Edgar Filing: FRANKLIN RESOURCES INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011



o	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: 001-09318

FRANKLIN RESOURCES, INC.

(Exact name of registrant as specified in its charter)



Delaware		13-2670991
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Franklin Parkway, San Mateo, CA		94403
(Address of principal executive offices)		(Zip Code)

(650) 312-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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. x YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding: 221,858,590 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of April 25, 2011.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Statements of Income

Unaudited



	Three Months Ended March 31,						Six Months Ended March 31,
(in thousands, except per share data)	2011			2010			2011			2010
Operating Revenues
Investment management fees	$	1,076,716		$	836,077		$	2,117,594		$	1,642,741
Sales and distribution fees	587,143			496,781			1,164,975			984,834
Shareholder servicing fees	75,750			71,376			147,805			140,919
Other, net	9,954			8,879			19,502			22,030
Total operating revenues	1,749,563			1,413,113			3,449,876			2,790,524
Operating Expenses
Sales, distribution and marketing	676,935			557,398			1,324,088			1,092,991
Compensation and benefits	315,810			271,041			608,204			525,353
Information systems and technology	41,477			39,809			81,844			77,812
Occupancy	32,703			29,799			63,571			60,406
General, administrative and other	53,156			53,931			83,453			105,850
Total operating expenses	1,120,081			951,978			2,161,160			1,862,412
Operating Income	629,482			461,135			1,288,716			928,112
Other Income (Expenses)
Consolidated sponsored investment products gains, net	9,770			5,669			9,032			20,741
Investment and other income, net	47,681			42,488			94,747			75,466
Interest expense	(8,364		)	(936		)	(16,259		)	(1,678		)
Other income, net	49,087			47,221			87,520			94,529
Income before taxes	678,569			508,356			1,376,236			1,022,641
Taxes on income	183,004			149,946			390,554			306,682
Net income	495,565			358,410			985,682			715,959
Less: net income (loss) attributable to
Nonredeemable noncontrolling interests	(7,577		)	204			(19,454		)	420
Redeemable noncontrolling interests	42			1,521			879			3,251
Net Income Attributable to Franklin Resources, Inc.	$	503,100		$	356,685		$	1,004,257		$	712,288
Earnings per Share
Basic	$	2.26		$	1.56		$	4.49		$	3.11
Diluted	2.25			1.55			4.47			3.10
Dividends per Share	$	0.25		$	0.22		$	0.50		$	3.44

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Balance Sheets

Unaudited



(in thousands)	March 31, 2011		September 30, 2010
Assets
Current Assets
Cash and cash equivalents	$	4,234,894	$	3,985,312
Cash and cash equivalents of consolidated variable interest entities	119,077		—
Receivables	793,213		684,223
Receivables of consolidated variable interest entities, at fair value	66,139		—
Investment securities, trading	777,837		361,396
Investment securities, available-for-sale	887,872		1,114,637
Investments of consolidated variable interest entities, at fair value	45,359		—
Investments in equity method investees and other	48,189		91,866
Deferred taxes	98,491		89,242
Prepaid expenses and other	33,131		36,117
Total current assets	7,104,202		6,362,793
Banking/Finance Assets
Cash and cash equivalents	314,472		138,404
Investment securities, trading	—		23,362
Investment securities, available-for-sale	330,181		408,239
Loans receivable, net	414,806		374,886
Loans receivable of consolidated variable interest entities, net	223,842		—
Other	40,360		16,303
Total banking/finance assets	1,323,661		961,194
Non-Current Assets
Investments of consolidated variable interest entities, at fair value	931,948		—
Investments in equity method investees and other	706,143		702,634
Property and equipment, net	561,955		548,956
Goodwill	1,467,211		1,444,269
Other intangible assets, net	613,463		562,360
Other	118,799		125,882
Total non-current assets	4,399,519		3,384,101
Total Assets	$	12,827,382	$	10,708,088

[Table continued on next page]

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Balance Sheets

Unaudited

[Table continued from previous page]



(dollars in thousands, except per share data)	March 31, 2011		September 30, 2010
Liabilities and Stockholders’ Equity
Current Liabilities
Compensation and benefits	$	279,874	$	330,879
Commercial paper	29,995		29,997
Current maturities of long-term debt of consolidated variable interest entities, at fair value	47,673		—
Accounts payable, accrued expenses and other	265,605		244,203
Other liabilities of consolidated variable interest entities, at fair value	140,729		—
Commissions	364,717		302,366
Income taxes	42,506		99,197
Total current liabilities	1,171,099		1,006,642
Banking/Finance Liabilities
Deposits	785,639		655,748
Long-term debt of consolidated variable interest entities	244,836		—
Federal Home Loan Bank advances	51,000		51,000
Other	2,256		16,745
Total banking/finance liabilities	1,083,731		723,493
Non-Current Liabilities
Long-term debt	899,039		898,903
Long-term debt of consolidated variable interest entities, at fair value	886,166		—
Deferred taxes	241,176		237,810
Other	96,224		91,261
Total non-current liabilities	2,122,605		1,227,974
Total liabilities	4,377,435		2,958,109
Commitments and Contingencies (Note 11)
Redeemable Noncontrolling Interests	30,468		19,533
Stockholders’ Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued	—		—
Common stock, $0.10 par value, 1,000,000,000 shares authorized; 221,843,061 and 224,007,674 shares issued and outstanding, at March 31, 2011 and September 30, 2010	22,184		22,401
Retained earnings	8,099,891		7,530,877
Appropriated retained earnings of consolidated variable interest entities	85,900		—
Accumulated other comprehensive income	205,533		173,716
Total Franklin Resources, Inc. stockholders’ equity	8,413,508		7,726,994
Nonredeemable noncontrolling interests	5,971		3,452
Total stockholders’ equity	8,419,479		7,730,446
Total Liabilities and Stockholders’ Equity	$	12,827,382	$	10,708,088

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited



	Six Months Ended March 31,
(in thousands)	2011			2010
Net Income	$	985,682		$	715,959
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	123,627			131,194
Stock-based compensation	44,479			40,368
Excess tax benefit from stock-based compensation	(13,023		)	(10,415		)
Net gains on sale of assets	(55,198		)	(2,122		)
Equity in net income of affiliated companies	(43,426		)	(17,290		)
Provision for loan losses	3,603			2,460
Other-than-temporary impairment of investments	13,606			1,463
Net losses of consolidated variable interest entities	17,736			—
Deferred income taxes	2,718			(2,092		)
Changes in operating assets and liabilities:
Increase in receivables, prepaid expenses and other	(153,461		)	(143,053		)
Increase in trading securities, net	(412,124		)	(100,580		)
(Decrease) increase in income taxes payable	(46,270		)	31,177
Increase in commissions payable	60,678			40,911
Increase in other liabilities	13,330			2,047
(Decrease) increase in accrued compensation and benefits	(53,613		)	6,370
Net cash provided by operating activities	488,344			696,397
Purchase of investments	(124,720		)	(420,686		)
Purchase of investments by consolidated variable interest entities	(394,888		)	—
Liquidation of investments	461,004			388,308
Liquidation of investments by consolidated variable interest entities	568,572			—
Liquidation of banking/finance investments	76,180			87,400
Increase in loans receivable, net	(41,233		)	(58,133		)
Decrease in loans receivable held by consolidated variable interest entities, net	85,695			—
Additions of property and equipment, net	(65,148		)	(27,862		)
Acquisitions of subsidiaries, net of cash acquired	(57,606		)	—
Cash and cash equivalents recognized due to adoption of new consolidation guidance	45,841			—
Net cash provided by (used in) investing activities	553,697			(30,973		)
Increase in deposits	129,891			44,556
Issuance of common stock	28,915			12,936
Dividends paid on common stock	(105,683		)	(783,832		)
Repurchase of common stock	(413,538		)	(291,491		)
Excess tax benefit from stock-based compensation	13,023			10,415
(Decrease) increase in commercial paper, net	(32		)	221,612
Proceeds from issuance of debt	—			9,000
Payments on debt by consolidated variable interest entities	(180,168		)	—
Noncontrolling interests	13,771			42,844
Net cash used in financing activities	$	(513,821	)	$	(733,960	)

[Table continued on next page]

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Condensed Consolidated Statements of Cash Flows

Unaudited

[Table continued from previous page]



	Six Months Ended March 31,
(in thousands)	2011			2010
Effect of exchange rate changes on cash and cash equivalents	$	16,507		$	(12,295	)
Increase (decrease) in cash and cash equivalents	544,727			(80,831		)
Cash and cash equivalents, beginning of period	4,123,716			3,104,451
Cash and Cash Equivalents, End of Period	$	4,668,443		$	3,023,620

Components of Cash and Cash Equivalents
Cash and cash equivalents, beginning of period:
Current assets	$	3,985,312		$	2,982,539
Banking/finance assets	138,404			121,912
Total	$	4,123,716		$	3,104,451
Cash and cash equivalents, end of period
Current assets	$	4,234,894		$	2,860,991
Current assets of consolidated variable interest entities	119,077			—
Banking/finance assets	314,472			162,629
Total	$	4,668,443		$	3,023,620

Supplemental Disclosure of Non-Cash Information
Decrease in noncontrolling interests due to net deconsolidation of certain sponsored investment products	$	(1,674	)	$	(81,613	)
Increase in assets, net of liabilities, related to consolidation of variable interest entities	60,760			—
Increase in receivables of consolidated variable interest entities related to investment trades pending settlement	65,865			—
Increase in other liabilities of consolidated variable interest entities related to investment trades pending settlement	(139,614		)	—

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	434,777		$	273,548
Cash paid for interest	20,207			3,589
Cash paid for interest by consolidated variable interest entities	23,066			—

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN RESOURCES, INC.

Notes to Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Note 1 – Basis of Presentation

The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2010. Certain amounts for the comparative prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended March 31, 2011.

In the quarter ended December 31, 2010 the Company changed the presentation of its condensed consolidated statements of income. The primary changes consisted of the classification of amortization of deferred sales commissions, previously presented as a separate line, and marketing support payments, previously included in advertising and promotion expenses, with related sales and distribution expenses previously reported as underwriting and distribution. The line was renamed sales, distribution and marketing to reflect the broader nature of the underlying expenses. Occupancy expenses previously included in information systems, technology and occupancy are now presented as a separate line to enhance transparency of each of the expense categories. Advertising and promotion expenses unrelated to marketing support payments are now classified with expenses previously reported as other, and the line was renamed general, administrative and other. No changes were made to the classification of revenues, however the line previously reported as underwriting and distribution fees was renamed sales and distribution fees.

Management believes that the revised presentation is more useful to readers of its financial statements and provides enhanced disclosure of its total sales, distribution and marketing expenses. The nature of the amortization of deferred sales commissions is consistent with the sales commission expenses recognized at the time of sale, therefore they are presented together. Similarly, marketing support payments, which are incurred in the Company’s U.S. business, are comparable in nature to a component of non-U.S. distribution expenses. Because of the growth in the Company’s international business and corresponding increase in distribution expenses, presenting them together with marketing support provides a more complete view of these distribution-related, asset-based expenses. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported net income or financial position and do not represent a restatement of any previously published financial results.

The following table presents the effects of the changes in the presentation of operating expenses to the Company’s previously-reported condensed consolidated statement of income:



(in thousands)	Three Months Ended March 31, 2010							Six Months Ended March 31, 2010
(in thousands)	As Reported		Adjustments			As Amended		As Reported		Adjustments			As Amended
Operating Expenses
Underwriting and distribution	$	487,023	$	(487,023	)	$	—	$	954,050	$	(954,050	)	$	—
Sales, distribution and marketing	—		557,398			557,398		—		1,092,991			1,092,991
Compensation and benefits	271,041		—			271,041		525,353		—			525,353
Information systems, technology and occupancy	69,608		(69,608		)	—		138,218		(138,218		)	—
Information systems and technology	—		39,809			39,809		—		77,812			77,812
Occupancy	—		29,799			29,799		—		60,406			60,406
Advertising and promotion	38,121		(38,121		)	—		72,969		(72,969		)	—
Amortization of deferred sales commissions	46,282		(46,282		)	—		92,828		(92,828		)	—
Other	39,903		(39,903		)	—		78,994		(78,994		)	—
General, administrative and other	—		53,931			53,931		—		105,850			105,850
Total operating expenses	$	951,978	$	—		$	951,978	$	1,862,412	$	—		$	1,862,412

Note 2 – New Accounting Guidance

On October 1, 2010, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance related to transfers of financial assets. The guidance revises sale accounting criteria for transfers of financial assets and eliminates the concept of a qualifying special-purpose entity (“QSPE”). The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

On October 1, 2010, the Company adopted new FASB guidance related to the consolidation of variable interest entities (“VIEs”). The guidance changes the model used to identify the primary beneficiary of VIEs other than entities that have the attributes of an investment company. The new model requires a qualitative analysis to determine whether a company’s variable interests give it a controlling financial interest in a VIE. The guidance also requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE. The adoption of the guidance resulted in the consolidation of automobile loan securitization trusts and collateralized loan obligations (“CLOs”) that were not previously consolidated. The consolidation of these entities resulted in increases to total assets, long-term debt and total stockholders’ equity of $1,384.7 million, $1,278.1 million and $106.6 million as of October 1, 2010. See Note 6 – Variable Interest Entities.

Note 3 – Acquisition

On January 18, 2011, the Company acquired all of the outstanding shares of Rensburg Fund Management Limited (“Rensburg”), a specialist U.K. equity manager, for a purchase consideration of $72.4 million in cash. The purchase price was preliminarily allocated $52.6 million to indefinite-lived intangible assets, $10.2 million to tangible net assets and $9.6 million to goodwill. The indefinite-lived intangible assets relate to management contracts. At acquisition date, Rensburg had approximately $1.5 billion in assets under management (“AUM”) relating to various U.K. unit trusts.

The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying condensed consolidated statements of income would not have been materially different.

Note 4 – Stockholders' Equity, Redeemable Noncontrolling Interests and Comprehensive Income

The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:



(in thousands)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity			Redeemable Noncontrolling Interests
for the six months ended March 31, 2011	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity			Redeemable Noncontrolling Interests
Balance at October 1, 2010	$	7,726,994		$	3,452		$	7,730,446		$	19,533
Adjustment for adoption of new consolidation guidance	106,601						106,601
Net income (loss)	1,004,257			(19,454		)	984,803			879
Net loss reclassified to appropriated retained earnings	(19,932		)	19,932			—
Other comprehensive income
Net unrealized losses on investments, net of tax	(13,032		)				(13,032		)
Currency translation adjustments	45,325						45,325
Net unrealized gains on defined benefit plans, net of tax	232						232
Cash dividends on common stock	(111,599		)				(111,599		)
Repurchase of common stock	(413,538		)				(413,538		)
Noncontrolling interests
Net deconsolidation of certain sponsored investment products				—			—			(1,674		)
Net subscriptions				2,041			2,041			11,730
Other ¹	88,200						88,200
Balance at March 31, 2011	$	8,413,508		$	5,971		$	8,419,479		$	30,468

^{_____________________}

¹ Primarily relates to stock-based compensation plans.



(in thousands)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests		Total Stockholders’ Equity			Redeemable Noncontrolling Interests
for the six months ended March 31, 2010	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests		Total Stockholders’ Equity			Redeemable Noncontrolling Interests
Balance at October 1, 2009	$	7,632,173		$	2,262	$	7,634,435		$	65,126
Net income	712,288			420		712,708			3,251
Other comprehensive income
Net unrealized gains on investments, net of tax	35,154					35,154
Currency translation adjustments	4,937					4,937
Net unrealized gains on defined benefit plans, net of tax	245					245
Cash dividends on common stock	(787,048		)			(787,048		)
Repurchase of common stock	(291,491		)			(291,491		)
Noncontrolling interests
Net deconsolidation of certain sponsored investment products				—		—			(81,613		)
Net subscriptions				534		534			42,310
Other¹	78,018					78,018
Balance at March 31, 2010	$	7,384,276		$	3,216	$	7,387,492		$	29,074

^{_____________________}

¹ Primarily relates to stock-based compensation plans.

The components of comprehensive income, including amounts attributable to noncontrolling interests, were as follows:



(in thousands)	Three Months Ended March 31,						Six Months Ended March 31,
(in thousands)	2011			2010			2011			2010
Net income	$	495,565		$	358,410		$	985,682		$	715,959
Net unrealized gains (losses) on investments, net of tax	(13,881		)	22,716			(13,032		)	35,154
Currency translation adjustments	32,658			(4,510		)	45,325			4,937
Net unrealized gains on defined benefit plans, net of tax	219			82			232			245
Total comprehensive income	514,561			376,698			1,018,207			756,295
Less: comprehensive income (loss) attributable to
Nonredeemable noncontrolling interests	(7,577		)	204			(19,454		)	420
Redeemable noncontrolling interests	42			1,521			879			3,251
Total Comprehensive Income Attributable to Franklin Resources, Inc.	$	522,096		$	374,973		$	1,036,782		$	752,624

During the three and six months ended March 31, 2011, the Company repurchased 1.8 million and 3.5 million shares of its common stock at a cost of $215.0 million and $413.5 million under its stock repurchase program. In December 2010, the Company’s Board of Directors authorized the repurchase of up to 10.0 million additional shares of its common stock under the stock repurchase program. At March 31, 2011, approximately 9.5 million shares of common stock remained available for repurchase under the stock repurchase program. During the three and six months ended March 31, 2010, the Company repurchased 1.1 million and 2.7 million shares of its common stock at a cost of $117.5 million and $291.5 million. The stock repurchase program is not subject to an expiration date.

Note 5 – Earnings per Share

The components of basic and diluted earnings per share were as follows:



(in thousands, except per share data)	Three Months Ended March 31,				Six Months Ended March 31,
(in thousands, except per share data)	2011		2010		2011		2010
Net Income Attributable to Franklin Resources, Inc.	$	503,100	$	356,685	$	1,004,257	$	712,288
Less: Allocation of earnings to participating nonvested stock and stock unit awards	2,762		1,976		4,803		4,061
Net Income Available to Common Stockholders	$	500,338	$	354,709	$	999,454	$	708,227

Weighted-average shares outstanding – basic	221,696		227,046		222,440		227,474
Effect of dilutive common stock options and non-participating nonvested stock unit awards	1,000		1,254		1,056		1,312
Weighted-Average Shares Outstanding – Diluted	222,696		228,300		223,496		228,786

Earnings per Share
Basic	$	2.26	$	1.56	$	4.49	$	3.11
Diluted	2.25		1.55		4.47		3.10

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive totaled nil and 0.2 million for the three and six months ended March 31, 2011, and 0.4 million for the three and six months ended March 31, 2010.

Note 6 – Variable Interest Entities

The Company consolidates VIEs for which it is considered the primary beneficiary. A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or the equity investment holders do not have defined rights and obligations normally associated with an equity investment.

The Company uses two different models for determining whether it is the primary beneficiary of VIEs. For all investment entities with the exception of CLOs, the Company is considered to be the primary beneficiary if it has the majority of the risks and rewards of ownership. For all other VIEs, including CLOs, the Company is considered to be the primary beneficiary if it has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE.

Under both models, the key estimates and assumptions used in the analyses may include the amount of AUM, investment management and related service fee rates, the life of the investment product, prepayment rates, and the discount rate.

Collateralized Loan Obligations

The Company provides collateral management services to CLOs, which are considered VIEs. These CLOs are asset-backed financing entities collateralized by a pool of assets, primarily corporate loans and, to a lesser extent, high-yield bonds. Multiple tranches of debt securities are issued by the CLOs, offering investors various maturity and credit risk characteristics. The debt holders of the CLOs have recourse only to the corresponding collateralized assets, which cannot be used by the Company for any other purpose. Scheduled debt payments are based on the performance of the CLOs collateral pool. The Company generally earns management fees in the form of senior and subordinated management fees from the CLOs based on the par value of outstanding investments and, in certain instances, may also receive performance-based fees. In addition, the Company holds equity interests in certain of these investment vehicles. The Company determined that it is the primary beneficiary of the CLOs as it has the power to direct the activities that most significantly impact the CLOs’ economic performance in its role as collateral manager and holds a variable interest for which the Company has the right to receive benefits that could potentially be significant to the CLOs.

The Company elected the fair value option for the financial assets and liabilities of the consolidated CLOs as this option better matches the changes in fair value of the assets and liabilities. During the three months ended March 31, 2011, the changes in fair values of the underlying assets and liabilities of the consolidated CLOs resulted in a $29.8 million net gain and $35.6 million net loss, for a combined net loss of $5.8 million. During the six months ended March 31, 2011, the changes in fair value of the underlying assets and liabilities of the consolidated CLOs resulted in a $64.0 million net gain and $78.9 million net loss, for a combined net loss of $14.9 million. The net losses include interest income and expense and are recognized in investment and other income, net in the condensed consolidated statements of income. The net losses attributable to third-party investors are reflected as net income (loss) attributable to nonredeemable noncontrolling interests in the condensed consolidated statements of income

and appropriated retained earnings in the condensed consolidated balance sheets.

The following table presents the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and long-term debt of the consolidated CLOs:



(in thousands)	Total Investments			Investments 90 Days or More Past Due			Long-term Debt
as of March 31, 2011	Total Investments			Investments 90 Days or More Past Due			Long-term Debt
Unpaid principal balance	$	986,849		$	21,429		$	1,118,324
Excess unpaid principal over fair value	(9,542		)	(8,249		)	(184,485		)
Fair value	$	977,307		$	13,180		$	933,839

Automobile Loan Securitization Trusts

In previous years, the Company entered into automobile loan securitization transactions with securitization trusts, which then issued asset-backed securities to private investors. The securitization transactions were comprised of prime, non-prime and sub-prime contracts for retail installment sales that were secured by new and used automobiles purchased from motor vehicle dealers. The Company purchased the sale contracts in the ordinary course of business.

The Company retained certain interests as part of the securitization transactions. The interests, which consist of interest-only strips receivable and cash on deposit, represent the Company’s contractual right to receive excess interest and cash from the pool of securitized loans after the payment of required amounts to holders of the asset-backed securities and certain other costs associated with the securitization. Prior to October 1, 2010, retained interests were recorded at fair value estimated using discounted cash flow analyses and recognized as banking/finance trading securities in the condensed consolidated balance sheets.

The Company also retained servicing responsibilities for the securitization trusts and receives annual servicing fees ranging from 1% to 2% of the loans securitized. The services provided primarily consist of the management, service and administration of the loans, collection and posting of payments, and maintenance of accounts for the benefit of, and making distributions to, the holders of the asset-backed securities. The Company determined that it is the primary beneficiary of the securitization trusts as it has the power to direct the activities that most significantly impact the securitization trusts’ economic performance in its role as servicer and holds a variable interest for which the Company has the right to receive benefits or the obligation to absorb losses that could potentially be significant to the securitization trusts. Prior to October 1, 2010, all of the securitization trusts met the definition of a QSPE and were not subject to consolidation under the previous accounting guidance.

The assets and liabilities of the securitization trusts are consolidated at their carrying values (the amounts at which they would have been carried in the Company’s condensed consolidated financial statements if the Company had always consolidated the securitization trusts). The holders of the asset-backed securities have recourse only to the collateralized assets of the securitization trusts, which cannot be used by the Company for any other purpose.

The following table shows further details of the loans serviced by the Company that were held by the securitization trusts and the loans that were managed together with them:



(in thousands)	March 31, 2011		September 30, 2010
Principal amount of loans
Loans receivable of consolidated VIEs¹	$	232,280	$	319,976
Loans receivable	81,912		73,602
Total	$	314,192	$	393,578
Principal amount of loans 30 days or more past due
Loans receivable of consolidated VIEs¹	$	4,526	$	12,080
Loans receivable	1,331		2,825
Total	$	5,857	$	14,905

^{_____________________}

¹ Disclosed as securitized loans prior to the adoption of new consolidation guidance.

The Company has provided guarantees to cover shortfalls for the securitization trusts in amounts due to the holders of the asset-backed securities if the shortfall exceeds cash on deposit. At March 31, 2011 and September 30, 2010, the maximum potential amounts of future payments related to these guarantees were $3.8 million and $6.2 million. During the six months ended March 31, 2011 and 2010, the Company did not provide any additional financial or other support to the securitization trusts or the holders of the asset-backed securities.

The original amount of loans serviced for the securitization trusts that were still in existence at March 31, 2011 and September 30, 2010 totaled $1.5 billion and $1.8 billion. At March 31, 2011 and September 30, 2010, the securitization trusts had approximately 25,400 and 31,600 loans outstanding, with weighted-average annualized interest rates of 11.00% and 10.51%.

Other Investment Products

The Company’s VIEs also include certain sponsored investment products other than CLOs and certain other investment products (collectively “other investment products”). These VIEs include limited partnerships, limited liability companies, and joint ventures. The Company’s variable interests generally consist of its equity ownership in and its investment management and related services fees earned from the VIEs. Based on its evaluations, the Company determined it was not the primary beneficiary of these VIEs and, as a result, did not consolidate these entities as of and for the periods ended March 31, 2011 and 2010.

The carrying values of the Company’s equity ownership interest in and investment management and related service fees receivable from the other investment products as recorded in the Company’s condensed consolidated balance sheets at March 31, 2011 and September 30, 2010 are set forth below. These amounts represent the Company’s maximum exposure to loss from these investment products.



(in thousands)	March 31, 2011		September 30, 2010
Current Assets
Receivables	$	79,143	$	63,813
Investment securities, available-for-sale	190,073		164,994
Investments in equity method investees and other	2,492		5,401
Total Current	271,708		234,208
Non-Current Assets
Investment securities, available-for-sale	—		845
Investments in equity method investees and other	642,083		636,548
Total Non-Current	642,083		637,393
Total	$	913,791	$	871,601

Total AUM of the other investment products in which the Company held a variable interest but was not the primary beneficiary were $53.5 billion at March 31, 2011 and $48.1 billion at September 30, 2010.

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored investment products. The Company also may voluntarily elect to provide its sponsored investment products with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its investment products during the three and six months ended March 31, 2011 and 2010.

Note 7 – Investments

Investments consisted of the following:



(in thousands)	March 31, 2011		September 30, 2010
Current
Investment securities, trading	$	777,837	$	361,396
Investment securities, available-for-sale
Sponsored investment products	823,442		1,032,602
Securities of U.S. states and political subdivisions	52,309		64,654
Securities of the U.S. Treasury and federal agencies	603		601
Other equity securities	11,518		16,780
Total investment securities, available-for-sale	887,872		1,114,637
Investments of consolidated VIEs, at fair value¹	45,359		—
Investments in equity method investees and other	48,189		91,866
Total Current	$	1,759,257	$	1,567,899
Banking/Finance
Investment securities, trading	$	—	$	23,362
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions	826		835
Securities of the U.S. Treasury and federal agencies²	2,383		53,099
Corporate debt securities³	122,286		123,108
Mortgage-backed securities – agency residential²	204,575		231,046
Other equity securities	111		151
Total investment securities, available-for-sale	330,181		408,239
Total Banking/Finance	$	330,181	$	431,601
Non-Current
Investments of consolidated VIEs, at fair value¹	$	931,948	$	—
Investments in equity method investees and other	706,143		702,634
Total Non-Current	$	1,638,091	$	702,634

__________________________

¹ See Note 6 – Variable Interest Entities.

²Includes total U.S. government-sponsored enterprise obligations with fair values of $204.6 million and $281.7 million at March 31, 2011 and September 30, 2010.

³Corporate debt securities are insured by the Federal Deposit Insurance Corporation or non-U.S. government agencies.

At March 31, 2011 and September 30, 2010, current investment securities, trading included $247.3 million and $86.3 million of investments held by sponsored investment products that were consolidated in the Company’s condensed consolidated financial statements.

At March 31, 2011 and September 30, 2010, banking/finance segment investment securities with aggregate carrying amounts of $130.1 million and $196.7 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, $67.1 million and $76.7 million were pledged as collateral for outstanding Federal Home Loan Bank (“FHLB”) borrowings and amounts available in secured FHLB short-term borrowing capacity, and $2.6 million and $3.5 million were pledged as collateral as required by federal and state regulators (see Note 10 – Debt). In addition, investment management and related services segment securities with aggregate carrying values of $7.3 million and $8.0 million were pledged as collateral at March 31, 2011 and September 30, 2010.

A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:



(in thousands)			Gross Unrealized
as of March 31, 2011	Cost Basis		Gains		Losses			Fair Value
Sponsored investment products	$	707,634	$	117,345	$	(1,537	)	$	823,442
Securities of U.S. states and political subdivisions	51,510		1,635		(10		)	53,135
Securities of the U.S. Treasury and federal agencies	2,958		28		—			2,986
Corporate debt securities	120,100		2,186		—			122,286
Mortgage-backed securities – agency residential	199,395		5,180		—			204,575
Other equity securities	11,275		632		(278		)	11,629
Total	$	1,092,872	$	127,006	$	(1,825	)	$	1,218,053



(in thousands)			Gross Unrealized
as of September 30, 2010	Cost Basis		Gains		Losses			Fair Value
Sponsored investment products	$	901,923	$	138,105	$	(7,426	)	$	1,032,602
Securities of U.S. states and political subdivisions	62,674		2,815		—			65,489
Securities of the U.S. Treasury and federal agencies	52,909		791		—			53,700
Corporate debt securities	120,159		2,949		—			123,108
Mortgage-backed securities – agency residential	225,443		5,603		—			231,046
Other equity securities	16,393		649		(111		)	16,931
Total	$	1,379,501	$	150,912	$	(7,537	)	$	1,522,876

The net unrealized holding gains on investment securities, available-for-sale included in accumulated other comprehensive income were $12.7 million and $28.0 million for the three and six months ended March 31, 2011 and $24.6 million and $38.8 million for the three and six months ended March 31, 2010.

The following tables show the gross unrealized losses and fair values of investment securities, available-for-sale with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:



	Less Than 12 Months					12 Months or Greater					Total
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
as of March 31, 2011	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Sponsored investment products	$	124,899	$	(1,425	)	$	4,311	$	(112	)	$	129,210	$	(1,537	)
Securities of U.S. states and political subdivisions	1,018		(10		)	—		—			1,018		(10		)
Other equity securities	4,209		(275		)	17		(3		)	4,226		(278		)
Total	$	130,126	$	(1,710	)	$	4,328	$	(115	)	$	134,454	$	(1,825	)



	Less Than 12 Months					12 Months or Greater					Total
(in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
as of September 30, 2010	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Sponsored investment products	$	66,816	$	(5,506	)	$	23,394	$	(1,920	)	$	90,210	$	(7,426	)
Other equity securities	4,174		(108		)	26		(3		)	4,200		(111		)
Total	$	70,990	$	(5,614	)	$	23,420	$	(1,923	)	$	94,410	$	(7,537	)

For the three and six months ended March 31, 2011, the Company recognized $0.4 million and $13.6 million of other-than-temporary impairment of investments, of which nil and $7.3 million related to available-for-sale equity securities. Other-than-temporary impairment of investments for the three and six months ended March 31, 2010 was de minimus and $1.5 million, and related entirely to available-for-sale equity securities. The Company did not recognize any other-than-temporary impairment of available-for-sale debt securities during the six months ended March 31, 2011 and 2010.

At March 31, 2011, maturities of available-for-sale debt securities were as follows:



(in thousands)	Cost Basis		Fair Value
Securities of U.S. states and political subdivisions
Due in one year or less	$	7,557	$	7,713
Due after one year through five years	35,909		37,061
Due after five years through ten years	8,044		8,361
Total	$	51,510	$	53,135
Securities of the U.S. Treasury and federal agencies
Due in one year or less	$	603	$	603
Due after ten years	2,355		2,383
Total	$	2,958	$	2,986
Corporate debt securities
Due in one year or less	$	40,100	$	40,758
Due after one year through five years	80,000		81,528
Total	$	120,100	$	122,286
Mortgage-backed securities – agency residential
Due after five years through ten years	$	14,367	$	15,548
Due after ten years	185,028		189,027
Total	$	199,395	$	204,575

Note 8 – Fair Value Measurements

The Company records substantially all of its investments at fair value or amounts that approximate fair value. There were no significant transfers between Level 1 and Level 2 for the six months ended March 31, 2011.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis.



(in thousands)	Level 1		Level 2		Level 3		Total
as of March 31, 2011	Level 1		Level 2		Level 3		Total
Current Assets
Cash and cash equivalents of consolidated VIEs	$	5,681	$	113,396	$	—	$	119,077
Receivables of consolidated VIEs	—		66,139		—		66,139
Investment securities, trading	556,118		218,110		3,609		777,837
Investment securities, available-for-sale
Sponsored investment products	823,442		—		—		823,442
Securities of U.S. states and political subdivisions	—		52,309		—		52,309
Securities of the U.S. Treasury and federal agencies	—		603		—		603
Other equity securities	7,329		4,189		—		11,518
Investments of consolidated VIEs	—		45,359		—		45,359
Banking/Finance Assets
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions	—		826		—		826
Securities of the U.S. Treasury and federal agencies	—		2,383		—		2,383
Corporate debt securities	—		122,286		—		122,286
Mortgage-backed securities – agency residential	—		204,575		—		204,575
Other equity securities	—		—		111		111
Non-Current Assets
Investments of consolidated VIEs	—		930,122		1,826		931,948
Life settlement contracts	—		—		9,861		9,861
Total Assets Measured at Fair Value	$	1,392,570	$	1,760,297	$	15,407	$	3,168,274
Current Liabilities
Current maturities of long-term debt of consolidated VIEs	$	—	$	—	$	47,673	$	47,673
Other liabilities of consolidated VIEs	—		140,729		—		140,729
Non-Current Liabilities
Long-term debt of consolidated VIEs	—		848,575		37,591		886,166
Total Liabilities Measured at Fair Value	$	—	$	989,304	$	85,264	$	1,074,568



(in thousands)	Level 1		Level 2		Level 3		Total
as of September 30, 2010	Level 1		Level 2		Level 3		Total
Current Assets
Investment securities, trading	$	263,444	$	94,622	$	3,330	$	361,396
Investment securities, available-for-sale
Sponsored investment products	1,032,602		—		—		1,032,602
Securities of U.S. states and political subdivisions	—		64,654		—		64,654
Securities of the U.S. Treasury and federal agencies	—		601		—		601
Other equity securities	12,610		4,170		—		16,780
Banking/Finance Assets
Investment securities, trading	—		—		23,362		23,362
Investment securities, available-for-sale
Securities of U.S. states and political subdivisions	—		835		—		835
Securities of the U.S. Treasury and federal agencies	—		53,099		—		53,099
Corporate debt securities	—		123,108		—		123,108
Mortgage-backed securities – agency residential	—		231,046		—		231,046
Other equity securities	—		—		151		151
Non-Current Assets
Life settlement contracts	—		—		9,214		9,214
Total Assets Measured at Fair Value	$	1,308,656	$	572,135	$	36,057	$	1,916,848

The fair values of trading and available-for-sale securities are determined based on valuation techniques using the best information available, and may include quoted market prices, published net asset values of sponsored investment products, independent third-party broker or dealer price quotes, and discounted cash flows or other valuation methods as appropriate for each security type. For further discussion of the Company’s valuation techniques, see Note 1 – Significant Accounting Policies in the Company’s Form 10-K for fiscal year 2010.

Cash and cash equivalents of consolidated VIEs primarily consist of short-term money market instruments which are not traded on an active market. The fair value of these instruments is based on market observable inputs and they are classified as Level 2.

Investments and long-term debt of consolidated VIEs. The fair values of investments and debt held by consolidated VIEs are primarily obtained from independent third-party broker or dealer price quotes and they are classified as Level 2. The VIEs also issued debt that is classified as Level 3 because its fair value is determined using unobservable inputs. In these instances, the Company employs a market-based approach, which uses prices of recent transactions, various market multiples, book values and other relevant information for the instrument or related or other comparable debt instruments to determine the fair value. If the market-based approach is not available, the Company utilizes an income-based valuation approach, which considers the net present value of anticipated future cash flows of the instrument. A discount may also be applied due to the nature or duration of any restrictions on the disposition of the instrument.

Receivables and other liabilities of consolidated VIEs primarily consist of investment trades pending settlement. The fair values of these receivables and liabilities are obtained from independent third-party broker or dealer quotes and they are classified as Level 2.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:



(in thousands)	Securities Held by Consolidated Sponsored Investment Products				Investments of Consolidated VIEs				Other¹				Total Level 3 Assets			Long-term Debt of Consolidated VIEs
for the three months ended March 31, 2011					Investments of Consolidated VIEs				Other¹				Total Level 3 Assets			Long-term Debt of Consolidated VIEs
Balance at January 1, 2011	$	4,936			$	1,931			$	9,546			$	16,413		$	85,253
Total realized and unrealized gains (losses):
Included in consolidated sponsored investment products gains, net	(1,270		)		—				—				(1,270		)	—
Included in investment and other income, net	—				(105		)		821				716			9,404
Purchases, sales and settlements, net	388				—				(395		)		(7		)	(12,563		)
Transfers out of Level 3	(445		)		—				—				(445		)	—
Effect of exchange rate changes	—				—				—				—			3,170
Balance at March 31, 2011	$	3,609			$	1,826			$	9,972			$	15,407		$	85,264
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at March 31, 2011	$	41		²	$	(105	)	³	$	292		³	$	228		$	9,404		³

___________________________

¹Other primarily consists of life settlement contracts.

²Included in consolidated sponsored investment products gains, net.

³Included in investment and other income, net.



(in thousands)	Securities Held by Consolidated Sponsored Investment Products			Residual Interests from Securitization Transactions			Investments of Consolidated VIEs		Other¹		Total Level 3 Assets			Long-term Debt of Consolidated VIEs
for the six months ended March 31, 2011				Residual Interests from Securitization Transactions			Investments of Consolidated VIEs		Other¹		Total Level 3 Assets			Long-term Debt of Consolidated VIEs
Balance at October 1, 2010	$	3,330		$	23,362		$	—	$	9,365	$	36,057		$	—
Adjustment for adoption of new consolidation guidance	—			(23,362		)	1,738		—		(21,624		)	71,382
Total realized and unrealized gains (losses):
Included in consolidated sponsored investment products gains, net	(1,116		)	—			—		—		(1,116		)	—
Included in investment and other income, net