hermes Funds that can have direct and/or indirect exposures to international sovereign debt and
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,
service providers, 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
income or certain other investment products and strategies and declines in the value of and returns on
cause material adverse effects on Federated Hermes’ Financial Condition (including, but not limited to, its reputation).
causing severe liquidity issues in its short-term, fixed-
AUM
AUM
, all of which could
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,
38
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, or 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
and Federated Hermes’ revenue. While not obligated, if Federated Hermes decides to provide credit support to a
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.
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 SEC, FINRA, FCA, CBI and NYSE. From time to time, applicable securities laws can be amended substantially.
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, marketed, distributed,
delivered, 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. Beginning in late 2021 and in 2022, there was an
uptick in proposed and final regulations issued by the
and other regulators, and the market turmoil in March 2020 as a
result of the Pandemic has continued to bring a renewed focus on additional money market fund reforms.
) and the National Futures Association (
CFTC
,
FINRA
NYSE
SEC
,
NFA
NFA
SEC
,
,
CBI
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 securities laws, proxy advisor regulations, antitrust or competition laws and other laws
and regulation. In addition to existing and potential future regulation, a
the
Brexit or other initiatives also can increase volatility in the
business, particularly as it expands in the
, or even the U.S., would be detrimental to Federated Hermes’ business. Regulatory reforms stemming from
EU
, particularly if enacted with broad application in
and could be detrimental to Federated Hermes’
for London-based
UK and
UK
and
FCA
. EU
FTT
UK
EU
or
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
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
to expand its use of
, sustainability, stewardship or other data inputs or investment techniques in providing its investment
ESG
39
ESG
ESG
ESG
disclosure requirements that can differ between jurisdictions, countries and
products, strategies, and services, and/or offering financial products and other investments, as well as when markets, customer
into its investment
requirements, support models and technology increase in complexity. Federated Hermes has integrated
processes and to varying degrees, certain Federated Hermes Funds and strategies. Related compliance expense is further
exacerbated by the increasing spectrum of
markets, as well as jurisdiction-specific legislation affecting the ability to utilize
to manage certain customer assets (such
as state government or pension fund assets). 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 other causes, 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. Regulators also can adopt new or
different interpretations of laws, rules, or regulations, either through formal rulemaking or informally through enforcement
proceedings, no-action letters, or exemptive orders or through providing comments to filings, that can negatively affect,
potentially in a material way, Federated Hermes’ products or strategies or its ability to manage, distribute, deliver or offer them.
Federated Hermes expends internal and external resources to respond to examinations and investigations, and defend
enforcement actions, and to resolve comments from regulators, 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;
AUM
(5) changes in fees charged, asset flows, levels and mix, and customer or shareholder relationships; and (6) reductions in
,
revenues and operating profits. For example, certain money market funds or other products or strategies can become less
attractive to institutional or other investors, which could result in changes in asset mix and reductions in
operating income. The renewed focus on additional money market fund regulation, including proposals to require swing pricing
and four-digit
for certain money market funds, increases this risk.
, revenues, and
NAVs
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 December 31, 2022
AUM
estimates that approximately $10 billion in
market funds to government money market funds.
could shift from institutional prime and municipal (or tax-exempt) money
, management
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’
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
businesses. These changes 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
, change asset flows, levels and mix, and otherwise affect the conduct of Federated Hermes’ or such customers’
40
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
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 certain redemptions 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,
calculate, 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., income, 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 entirely or in part (whether through settlement or
adjudication), 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 other liabilities resulting from any such matters, or from the operation of Federated Hermes’ business, products,
strategies, and services.
ESG
,
Risks Related to Auditor Independence. As with other public companies, there can be no assurance that a registered public
accounting firm (Accounting Firm) engaged by Federated Hermes or the Federated Hermes Funds to audit or review their
respective financial statements will remain eligible to serve as the independent Accounting Firm to Federated Hermes or any
Federated Hermes Fund under applicable securities laws. Similar to other fund sponsors that are public companies, certain
41
IESBA
Federated Hermes Funds also utilize the Accounting Firm engaged by Federated Hermes. If it were to be determined that the
independence requirements under applicable securities laws or International Ethics Standards Board for Accountants (IESBA)
rules, or any applicable similar rules in relevant jurisdictions outside the U.S., 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
rules. If it were to be determined that an Accounting
be considered compliant with the applicable securities laws and/or
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 and/or
rules, or any
applicable similar rules in relevant jurisdictions outside the U.S., with respect to such Federated Hermes Fund. 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 would be an affiliate (i.e., the ultimate
parent company) of the investment advisor to the relevant Federated Hermes Fund. In either case, such events could have a
material adverse effect on Federated Hermes' Financial Condition.
IESBA
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 when due diligence is conducted remotely); 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 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, models and business processes
are not completed correctly, in a controlled manner, in a timely manner or in a manner that achieves intended results. These
types of changes also give rise to other risks, such as the risk that an employee, service provider or third party, or group of
employees, service providers or third parties, could intentionally or unintentionally compromise the integrity or security of
confidential, proprietary or personal information of Federated Hermes, its employees or its customers or shareholders.
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
42
recovery, compliance, and other areas of its business, and continues to explore 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 expose 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 remote and hybrid work environments
increase 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 in any case accurately, on a timely basis or at all . 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
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, 2022, 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
s, or allow the transaction of business, or other disruptions to operations), and/or fail to comply with
NAV
43
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.
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 its nature, magnitude and severity, 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.
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
lingering Pandemic, remote and hybrid work arrangements, and other factors 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, 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 post-Pandemic work
environment, and related work environment changes, including remote and hybrid-working arrangements, can create retention
and other human capital resource management risks. State and federal laws, rules and regulations intended to limit or curtail the
enforceability of non-competition, employee non-solicitation, confidentiality and similar restrictive covenant clauses can make
it more difficult to retain qualified personnel. 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
44
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 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 key employees could cause higher redemption rates for certain
relationships. 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.
or the loss of customer or shareholder
AUM
No Assurance of Successful Acquisitions. Like other companies, Federated Hermes’ business strategy contemplates seeking
acquisition candidates and growing through acquisitions. For Federated Hermes, this generally involves 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, result in violations of applicable laws, rules or regulations, increased taxes or otherwise increase legal, tax or
compliance concerns, 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.
ESG
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, political or other views against
investing or integration, oppositions to trademark or other intellectual property
registration applications or allegations of trade name, trademark 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
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, business prospects). With increased
focus on sustainability, as well as ESG matters, any perceived deficiency in Federated Hermes’ policies and practices on, or
political or other public backlash against, 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).
strategies or initiatives,
ESG
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, or military escalation (such as
Russia’s invasion of Ukraine), terrorist attack or other business continuity event, unexpected market, economic or political
developments, or extreme weather, droughts, storms, climate, or other similar
Hermes’, its products’, accounts’, customers’, shareholders’ and portfolio 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,
changes could adversely impact Federated
ESG
45
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,
, revenue and
could adversely affect operations, damage Federated Hermes’ reputation, and cause Federated Hermes
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 the failure to keep business continuity plans up-to-date, or if such plans are improperly
implemented or deployed during a disruption, it could adversely impact Federated Hermes’ ability to operate, which can cause
its
, revenue and earnings to decline or impact Federated Hermes’ ability to comply with regulatory 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.
AUM
SEC
LIBOR
LIBOR
SONIA
SOFR
,
staff has indicated that the
can cause the renegotiation or re-pricing of certain credit facilities, derivatives, or other financial transactions to which
and transition
or another alternative interest rate, also could adversely impact Federated Hermes’, its products’, customers’,
Unpredictable consequences, or side effects, of certain known or planned events, such as the phase-out of
to
and shareholders’, and their respective service providers’ ability to conduct business. The
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
LIBOR
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. There can be obstacles to
converting certain longer-term securities and transactions to new benchmarks. As market participants transition away from
, its usefulness can deteriorate. The transition process can lead to increased volatility and illiquidity in markets that
LIBOR
’s potential deterioration can adversely affect the
continue to rely on
liquidity and/or market value of securities that use
-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).
as a benchmark interest rate, including remaining
to determine applicable interest rates.
LIBOR
LIBOR
LIBOR
LIBOR
The Pandemic. The coronavirus Pandemic had a significant impact around the world. It prompted governments and businesses
to take unprecedented measures in response. 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 continued, to varying degrees, in 2022 and continues, to varying degrees, in
2023.
The Pandemic created, and can still create, risks to Federated Hermes that cannot be foreseen and are uncertain. Such risks can
be long term and adversely effect, potentially in a material way, Federated Hermes’ Financial Condition. As the Pandemic
continues to evolve, it is not possible to predict the full extent to which it will adversely impact Federated Hermes’ Financial
Condition, which will depend on numerous developing factors that remain uncertain and subject to change. 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.
46
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
NYSE
under the symbol
FHI
.
The approximate number of beneficial shareholders of Class A and Class B common stock as of January 27, 2023, was 1 and
27,091, 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 2022.
October2
November2
December2
Total
Total Number
of Shares
Purchased
9,397
115,735
202,000
327,132
$
Average
Price Paid
Per Share
0.00
10.75
35.52
$ 25.74
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
0
35,000
200,000
235,000
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs1
4,957,415
4,922,415
4,722,415
4,722,415
1
2
In December 2021, the board of directors authorized a share repurchase program with no stated expiration date that allowed the
repurchase of up to 7.5 million shares of Class B common stock. This program was fulfilled in September 2022. In June 2022, the board
of directors authorized a share repurchase program with no stated expiration date that allows the repurchase of up to 5.0 million shares
of Class B common stock. No other program existed as of December 31, 2022. See Note (14) to the Consolidated Financial Statements
for additional information.
In October, November and December 2022, 9,397, 80,735 and 2,000 shares, respectively, of Class B common stock with a weighted-
average price of $0.00, $0.07 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.
47
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, 2022.
The graph assumes that the value of the investment in Class B common stock and each index was $100 on December 31, 2017.
Total return includes reinvestment of all dividends. As a member of the S&P MidCap 400 Index as of December 31, 2022,
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.
12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022
126.02
$
Federated Hermes
138.34
S&P MidCap 400 Index
$
119.34
S&P 1500 Asset Management & Custody Banks Index $
126.22
159.12
148.07
93.72
127.54
109.83
97.41
112.21
94.51
76.66
88.92
74.87
$
$
$
$
$
$
$
$
$
$
$
$
ITEM 6 – [RESERVED]
48
Comparison of Cumulative Five Year Total ReturnFederated HermesS&P MidCap 400 IndexS&P 1500 Asset Management & Custody Banks Index201720182019202020212022$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 a global leader in active, responsible investing with $668.9 billion in managed assets as of December 31,
2022. The majority of Federated Hermes’ revenue is derived from advising Federated Hermes Funds and Separate Accounts in
domestic and international public and private 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/serviced assets,
including market conditions and the ability to attract and retain assets. Generally, managed assets in Federated Hermes’ public
market investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement,
while managed assets in Federated Hermes private market investment products and strategies are subject to restrictions and
withdrawals. Fee rates for Federated Hermes’ services generally vary by asset and service type and can vary based on changes
in asset levels. Generally, advisory fees charged for services provided to multi-asset and equity products and strategies are
higher than advisory fees charged to alternative/private markets and fixed-income 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
AUM
across both asset and product types. Federated Hermes can 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’ public market 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.
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
and upon the profitability of those assets, which is impacted, in part, by Fee Waivers. Fees for mutual
attract and retain
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
, gross and net product sales, total revenue and net income, both in total and per diluted share.
AUM
AUM
49
Business Developments
Intangible Asset Impairment
A $31.5 million non-cash impairment of an intangible asset associated with the 2018 acquisition of
Intangible Asset Related expense on the Consolidated Statements of Income as of December 31, 2022. See Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and
Note (9) to the Consolidated Financial Statements for additional information.
was recorded in
FHL
Business Combination
Effective October 1, 2022, Federated Hermes completed the acquisition of substantially all of the assets of C.W. Henderson and
Associates, Inc. (
municipal securities (
Acquisition). See Note (2) to the Consolidated Financial Statements for additional information.
), a Chicago-based registered investment advisor specializing in the management of tax-exempt
CWH
CWH
Unsecured Senior Notes
On March 17, 2022, Federated Hermes entered into a Note Purchase Agreement (Note Purchase Agreement) by and among
Federated Hermes and the purchasers of certain unsecured senior notes in the aggregate amount of $350 million ($350 million
Notes), at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the
agreement. The entire principal amount of the $350 million Notes will become due March 17, 2032, subject to certain
prepayment requirements under limited conditions. See Note (11) to the Consolidated Financial Statements for additional
information.
Equity Acquisition
FHL
On March 14, 2022, Federated Hermes completed a tender offer resulting in the acquisition of the remaining approximately
10% noncontrolling interests in
certain members of
employees under a long-term incentive plan established in connection with the 2018 acquisition of
FHL
wholly-owned subsidiary of Federated Hermes. See Note (2) to the Consolidated Financial Statements for additional
information.
Noncontrolling Interests). As a result of the 2022 Acquisition of
from a trustee of a non-U.S. domiciled employee benefit trust established for the benefit of
(2022 Acquisition of
became an indirect,
’s management, a non-U.S. resident former
employee and other non-U.S. resident key
Noncontrolling Interests,
FHL
FHL
FHL
FHL
FHL
FHL
The Pandemic
Federated Hermes continues to actively monitor the ongoing Pandemic and resulting developments and their potential impact
on Federated Hermes’ employees and Financial Condition. The Pandemic adversely impacted the global economy, contributed
to significant volatility in financial markets and impacted the workforce and recruiting practices. Over the course of the
Pandemic, many jurisdictions instituted quarantines, imposed limitations on travel, and restricted access to offices and public
venues, some of which are ongoing or could reoccur, and many businesses implemented similar precautionary measures. Such
measures, as well as the general uncertainty surrounding the containment and impact of the Pandemic, created significant
disruption in economic activity. Throughout the Pandemic, there has not been a significant disruption of Federated Hermes’
business processes, allowing it to remain fully operational and to continue to provide services to its customers. As of
December 31, 2022, while Federated Hermes’ stock price has fluctuated amidst the volatility in stock prices on major
exchanges (particularly at the beginning of the Pandemic), 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 (as defined below) except to the extent that the net Voluntary Yield-related Fee Waivers resulting from the near-zero
interest rate environment that existed throughout 2021 and into the second quarter 2022 were attributable to the Pandemic. With
the increase in short-term interest rates beginning in March 2022, net Voluntary Yield-related Fee Waivers were greatly
diminished in the second quarter 2022 and ceased early in the third quarter 2022. See “Low Short-Term Interest Rates” below
for additional information on Voluntary Yield-related Fee Waivers. 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. The aggregate extent to
which the Pandemic, including existing and new variants, and its related impact on the global economy and financial markets,
affects Federated Hermes’ Financial Condition, will depend on future developments that are highly uncertain and cannot be
predicted, including any residual effects of the Pandemic, the emergence and spread of variants, any prevalence of severe,
unconstrained and/or escalating rates of infection in certain countries and regions, the availability, adoption and efficacy of
50
treatments and vaccines, and future actions taken by governmental authorities, central banks and other third parties in response
to such events.
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the Pandemic, the
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 was not sufficient to cover all of the fund’s
operating expenses. Beginning in the first quarter 2020, Federated Hermes had implemented Voluntary Yield-related Fee
Waivers. These waivers had 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. In response to global economic activity and elevated inflation levels, the
multiple times in 2022 and in February 2023. The range is currently 4.50% - 4.75% as of the February 1, 2023
meeting.
These rate increases eliminated the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers in the second half of
2022.
raised the federal funds target rate
decreased the federal funds
FOMC
FOMC
FOMC
For the year ended December 31, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million. These fee waivers were
partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to
Federated Hermes was $18.8 million. 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.
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: various federal securities
laws, such as the 1933 Act, 1934 Act, 1940 Act, and Advisers Act; state laws regarding securities fraud and registration;
regulations or other rules promulgated by various regulatory authorities, or other authorities. Various 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,
regulations and directives or consultations (collectively, both domestically and internationally, as applicable, Regulatory
Developments) continue to impact the investment management industry generally, and will continue to impact, to various
degrees, Federated Hermes’ Financial Condition. 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.
51
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
2022
2021
2022
vs. 2021
$
81,523
86,743
20,802
2,989
192,057
476,844
$ 668,901
$
96,716
97,550
22,920
3,780
220,966
447,907
$ 668,873
$
43,342
43,180
13,050
2,851
102,423
335,937
438,360
38,181
43,563
7,752
138
89,634
140,907
230,541
$ 668,901
$
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
(16)%
(11)
(9)
(21)
(13)
6
0 %
(24)%
(28)
(12)
(21)
(24)
7
(2)
(4)
16
(5)
(20)
5
4
4
0 %
52
Average Managed Assets
in millions for the years ended December 31,
By Asset Class
Equity
Fixed-Income
Alternative / Private Markets
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
Total Average Fund Assets
Separate Accounts:
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Separate Account Assets
Total Average Managed Assets
2022
2021
2020
2022
vs. 2021
2021
vs. 2020
$ 84,793
89,776
21,799
3,273
199,641
432,992
$ 632,633
$
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
$ 47,047
50,043
13,903
3,130
114,123
294,490
408,613
37,746
39,733
7,896
143
85,518
138,502
224,020
$ 632,633
$
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
205,672
$ 632,799
$
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
181,888
$ 613,908
(14)%
(2)
5
(16)
(7)
3
0 %
(19)%
(14)
5
(15)
(15)
0
(4)
(5)
19
5
(22)
6
11
9
0 %
22 %
23
14
2
21
(4)
3 %
28 %
24
16
2
24
(10)
(1)
13
22
10
(4)
16
11
13
3 %
53
Changes in Equity Fund and Separate Account Assets
in millions for the years ended December 31,
Equity Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
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
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
Ending Assets
2022
2021
$
$
$
$
$
$
57,036
12,796
(15,134)
(2,338)
(31)
0
(908)
(10,417)
43,342
39,680
11,189
(10,466)
723
(28)
(713)
(1,481)
38,181
96,716
23,985
(25,600)
(1,615)
(59)
0
(1,621)
(11,898)
81,523
$
$
$
$
$
$
54,312
14,265
(15,915)
(1,650)
(362)
408
(522)
4,850
57,036
37,476
7,564
(10,846)
(3,282)
403
(574)
5,657
39,680
91,788
21,829
(26,761)
(4,932)
41
408
(1,096)
10,507
96,716
1
2
3
Reflects the impact of translating non-
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.
for reporting purposes.
denominated
AUM
into
USD
USD
54
Changes in Fixed-Income Fund and Separate Account Assets
in millions for the years ended December 31,
Fixed-Income Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Fixed-Income Separate Accounts
Beginning Assets
3
Sales
Redemptions
3
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
Redemptions
3
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
2022
2021
$
$
$
$
$
$
59,862
18,403
(29,869)
(11,466)
(63)
0
(253)
(4,900)
43,180
37,688
9,613
(4,857)
4,756
(1)
3,524
(68)
(2,336)
43,563
97,550
28,016
(34,726)
(6,710)
(64)
3,524
(321)
(7,236)
86,743
$
$
$
$
$
$
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
1
2
3
Reflects the impact of translating non-
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.
for reporting purposes.
denominated
AUM
into
USD
USD
55
Changes in Alternative / Private Markets Fund and Separate Account Assets
in millions for the years ended December 31,
Alternative / Private Markets Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
Alternative / Private Markets Separate Accounts
Beginning Assets
3
Sales
Redemptions
3
Net Sales (Redemptions)3
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
Total Alternative / Private Markets
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
2022
2021
$
$
$
$
$
$
14,788
2,562
(3,150)
(588)
1
0
(1,463)
312
13,050
8,132
1,271
(565)
706
(854)
(232)
7,752
22,920
3,833
(3,715)
118
1
0
(2,317)
80
20,802
$
$
$
$
$
$
12,100
3,699
(2,657)
1,042
(2)
81
(162)
1,729
14,788
6,984
1,124
(513)
611
(92)
629
8,132
19,084
4,823
(3,170)
1,653
(2)
81
(254)
2,358
22,920
1
2
3
Reflects the impact of translating non-
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.
for reporting purposes.
denominated
AUM
into
USD
USD
56
Changes in Multi-Asset Fund and Separate Account Assets
in millions for the years ended December 31,
Multi-Asset Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
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
Ending Assets
2022
2021
3,608
241
(559)
(318)
8
0
(447)
2,851
172
2
(13)
(11)
0
0
(23)
138
3,780
243
(572)
(329)
8
0
0
(470)
2,989
$
$
$
$
$
$
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
$
$
$
$
$
$
1
2
3
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-
for reporting purposes.
denominated
AUM
into
USD
USD
57
Changes in Total Long-Term Assets
in millions for the years ended December 31,
Total Long-Term Fund Assets
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
Total Long-Term Separate Accounts Assets
Beginning Assets
3
Sales
3
Redemptions
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
Total Long-Term Assets
Beginning Assets
3
Sales
3
Redemptions
Net Sales (Redemptions)3
Net Exchanges
Acquisitions/(Dispositions)
1
Impact of Foreign Exchange
Market Gains and (Losses)2
Ending Assets
2022
2021
$ 135,294
34,002
(48,712)
(14,710)
(85)
0
(2,624)
(15,452)
$ 102,423
$
$
85,672
22,075
(15,901)
6,174
(29)
3,524
(1,635)
(4,072)
89,634
$ 220,966
56,077
(64,613)
(8,536)
(114)
3,524
(4,259)
(19,524)
$ 192,057
$ 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
1
2
3
Reflects the impact of translating non-
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.
for reporting purposes.
denominated
AUM
into
USD
USD
58
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
2020
2021
2022
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
69 %
13 %
14 %
3 %
1 %
0 %
47 %
7 %
8 %
2 %
1 %
0 %
22 %
6 %
6 %
1 %
0 %
0 %
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 %
Percent of Total Revenue
2022
40 %
36 %
14 %
7 %
2 %
1 %
37 %
28 %
12 %
4 %
2 %
0 %
3 %
8 %
2 %
3 %
0 %
1 %
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 %
Total managed assets represent the balance of
balance of
AUM
generally calculated daily based on
revenue earned and asset-based expenses incurred during the same period.
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 remained flat for 2022 as compared to 2021. Period-end managed assets remained flat at December 31,
2022 as compared to December 31, 2021, with an increase in money market assets, partially offset by decreases in equity and
fixed-income assets. Total average money market assets increased 3% for 2022 compared to 2021. Period-end money market
assets increased 6% at December 31, 2022 as compared to December 31, 2021. Average equity assets decreased 14% for 2022
as compared to 2021. Period-end equity assets decreased 16% at December 31, 2022 as compared to December 31, 2021
primarily due to market depreciation. Average fixed-income assets decreased 2% for 2022 as compared to 2021. Period-end
fixed-income assets decreased 11% at December 31, 2022 as compared to December 31, 2021 primarily due to market
depreciation and net redemptions, partially offset by assets acquired in connection with the
Acquisition. Average
alternative/private markets assets increased 5% for 2022 as compared to 2021. Period-end alternative/private markets assets
decreased 9% at December 31, 2022 as compared to December 31, 2021 primarily due to foreign exchange rate fluctuations.
CWH
FOMC
can soon end interest rate increases rallied risk assets in the fourth quarter
Moderating inflation and expectations that the
2022, easing the sting of a volatile year for most equity and fixed-income asset classes. In December, the
magnitude of its federal funds target rate increases to 50 basis points from 75 basis points the prior four meetings, though the
target range still rose 425 basis points to 4.25% - 4.50% in nine months in 2022, the most aggressive tightening cycle since the
early 1980s. Policymakers also signaled the pace of target rate increases would ease further and eventually end in 2023. Futures
markets went a step further and began pricing rate cuts as early as fall 2023. Recession risks rose toward the end of the fourth
quarter 2022 amid broadening economic deterioration. Various gauges of manufacturing and services activity contracted,
housing remained mired in a deep slump, business investment slowed, and both consumer spending and job growth decelerated.
pared the
FOMC
59
For all of 2022, the S&P 500 Index and the Nasdaq Composite posted total returns of -19.4% and -33.1%, respectively, their
worst years since 2008, while the Dow Jones Industrial Average returned -8.8%. Overseas, a warm winter, reopening China and
diminished impacts from Russia’s war on Ukraine brightened economic sentiment in 2022’s waning weeks, lifting the markets
in what still was a tough year, with the
and
respective -16.6% and -18.3% for all of 2022. Although money market and liquidity products benefited, rising rates created
challenges for fixed-income markets over the course of 2022, with the Bloomberg
the worst year in its history.
Aggregate Bond Index returning -13.0%,
All Country World ex
indexes returning a
World ex
MSCI
MSCI
USA
USA
US
For an explanation of the changes in managed assets at December 31, 2021 compared to December 31, 2020 and changes in
average managed assets for 2021 as compared to 2020, see Federated Hermes’ Annual Report on Form 10-K for the year ended
December 31, 2021, 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 2021 as compared to 2020, see Federated Hermes’ Annual Report on Form 10-K for the year
ended December 31, 2021, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations.
Revenue. Revenue increased $145.4 million in 2022 as compared to 2021 primarily due to a decrease of $335.0 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). This increase in revenue was partially offset by (1) a decrease in
equity revenue of $147.9 million due to lower average equity assets, (2) a decrease in fixed-income revenue of $28.6 million
due to a change in the mix of average assets and (3) a decrease in performance fees of $7.7 million.
Federated Hermes’ ratio of revenue to average managed assets for 2022 was 0.23% as compared to 0.20% for 2021. The
increase in the rate was primarily due to the increase in revenue from lower Voluntary Yield-related Fee Waivers, partially
offset by a decrease in revenue from lower average equity assets during 2022 as compared to 2021.
Operating Expenses. Total operating expenses for 2022 increased $174.8 million compared to 2021. Distribution expense
increased $153.7 million primarily related to a decrease of $210.6 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). This increase in Distribution expense was partially offset by (1) changes in the mix of average money market assets
($19.0 million), (2) lower average equity assets ($16.7 million) and (3) a decrease in competitive payments ($15.5 million).
Compensation and Related expense decreased $19.8 million primarily driven by the decrease in the average
exchange rate for 2022 as compared to 2021. Intangible Asset Related expense increased $30.2 million primarily due to the
intangible asset impairment. See Note (9) to the Consolidated Financial Statements for additional information on this
impairment.
USD
GBP
/
Nonoperating Income (Expenses). Nonoperating Income (Expenses), net, decreased $40.6 million in 2022 as compared to
2021. The decrease is primarily due to a $38.2 million decrease in Gain (Loss) on Securities, net due primarily to a decrease in
the market value of investments in 2022 as compared to an increase in the market value of investments in 2021 and a decrease
of $9.3 million from higher debt expense primarily due to the Note Purchase Agreement entered into in 2022. These decreases
were partially offset by an increase in yield on investments of $5.8 million due to rising interest rates.
Income Taxes. The income tax provision for 2022 and 2021 was $71.7 million and $104.0 million, respectively. The provision
for 2022 decreased $32.3 million as compared to 2021 primarily as a result of (1) lower income before income taxes ($18.2
million) and (2) a $14.5 million increase to deferred tax expense recorded in 2021 associated with the change in the
from 19% to 25% effective April 1, 2023. The effective tax rate was 23.4% for 2022 and 27.6% for 2021. See Note (15) to the
Consolidated Financial Statements for additional information on the effective tax rate, as well as other tax disclosures.
tax rate
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 2022 decreased $0.10 as compared to 2021 primarily due to decreased net income ($0.32),
partially offset by a decrease in shares outstanding due to share repurchases ($0.22).
. Net income decreased $30.8 million in 2022 as compared to 2021
Inc
60
Liquidity and Capital Resources
Liquid Assets. At December 31, 2022, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents,
investments and receivables, totaled $559.5 million as compared to $492.7 million at December 31, 2021. The change in liquid
assets is discussed below.
At December 31, 2022, Federated Hermes’ liquid assets included investments in certain money market and fluctuating-value
Federated Hermes Funds that can 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 $282
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 $323.9 million for 2022 as
compared to $170.4 million for 2021. The increase of $153.5 million was primarily due to (1) a net decrease of $159.2 million
in cash paid for trading securities for the year ended December 31, 2022 as compared to 2021, (2) an increase in cash received
related to the $145.4 million increase in revenue previously discussed, (3) a decrease of $7.8 million in cash paid for incentive
compensation for the year ended December 31, 2022 as compared to 2021 and (4) a decrease of $6.3 million in cash paid for
taxes for the year ended December 31, 2022 as compared to 2021. These increases in cash were partially offset by (1) an
increase in cash paid related to the $153.7 million increase in Distribution expense previously discussed and (2) an increase of
$6.1 million in cash paid for interest for the year ended December 31, 2022 as compared to 2021 primarily related to the $350
million Notes issued in March 2022.
Cash Used by Investing Activities. In 2022, net cash used by investing activities was $32.4 million which primarily
Acquisition (see Note (2) to the Consolidated
represented $28.1 million related to the initial closing payment for the
Financial Statements) and $22.6 million paid for purchases of Investments—Affiliates and Other, partially offset by $22.8
million in cash received from redemptions of Investments—Affiliates and Other.
CWH
Cash Used by Financing Activities. In 2022, net cash used by financing activities was $168.5 million. Of this amount,
Federated Hermes paid (1) $361.7 million in connection with its debt obligations, (2) $218.1 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) and (3) $97.9 million or $1.08 per share in dividends to holders of its common shares.
This activity was partially offset by (1) $488.3 million of new borrowings, including amounts borrowed under Federated
Hermes’ revolving credit facility and the proceeds from the $350 million Notes issued in March 2022 and (2) $55.2 million of
contributions from noncontrolling interests in subsidiaries.
Borrowings. On March 17, 2022, pursuant to a Note Purchase Agreement, Federated Hermes issued unsecured senior notes in
the aggregate amount of $350 million at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and
September in each year of the agreement. The entire principal amount of the $350 million Notes will become due March 17,
2032. Citigroup Global Markets
acted as lead placement agents in relation to the $350
million Notes and certain subsidiaries of Federated Hermes are guarantors of the obligations owed under the Note Purchase
Agreement. As of December 31, 2022, the outstanding balance of the $350 million Notes was $347.6 million, net of
unamortized issuance costs in the amount of $2.4 million, and was recorded in Long-Term Debt on the Consolidated Balance
Sheets. The proceeds were or will be used to supplement cash flow from operations, to fund share repurchases and potential
acquisitions, to pay down debt outstanding under the Credit Agreement and for other general corporate purposes. See Note (11)
to the Consolidated Financial Statements for additional information on the Note Purchase Agreement.
Capital Markets
. and
PNC
LLC
Inc
Bank, National Association as administrative agent,
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
arranger, Citigroup Global Markets,
Bank, New York Branch as documentation agent (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
LLC
., as joint lead arranger, Citibank, N.A. as syndication agent, and Toronto-Dominion
, as sole bookrunner and joint lead
Capital Markets
PNC
Inc
61
share repurchases. As of December 31, 2022, Federated Hermes has $350 million available to borrow under the Credit
Agreement. See Note (11) to the Consolidated Financial Statements for additional information.
Both the Note Purchase Agreement and the Credit Agreement include an interest coverage ratio covenant (consolidated
earnings before interest, taxes, depreciation and amortization (
covenant (consolidated debt to consolidated
in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended
December 31, 2022. An interest coverage ratio of at least 4 to 1 is required and, as of December 31, 2022, Federated Hermes’
interest coverage ratio was 42 to 1. A leverage ratio of no more than 3 to 1 is required and, as of December 31, 2022, Federated
Hermes’ leverage ratio was 0.79 to 1.
) to consolidated interest expense) and a leverage ratio
) as well as other customary terms and conditions. Federated Hermes was
EBITDA
EBITDA
Both the Note Purchase Agreement and the Credit Agreement have certain stated events of default and cross default provisions
which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable
grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency,
cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require
the repayment of amounts borrowed.
Dividends. Cash dividends of $97.9 million, $105.8 million and $207.8 million were paid in 2022, 2021 and 2020, 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. All dividends were considered ordinary dividends for tax purposes.
Contractual Obligations. As of December 31, 2022, 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. The entire principal amount of the $350 million Notes will become due no later than March 17,
2032. The interest rate is fixed at 3.29% per annum, payable semiannually. See Note (11) to the Consolidated Financial
Statements for additional information.
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, 2022, Federated Hermes had purchase obligations of approximately $37.8 million payable within 12 months and
an additional $26.0 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, paying debt obligations, repurchasing company stock, paying taxes, developing
and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and
equipment (including technology). Any number of factors can 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 could continue to increase.
On January 26, 2023, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 8, 2023, resulting in $24.1 million being paid on February 15, 2023.
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.
62
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. See Note (2) to the Consolidated
Financial Statements for additional information on the
Acquisition.
CWH
Investments—Consolidated Investment Companies at December 31, 2022 increased $2.9 million from December 31, 2021
primarily due to an increase of (1) $17.6 million related to the consolidation of a variable interest entity (
) and a voting
rights entity (
offset by a decrease of (1) $15.9 million related to the deconsolidation of
existing consolidated funds in 2022.
) and (2) $16.2 million in net purchases in existing consolidated funds in 2022. These increases were partially
s and (2) $15.0 million of net depreciation on
VRE
VRE
VIE
Investments—Affiliates and Other at December 31, 2022 decreased $11.3 million from December 31, 2021 primarily due to
(1) $14.2 million in net depreciation and (2) a decrease of $4.7 million related to the consolidation of a
reclassified Federated Hermes' investments into Investments—Consolidated Investment Companies. These decreases were
partially offset by an increase of $10.2 million related to the deconsolidation of a
Hermes’ investment into Investments—Affiliates and Other.
in 2022 which reclassified Federated
and a
VRE
VRE
VIE
which
Goodwill at December 31, 2022 increased $1.5 million from December 31, 2021 primarily as a result of the
($16.4 million), partially offset by a $14.8 million decrease related to foreign exchange rate fluctuations on goodwill
denominated in a foreign currency.
CWH
Acquisition
Intangible Assets, net at December 31, 2022 decreased $62.1 million from December 31, 2021 primarily due to (1) a $34.4
million decrease in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate
fluctuations, (2) a $31.5 million impairment charge and (3) $12.5 million of amortization expense. These decreases were
partially offset by a $16.2 million increase in intangibles primarily related to the
Acquisition.
CWH
Right-of-Use Assets, net at December 31, 2022 decreased $15.4 million from December 31, 2021 due primarily to annual
amortization and Long-Term Lease Liabilities at December 31, 2022 decreased $18.5 million from December 31, 2021
primarily due to payments made on leases during 2022.
Accrued Compensation and Benefits at December 31, 2022 decreased $12.4 million from December 31, 2021 primarily due to
the 2021 accrued annual incentive compensation being paid in the first quarter 2022 ($123.4 million), partially offset by 2022
incentive compensation accruals recorded at December 31, 2022 ($113.5 million).
Long-Term Deferred Tax Liability, net at December 31, 2022 decreased $24.8 million from December 31, 2021 primarily due
to a $7.9 million reduction in the foreign deferred tax liability associated with the impairment of an intangible asset, an increase
in foreign deferred tax assets of $6.4 million and a $6.0 million decrease related to foreign exchange rate fluctuations on
deferred tax assets and liabilities denominated in a foreign currency.
In July 2022, Federated Hermes’ board of directors authorized the retirement of 10 million treasury shares which restored these
shares to authorized but unissued status. Federated Hermes recorded a $313.8 million reduction to Treasury Stock, at cost using
the specific-identification method and a $42.7 million reduction to Class B common stock, at cost using the average cost
method. The difference was recorded as a reduction to Retained Earnings and Additional Paid-In Capital from Treasury Stock
Transactions. There was no impact to total equity as a result of this non-cash transaction.
63
Variable Interest Entities
Federated Hermes is involved with various entities in the normal course of business that could be deemed to be
Hermes determined that it was the primary beneficiary of certain Federated Hermes Fund
VIE
assets, liabilities and operations of these
Financial Statements for more information.
s in its Consolidated Financial Statements. See Note (5) to the Consolidated
s. Federated
s and, as a result, consolidated the
VIE
VIE
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 can differ from those estimates
made by management and those differences can 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
impairment. An impairment could have a material adverse effect on Federated Hermes’ Financial Condition.
FHL
right to manage public fund assets; (2)
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
intangible assets’ units of accounting are: (1)
rights 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 2022, management used both a quantitative and
qualitative approach. Management considers macroeconomic and entity-specific factors, including projected
revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a
royalty rate. In addition, management reconsiders on a quarterly basis whether events or circumstances indicate that a change in
the useful life has 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.
trade name; and (3) all other
, projected
AUM
FHL
FHL
FHL
right to manage public fund assets which totaled £150.3 million acquired in
The uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed
beginning in the first quarter 2020 for the
connection with the 2018
acquisition. Management used an income-based approach to valuation, the discounted cash flow
method, in valuing the asset. This method resulted in no impairment for the first three quarters of 2022 since the estimated fair
value of this intangible asset exceeded the carrying value. The discounted cash flow analysis prepared as of September 30, 2022
resulted in the estimated fair value exceeding the carrying value by less than 10%. As a result of continued increases in market
interest rates and a decrease in near-term projected cash flows, a discounted cash flow analysis was prepared as of
December 31, 2022 and resulted in a non-cash impairment charge of $31.5 million driven by changes in projected cash flows
and a higher discount rate as compared to the prior quarter. After the impairment, the
right to manage public fund assets
totaled £124.4 million ($150.4 million). The key assumptions in the discounted cash flow 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, 2022, 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 8%. An increase or decrease of 10% in pre-tax profit margins would result in a
FHL
64
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%. Any market volatility and other events
related to geopolitical, Pandemic-related or other unexpected events could further reduce the AUM, revenues and earnings
associated with this intangible asset and can result in subsequent impairment tests being based upon updated assumptions and
future cash flow projections, which can result in an impairment. For additional information on risks related to geopolitical,
Pandemic-related or other unexpected events, see Item 1A - Risk Factors - General Risk Factors - Other General Risks -
Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic).
The impairment charge was recorded in Operating Expenses - Intangible Asset Related expense on the Consolidated Statements
of Income. After the impairment charge, Federated Hermes had $343.2 million in indefinite-lived intangible assets recorded on
its Consolidated Balance Sheets as of December 31, 2022. No impairment charges were recorded during the years ended
December 31, 2021 or 2020.
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, 2022, Federated Hermes was exposed to
interest-rate risk as a result of investments in debt securities held by certain consolidated investment companies and strategies
($54.9 million) and holding investments in fixed-income Federated Hermes Funds ($35.0 million). At December 31, 2022,
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’ results of operations or financial
condition. At December 31, 2022, these investments and additional investments in money market accounts ($281.8 million)
exposed Federated Hermes to credit risk. At December 31, 2022, management considered a hypothetical 300-basis-point
fluctuation in credit spreads. Management determined that such a fluctuation could impact Federated Hermes’ results of
operations and financial condition by approximately $10 million.
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 $55.4 million investment in equity Federated Hermes Funds and
Separate Accounts at December 31, 2022. Federated Hermes’ investment in these products and strategies represents its
maximum exposure to loss. At December 31, 2022, management considered a hypothetical 20% fluctuation in fair value and
determined that such a fluctuation on these investments could impact Federated Hermes’ results of operations and financial
condition by approximately $11 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, 2022, Federated Hermes was exposed to foreign exchange risk as a result of its investments in Federated Hermes
Funds holding non-USD securities as well as non-USD operating cash accounts and receivables held by certain foreign
operating subsidiaries of Federated Hermes ($49.1 million). Of these investments, cash accounts and receivables held at
December 31, 2022, management considered a hypothetical 20% fluctuation in applicable foreign exchange rates and
determined that such a fluctuation could impact Federated Hermes’ results of operations and financial condition by
approximately $10 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 USD upon consolidation. During 2022, FHL entered into foreign currency forward
transactions in order to hedge against foreign exchange rate fluctuations in the USD (combined notional amount of £67.3
million as of December 31, 2022). FHL is exposed to foreign currency exchange risk as a result of a portion of its revenue
being earned in USD. Management considered a hypothetical 20% fluctuation in the currency exchange rate and determined
65
that such a fluctuation could impact Federated Hermes’ results of operations and financial condition by approximately $11
million.
In addition to market risks attributable to Federated Hermes’ investments, nearly all of Federated Hermes’ revenue is calculated
based on AUM. Accordingly, changes in the market value of managed assets have a direct impact on Federated Hermes’
revenue. Declines in the fair values of these assets as a result of changes in the market or other conditions will negatively
impact revenue and net income. Assuming the ratio of revenue from managed assets to average AUM for 2022 remained
unchanged, a 20% decline in the average AUM would result in a corresponding 20% decline in revenue. Certain expenses,
including distribution and compensation and related expenses, may not vary in proportion with changes in the market value of
managed assets. As such, the impact on net income from a decline in the market values of managed assets can 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.
66
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Federated Hermes, Inc.’s (including its consolidated subsidiaries, Federated Hermes) management is responsible for the
preparation, integrity and fair presentation of the consolidated financial statements in this annual report. These consolidated
financial statements and notes have been prepared in conformity with U.S. generally accepted accounting principles from
accounting records which management believes fairly and accurately reflect Federated 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,
2022, 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, 2022, Federated Hermes’ internal controls over financial
reporting were effective. Ernst & Young LLP, independent registered public accounting firm, has audited the consolidated
financial statements included in this annual report and has audited the effectiveness of the internal control over
financial reporting.
Federated Hermes, Inc.
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
February 24, 2023
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
67
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Federated Hermes, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Federated Hermes, Inc. (the Company) as of December 31,
2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, 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 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit 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.
68
Valuation of Indefinite-Lived Intangible Asset
Description of
the Matter
At December 31, 2022, the Company had $150.4 million of an indefinite-lived intangible asset related to the
right to manage public fund assets acquired in connection with the 2018 Federated Hermes Limited (FHL)
acquisition (FHL 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. The Company evaluated the FHL indefinite-lived intangible asset at
December 31, 2022 in light of increases in market interest rates and a decrease in management’s near term
projected cash flows and determined that the carrying value exceeded fair value, and recorded an impairment
loss of $31.5 million.
Auditing the Company’s impairment test of the FHL 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 included the discount rate and certain assumptions
that form the basis of the forecasted results, such as projected revenue growth rates and projected pre-tax profit
margins. These significant assumptions are forward-looking and could be materially affected by future
economic and market conditions.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company’s impairment testing process for indefinite-lived intangible assets, including controls over
management’s review of the significant assumptions described above.
Our audit procedures to test the estimated fair value of the Company’s FHL indefinite-lived intangible asset
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 FHL indefinite-lived intangible asset that would result from
reasonably expected changes in the significant assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1996.
Pittsburgh, Pennsylvania
February 24, 2023
69
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Federated Hermes, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Federated Hermes, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Federated Hermes, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, 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, 2022, and the related notes and our report dated February 24, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 24, 2023
70
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 $21, 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:
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, 99,505,456 and 109,505,456 Shares
Issued, respectively
Retained Earnings
Treasury Stock, at Cost, 10,229,521 and 16,094,488 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.)
71
2022
2021
$ 336,782
108,448
76,524
58,068
35,941
27,004
8,264
651,031
800,417
409,157
35,743
92,860
31,271
369,448
$ 2,020,479
1,
$
73,901
149,760
18,394
15,358
257,413
347,581
180,410
86,809
40,753
655,553
912,966
$ 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
61,821
63,202
189
189
440,953
1,015,589
448,929
1,187,001
(365,363)
(45,676)
1,045,692
$ 2,020,479
(538,464)
16,362
1,114,017
$ 2,018,187
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
Intangible Asset Related
Other
Total Operating Expenses
Operating Income
Nonoperating Income (Expenses)
Investment Income, net
Gain (Loss) on Securities, net
Debt Expense
Other, net
Total Nonoperating Income (Expenses), net
Income Before Income Taxes
Income Tax Provision
Net Income Including the Noncontrolling Interests in Subsidiaries
Less: Net Income (Loss) Attributable to the Noncontrolling Interests in
Subsidiaries
Net Income
Amounts Attributable to Federated Hermes, Inc.
Earnings Per Common Share—Basic
Earnings Per Common Share—Diluted
Cash Dividends Per Share
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
2022
2021
2020
$ 772,993
238,638
294,557
121,383
18,243
1,445,814
$ 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
512,713
314,554
77,783
57,747
43,361
20,931
12,456
44,066
25,407
1,109,018
336,796
8,973
(28,696)
(11,073)
222
(30,574)
306,222
71,658
234,564
532,492
160,884
75,429
60,331
44,573
21,600
5,337
13,823
19,706
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
13,817
15,361
1,030,117
418,151
4,119
18,067
(2,678)
8,398
27,906
446,057
110,035
336,022
(4,932)
$ 239,496
2,015
$ 270,293
9,658
$ 326,364
$
$
$
2.65
2.65
1.08
$
$
$
2.77
2.75
1.08
$
$
$
3.25
3.23
2.08
72
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31,
Net Income Including the Noncontrolling Interests in Subsidiaries
2022
$ 234,564
2021
$ 272,308
2020
$ 336,022
Other Comprehensive Income (Loss), net of tax
Permanent Equity
Foreign Currency Translation Gain (Loss)
Temporary Equity
(62,038)
1,191
15,420
Foreign Currency Translation Gain (Loss)
Other Comprehensive Income (Loss), net of tax
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries
(2,329)
(64,367)
170,197
(7,443)
(6,252)
266,056
6,593
22,013
358,035
Less: Comprehensive Income (Loss) Attributable to Redeemable
Noncontrolling Interest in Subsidiaries
Comprehensive Income Attributable to Federated Hermes, Inc.
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
(7,261)
$ 177,458
(5,428)
$ 271,484
16,251
$ 341,784
73
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Balance at January 1, 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
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 FHL
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Purchase of Treasury Stock
Balance at December 31, 2021
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 FHL
Retirement of Treasury Stock
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Purchase of Treasury Stock
Balance at December 31, 2022
(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
9,000
0
0
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
0
0
0
9,000
Shares
Class B
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
0
0
0
0
2,321,592
0
0
0
0
0
(6,456,625)
89,275,935
Treasury
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
0
0
0
0
(2,321,592)
0
0
0
(10,000,000)
0
6,456,625
10,229,521
74
Total
Permanent
Equity
$ 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
239,496
(62,038)
0
0
36,149
(97,842)
0
37,567
0
(14,221)
(207,436)
1,045,692
$
$
Redeemable
Noncontrolling
Interests in
Subsidiaries/
Temporary
Equity
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
(4,932)
(2,329)
55,171
(435)
707
0
(25,979)
(37,805)
0
14,221
0
61,821
$
$
$
$
Federated Hermes, Inc. Shareholders’ Equity
Additional
Paid-in Capital
from Treasury
Stock
Transactions
Common Stock
Retained
Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
$
$
$
$
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
0
0
0
0
34,724
0
0
0
(42,700)
0
0
441,142
$
$
$
$
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(46)
0
0
3,518
(3,472)
0
0
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
239,496
0
0
0
(31,181)
(97,842)
0
0
(267,664)
(14,221)
0
1,015,589
$
$
$
$
$
$
(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)
0
0
0
0
32,652
0
0
34,049
313,836
0
(207,436)
(365,363)
$
$
$
$
(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
0
(62,038)
0
0
0
0
0
0
0
0
0
(45,676)
75
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
Impairment of Intangible Asset
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 FHL
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.)
2022
2021
2020
$ 234,564
$ 272,308
$ 336,022
28,085
34,798
707
4,844
(18,718)
31,520
24,383
(20,170)
(20)
(4,367)
18,582
4,669
(14,929)
323,948
(22,644)
(28,111)
0
22,770
(4,372)
(32,357)
(97,915)
(218,141)
(25,979)
55,171
0
488,300
(361,650)
(8,299)
(168,513)
30,010
30,294
9,411
(6,964)
19,033
0
(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
0
(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)
(20,174)
(2,311)
5,842
102,904
238,051
340,955
3,773
400
$ 336,782
(70,584)
308,635
238,051
4,419
305
$ 233,327
59,124
249,511
308,635
6,455
361
$ 301,819
$ 85,579
$ 7,184
$ 91,925
$ 1,133
$ 98,730
$ 2,393
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2022, 2021 and 2020)
(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 could differ from those estimates, and such differences could 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 could 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.
77
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 could 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 could vary from period to period, most commonly as a result of changes in its percentage of ownership
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
78
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 can 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, 2022 and 2021.
(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. 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
79
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 can 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 2022, 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
80
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 Operating
Expenses - 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.
81
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 FHL, prior to the 2022 Acquisition of FHL Noncontrolling Interests (see Note (2) for additional information), the
noncontrolling interests primarily represented equity which was 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 were allocated to Federated Hermes and the noncontrolling interest holder based on
their relative ownership percentages. The noncontrolling interests carrying value was adjusted on a quarterly basis to the higher
of the carrying value or redemption value (fair value), as of the balance sheet date, through a corresponding adjustment to
retained earnings. Management previously used an independent valuation expert to assist in estimating the 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 redemption value was derived from equally weighting the result of each of the three
methodologies. The estimation of the redemption value included 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.
Conversely, if Federated Hermes issues treasury stock for less than its cost, first Additional Paid-in Capital from Treasury Stock
Transactions is reduced to zero with any further required reductions 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
82
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 FHL. The subsidiary granted 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 was 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 was adjusted for actual forfeitures as they occurred, with a corresponding adjustment to Redeemable
Noncontrolling Interests in Subsidiaries in the Consolidated Balance Sheets. On March 14, 2022, Federated Hermes completed
the 2022 Acquisition of FHL Noncontrolling Interests resulting in the acquisition of the remaining shares of FHL. See Note (2)
and Note (13) for additional information.
(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.
(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, except for circumstances where shares vest upon retirement and the employee has
reached retirement age. In addition to the amounts excluded from the basic earnings per share calculation, prior to the 2022
Acquisition of FHL Noncontrolling Interests (see Note (2) for additional information), net income available to unvested
shareholders of a nonpublic consolidated subsidiary was excluded from the computation of diluted earnings per share.
83
(w) Business Segments
Business or operating segments are defined as a component of an enterprise that engages in activities from which it could earn
revenue and incur expenses for which discrete financial information is available and is regularly evaluated by Federated
Hermes’ 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) Business Combination and Equity Acquisition
CWH Acquisition
Effective October 1, 2022, Federated Hermes completed the acquisition of substantially all of the assets of C.W. Henderson and
Associates, Inc. (CWH), a Chicago-based registered investment advisor specializing in the management of tax-exempt
municipal securities (CWH Acquisition). This acquisition will enhance Federated Hermes’ existing separately managed
accounts business. The CWH Acquisition included an upfront cash payment of $28.1 million. The purchase agreement also
provides for a series of contingent purchase price payments, which can total as much as $17.6 million in the aggregate and can
become payable annually over the next five years based on certain levels of net revenue growth.
Federated Hermes has performed a valuation of the fair value of the CWH Acquisition. Due to the timing of the acquisition and
status of the valuation work, the purchase price allocation for assets acquired (excluding the Right-of-Use Asset) and liabilities
assumed (excluding the Lease Liability) is preliminary. Provisional amounts will be finalized as new information is obtained
about facts and circumstances that existed as of October 1, 2022. Although preliminary results of the valuation are reflected in
the Consolidated Financial Statements as of December 31, 2022, the final purchase price allocation may reflect adjustments to
this preliminary valuation and such adjustments may be material. The following table summarizes the preliminary purchase
price allocation determined as of the purchase date:
$
$
0.8
15.4
16.4
0.8
3.7
28.1
(in millions)
Right-of-Use Asset
Intangible Assets1
Goodwill2
Less: Lease Liability Assumed
Less: Fair Value of Contingent Consideration
Total Upfront Purchase Price Consideration
1
Includes $14.8 million for customer relationships with an estimated useful life of 12 years and $0.6 million for a trade name with an
estimated useful life of five years, all of which are recorded in Intangibles Assets, net on the Consolidated Balance Sheets.
The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled
workforce of CWH and is deductible for tax purposes.
2
2022 Acquisition of FHL Noncontrolling Interests
On March 14, 2022, Federated Hermes completed the 2022 Acquisition of FHL Noncontrolling Interests resulting in the
acquisition of the remaining approximately 10% noncontrolling interests in FHL from a trustee of a non-U.S. domiciled
employee benefit trust established for the benefit of certain members of FHL’s management, a non-U.S. resident former FHL
employee and other non-U.S. resident key FHL employees under a long-term incentive plan established in connection with the
2018 acquisition of FHL. As a result of the 2022 Acquisition of FHL Noncontrolling Interests, FHL became an indirect,
wholly-owned subsidiary of Federated Hermes.
The 2022 Acquisition of FHL Noncontrolling Interests was transacted in shares whereby Federated Hermes issued awards of
restricted Class B common stock under Federated Hermes Stock Incentive Plan and Federated Hermes UK Sub-Plan, as
amended, and treasury Class B common stock, in exchange for the beneficial interests in shares of FHL. The FHL shares were
exchanged at fair value for Federated Hermes shares valued at £36.4 million or $47.5 million, which was based on a third-party
valuation of FHL. See Note (13) for additional information regarding the share exchange.
84
(3) Revenue from Contracts with Customers
The following table presents Federated Hermes’ revenue disaggregated by asset class:
(in thousands)
Money market
Equity
Fixed-income
Other1
2020
570,815
551,028
193,649
132,776
$ 1,448,268
Primarily includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), multi-asset
and stewardship services revenue.
2021
239,318
677,917
237,702
145,510
$ 1,300,447
2022
575,261
526,957
206,794
136,802
$ 1,445,814
Total Revenue
1
The following table presents Federated Hermes’ revenue disaggregated by performance obligation:
(in thousands)
Asset Management1
Administrative Services
Distribution2
Other3
2020
$ 1,011,467
318,152
92,922
25,727
$ 1,448,268
The performance obligation can 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.
2022
$ 1,011,631
294,557
112,356
27,270
$ 1,445,814
2021
$ 915,984
306,639
49,600
28,224
$ 1,300,447
Total Revenue
1
2
3
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.
2022
$ 1,188,933
238,638
18,243
$ 1,445,814
2021
$ 1,024,922
259,026
16,499
$ 1,300,447
2020
$ 1,191,851
241,631
14,786
$ 1,448,268
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, 2022. 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 applicable foreign exchange rates as of December 31, 2022, Federated
Hermes may recognize future fixed revenue from these services as presented in the following table:
(in thousands)
2023
2024
2025
2026 and Thereafter
Total Remaining Unsatisfied Performance Obligations
$
$
9,566
3,258
1,131
307
14,262
85
(4) Concentration Risk
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:
Money Market Assets
Equity Assets
Fixed-Income Assets
2022
40 %
36 %
14 %
2021
19 %
52 %
18 %
2020
40 %
38 %
13 %
The change in the relative proportion of Federated Hermes’ revenue attributable to equity and fixed-income assets in 2022, as
compared to 2021, was primarily the result of an increase in money market revenue due to a decrease in Voluntary Yield-
related Fee Waivers. See section below entitled Low Short-Term Interest Rates.
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 decreased money market revenue primarily due to an increase in
Voluntary Yield-related Fee Waivers and higher average equity and fixed-income assets in 2021.
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the Pandemic, the 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 was not sufficient to cover all of the fund’s
operating expenses. Beginning in the first quarter 2020, Federated Hermes had implemented Voluntary Yield-related Fee
Waivers. These waivers were 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. In response to global economic activity and elevated inflation levels, the FOMC raised the federal funds target rate
multiple times in 2022 and in February 2023. The range is currently 4.50% - 4.75% as of the February 1, 2023 FOMC meeting.
These rate increases eliminated the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers in the second half of
2022.
For the year ended December 31, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million. These fee waivers were
partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to
Federated Hermes was $18.8 million. 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.
(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 Government Obligations Fund
Federated Strategic Value Dividend strategy
Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II
2022
12 %
10 %
7 %
2021
5 %
9 %
11 %
2020
13 %
8 %
9 %
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 11%, 3% and 7% of Federated Hermes’ total revenue for 2022, 2021 and 2020, respectively, was derived from
services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary. The
increase in 2022 was primarily due to a decrease in Voluntary Yield-related Fee Waivers. Significant negative changes in
86
Federated Hermes’ relationship with this intermediary 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 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 could 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 could implement fee waivers, rebates or expense reimbursements for
various Federated Hermes Funds for competitive reasons (such as Voluntary Yield-related Fee Waivers or to maintain certain
fund expense ratios/yields), to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers).
For the years ended December 31, 2022, 2021 and 2020, Fee Waivers totaled $563.2 million, $917.9 million and $675.3
million, respectively, of which $440.7 million, $775.6 million and $537.8 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 could 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 money market
Federated Hermes Funds. In these instances, such capital contributions typically are intended to either offset realized losses or
other permanent impairments to a fund’s NAV, increase the market-based NAV per share of the fund’s portfolio that is being
reorganized to equal the market-based NAV per share of the acquiring fund or to bear a portion of expenses relating to a fund
liquidation. Under current money 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 contributions for the years ended December 31, 2022 or 2020 and no
material contributions for the year ended December 31, 2021.
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, 2022 and 2021.
(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.
87
(b) Consolidated Variable Interest Entities
As of December 31, 2022 and 2021, 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
Other Long-Term Assets
Less: Liabilities
Less: Accumulated Other Comprehensive Income (Loss), net of tax
Less: Redeemable Noncontrolling Interests in Subsidiaries
Federated Hermes’ Net Interest in VIEs
2022
8.0
50.1
0.7
13.4
5.7
1.2
49.5
15.8
$
$
2021
3.0
35.9
0.1
13.8
1.4
0.0
33.3
18.1
$
$
Federated Hermes’ net interest in the consolidated VIEs represents the value of Federated Hermes’ economic ownership interest
in those VIEs.
During the year ended December 31, 2022, there was one new consolidation of a VIE when Federated Hermes’ ownership
increased due to redemptions from third-party investors. There was no material impact to the Consolidated Statements of
Income as a result of this consolidation. There were no new deconsolidations of VIEs during the year ended December 31,
2022.
(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, 2022 and 2021, Federated Hermes’ maximum risk of loss related to investments in variable interests in non-
consolidated VIEs was $101.7 million and $170.6 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 $5.4 billion and $8.0 billion at December 31, 2022 and 2021, respectively. Of the Receivables
—Affiliates at December 31, 2022 and 2021, $0.7 million for each period related to non-consolidated VIEs and represented
Federated Hermes’ maximum risk of loss from non-consolidated VIE receivables.
(6) Investments
At December 31, 2022 and 2021, Federated Hermes held investments in non-consolidated fluctuating-value Federated Hermes
Funds of $67.0 million and $77.6 million, respectively, primarily in mutual funds which represent equity investments for
Federated Hermes, and held investments in Separate Accounts of $9.5 million and $10.2 million at December 31, 2022 and
2021, 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, 2022 and 2021, were primarily composed of domestic debt
securities ($4.6 million and $5.2 million, respectively) and stocks of large domestic and foreign companies ($3.4 million for
both periods).
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, 2022 and 2021, were primarily composed
of domestic and foreign debt securities ($57.8 million and $65.2 million, respectively), stocks of large domestic and foreign
companies ($45.3 million and $28.5 million, respectively) and stocks of small and mid-sized domestic and foreign companies
($3.3 million and $7.4 million, respectively).
88
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
2022
2021
2020
$
(7,896)
(7,333)
(15,229)
(16,487)
3,020
(13,467)
(28,696)
$
$
$
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
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 can 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 can 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.
89
(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)
2022
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Investments—Affiliates and Other
Other1
Total Financial Assets
Total Financial Liabilities2
2021
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Investments—Affiliates and Other
1
Other
Total Financial Assets
2
Total Financial Liabilities
Level 1
Level 2
Level 3
Total
$ 336,782
49,119
71,369
6,538
$ 463,808
$
27
$ 233,327
38,799
82,594
7,105
$ 361,825
$
0
$
$
$
$
$
$
0
59,329
5,130
469
64,928
4
0
66,743
5,165
0
71,908
1,644
$
$
$
$
$
$
0
0
25
0
25
$ 336,782
108,448
76,524
7,007
$ 528,761
8,439
$
8,470
0
0
46
0
46
$ 233,327
105,542
87,805
7,105
$ 433,779
11,652
$
13,296
1
2
Amounts primarily consist of restricted cash and security deposits.
Amounts primarily consist of acquisition-related future contingent consideration liabilities as of December 31, 2022 and acquisition-
related future contingent consideration liabilities and a derivative liability as of December 31, 2021.
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, 2022 or 2021.
Cash and Cash Equivalents
Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market
funds totaled $289.8 million and $183.4 million at December 31, 2022 and 2021, 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 values of certain securities held by consolidated Federated Hermes Funds,
which are determined by third-party pricing services and utilize observable market inputs of comparable investments, are
classified within Level 2 of the valuation hierarchy.
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 values of certain securities, which are determined by third-party pricing services and utilize
observable market inputs of comparable investments, are classified within Level 2 of the valuation hierarchy.
90
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 could 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, 2022, acquisition-related future consideration liabilities of $8.4 million
were primarily related to the CWH Acquisition and business combinations made in 2020 and were recorded in Other Current
Liabilities ($1.7 million) and Other Long-Term Liabilities ($6.7 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, 2021
Acquisitions
Changes in Fair Value
Contingent Consideration Payments
Balance at December 31, 2022
Investments using Practical Expedients
$
11,652
3,743
142
(7,098)
8,439
$
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, 2022 and December 31, 2021, these investments totaled $18.3 million and $17.5 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, 2022.
(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, net of
unamortized issuance costs in the amount of $2.4 million.
(8) Derivatives
FHL, a British Pound Sterling-denominated subsidiary of Federated Hermes, enters into foreign currency forward transactions
in order to hedge against foreign exchange rate fluctuations in the USD. None of these forwards have been designated as
hedging instruments for accounting purposes. As of December 31, 2022, FHL held foreign currency forwards with a combined
notional amount of £67.3 million and expiration dates ranging from March 2023 through September 2023. Federated Hermes
recorded $0.5 million in Other Current Assets on the Consolidated Balance Sheets, which represented the fair value of these
derivative instruments as of December 31, 2022.
As of December 31, 2021, FHL 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.
For the years ended December 31, 2022 and 2021 Federated Hermes recorded a $15.4 million realized loss and $4.5 million
realized gain, respectively, to Operating Expenses - Other on the Consolidated Statements of Income for foreign currency
forward transactions.
91
(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 ($295.6 million and $347.8 million at December 31, 2022 and 2021, respectively) and trade names ($47.6
million and $53.1 million at December 31, 2022 and 2021, respectively). The decrease in indefinite-lived intangible assets at
December 31, 2022 as compared to December 31, 2021 is primarily due to a $31.5 million non-cash impairment of an
intangible asset and a $27.2 million decrease in the value of intangible assets denominated in a foreign currency as a result of
foreign exchange rate fluctuations.
The uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed
beginning in the first quarter 2020 for the FHL right to manage public fund assets acquired in connection with the 2018 FHL
acquisition. Management used an income-based approach to valuation, the discounted cash flow method, in valuing the asset.
As a result of continued increases in market interest rates and a decrease in near-term projected cash flows, a discounted cash
flow analysis was prepared as of December 31, 2022 and resulted in a non-cash impairment charge of $31.5 million driven by
changes in projected cash flows and a higher discount rate as compared to the prior quarter. The non-cash impairment was
recorded in Operating Expenses - Intangible Asset Related on the Consolidated Statements of Income. After impairment, as of
December 31, 2022, the FHL right to manage public fund assets totaled $150.4 million.
(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
2022
$ 113,571
(47,650)
65,921
$
2021
$ 109,904
(39,618)
70,286
$
The decrease in finite-lived intangible assets at December 31, 2022 as compared to December 31, 2021 primarily relates to
amortization expense ($12.5 million) and foreign exchange translation ($7.2 million) which was partially offset by intangible
assets recorded in connection with the CWH Acquisition ($15.4 million).
Amortization expense for finite-lived intangible assets was $12.5 million, $13.8 million and $13.8 million in 2022, 2021 and
2020, respectively, and was recorded in Operating Expenses - Other 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)
2023
2024
2025
2026
2027
13,246
12,399
12,327
8,745
5,557
$
(c) Goodwill
Goodwill at December 31, 2022 increased $1.5 million from December 31, 2021 primarily as a result of the CWH Acquisition,
partially offset by a $14.8 million decrease related to foreign exchange rate fluctuations on goodwill denominated in a foreign
currency.
92
(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
to 7 years
$
Up to term of lease
14 years
to 15 years
4
$
2022
89,367
40,243
17,851
7,922
155,383
(119,640)
35,743
2021
94,230
41,826
17,851
6,682
160,589
(113,624)
46,965
$
$
Depreciation expense was $15.1 million, $15.4 million and $16.0 million for the years ended December 31, 2022, 2021 and
2020, respectively, and was recorded in Operating Expenses - Office and Occupancy on the Consolidated Statements of
Income.
(11) Debt
Unsecured Senior Notes
On March 17, 2022, Federated Hermes entered into a Note Purchase Agreement (Note Purchase Agreement) by and among
Federated Hermes and the purchasers of certain unsecured senior notes in the aggregate amount of $350 million ($350 million
Notes), at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the
agreement. Citigroup Global Markets Inc. and PNC Capital Markets LLC acted as lead placement agents in relation to the
Notes and certain subsidiaries of Federated Hermes are guarantors of the obligations owed under the Note Purchase Agreement.
As of December 31, 2022, $347.6 million, net of unamortized issuance costs in the amount of $2.4 million, was recorded in
Long-Term Debt on the Consolidated Balance Sheets.
The entire principal amount of the $350 million Notes will become due March 17, 2032, subject to certain prepayment
requirements under limited conditions. Federated Hermes can elect to prepay the $350 million Notes under certain limited
circumstances including with a make-whole amount if mandatorily prepaid without the consent of the holders of the $350
million Notes. The Note Purchase Agreement does not feature a facility for the further issuance of additional notes or
borrowing of any other amounts and there is no commitment fee payable in connection with the $350 million Notes.
The Note Purchase Agreement includes an interest coverage ratio covenant and a leverage ratio covenant as well as other
customary terms and conditions. Federated Hermes was in compliance with all of its covenants at and during the period ended
December 31, 2022. 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 Note Purchase Agreement includes certain stated events of default and cross default provisions which would permit the
lenders/counterparties to accelerate the repayment of the $350 million Notes if not cured within the applicable grace periods.
The events of default generally include breaches of contract, failure to make required payments, insolvency, certain material
misrepresentations and other proceedings, whether voluntary or involuntary, that would require the repayment of the $350
million Notes prior to their stated date of maturity. Any such accelerated amounts would accrue interest at a default rate and
could include an additional make-whole amount upon repayment. The $350 million Notes rank without preference or priority,
with other unsecured and senior indebtedness of Federated Hermes.
Revolving Credit Facility
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 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
93
London Interbank Offering Rate (LIBOR) based on the tenor selection 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, 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, can elect to make discretionary principal
payments. During 2022, Federated Hermes borrowed $138.3 million and repaid $361.7 million from the revolving credit
facility under the Credit Agreement.
As of December 31, 2022, there were no outstanding borrowings under the revolving credit facility. As of December 31, 2021,
the amount outstanding under the revolving credit facility was $223.4 million and was recorded as Long-Term Debt on the
Consolidated Balance Sheets. The interest rate was 1.161% as of December 31, 2021, 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, 2022, Federated Hermes has $350 million available for borrowings under the revolving credit
facility and an additional $200 million available via its optional accordion feature.
The Credit Agreement includes representations and warranties, affirmative and negative financial covenants, including an
interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants.
Federated Hermes was in compliance with all covenants at and during the year ended December 31, 2022. 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 Operating
Expenses - Compensation and Related amounted to $13.9 million, $14.4 million and $13.4 million for 2022, 2021 and 2020,
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 36.1 million shares of Class B
common stock have been authorized for granting share-based awards in the form of restricted stock, stock options or other
share-based awards. As of December 31, 2022, 4.6 million shares are available under the Plan.
Share-based compensation expense was $34.8 million, $30.3 million and $26.7 million for the years ended December 31, 2022,
2021 and 2020, respectively. The associated tax benefits recorded in connection with share-based compensation expense were
$8.2 million, $7.1 million and $6.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. At
December 31, 2022, the maximum remaining unrecognized compensation expense related to share-based awards approximated
$95.2 million which is expected to be recognized over a weighted-average period of approximately six 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
94
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. For an award with a five-year vesting period, the restrictions on the
vested portion of the award typically lapse on the award’s six-, seventh- and eighth-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, 2022:
Non-vested at January 1, 2022
Granted1
Vested
Forfeited
Non-vested at December 31, 2022
Restricted
Shares
3,940,510
2,314,542
(1,604,254)
(114,040)
4,536,758
$
Weighted-
Average Grant-
Date Fair Value
27.24
32.89
28.56
31.23
29.54
$
1 During 2022, Federated Hermes awarded 1,345,999 shares of restricted Class B common stock under the UK Sub-Plan that generally
vest over a five-year period. Federated Hermes awarded 494,043 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 date and issued out of treasury, generally vests over a three-year period. In
addition, Federated Hermes awarded 474,500 shares of restricted Class B common stock under this same Plan that generally vest over a
ten-year period.
Federated Hermes awarded 2,314,542 shares of restricted Class B common stock with a weighted-average grant-date fair value
of $32.89 to employees during 2022; 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; and 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.
The total fair value of restricted stock vested during 2022, 2021 and 2020 was $52.0 million, $35.0 million and $24.2 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 FHL. These awards, which were subject to continued-service vesting requirements, vested over a period of three
to five years. The award holders had a right to exercise a put option to sell shares to Federated Hermes at fair value and
Federated Hermes had a right to exercise a call option to acquire shares at fair value. Federated Hermes recognized
compensation expense for this plan of $0.7 million, $9.4 million and $8.8 million in Operating Expenses - Compensation and
Related on the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020, respectively.
On March 14, 2022, Federated Hermes completed the 2022 Acquisition of FHL Noncontrolling Interests resulting in the
acquisition of the remaining shares of FHL. Federated Hermes granted 1,183,066 shares of restricted Federated Hermes Class B
common stock pursuant to award agreements to certain FHL employees in exchange for their beneficial interests in awards of
restricted FHL shares held on March 14, 2022. These shares of Federated Hermes Class B common stock were reserved for
issuance under the Plan. Federated Hermes also issued a combined 318,807 shares of treasury Federated Hermes Class B
common stock to the trustee of a non-U.S. domiciled employee benefit trust, and a non-U.S. resident former FHL employee, in
exchange for beneficial interests in the FHL shares held by them on March 14, 2022. The Federated Hermes shares now held by
the employee benefit trust are to be used for future restricted stock awards for FHL management and key employees. As of
December 31, 2022, 155,874 shares remain available in the employee benefit trust.
(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.
95
(a) Dividends
Cash dividends of $97.9 million, $105.8 million and $207.8 million were paid in 2022, 2021 and 2020, 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.
All dividends were considered ordinary dividends for tax purposes.
(b) Treasury Stock
In December 2021, the board of directors authorized a share repurchase program with no stated expiration date that allowed the
repurchase of up to 7.5 million shares of Class B common stock. This program was fulfilled in September 2022. In June 2022,
the board of directors authorized a share repurchase program with no stated expiration date that allows the repurchase of up to
5.0 million shares of Class B common stock. No other program existed as of December 31, 2022. 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, 2022, Federated Hermes
repurchased 6.5 million shares of its Class B common stock for $207.4 million ($1.8 million of which was accrued in Other
Current Liabilities as of December 31, 2022), nearly all of which were repurchased in the open market. At December 31, 2022,
4.7 million shares remained available to be repurchased under this share repurchase program.
In July 2022, Federated Hermes’ board of directors authorized the retirement of 10.0 million treasury shares which restored
these shares to authorized but unissued status. Federated Hermes recorded a $313.8 million reduction to Treasury Stock, at cost
using the specific-identification method and a $42.7 million reduction to Class B common stock, at cost using the average cost
method. The difference was recorded as a reduction to Retained Earnings and Additional Paid-In Capital from Treasury Stock
Transactions. There was no impact to total equity as a result of this non-cash transaction.
(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
2022
2021
2020
$
$
77,954
11,842
580
90,376
$
73,351
8,628
2,970
84,949
(1,589)
(256)
(16,873)
(18,718)
71,658
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
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
2022
21.0 %
2.9
(1.8)
1.2
0.1
23.4 %
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 %
96
The effective tax rate for 2022 decreased to 23.4% as compared to the effective tax rate for 2021 of 27.6% primarily due to an
increase in foreign deferred tax expense in 2021 in connection with the revaluation of net foreign deferred tax liabilities
resulting from 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 and 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
2022
2021
$
$
69,634
25,630
18,267
5,619
119,150
(52,432)
66,718
$
$
71,492
30,289
21,457
1,125
124,363
(59,250)
65,113
$ 217,963
23,201
5,790
174
$ 247,128
$ 180,410
$ 232,702
27,983
3,783
5,851
$ 270,319
$ 205,206
Long-Term Deferred Tax Liability, net at December 31, 2022 decreased $24.8 million from December 31, 2021 primarily due
to a $7.9 million reduction in the foreign deferred tax liability associated with the impairment of an intangible asset, an increase
in foreign deferred tax assets of $6.4 million and a $6.0 million decrease related to foreign exchange rate fluctuations on
deferred tax assets and liabilities denominated in a foreign currency.
At December 31, 2022, Federated Hermes had deferred tax assets related to state and foreign tax net operating loss
carryforwards in certain taxing jurisdictions in the aggregate of $69.6 million. The state net operating losses will expire through
2042, while most foreign net operating losses do not expire. A valuation allowance has been recognized for $43.7 million
(or 99.6%) of the deferred tax asset for state tax net operating losses, and for $8.7 million (or 33.9%) 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, 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.
Federated Hermes’ remaining deferred tax assets as of December 31, 2022 and 2021 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.
97
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, 2022 or 2021. Therefore, there were no material changes during 2022, 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 2019 to 2022 remain open to examination, while filings in its major state tax jurisdictions
from tax years 2018 to 2022 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 Weighted-Average Federated Hermes Common Stock2
Dilutive Impact from Non-forfeitable Restricted Stock
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
2022
2021
2020
$ 239,496
$ 270,293
$ 326,364
(11,828)
$ 227,668
(10,858)
$ 259,435
(12,515)
$ 313,849
0
$ 227,668
(1,580)
$ 257,855
(2,439)
$ 311,410
85,762
4
85,766
93,754
17
93,771
96,503
0
96,503
$
$
2.65
2.65
$
$
2.77
2.75
$
$
3.25
3.23
2
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, except for circumstances where shares vest upon retirement and the employee has
reached retirement age.
(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 2032. 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, 2022, 2021, and 2020, Federated Hermes recorded $19.0 million, $19.0 million and
$13.0 million, respectively, in operating lease costs to Operating Expenses - Office and Occupancy on the Consolidated
Statements of Income.
98
The following table reconciles future minimum undiscounted payments of the operating lease liabilities recorded on the
Consolidated Balance Sheets as of December 31, 2022:
(in millions)
2023
2024
2025
2026
2027
2028 and Thereafter
Total Undiscounted Lease Payments
Present Value Adjustment1
Net Operating Lease Liabilities
1 Calculated using the IBR for each lease.
$
$
$
21.4
19.5
14.8
13.2
12.9
35.3
117.1
(11.9)
105.2
The following information relates to the operating leases recorded on the Consolidated Balance Sheets as of December 31,
2022:
Weighted-average remaining lease term (in years)
Weighted-average discount rate (IBR)
Cash paid in 2022 for the amounts included in the measurement of lease liabilities (in millions)
6.9
3.1 %
$ 20.1
(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, 2019
Other Comprehensive Income (Loss)
Balance at December 31, 2020
Other Comprehensive Income (Loss)
Balance at December 31, 2021
Other Comprehensive Income (Loss)
Balance at December 31, 2022
$
(249)
15,420
$
15,171
1,191
$
16,362
(62,038)
$
(45,676)
99
(19) Redeemable Noncontrolling Interests in Subsidiaries
The following table presents the changes in Redeemable Noncontrolling Interests in Subsidiaries:
(in thousands)
Balance at January 1, 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
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
in FHL
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 FHL
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
in FHL
Balance at December 31, 2021
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 FHL
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
in FHL
Balance at December 31, 2022
$
Consolidated
Investment
Companies
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
(6,320)
0
53,040
(435)
0
(20,627)
0
FHL and
other entities
$ 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
1,388
(2,329)
2,131
0
707
(5,352)
(37,805)
Total
$ 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
(4,932)
(2,329)
55,171
(435)
707
(25,979)
(37,805)
0
50,317
$
14,221
11,504
14,221
61,821
$
$
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 non-cash transaction and was therefore excluded
from the Consolidated Statements of Cash Flows.
During 2022, 2021 and 2020, the FHL Redeemable Noncontrolling Interests in Subsidiaries carrying value was adjusted by
$14.2 million, $19.3 million and $1.5 million, respectively, to the current redemption value, assuming the FHL noncontrolling
interests was redeemable at the balance sheet date. The noncontrolling interests were adjusted through a corresponding
adjustment to retained earnings.
100
(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) 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 can 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, 2022, management does not believe that a
material loss related to any of these matters is reasonably possible.
(c) Legal Proceedings
Like other companies, Federated Hermes has claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2022, Federated Hermes does not believe that a material loss related to any of 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
2022
$ 1,159,373
286,441
$ 1,445,814
2021
$ 953,620
346,827
$ 1,300,447
2020
$ 1,168,018
280,250
$ 1,448,268
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.
(22) Subsequent Events
$
2022
87,637
40,966
$ 128,603
2021
$ 105,558
49,713
$ 155,271
On January 26, 2023, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 8, 2023, resulting in $24.1 million being paid on February 15, 2023.
101
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 CEO 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, 2022. Based upon that
evaluation, the President and CEO and the Chief Financial Officer concluded that Federated Hermes’ disclosure controls and
procedures were effective at December 31, 2022.
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, 2022 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 2023 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.
102
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this Item is contained in Federated Hermes’ Information Statement for the 2023 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, 2022. 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 2023 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 2023 Annual Meeting
of Shareholders under the captions Related Person Transactions, 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 2023 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))
103
2.09
2.10
3.04
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
10.69
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 3.1 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))
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))
104
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
10.116
10.117
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))
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))
10.118
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))
105
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
10.134
10.135
10.136
10.137
10.138
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))
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
(incorporated by reference to Exhibit 10.135 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2021 (File No. 001-14818))
Form of Restricted Stock Award Agreement (Pool A and Pool B) for UK Sub-Plan (incorporated by reference to
Exhibit 10.136 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (File No.
001-14818))
Form of Restricted Stock Award Agreement (Pool A) for UK Sub-Plan (incorporated by reference to Exhibit
10.137 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (File No. 001-14818))
Form of Restricted Stock Award Agreement (Pool A) for Singapore (incorporated by reference to Exhibit 10.138
to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (File No. 001-14818))
106
10.139
10.140
10.141
10.142
14.03
21.01
23.01
31.01
31.02
32.01
Form of Restricted Stock Award Agreement (Retiring Employee) for UK Sub-Plan (incorporated by reference to
Exhibit 10.139 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (File No.
001-14818))
Federated Hermes, Inc. $350,000,000 3.29% Senior Notes due March 17, 2032 Note Purchase Agreement dated
March 17, 2022 (incorporated by reference to Exhibit 10.1 to the March 31, 2022 Quarterly Report on Form 10-Q
(File No. 001-14818))
Asset Purchase Agreement among Federated Hermes, Inc., C.W. Henderson & Associates, Inc. and the owners
dated as of July 15, 2022 (incorporated by reference to Exhibit 10.1 to the June 30, 2022 Quarterly Report on
Form 10-Q (File No. 001-14818))
First Amendment, dated September 30, 2022, to the Asset Purchase Agreement dated as of July 15, 2022, by and
among Federated Hermes, Inc., C.W. Henderson & Associates, Inc. and the owners (filed herewith)
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))
Subsidiaries of the Registrant (filed herewith)
Consent of Independent Registered Public Accounting Firm (filed herewith)
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith)
The following XBRL documents are filed herewith:
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
its XBRL tags are embedded within the Inline XBRL document.
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
107
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 24, 2023
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 24, 2023
February 24, 2023
/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 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
Director
Director
Director
Director
108
EXHIBIT INDEX
Exhibit
Number
10.142
21.01
23.01
31.01
31.02
32.01
First Amendment, dated September 30, 2022, to the Asset Purchase Agreement dated as of July 15, 2022, by
and among Federated Hermes, Inc., C.W. Henderson & Associates, Inc. and the owners
Description
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
109
Corporate information
Corporate offi 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 27, 2023. 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.
Chicago, Ill.
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 on its
website, free of charge, its annual report on
Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, annual information
statements and amendments to those reports,
including those fi led or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as soon as reasonably practicable
after such information is electronically fi led with or
furnished to the SEC.
Shareholders of record with questions concerning
account information, certifi cates, transferring
securities, dividend payments, requesting direct
deposit information or processing a change of
address should contact:
Computershare
P.O. Box 43006
Providence, RI 02940-3078
Or by courier delivery:
Computershare
150 Royall St., Suite 101
Canton, MA 02021
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 fi rm
Ernst & Young LLP, Pittsburgh, Pa.
Federated Herm es, Inc.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Contact us at FederatedHermes.com
or call 1-800-341-7400.
0030705 (3/23)
© 2023 Federated Hermes, Inc.