What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-11 compared with 2020-02-12 · 382 added, 266 removed, 536 unchanged (55% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Percentage change figures are calculated using assets under management rounded to the nearest million and financial statement amounts rounded to the nearest thousand.

Impact of COVID-19

General Economic Conditions

During the first quarter of 2020, COVID-19 significantly impacted the global economy.

The impact has been profound, has continued through the fourth quarter of 2020 and is likely to persist for months to come.

While many businesses have re-opened, vaccinations have begun and leading economic indicators are showing signs of improvement, the overall extent and duration of COVID-19's impact on businesses and economic activity generally remains unclear.

A recession in the near term remains possible.

Economic effects from COVID-19, which have impacted virtually all countries and industries, include:

• Many small and large businesses being forced to interrupt their operations and as a result, lay off employees or even close;

• The re-opening and subsequent shuttering again of certain businesses in various countries around the world;

• Temporary large-scale population lock-downs, domestic and international travel restrictions and social-distancing measures were implemented, driving sharp declines in consumer and business spending.

Further, while many businesses have re-opened, some are only allowing limited capacity, imposing social distancing restrictions and providing limited hours of operation, and while consumer spending has improved during the second half of 2020, uncertainty remains;

• Schools, many of which were shuttered during the first quarter, have allowed students to return to in-person instruction, but the constant concern and uncertainty of whether an outbreak may occur, have forced many schools to re-implement remote instruction, creating significant strain and uncertainty for working parents, which may slow or reverse the economic recovery;

• Significant declines and increased volatility impacted global financial markets during the first quarter, including 23.2% and 20.0% declines in the Dow Jones Industrial Average (“Dow”) and S&P 500 Index (“S&P”), respectively.

Although the financial markets recovered their first quarter losses to new highs in the months since, the prospect of continued volatility remains, especially given the uncertainty surrounding the continued economic effects of the virus (please see "Market Environment" below for additional details).

• The initial distribution of multiple COVID-19 vaccinations was initiated in the later part of the fourth quarter, but the speed, selective nature and logistical challenges of distribution, and the concerns in some communities around the safety and efficacy of the vaccine, have caused turmoil for many, further heightening the anxiety around the virus.

Governments around the world have responded to COVID-19 with economic stimulus measures, including a $2 trillion emergency relief bill passed in the U.S during the first quarter of 2020 and an additional $900 billion in aid passed during the fourth quarter of 2020.

Similar fiscal stimulus was passed by many governments around the world.

These measures and possible additional stimulus and aid measures are intended to steady businesses and consumers until economic activity meaningfully recovers.

The timing and magnitude of any such recovery, however, remains uncertain.

Various countries around the world have continued to experience surges in the rates of COVID-19 infections, which are likely the result of greatly increased social interactions, including at colleges and universities, after re-opening of economies, as well as more contagious strains of the virus.

As a result, several countries have paused the continued progression of their re-openings or re-imposed closing mandates on certain businesses, such as bars, restaurants and entertainment venues.

These circumstances may adversely affect consumer sentiment and the pace of business re-openings, and they also may delay any economic recovery.

At the initial onset of COVID-19 during the first quarter of 2020, we quickly responded in the various jurisdictions where we operate, including the U.S., the U.K., Hong Kong, Shanghai, Singapore and Taiwan.

We implemented business continuity measures, including travel restrictions and a work-from-home requirement for almost all personnel (other than a relatively small number of employees whose physical presence in our offices was considered critical), which has remained in place (except in our Asia offices, most of which have reopened) throughout the second, third and fourth quarters, to ensure operating continuity for all critical functions.

We also instituted a notification process for any employee who tests positive for COVID-19 or has been exposed to someone else who has tested positive.

As the COVID-19 crisis has continued to evolve since the lockdown in the first quarter, certain key functions of the business, such as Risk Management, Business Continuity, Finance and Human Capital, have maintained constant communication and monitored the evolution of the pandemic to keep our employees safe and advise of key developments.

Additionally, we continue to monitor communications from the World Health Organization and the U.S.

Centers for Disease Control and Prevention to ensure we have current information.

We have continued to enhance our technology, which has increased the effectiveness of our remote work force.

We have also continued to enhance our virtual programs to support business functions, such as training on cybersecurity and enhancements to our existing technology platforms.

There has been a heightened focus on the emotional well-being of our employees, and we have provided regular touch points with employees through virtual town halls and management communications.

Additionally, we have maintained regular communications and updates on the virus and the Company's response, which are posted on the Company's internal website, to ensure transparent communication with our employees.

If any of our employees test positive for COVID-19 or interact with someone who has the virus, they are required to contact AB immediately for support and contact-tracing.

We continue to consider, and in some cases methodically implement, return to office programs for our U.S., European and Asia offices.

However, we continue to monitor the daily evolution of the crisis in order to ensure the health and safety of our employees remains our top priority.

We will modify our return to office plans, as needed, to ensure the safety of our employees and to ensure that the highest safety and cleanliness protocols are followed.

We believe that our business continuity plan and technology platform will continue to support the effectiveness of our employees working remotely.

Asset managers, such as AB, rely heavily on the performance of the financial markets largely to determine assets under management (“ AUM ”) and revenues.

Our results during the first quarter of 2020 were strong, which was primarily a reflection of financial market conditions during January and February, which were not adversely affected by COVID-19.

Market conditions deteriorated dramatically during March, which negatively impacted our performance in that month.

Financial markets, and hence our performance, rebounded during the ensuing months, primarily due to a U.S.

Federal Government stimulus package and U.S.

Treasury programs, which were instituted during March 2020 and throughout the second quarter.

These programs renewed confidence in the financial markets by introducing liquidity through government purchasing of financial instruments.

As various states and countries around the world eased restrictions on business and lockdown protocols during the second quarter and increasingly throughout the third and fourth quarters, increases in consumer spending, decreases in the unemployment rate and improvement in other leading economic indicators have stimulated domestic and global financial market performance.

As a result of these developments, our AUM has increased in the second, third and fourth quarters.

However, as U.S.

states and countries globally have continued to ease restrictions, there has been a resurgence in the spread of the virus, causing certain states and countries to, among other things, shutter some businesses again or impose new social distancing restrictions.

As a result, market volatility continues.

The economic impact of COVID-19 and any additional declines in the financial markets could have a significant adverse effect on our AUM and revenues, particularly if economic activity does not continue to recover.

Although countries throughout the world continue to grapple with re-opening their economies, this will continue to be a gradual process, and there is a significant risk that the opening process may be further interrupted if infection rates increase.

Also, although unemployment rates have declined, they are still considered high and any reluctance of consumers to resume spending will do long-term damage to the global economy, which would have an adverse effect on our business.

Additionally, as most of our workforce is working remotely, we are mindful of increased risk related to cybersecurity, which could significantly disrupt our business functions.

Ultimately, the return to normal business and economic activity will likely require the broad application of effective vaccines.

Although the distribution of multiple vaccines was initiated towards the end of the fourth quarter, the speed, selective nature of those who are eligible to receive the vaccination, as well as logistical challenges regarding availability and distribution of the vaccines, could mean many months until the general population has been vaccinated.

Executive Overview

Percentage change figures are calculated using assets under management rounded to the nearest million and financial statement amounts rounded to the nearest thousand.

Our total assets under management (" AUM ") as of December 31, 2020 were $685.9 billion, up $63.0 billion, or 10.1%, during 2020.

The increase was driven primarily by market appreciation of $82.2 billion and net inflows of $25.2 billion (mainly due to Retail net inflows of $23.8 billion).

Institutional AUM increased $36.4 billion, or 14.8%, to $282.7 billion during 2019, due to market appreciation of $34.0 billion and net inflows of $2.4 billion.

Gross sales decreased $9.0 billion from $26.1 billion in 2018 to $17.1 billion in 2019.

Redemptions and terminations decreased $18.1 billion from $30.1 billion in 2018 to $12.0 billion in 2019.

The declines in both sales and redemptions in 2019 were primarily driven by significant one-time fundings and terminations related to low-fee Customized Retirement Strategies, which occurred in 2018.

Retail AUM increased $58.4 billion, or 32.3%, to $239.2 billion during 2019, primarily due to market appreciation of $34.5 billion and net inflows of $23.8 billion.

The increase was driven primarily by market appreciation of $65.4 billion, partially offset by net outflows of $2.6 billion (due to Private Wealth Management net outflows of $2.0 billion and Retail net outflows of $1.6 billion, offset by Institutional net inflows of $1.0 billion).

Excluding AXA's redemption of low-fee fixed income mandates of $11.8 billion, the firm generated net inflows of $9.2 billion in 2020.

Institutional AUM increased $32.9 billion, or 11.6%, to $315.6 billion during 2020, primarily due to market appreciation of $30.5 billion and net inflows of $1.0 billion.

Gross sales increased $13.8 billion, from $17.1 billion in 2019 to $30.9 billion in 2020.

Redemptions and terminations decreased $2.5 billion from $46.5 billion in 2018 to $44.0 billion in 2019.

Private Wealth Management AUM increased $11.7 billion, or 13.2%, to $101.0 billion during 2019, primarily due to market appreciation of $13.7 billion, offset by net outflows of $1.0 billion.

Gross sales decreased $2.2 billion from $13.5 billion in 2018 to $11.3 billion in 2019.

Redemptions and terminations increased $11.3 billion, from $12.0 billion in 2019 to $23.3 billion in 2020.

Bernstein Research Services revenue decreased $31.5 million, or 7.2%, in 2019.

The decrease was due to lower global customer activity and trading commissions, partially offset by the inclusion of revenues from our acquisition of Autonomous Research LLP (" Autonomous ").

Our acquisition of Autonomous closed on April 1, 2019.

Excluding AXA's redemption of low-fee fixed income mandates of $11.8 billion, institutional net inflows were $12.8 billion in 2020.

Retail AUM increased $26.1 billion, or 10.9%, to $265.3 billion during 2020, primarily due to market appreciation of $28.1 billion, partially offset by net outflows of $1.6 billion.

Gross sales increased $3.6 billion, from $75.3 billion in 2019 to $78.9

billion in 2020.

Redemptions and terminations increased $25.5 billion, from $44.0 billion in 2019 to $69.5 billion in 2020, due to record first quarter 2020 redemptions, reflecting the financial market sell-off in March amidst the onset of COVID-19.

Private Wealth Management AUM increased $4.0 billion, or 3.9%, to $105.0 billion during 2020, primarily due to market appreciation of $6.8 billion, partially offset by net outflows of $2.0 billion.

Gross sales increased $3.0 billion, from $11.3 billion in 2019 to $14.3 billion in 2020.

Redemptions and terminations increased $4.1 billion, from $12.4 billion in 2019 to $16.5 billion in 2020.

Bernstein Research Services revenue increased $51.8 million, or 12.7%, in 2020.

The increase was due to higher market volatility, particularly between March and June 2020, primarily as a result of COVID-19, which led to higher customer activity and greater global trading volumes.

We expect customer activity and trading volumes to gradually decrease in 2021 and to normalize in 2022, as the volatility surrounding COVID-19 begins to decline.

Any decreases in customer activity and trading volumes will have a corresponding effect on Bernstein Research services revenue.

Furthermore, all of 2020 reflects the inclusion of revenues from our acquisition of Autonomous Research ( "Autonomous" ), which closed on April 1, 2019.

Our 2020 net revenues of $3.7 billion increased $190.1 million, or 5.4%, compared to the prior year's net revenues.

The most significant contributors to the increase were higher base advisory fees of $128.4 million, higher distribution revenues of $36.5 million and higher investment gains revenue of $36.0 million, offset by lower Bernstein Research Services revenue of $31.5 million and lower performance-based fees of $18.5 million.

The most significant contributors to the increase were higher base advisory fees of $90.4 million, higher distribution revenues of $74.7 million, higher Bernstein Research Services revenue of $51.8 million and higher performance-based fees of $33.0 million, partially offset by higher investment losses of $55.1 million and lower net dividend and interest income of $11.9 million.

Our operating expenses of $2.8 billion increased $106.1 million, or 3.9%, compared to the prior year's expenses.

The increase primarily was due to higher employee compensation and benefits of $64.0 million, higher promotion and servicing expenses of $51.7 million and higher general and administrative expenses (including real estate charges) of $31.9 million.

Our operating income decreased $1.9 million, or 0.2%, to $823.4 million from $825.3 million in 2018 and our operating margin decreased from 23.9% in 2018 to 22.6% in 2019.

The increase primarily was due to higher promotion and servicing expenses of $63.6 million, higher employee compensation and benefits of $51.4 million and higher general and administrative expenses (including real estate charges) of $3.0 million, partially offset by lower amortization of intangible assets of $7.4 million and lower interest on borrowings of $6.9 million.

Our operating income increased $84.0 million, or 10.2%, to $907.4 million from $823.4 million in 2019 and our operating margin increased from 22.6% in 2019 to 24.6% in 2020.

Market Environment

Equity markets finished positive in 2019, keyed by reduction of trade tensions between the U.S.

and China, ongoing stimulus from Central Bank fiscal policies and the resilient U.S.

Specifically, the S&P 500, the Dow Jones Industrial Average and the Nasdaq each rallied to finish the year with record high point gains.

Despite a downturn in manufacturing and businesses generally being reluctant to invest, consumer spending has remained at a healthy level and the labor market has remained strong, with the unemployment rate at a 50-year low.

Three rate cuts by the Federal Reserve during the year and new repurchase programs helped reduce stresses in short term funding markets and unwind the inverted yield curve.

Inflation continues to approximate the Federal Reserve’s target and, barring a material deterioration in the U.S.

economy, the Federal Reserve has indicated a pause in rate cuts.

Also, the improved global economic data and alleviated trade tensions sparked a rally in international equities and a weakening of the U.S.

In the U.K., while the economic consequences of Brexit are still to be determined, the results of the special election held in December 2019 boosted the U.K.

pound and the U.K.

equity market.

The era of negative rates in some European jurisdictions may be ending, and different approaches to improving liquidity, which may inure to the benefit of the banking system, are being considered.

In Asia, markets remained relatively weak, and uncertainty surrounds the continued demonstrations in Hong Kong.

China is balancing the short-term need for economic stimulus against the medium-term need to reduce debt levels in the Chinese economy.

This analysis by the Chinese will likely result in modest stimulus to boost the Chinese economy.

Despite 2020 being a year marked by a global pandemic, record-breaking recession and unemployment levels, and a contentious U.S.

presidential election, equity markets closed the year with solid gains.

The S&P 500, Dow Jones Industrial Average and Nasdaq each rallied for most of the fourth quarter, finishing the year in positive territory.

In the U.S., the presidential election passed with a market-friendly outcome, the distribution of multiple COVID-19 vaccines was initiated and the unemployment rate continued to decline.

Meanwhile, after months of deadlock, a COVID-19 relief package was passed in the fourth quarter, consisting of direct payments, unemployment benefits and small business aid.

However, even with the increasing likelihood of COVID-19 vaccines potentially boosting activity in 2021, significant slack in the economy and labor market by the end of this year are likely.

As a result, the U.S.

Federal Reserve will likely keep interest rates near zero as the economy improves.

In the U.K., COVID-19 and Brexit uncertainty resulted in the worst performing year for its equity market since the 2008 financial crisis.

However, with a Brexit deal reached in the final days of 2020 between the U.K.

and the distribution of a COVID-19 vaccine, the U.K.

economy may rebound in 2021.

The Bank of England is likely to keep rates on hold during the recovery phase.

In China, the economy has returned to almost pre-pandemic output levels.

Chinese efforts to re-center the economy on a consumer-led model are expected to continue and fiscal policy will likely remain supportive through 2021.

More stimulus may be announced in the first quarter of 2021 as the government continues to support consumption.

While the economic outlook for China in 2021 appears positive, one big unknown is the future of the relationship between China and the new U.S.

administration.

In Europe, MiFID II, which became effective on January 3, 2018, has made significant modifications to the manner in which European broker-dealers can be compensated for research.

These modifications are believed to have significantly reduced the

overall research spend by European buy-side firms, which has decreased the revenues we derive from our European clients.

These modifications are believed to have significantly reduced the overall research spend by European buy-side firms, which has decreased the revenues we derive from our European clients.

Our European clients may continue to reduce their research budgets, which could result in a significant decline in our sell-side revenues.

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As a result, AXA owned less than 10% of the outstanding common stock of EQH as of December 31, 2020.

While we cannot at this time predict the eventual impact on AB of this transaction, such impact could include a reduction in the support AXA has provided to AB in the past with respect to AB's investment management business, resulting in a decrease in our revenues and ability to initiate new investment services.

Also, AB relies on AXA, including its subsidiary, AXA Business Services, for a number of significant services and AB has benefited from its affiliation with AXA in certain common vendor relationships.

Some of these arrangements are expected to change with possible negative financial implications for AB.

AXA has notified us of their intent to terminate approximately $14 billion of fixed income investment mandates during the first half of 2020.

While we cannot at this time predict the full impact on AB of this transaction, such impact has included a reduction in the support AXA provided to AB in the past with respect to AB's investment management business, resulting in a modest decrease in our revenues and ability to initiate new investment services.

Also, AB relies on AXA, including its subsidiary, AXA Business Services, for several significant services and AB has benefited from its affiliation with AXA in certain common vendor relationships.

Some of these arrangements have changed, and others are expected to change, with immaterial financial implications for AB.

Our ending AUM at December 31, 2020 reflects $11.8 billion in 2020 outflows resulting from AXA's redemption of certain low-fee fixed income mandates.

We expect these redemptions to total approximately $14 billion, with the remaining redemptions expected to be completed during the first half of 2021.

The revenue we earn from the management of these assets is not significant.

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Subsequently, on January 14, 2020, we announced our plans to relocate an additional 200 jobs to Nashville thereby increasing the total relocated jobs to 1,250.

The decision to add the additional jobs was the result of the growth in our business, select investments we are making, and the insourcing of roles typically performed by consultants.

The decision to add the additional jobs was the result of the growth in our business, select investments we are making, and the in-sourcing of roles typically performed by consultants.

Our Nashville headquarters will house Finance, IT, Operations, Legal, Compliance, Internal Audit, Human Capital, and Sales and Marketing.

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We believe relocating our corporate headquarters to Nashville will afford us the opportunity to provide an improved quality of life alternative for our employees and enable us to attract and recruit new talented employees to a highly desirable location while improving the long-term cost structure of the firm.

During the transition period, which began in 2018 and is expected to continue through 2024, we currently estimate that we will incur transition costs of approximately $155 million to $165 million.

During the transition period, which began in 2018 and is expected to continue through 2024, we currently estimate we will incur transition costs of approximately $145 million to $155 million, which is less than our previous estimate of $155 million to $165 million.

These costs include employee relocation, severance, recruitment, and overlapping compensation and occupancy costs.

Over this same period, we expect to realize total expense savings of approximately $180 million to $190 million, an amount greater than the total transition costs.

However, we will incur some transition costs before we begin to realize expense savings.

We incurred $10 million of transition costs in 2018 and approximately $33 million in 2019.

With regard to 2019, this compares to estimated expense savings of approximately $16 million, resulting in a $0.06 reduction in net income per unit ( “EPU” ) in 2019.

We currently anticipate a similar EPU reduction in 2020 of approximately $0.06.

We also expect to achieve breakeven or a slight accretion in EPU in 2021 and then achieve EPU accretion in each year thereafter.

Beginning in 2025, once the transition period has been completed, we estimate ongoing annual expense savings of approximately $75 million to $80 million, which will result from a combination of occupancy and compensation-related savings.

Our estimates for both the transition costs and the corresponding expense savings are based on our current assumptions of employee relocation costs, severance and overlapping compensation, and occupancy costs.

Over this same period, we expect to realize total expense savings of approximately $205 million to $215 million, which is greater than our previous estimate of $185 million to $195 million, and is an amount greater than the total transition costs.

However, we did incur some transition costs before we began to realize expense savings.

For the period beginning in 2018 and ending in 2020, we incurred $70 million of cumulative transition costs compared to $46 million of cumulative savings.

In 2020, expense savings of $30 million were greater than transition costs of $26 million, resulting in a net increase of $0.01 in net income per unit ( “EPU” ).

We currently anticipate an EPU increase in 2021 of approximately $0.02 and expect to achieve increasing EPU accretion in each year thereafter.

Beginning in 2025, once the transition period has been completed, we estimate ongoing annual expense savings towards the upper end of the range of $75 million to $80 million, which will result from a combination of occupancy and compensation-related savings.

Our estimates for both the transition costs and the corresponding expense savings are based upon our current assumptions of employee relocation costs, severance, and overlapping compensation and occupancy costs.

In addition, our estimates for both the timing of when we incur transition costs and realize the related expense savings are based on our current relocation implementation plan and the timing for execution of each phase.

The actual total charges we eventually record, the related expense savings we realize, and timing and magnitude of EPU impact are expected to differ from our current estimates as we implement each phase of our headquarters relocation.

During October 2018, we signed a lease, which commences in mid-2020, relating to 218,976 square feet of space at our new Nashville headquarters.

The actual total charges we eventually record, the related expense savings we realize, and timing of EPU impact may differ from our current estimates as we implement each phase of our headquarters relocation.

During October 2018, we signed a lease, which commenced in the fourth quarter of 2020, relating to 218,976 square feet of space at our new Nashville headquarters.

Our estimated total base rent obligation (excluding taxes, operating expenses and utilities) over the 15-year initial lease term is $134 million.

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Adjusted Operating Margin Target

We previously adopted a goal of increasing our adjusted operating margin to a target of 30% by 2020 (the “2020 Margin Target” ), subject to the assumptions, factors and contingencies described as part of the initial disclosure of this target.

Our adjusted operating margin for 2019 was 27.5%.

Our AUM and, therefore, our investment advisory revenues, including performance-based fee revenues, are heavily dependent on the level and volatility of the financial markets.

Based upon our current revenue and expense projections, we do not believe that achieving the 2020 Margin Target is likely.

However, we are taking additional actions to better align our expenses with our expected revenues.

We remain committed to achieving an adjusted operating margin of 30% in years subsequent to 2020 and will take continued actions in this regard, subject to prevailing market conditions and the evolution of our business mix.

Our adjusted operating margin, which was 27.5% for 2019, increased to 30.1% for 2020, achieving our target.

We do not currently expect to set a new adjusted operating margin target going forward.

Our AUM and, therefore, our investment advisory revenues, including performance-based fee revenues, are heavily dependent on the level and volatility of the financial markets, which ended 2020 favorably.

Despite the challenges faced from the COVID-19 pandemic (please refer to “Impact of COVID-19” above and “Risk Factors” in Item 1A ), we benefited from certain of our adjusted operating expenses declining significantly, such as costs associated with travel and entertainment and client meetings during 2020.

We do not anticipate the COVID-19-related cost-savings or market tailwinds to be indicative of future performance.

We also expect continued investments in growth initiatives for our firm.

Considering these factors, our adjusted operating margin may be less favorable in future periods, although we will continue to strive for improvement over the long-term.

AB Holding’s principal source of income and cash flow is attributable to its investment in AB Units.

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Results of Operations

Years Ended December 31,

Years Ended December 31, % Change

2020 2019 2018 2020-19 2019-18

(in thousands, except per unit amounts)

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Equity in net income attributable to AB Unitholders $ 308,404 $ 266,292 $ 270,647 15.8 (1.6)

Income taxes 29,024 27,729 28,250 4.7 (1.8)

Net income of AB Holding $ 279,380 $ 238,563 $ 242,397 17.1 (1.6)

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$ 2.91 $ 2.53 $ 2.68 15.0 (5.6)

________________________

(1) Distributions reflect the impact of AB’s non-GAAP adjustments.

AB Holding had net income of $279.4 million in 2020 compared to $238.6 million in 2019, reflecting higher net income attributable to AB Unitholders.

AB Holding had net income of $238.6 million in 2019 compared to $242.4 million in 2018, reflecting lower net income attributable to AB Unitholders and lower weighted average equity ownership interest.

AB Holding had net income of $242.4 million in 2018 compared to $207.4 million in 2017 , reflecting higher net income attributable to AB Unitholders and higher weighted average equity ownership interest.

AB Holding's partnership gross income is derived from its interest in AB.

AB Holding’s income taxes, which reflect a 3.5% federal tax on its partnership gross income from the active conduct of a trade or business, are computed by multiplying certain AB qualifying revenues (primarily U.S.

investment advisory fees, research payments and brokerage commissions) by AB Holding’s ownership

interest in AB, multiplied by the 3.5% tax rate.

investment advisory fees, brokerage commissions and direct payments for research services) by AB Holding’s ownership interest in AB, multiplied by the 3.5% tax rate.

AB Holding’s effective tax rate was 9.4% in 2020, 10.4% in 2019 and 10.4% in 2018.

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As supplemental information, AB provides the performance measures “adjusted net revenues,” “adjusted operating income” and “adjusted operating margin,” which are the principal metrics management uses in evaluating and comparing the period-to-period operating performance of AB.

Management principally uses these metrics in evaluating performance because they present a clearer picture of AB's operating performance and allow management to see long-term trends without the distortion primarily caused by long-term incentive compensation-related mark-to-market adjustments, real estate charges and other adjustment items.

Similarly, management believes that these management operating metrics help investors better understand the underlying trends in AB's results and, accordingly, provide a valuable perspective for investors.

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Years Ended December 31,

2020 2019 2018

(in thousands, except per unit amounts)

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During the year ended December 31, 2020, net cash provided by operating activities was $270.0 million, compared to $222.8 million during the corresponding 2019 period.

The decrease primarily resulted from lower cash distributions received from AB of $58.6 million .

During the year ended December 31, 2018 , net cash provided by operating activities was $279.3 million, compared to $202.4 million during the corresponding 2017 period.

The increase primarily resulted from higher cash distributions received from AB of $49.5 million.

During the year ended December 31, 2019, net cash provided by operating activities was $222.8 million, compared to $279.3 million during the corresponding 2018 period.

The decrease primarily resulted from lower cash distributions received from AB of $58.6 million.

During the years ended December 31, 2020, 2019 and 2018, net cash used in investing activities was $0.1 million, $11.5 million and $16.6 million, respectively, reflecting investments in AB with proceeds from exercises of compensatory options to buy AB Holding Units.

During the year ended December 31, 2020, net cash used in financing activities was $269.9 million, compared to $211.2 million during the corresponding 2019 period.

The decrease primarily was due to lower cash distributions to Unitholders of $58.2 million , partially offset by lower proceeds from exercise of compensatory options to buy AB Holding Units of $5.1 million .

The increase primarily was due to higher cash distributions to Unitholders of $48.4

million and lower proceeds from exercise of compensatory options to buy AB Holding Units of $11.4 million.

During the year ended December 31, 2019, net cash used in financing activities was $211.2 million, compared to $262.7 million during the corresponding 2018 period.

The increase primarily was due to higher cash distributions to Unitholders of $78.3 million and lower proceeds from exercise of compensatory options to buy AB Holding Units of $3.5 million.

The decrease primarily was due to lower cash distributions to Unitholders of $58.2 million, partially offset by lower proceeds from exercise of compensatory options to buy AB Holding Units of $5.1 million.

Management believes that AB Holding will have the resources it needs to meet its financial obligations as a result of the cash flow AB Holding realizes from its investment in AB.

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Assets under management by distribution channel are as follows:

As of December 31,

As of December 31, % Change

2020 2019 2018 2020-19 2019-18

(in billions)

Institutions $ 315.6 $ 282.7 $ 246.3 11.6 % 14.8 %

Retail 265.3 239.2 180.8 10.9 32.3

Private Wealth Management 105.0 101.0 89.3 3.9 13.2

Total $ 685.9 $ 622.9 $ 516.4 10.1 20.6

Assets under management by investment service are as follows:

As of December 31,

As of December 31, % Change

2020 2019 2018 2020-19 2019-18

(in billions)

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Passively Managed (1)

64.5 60.1 50.2 7.3 19.9

Total Equity 282.3 237.3 186.4 19.0 27.4

Actively Managed

Taxable 263.2 258.3 219.7 1.9 17.6

Tax-exempt 50.3 47.1 41.7 6.7 13.1

313.5 305.4 261.4 2.6 16.9

Passively Managed (1)

8.5 9.3 9.4 (8.4) (1.5)

Total Fixed Income 322.0 314.7 270.8 2.3 16.2

Alternatives/Multi-Asset Solutions (2)

Actively Managed 79.1 69.3 58.3 14.2 18.8

Passively Managed (1)

2.5 1.6 0.9 54.1 76.8

Total Other 81.6 70.9 59.2 15.1 19.7

Total $ 685.9 $ 622.9 $ 516.4 10.1 20.6

(1) Includes index and enhanced index services.

Includes certain multi-asset solutions and services and certain alternative investments.

(2) Includes certain multi-asset solutions and services not included in equity or fixed income services.

Changes in assets under management during 2020 and 2019 are as follows:

Distribution Channel

Institutions Retail Private

Management Total

(in billions)

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Net long-term inflows (outflows) (2)

Adjustments (3)

1.0 (1.6) (2.0) (2.6)

Acquisitions — 0.2 — 0.2

Transfers 1.4 (0.6) (0.8) —

Market appreciation 30.5 28.1 6.8 65.4

Net change 32.9 26.1 4.0 63.0

Balance as of December 31, 2020 $ 315.6 $ 265.3 $ 105.0 $ 685.9

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Cash flow/unreinvested dividends (2.7) (7.5) 0.1 (10.1)

Net long-term (outflows) inflows

Market depreciation

Net long-term inflows (outflows) 2.4 23.8 (1.0) 25.2

Adjustments (1)

— — (0.9) (0.9)

Transfers — 0.1 (0.1) —

Market appreciation 34.0 34.5 13.7 82.2

Net change 36.4 58.4 11.7 106.5

Balance as of December 31, 2019 $ 282.7 $ 239.2 $ 101.0 $ 622.9

(1) Approximately $900 million of non-investment management fee earning taxable and tax-exempt money market assets

were removed from assets under management during the second quarter of 2019.

(2) Institutional net flows for 2020 include $11.8 billion of AXA redemptions of certain low-fee fixed income mandates.

Investment Service

Managed Equity

- Taxable Fixed

Alternatives/Multi-Asset Solutions (2)

(in billions)

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Net long-term inflows (outflows) (3)

Adjustments (3)

7.4 (4.6) (9.8) 1.0 (1.6) 5.0 (2.6)

Acquisition — — — — — 0.2 0.2

Market appreciation 33.2 9.0 14.7 2.2 0.8 5.5 65.4

Net change 40.6 4.4 4.9 3.2 (0.8) 10.7 63.0

Balance as of December 31, 2020 $ 217.8 $ 64.5 $ 263.2 $ 50.3 $ 8.5 $ 81.6 $ 685.9

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Net long-term inflows (outflows) 4.0 (4.1) 18.7 3.0 (0.9) 4.5 25.2

Adjustments (4)

— — (0.4) (0.5) — — (0.9)

Market (depreciation) appreciation 37.0 14.0 20.3 2.9 0.8 7.2 82.2

Net change 41.0 9.9 38.6 5.4 (0.1) 11.7 106.5

Balance as of December 31, 2019 $ 177.2 $ 60.1 $ 258.3 $ 47.1 $ 9.3 $ 70.9 $ 622.9

(1) Includes index and enhanced index services.

Includes certain multi-asset solutions and services and certain alternative investments.

(2) Includes certain multi-asset solutions and services not included in equity or fixed income services.

(3) Fixed income – taxable investment service net flows for 2020 include $11.8 billion of AXA redemptions of certain low-fee fixed income mandates.

(4) Approximately $900 million of non-investment management fee earning taxable and tax-exempt money market assets

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Actively Managed

Equity $ 7.4 $ 4.0

Alternatives/Multi-Asset Solutions 4.5 4.0

Passively Managed

Total net long-term inflows (outflows)

Equity (4.6) (4.1)

Alternatives/Multi-Asset Solutions 0.5 0.5

Total net long-term (outflows) inflows $ (2.6) $ 25.2

Average assets under management by distribution channel and investment service are as follows:

Years Ended December 31,

Years Ended December 31, % Change

2020 2019 2018 2020-19 2019-18

(in billions)

Distribution Channel:

Institutions $ 285.9 $ 265.4 $ 258.1 7.7 % 2.8 %

Retail 236.5 212.3 191.8 11.4 10.7

Private Wealth Management 97.1 96.5 94.3 0.7 2.3

Total $ 619.5 $ 574.2 $ 544.2 7.9 5.5

Investment Service:

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Equity Passively Managed (1)

57.1 56.4 53.8 1.2 4.8

Fixed Income Actively Managed – Taxable 254.4 239.7 230.3 6.2 4.1

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Fixed Income Passively Managed (1)

9.4 9.4 9.8 0.2 (4.4)

Alternatives/Multi-Asset Solutions (2)

70.9 65.7 62.6 7.8 5.1

Total $ 619.5 $ 574.2 $ 544.2 7.9 5.5

(1) Includes index and enhanced index services.

Includes certain multi-asset solutions and services and certain alternative investments.

(2) Includes certain multi-asset solutions and services not included in equity or fixed income services.

During 2020, our Institutional channel average AUM of $285.9 billion increased $20.5 billion, or 7.7%, compared to 2019, primarily due to this AUM increasing $32.9 billion, or 11.6%, to $315.6 billion over the last twelve months.

The $32.9 billion increase in AUM resulted primarily from market appreciation of $30.5 billion and net inflows of $1.0 billion.

During 2019, our Institutional channel average AUM of $265.4 billion increased $7.3 billion, or 2.8%, compared to 2018, primarily due to this AUM increasing $36.4 billion, or 14.8%, to $282.7 billion during 2019.

The $36.4 billion increase in AUM resulted from market appreciation of $34.0 billion and net inflows of $2.4 billion.

During 2018, our Institutional channel average AUM of $258.1 billion increased $4.3 billion, or 1.7%, compared to 2017;

however, this AUM decreased $23.0 billion, or 8.5%, to $246.3 billion during 2018.

The $23.0 billion decrease in AUM resulted from market depreciation of $13.2 billion (with $11.6 billion of market deprecation occurring in the fourth quarter of 2018) and net outflows of $10.0 billion.

During 2020, our Retail channel average AUM of $236.5 billion increased $24.2 billion, or 11.4%, compared to 2019, primarily due to this AUM increasing $26.1 billion, or 10.9%, to $265.3 billion over the last twelve months.

The $26.1 billion increase in AUM resulted primarily from market appreciation of $28.1 billion, partially offset by net outflows of $1.6 billion.

During 2019, our Retail channel average AUM of $212.3 billion increased $20.5 billion, or 10.7%, compared to 2018, primarily due to this AUM increasing $58.4 billion, or 32.3%, to $239.2 billion during 2019.

The $58.4 billion increase in AUM resulted primarily from market appreciation of $34.5 billion and net inflows of $23.8 billion.

During 2018, our Retail channel average AUM of $191.8 billion increased $14.3 billion, or 8.1%, compared to 2017;

however, this AUM decreased $12.1 billion, or 6.3%, to $180.8 billion during 2018.

The $12.1 billion decrease in AUM resulted primarily from market depreciation of $12.3 billion (with $16.4 billion of market deprecation occurring in the fourth quarter of 2018).

During 2020, our Private Wealth Management channel average AUM of $97.1 billion increased $0.6 billion, or 0.7%, compared to 2019, primarily due to this AUM increasing $4.0 billion, or 3.9%, to $105.0 billion over the last twelve months.

The $11.7 billion increase in AUM resulted primarily from market appreciation of $13.7 billion, partially offset by net outflows of $1.0 billion and an adjustment of $0.9 billion in the second quarter of 2019 relating to the removal of non-investment management fee earning assets.

During 2018, our Private Wealth Management channel average AUM of $94.3 billion increased $7.6 billion, or 8.8%, compared to 2017;

however, this AUM decreased $3.0 billion, or 3.2%, to $89.3 billion during 2018.

The $3.0 billion decrease in AUM resulted from market depreciation of $4.5 billion (with $6.8 billion of market deprecation occurring in the fourth quarter of 2018), offset by net inflows of $1.9 billion.

As a result of the significant market declines in the fourth quarter of 2018, AUM as of December 31, 2018 was lower than AUM as of December 31, 2017 in all three distribution channels;

however, average AUM during 2018 was higher than average AUM during 2017 in all three distribution channels, reflecting our strong performance through the first nine months of 2018.

Conversely, the dynamic experienced in the fourth quarter of 2018 combined with positive market performance in 2019 resulted in the increases in our year-end AUM as of December 31, 2019 for all three distribution channels significantly outpacing the respective increases in average AUM during 2019.

The $4.0 billion increase in AUM resulted primarily from market appreciation of $6.8 billion, partially offset by net outflows of $2.0 billion.

During 2019, our Private Wealth Management channel average AUM of $96.5 billion increased $2.2 billion, or 2.3%, compared to 2018, primarily due to this AUM increasing $11.7 billion, or 13.2%, to $101.0 billion during 2019.

The $11.7 billion increase in AUM resulted from market appreciation of $13.7 billion, partially offset by net outflows of $1.0 billion and an adjustment of $0.9 billion in the second quarter of 2019 relating to the removal of non-investment management fee earning assets.

Absolute investment composite returns, gross of fees, and relative performance as of December 31, 2020 compared to benchmarks for certain representative Institutional equity and fixed income services are as follows:

1-Year 3-Year 5-Year

Global High Income - Hedged (fixed income)

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Bloomberg Barclays Global High Yield Index - Hedged) (2.1) (0.6) (0.1)

Global Fixed Income - Unhedged (fixed income)

Absolute return

Relative return (vs.

Bloomberg Barclays Global Treasury Index)

Global Plus - Hedged (fixed income)

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JPM EMBI Global/JPM EMBI) 2.4 0.3 1.2

Relative Value

Sustainable Global Thematic

Absolute return 40.9 19.0 18.3

Relative return (vs.

Russell 1000 Value Index)

MSCI ACWI Index) 24.6 8.9 6.1

International Strategic Core Equity

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Russell 1000 Value Index) (1.0) (4.0) (3.3)

1-Year 3-Year 5-Year

Small Cap Growth

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Consolidated Results of Operations

Years Ended December 31,

Years Ended December 31, % Change

2020 2019 2018 2020-19 2019-18

(in thousands, except per unit amounts)

Net revenues $ 3,708,536 $ 3,518,432 $ 3,367,361 5.4 % 4.5 %

Expenses 2,801,100 2,694,995 2,542,047 3.9 6.0

Operating income 907,436 823,437 825,314 10.2 (0.2)

Net income of consolidated entities attributable to non-controlling interests

Income taxes 45,653 41,754 45,816 9.3 (8.9)

Net income 861,783 781,683 779,498 10.2 0.3

Net (loss) income of consolidated entities attributable to non-controlling interests (4,169) 29,641 21,910 n/m 35.3

Net income attributable to AB Unitholders $ 865,952 $ 752,042 $ 757,588 15.1 (0.7)

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Operating margin (1)

24.6 % 22.6 % 23.9 %

(1) Operating income excluding net income (loss) attributable to non-controlling interests as a percentage of net revenues.

Net income attributable to AB Unitholders for the year ended December 31, 2020 increased $113.9 million from the year ended December 31, 2019.

The increase primarily is due to (in millions):

Higher base advisory fees $ 90.4

Higher distribution revenues 74.7

Higher Bernstein Research Services revenue 51.8

Higher net loss of consolidated entities attributable to non-controlling interest 33.8

Higher performance-based fees 33.0

Lower amortization of intangible assets 7.4

Lower interest on borrowings 6.9

Higher promotion and servicing expenses (63.6)

Higher investment losses (55.1)

Higher employee compensation and benefits (51.4)

Lower net dividend and interest income (11.9)

Higher general and administrative expenses (including real estate charges) (3.0)

Net income attributable to AB Unitholders for the year ended December 31, 2019 decreased $5.5 million from the year ended December 31, 2018.

The decrease primarily is due to (in millions):

The decrease primarily was due to (in millions):

Higher employee compensation and benefits $ (64.0)

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Higher investment gains 36.0

Net income attributable to AB Unitholders for the year ended December 31, 2018 increased $95.2 million from the year ended December 31, 2017.

The increase primarily was due to (in millions):

Higher base advisory fees

Lower general and administrative expenses (including real estate charges)

Lower net income of consolidated entities attributable to non-controlling interest

Higher performance-based fees

Lower income tax expenses

Higher distribution revenues

Changes in contingent payment arrangements

Lower investment gains

Higher employee compensation and benefits

Higher promotion and servicing expenses

Lower Bernstein Research Services revenue

Units Outstanding

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Years Ended December 31,

2020 2019 2018

(in thousands)

Net revenues, US GAAP basis $ 3,708,536 $ 3,518,432 $ 3,367,361

Impact of adoption of revenue recognition standard ASC 606

Distribution-related payments

Amortization of deferred sales commissions

Pass-through fees and expenses

Distribution-related adjustments:

Distribution revenues (529,781) (455,043) (418,562)

Investment advisory services fees (66,858) (47,951) (29,967)

Pass through adjustments:

Investment advisory services fees (18,279) (20,914) (4,395)

Other revenues (39,333) (35,926) (35,824)

Impact of consolidated company-sponsored funds 954 (33,044) (38,142)

Long-term incentive compensation-related investment gains and dividend and interest (6,772) (8,939) 3,509

Loss (gain) on sale of software technology investment

Write-down on investment 859 — 3,733

Impact of adoption of revenue recognition standard ASC 606 — — 77,844

Adjusted net revenues $ 3,049,326 $ 2,916,615 $ 2,925,604

Operating income, US GAAP basis $ 907,436 $ 823,437 $ 825,314

Impact of adoption of revenue recognition standard ASC 606

Real estate charges

Acquisition-related expenses

Real estate 2,880 2,623 7,160

Long-term incentive compensation-related items (83) 1,217 3,064

CEO's EQH award compensation 802 1,125 —

Loss (gain) on sale of software technology investment

Write-down of investment 859 — 3,733

Acquisition-related expenses 3,301 6,734 1,924

Contingent payment arrangements (1,366) (3,051) (2,429)

Impact of adoption of revenue recognition standard ASC 606 — — 35,156

Sub-total of non-GAAP adjustments 6,393 8,648 48,655

Net income of consolidated entities attributable to non-controlling interests

Net (loss) income of consolidated entities attributable to non-controlling interests (4,169) 29,641 21,910

Adjusted operating income 917,998 802,444 852,059

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Adjusted operating margin 30.1 % 27.5 % 29.1 %

Adjusted operating income for the year ended December 31, 2019 decreased $49.6 million, or 5.8%, from the year ended December 31, 2018, primarily due to lower performance-based fees of $99.3 million, lower Bernstein Research Services revenue of $31.5 million, higher general and administrative expenses of $29.3 million, higher net distribution expenses of $17.8 million and higher employee compensation expenses (excluding the impact of long-term incentive compensation-related items) of $8.3 million, offset by higher investment advisory base fees of $113.3 million and higher investments gains and losses revenue of $22.4 million.

Adjusted operating income for the year ended December 31, 2018 increased $101.9 million, or 13.6%, from the year ended December 31, 2017, primarily due to higher investment advisory base fees of $139.3 million, higher performance-based fees of $90.7 million and lower general and administrative expenses of $19.1 million, offset by higher employee compensation expenses (excluding the impact of long-term incentive compensation-related items) of $119.6 million, lower Bernstein Research Services revenue of $10.5 million, lower investments gains and losses revenue of $9.5 million and higher promotion and servicing expenses of $8.6 million .

Adjusted operating income for the year ended December 31, 2020 increased $115.6 million, or 14.4%, from the year ended December 31, 2019, primarily due to higher investment advisory base fees of $74.1 million, higher Bernstein Research Services revenue of $51.8 million, lower promotion and servicing expenses of $33.4 million, higher performance-based fees of $33.2 million, lower amortization of intangibles of $7.4 million and lower interest on borrowings of $6.9 million, partially offset by higher employee compensation expenses (excluding the impact of long-term incentive compensation-related items) of $56.1 million, higher net investment losses of $22.8 million, lower net dividend and interest income of $8.5 million and higher general and administrative expenses of $8.2 million.

Adjusted operating income for the year ended December 31, 2019 decreased $49.6 million, or 5.8%, from the year ended December 31, 2018, primarily due to lower performance-based fees of $99.3 million, lower Bernstein Research Services revenue of $31.5 million, higher general and administrative expenses of $29.3 million and higher employee compensation expenses (excluding the impact of long-term incentive compensation-related items) of $8.3 million, offset by higher investment advisory base fees of $95.5 million and higher investments gains and losses revenue of $22.4 million.

On January 1, 2018, as a result of our adoption of ASC 606, we recorded a cumulative effect adjustment, net of tax, of $35.0 million to partners’ capital in the consolidated statement of financial condition.

This amount represented carried interest distributions

of $77.9 million previously received, net of revenue sharing payments to investment team members, of $42.7 million, with respect to which it was probable that significant reversal would not occur.

This amount represented carried interest distributions of $77.9 million previously received, net of revenue sharing payments to investment team members, of $42.7 million, with respect to which it was probable that significant reversal would not occur.

These amounts were included in adjusted net revenues and adjusted operating income in the first quarter of 2018.

Adjusted Net Revenues

Adjusted net revenues offset distribution-related payments to third parties as well as amortization of deferred sales commissions against distribution revenues.

We believe offsetting net revenues by distribution-related payments is useful for our investors and other users of our financial statements because such presentation appropriately reflects the nature of these costs as pass-through payments to third parties who perform functions on behalf of our sponsored mutual funds and/or shareholders of these funds.

We offset amortization of deferred sales commissions against net revenues because such costs, over time, essentially offset our distribution revenues.

We also exclude additional pass-through expenses we incur (primarily through our transfer agency) that are reimbursed and recorded as fees in revenues.

Net Revenue, as adjusted, is reduced to exclude all of the company's distribution revenues, which are recorded as a separate line item on the consolidated statement of income, as well as a portion of investment advisory services fees received that is used to pay distribution and servicing costs.

For certain products, based on the distinct arrangements, certain distribution fees are collected by us and passed through to third-party client intermediaries, while for certain other products, we collect investment advisory services fees and a portion is passed through to third-party client intermediaries.

In both arrangements, the third-party client intermediary owns the relationship with the client and is responsible for performing services and distributing the product to the client on our behalf.

We believe offsetting distribution revenues and certain investment advisory services fees is useful for our investors and other users of our financial statements because such presentation appropriately reflects the nature of these costs as pass-through payments to third parties that perform functions on behalf of our sponsored mutual funds and/or shareholders of these funds.

Distribution-related adjustments fluctuate each period based on the type of investment products sold, as well as the average AUM over the period.

Also, we adjust distribution revenues for the amortization of deferred sales commissions as these costs, over time, will offset such revenues.

We adjust investment advisory and services fees and other revenues for pass through costs, primarily related to our transfer agent and shareholder servicing fees.

These fees do not affect operating income, but they do affect our operating margin.

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We adjust for the revenue impact of consolidating company-sponsored investment funds by eliminating the consolidated company-sponsored investment funds' revenues and including AB's fees from such consolidated company-sponsored investment funds and AB's investment gains and losses on its investments in such consolidated company-sponsored investment funds that were eliminated in consolidation.

Adjusted net revenues exclude investment gains and losses and dividends and interest on employee long-term incentive compensation-related investments.

Adjusted net revenues include the impact of our adoption of revenue recognition standard ASC 606 during the first quarter of 2018, as discussed above .

During 2017, we excluded a realized gain of $4.6 million on the exchange of software technology for an ownership stake in a third party provider of financial market data and trading tools.

During 2018, we decreased our valuation of this investment by $3.7 million.

Also, adjusted net revenues exclude investment gains and losses and dividends and interest on employee long-term incentive compensation-related investments.

During the first quarter of 2020, we wrote-off an investment that had been received in exchange for the sale of software technology, bringing the balance to zero.

Previously, we had been excluding the value of this investment from adjusted net revenues.

Lastly, adjusted net revenues include the impact of our adoption of revenue recognition standard ASC 606 during the first quarter of 2018, as discussed above .

Adjusted Operating Income

Adjusted operating income represents operating income on a US GAAP basis excluding (1) real estate charges (credits), (2) acquisition-related expenses, (3) the impact on net revenues and compensation expense of the investment gains and losses (as well as the dividends and interest) associated with employee long-term incentive compensation-related investments, (4) our CEO's EQH award compensation, as discussed below , (5) loss (gain) on the sale of a software technology investment, (6) adjustments to contingent payment arrangements, and (7) the impact of consolidated company-sponsored investment funds;

Adjusted operating income represents operating income on a US GAAP basis excluding (1) real estate charges (credits), (2) the impact on net revenues and compensation expense of the investment gains and losses (as well as the dividends and interest) associated with employee long-term incentive compensation-related investments, (3) our CEO's EQH award compensation, as discussed below , (4) the write-down of an investment ( discussed immediately above ), (5) acquisition-related expenses, (6) adjustments to contingent payment arrangements, and (7) the impact of consolidated company-sponsored investment funds;

provided, however, that adjusted operating income includes the revenues and expenses associated with our implementation of ASC 606 during the first quarter of 2018 discussed above .

1 unchanged sentence

However, beginning in the fourth quarter of 2019, real estate charges (credits), while excluded in the period in which the charges (credits) are recorded, are included ratably over the remaining applicable lease term.

Acquisition-related expenses have been excluded because they are not considered part of our core operating results when comparing financial results from period to period and to industry peers.

During 2019, these expenses included an intangible asset impairment charge of $3.1 million relating to our 2016 acquisition.

Prior to 2009, a significant portion of employee compensation was in the form of long-term incentive compensation awards that were notionally invested in AB investment services and generally vested over a period of four years.

1 unchanged sentence

All such investments had vested as of year-end 2012 and the investments have been delivered to the participants, except for those investments with respect to which the participant elected a long-term deferral.

Fluctuation in the value of these investments is recorded within investment gains and losses on the income statement and also impacts compensation expense.

Fluctuation in the value of these investments, which also impacts compensation expense, is recorded within investment gains and losses on the income statement.

Management believes it is useful to reflect the offset achieved from economically hedging the market exposure of these investments in the calculation of adjusted operating income and adjusted operating margin.

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The board of directors of EQH granted to Seth P.

Bernstein (“ CEO ”) equity awards in connection with EQH's IPO and Mr.

Bernstein (“ CEO ”), our President and Chief Executive Officer, equity awards in connection with EQH's IPO and Mr.

Bernstein's membership on the EQH Management Committee.

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Any awards granted to Mr.

Bernstein by EQH are

recorded as compensation expense in AB’s consolidated statement of income.

Bernstein by EQH are recorded as compensation expense in AB’s consolidated statement of income.

The compensation expense associated with these awards has been excluded from our non-GAAP measures because they are non-cash and are based upon EQH's, and not AB's, financial performance.

The loss (gain) on the sale of a software technology investment has been excluded due to its non-recurring nature and because it is not part of our core operating results.

The write-off of the investment discussed above in Adjusted Net Revenues has been excluded due to its non-recurring nature and because it is not part of our core operating results.

Acquisition-related expenses have been excluded because they are not considered part of our core operating results when comparing financial results from period to period and to industry peers.

During 2020, these expenses included an intangible asset impairment charge of $1.5 million relating to our 2016 acquisition.

The recording of changes in estimates of contingent consideration payable with respect to contingent payment arrangements associated with our acquisitions are not considered part of our core operating results and, accordingly, have been excluded.

Adjusted net revenues include the impact of our adoption of revenue recognition standard ASC 606 during the first quarter of 2018, as discussed above .

We adjusted for the operating income impact of consolidating certain company-sponsored investment funds by eliminating the consolidated company-sponsored funds' revenues and expenses and including AB's revenues and expenses that were eliminated in consolidation.

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The components of net revenues are as follows:

Years Ended December 31,

Years Ended December 31, % Change

2020 2019 2018 2020-19 2019-18

(in thousands)

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Institutions:

Base fees $ 458,449 $ 451,125 $ 444,884 1.6 % 1.4 %

Performance-based fees 53,351 27,839 32,898 91.6 (15.4)

511,800 478,964 477,782 6.9 0.2

Base fees 1,186,560 1,076,495 992,037 10.2 8.5

Performance-based fees 24,412 22,510 18,278 8.4 23.2

1,210,972 1,099,005 1,010,315 10.2 8.8

Private Wealth Management:

Base fees 817,801 844,809 807,147 (3.2) 4.7

Performance-based fees 54,863 49,266 66,967 11.4 (26.4)

872,664 894,075 874,114 (2.4) 2.3

Base fees 2,462,810 2,372,429 2,244,068 3.8 5.7

Performance-based fees 132,626 99,615 118,143 33.1 (15.7)

2,595,436 2,472,044 2,362,211 5.0 4.6

Bernstein Research Services 459,744 407,911 439,432 12.7 (7.2)

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Dividend and interest income 50,923 104,421 98,226 (51.2) 6.3

Investment gains

Investment (losses) gains (16,401) 38,659 2,653 n/m n/m

Other revenues 104,703 97,559 98,676 7.3 (1.1)

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Interest expense 15,650 57,205 52,399 (72.6) 9.2

Net revenues $ 3,708,536 $ 3,518,432 $ 3,367,361 5.4 4.5

Investment Advisory and Services Fees

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Fair valuation methods include:

discounted cash flow models or any other methodology that is validated and approved by our Valuation Committee ( see paragraph immediately below for more information regarding our Valuation

discounted cash flow models or any other

methodology that is validated and approved by our Valuation Committee ( see paragraph immediately below for more information regarding our Valuation Committee).

Fair valuation methods are used only where AUM cannot be valued using market-based valuation methods, such as in the case of private equity or illiquid securities.

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We are eligible to earn performance-based fees on 6.0%, 8.5% and 0.8% of the assets we manage for institutional clients, private wealth clients and retail clients, respectively (in total, 4.4% of our AUM).

Our investment advisory and services fees increased by $109.8 million, or 4.6%, in 2019, primarily due to a $128.4 million, or 5.7%, increase in base fees, which primarily resulted from a 5.5% increase in average AUM and the impact of a slight shift in product mix from fixed income to equities, which generally have higher fees.

Our investment advisory and services fees increased by $123.4 million, or 5.0%, in 2020, due to a $90.4 million, or 3.8%, increase in base fees and a $33.0 million increase in performance-based fees.

The increase in base fees is primarily due to an 7.9% increase in average AUM, partially offset by a lower portfolio fee rate.

Our investment advisory and services fees increased by $109.8 million, or 4.6%, in 2019, due to a $128.4 million, or 5.7%, increase in base fees, which primarily resulted from a 5.5% increase in average AUM and the impact of a slight shift in product mix from fixed income to equities, which generally have higher fees.

This increase was partially offset by an $18.5 million decrease in performance-based fees.

Our investment advisory and services fees increased by $160.9 million, or 7.3%, in 2018, primarily due to a $137.5 million, or 6.5%, increase in base fees, which primarily resulted from a 5.1% increase in average AUM and the impact of a shift in distribution channel mix from Institutions to Retail and Private Wealth Management.

Also, performance-based fees increased $23.4 million.

Institutional investment advisory and services fees increased $1.2 million, or 0.2%, in 2019, primarily due to an increase in base fees of $6.2 million, or 1.4%, primarily resulting from a 2.8% increase in average AUM, partially offset by a decrease in performance-based fees of $5.1 million and the impact of lower fee realization from active equities.

Institutional investment advisory and services fees increased $2.2 million, or 0.5%, in 2018, primarily due to an increase in base fees of $14.4 million, or 3.4%, primarily resulting from a 1.7% increase in average AUM and the impact of higher fees from alternatives and a shift in product mix to active equities, which generally have higher fees.

The increase was partially offset by a decrease in performance-based fees of $12.3 million.

Retail investment advisory and services fees increased $88.7 million, or 8.8%, in 2019, primarily due to an increase in base fees of $84.5 million, or 8.5%, primarily resulting from a 10.7% increase in average AUM, partially offset by the impact of lower fee realization from active equities.

Also, performance-based fees increased $4.2 million.

Retail investment advisory and services fees increased $63.6 million, or 6.7%, in 2018, primarily due to an increase in base fees of $69.5 million, or 7.5%, primarily resulting from an 8.1% increase in average AUM.

The increase was partially offset by a decrease in performance-based fees of $5.9 million.

Private Wealth Management investment advisory and services fees increased by $20.0 million, or 2.3%, in 2019, due to an increase in base fees of $37.7 million, or 4.7%, primarily resulting from an 2.3% increase in average AUM and the impact of a shift in product mix to alternatives, which generally have higher fees.

This increase was partially offset by a $17.7 million decrease in performance-based fees.

Private Wealth Management investment advisory and services fees increased $95.1 million, or 12.2%, in 2018, due to an increase in base fees of $53.6 million, or 7.1%, resulting from an 8.8% increase in average AUM.

In addition, performance-based fees increased $41.6 million.

Institutional investment advisory and services fees increased $32.8 million, or 6.9%, in 2020, due to an increase in performance-based fees of $25.5 million and an increase in base fees of $7.3 million, or 1.6%.

The increase in base fees is primarily due to an 7.7% increase in average AUM, partially offset by a lower portfolio fee rate.

Institutional investment advisory and services fees increased $1.2 million, or 0.2%, in 2019, due to an increase in base fees of $6.2 million, or 1.4%, partially offset by a decrease in performance-based fees of $5.0 million.

The increase in base fees was primarily due to a 2.8% increase in average AUM, partially offset by the impact of lower fee realization from active equities.

Retail investment advisory and services fees increased $112.0 million, or 10.2%, in 2020, due to an increase in base fees of $110.1 million, or 10.2%, and a $1.9 million increase in performance-based fees.

The increase in base fees is primarily due to a 11.4% increase in average AUM, partially offset by a lower portfolio fee rate.

Retail investment advisory and services fees increased $88.7 million, or 8.8%, in 2019, due to an increase in base fees of $84.5 million, or 8.5%, and a $4.2 million increase in base fees.

The increase in base fees was primarily due to a 10.7% increase in average AUM, partially offset by the impact of lower fee realization from active equities.

Private Wealth Management investment advisory and services fees decreased by $21.4 million, or 2.4%, in 2020, due to a decrease in base fees of $27.0 million, or 3.2%, partially offset by a $5.6 million increase in performance-based fees.

The decrease in base fees is primarily due to the impact of a lower portfolio fee rate, as well as a product mix shift with high fee value equity strategies now representing a lower percentage of our total AUM than in prior periods.

Private Wealth Management investment advisory and services fees increased $20.0 million, or 2.3%, in 2019, due to an increase in base fees of $37.7 million, or 4.7%, partially offset by a decrease in performance-based fees of $17.7 million.

The increase in base fees was primarily due to a 2.3% increase in average AUM and the impact of a shift in product mix to alternatives, which generally have higher fees.

Bernstein Research Services

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These clients compensate us principally by directing us to execute brokerage transactions on their behalf, for which we earn commissions, and to a lesser extent, but increasingly, by paying us directly for research through commission sharing agreements or cash payments.

Revenues from Bernstein Research Services increased $51.8 million, or 12.7%, in 2020.

The increase was due to higher market volatility in 2020, particularly between March and June 2020, primarily as a result of the COVID-19 pandemic, which led to

higher customer activity and greater global trading volumes.

We expect customer activity and trading volumes to gradually decrease in 2021 and to normalize in 2022, as the volatility surrounding COVID-19 begins to decline.

Any decreases in customer activity and trading volumes will have a corresponding effect on Bernstein Research services revenue.

Furthermore, all of 2020 reflects the inclusion of revenues from our acquisition of Autonomous (which closed on April 1, 2019).

Revenues from Bernstein Research Services decreased $31.5 million, or 7.2%, in 2019.

The decrease was due to lower global customer activity and trading commissions, partially offset by the inclusion of revenues from our acquisition of Autonomous (which closed on April 1, 2019).

Revenues from Bernstein Research Services decreased $10.5 million, or 2.3%, in 2018.

The decrease was driven by a reduction in commission rates due to the unbundling of research services and a volume mix shift to lower fee electronic trading across all regions, partially offset by a weaker U.S.

Distribution Revenues

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Period-over-period fluctuations of distribution revenues typically are in line with fluctuations of the corresponding average AUM of these mutual funds.

Distribution revenues increased $74.7 million, or 16.4%, in 2020, primarily due to the corresponding average AUM of these mutual funds increasing 13.2%.

Distribution revenues increased $36.5 million, or 8.7%, in 2019, primarily due to the corresponding average AUM of these mutual funds increasing 10.0%, offset by the impact of a shift in product mix from mutual funds that have higher distribution rates to mutual funds with lower distribution rates.

Distribution revenues increased $6.5 million, or 1.6%, in 2018, primarily due to the corresponding average AUM of these mutual funds increasing 4.5%, offset by the impact of a shift in product mix.

Average AUM for Japan and Taiwan domiciled funds increased 35.1%, while average AUM of B-share and C-share mutual funds (which have higher distribution rates than A- share mutual funds, as well as other funds not domiciled in the U.S.

or Luxembourg) decreased 22.5%.

Dividend and Interest Income and Interest Expense

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Interest expense principally reflects interest accrued on cash balances in customers’ brokerage accounts.

Dividend and interest income decreased $53.5 million, or 51.2%, in 2020, primarily due to lower interest earned on customer margin balances and U.S.

Treasury Bills, as well as lower dividend and interest income in our consolidated company-sponsored investment funds.

Interest expense decreased $41.6 million, or 72.6%, in 2020, due to lower interest paid on cash balances in customers' brokerage accounts.

Dividend and interest income increased $6.2 million, or 6.3%, in 2019, primarily due to higher interest earned on customer margin balances and U.S.

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Interest expense increased $4.8 million, or 9.2%, in 2019, due to higher interest paid on cash balances in customers' brokerage accounts.

Dividend and interest income increased $27.1 million, or 38.0%, in 2018, primarily due to higher interest earned on customer margin balances and U.S.

Treasury Bills.

Interest expense increased $27.2 million in 2018, due to higher interest paid on cash balances in customers' brokerage accounts.

Investment Gains (Losses)

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Years Ended December 31,

2020 2019 2018

(in thousands)

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Realized gains $ 2,655 $ 1,672 $ 2,512

Unrealized (losses) gains

Unrealized gains (losses) 2,914 5,859 (8,032)

Investments held by consolidated company-sponsored investment funds:

Realized (losses) gains

Unrealized gains

Realized gains (losses) 3,357 9,378 (1,134)

Unrealized (losses) gains (854) 36,150 14,217

Seed capital investments:

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Seed capital and other 25,002 17,301 (943)

Unrealized gains (losses)

Derivatives (30,343) (30,320) 7,001

Unrealized (losses) gains

Seed capital and other (12,387) 7,510 (15,003)

Derivatives (5,220) (8,013) 5,384

Brokerage-related investments:

Realized (losses) (1,188) (1,209) (1,410)

Unrealized gains (losses)

Unrealized (losses) gains (337) 331 61

$ (16,401) $ 38,659 $ 2,653

Other Revenues

Other revenues consist of fees earned for transfer agency services provided to company-sponsored mutual funds, fees earned for administration and recordkeeping services provided to company-sponsored mutual funds and the general accounts of EQH and its subsidiaries, and other miscellaneous revenues.

Other revenues increased $7.1 million, or 7.3%, in 2020, primarily due to higher shareholder servicing fees, higher brokerage income and higher mutual fund reimbursements, partially offset by lower investment income related to our consolidated company-sponsored investment funds.

Other revenues decreased $1.1 million, or 1.1%, in 2019, primarily due to lower brokerage income and lower investment income related to our consolidated company-sponsored investment funds, partially offset by higher shareholder servicing fees.

Other revenues increased $1.5 million, or 1.6%, in 2018, primarily due to higher shareholder servicing fees and higher mutual fund reimbursements.

The components of expenses are as follows:

Years Ended December 31,

Years Ended December 31, % Change

2020 2019 2018 2020-19 2019-18

(in thousands)

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Trade execution, marketing, T&E and other 189,787 219,860 222,630 (13.7) (1.2)

786,425 722,854 671,159 8.8 7.7

General and administrative:

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Real estate charges 5,526 3,324 7,160 66.2 (53.6)

Contingent payment arrangements

491,070 488,074 456,156 0.6 7.0

Contingent payment arrangements 1,855 (510) (2,219) n/m (77.0)

Interest on borrowings 6,180 13,035 10,359 (52.6) 25.8

Amortization of intangible assets 21,372 28,759 27,781 (25.7) 3.5

Total $ 2,801,100 $ 2,694,995 $ 2,542,047 3.9 6.0

Employee Compensation and Benefits

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Our ratios of adjusted compensation expense as a percentage of adjusted net revenues were 47.9%, 47.9% and 47.5%, respectively, for the years ended December 31, 2020, 2019 and 2018.

In 2020, employee compensation and benefits expense increased $51.4 million, or 3.6%, primarily due to higher incentive compensation of $58.8 million and higher base compensation of $13.5 million (primarily higher base salaries), offset by lower fringes of $8.5 million, lower commissions of $6.2 million and lower other employment costs of $6.2 million.

In 2019, employee compensation and benefits expense increased $64.0 million, or 4.6%, primarily due to higher base compensation of $34.1 million (primarily higher salaries), higher incentive compensation of $17.4 million and higher fringes of $15.6 million, partially offset by lower commissions of $3.2 million.

In 2018, employee compensation and benefits expense increased $65.3 million, or 5.0%, primarily due to higher incentive compensation of $19.3 million, higher commissions of $19.0 million, higher base compensation of $14.7 million (primarily higher salaries), and higher fringes of $7.4 million.

Promotion and Servicing

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Promotion and servicing expenses increased $63.6 million, or 8.8%, in 2020.

The increase primarily was due to higher distribution-related payments of $60.8 million and higher travel and entertainment expenses of $3.2 million, offset by lower amortization of deferred sales commissions of $6.3 million, lower trade execution and clearance expenses of $3.7 million and lower marketing expenses of $2.5 million.

The increase primarily was due to higher distribution-related payments of $81.3 million, higher amortization of deferred sales commissions of $12.3 million, higher trade execution and clearance expenses of $7.9 million and higher transfer fees of $4.8 million, offset by lower travel and entertainment expenses of $34.3 million and lower marketing expenses of $8.4 million.

The decrease in travel and entertainment and marketing expense is primarily a result of cost savings associated with the COVID-19 pandemic and we expect these costs to increase in 2021 and further normalize in 2022, as the pandemic recedes.

Promotion and servicing expenses increased $51.7 million, or 7.7%, in 2019.

The increase primarily was due to higher distribution-related payments of $15.7 million, higher marketing expenses of $4.5 million and higher trade execution and clearance expenses of $4.5 million, offset by lower amortization of deferred sales commissions of $10.5 million.

General and Administrative

General and administrative expenses include portfolio services expenses, technology expenses, professional fees and office-related expenses (occupancy, communications and similar expenses).

General and administrative expenses as a percentage of net revenues were 13.9%, 13.5% and 15.7% for the years ended December 31, 2019, 2018 and 2017, respectively.

General and administrative expenses as a percentage of net revenues were 13.2% (13.1% excluding real estate charges), 13.9% (13.8% excluding real estate charges) and 13.5% (13.3% excluding real estate charges) for the years ended December 31, 2020, 2019 and 2018, respectively.

General and administrative expenses increased $3.0 million, or 0.6%, during 2020, primarily due to higher technology fees of $4.7 million, higher charitable contributions of $3.9 million, higher portfolio service fees of $3.6 million, higher real estate charges of $2.2 million and higher other taxes of $1.6 million, partially offset by lower professional fees of $9.1 million and lower office-related expenses of $3.5 million.

General and administrative expenses increased $31.9 million, or 7.0%, during 2019, primarily due to higher portfolio service fees of $11.2 million, higher technology fees of $11.0 million and higher professional fees of $7.0 million.

General and administrative expenses decreased $62.0 million, or 12.0%, during 2018, primarily due to lower real estate charges of $29.5 million, the lack of a $19.7 million vendor termination fee recorded in 2017, lower rent expense of $5.0 million, lower exchange rate losses of $2.8 million and lower errors of $2.7 million.

Contingent Payment Arrangements

Contingent payment arrangements reflect changes in estimates of contingent payment liabilities associated with acquisitions in previous periods, as well as accretion expense of these liabilities.

The expense of $1.9 million for 2020 reflects accretion expense of $3.3 million, offset by the change in estimate of the contingent consideration payable relating to our 2016 acquisition of $1.4 million.

The credit of $0.5 million for 2019 reflects the change in estimate of the contingent consideration payable relating to our 2016 acquisition of $3.1 million, offset by accretion expenses of $2.6 million.

The credit of $2.2 million for 2018 reflects the change in estimate of the contingent consideration payable relating to our 2016 acquisition of $2.4 million, offset by accretion expenses of $0.2 million.

The expense of $0.3 million for 2017 reflects accretion expenses of $0.5 million, offset by a change in estimate of the contingent consideration payable relating to our 2010 acquisition of $0.2 million.

Interest on Borrowings

Interest expense decreased 52.6% in 2020, reflecting lower interest rates partially offset by higher weighted average borrowings.

Average daily borrowings for both the EQH facility and commercial paper were $554.0 million at a weighted average interest rate of 0.5% during 2020 compared to $436.9 million and 2.5% during 2019.

Interest expense increased 25.8% in 2019, reflecting both higher weighted average borrowings and interest rates.

Average daily borrowings for both the EQH facility and commercial paper were $436.9 million at a weighted average interest rate of 2.5% during 2019 compared to $350.3 million and 2.0% for commercial paper during 2018.

Interest expense increased 26.4% in 2018, reflecting higher weighted average interest rates on commercial paper borrowings.

Average daily borrowings of commercial paper during 2018 and 2017 were $350.3 million and $482.2 million, respectively, with weighted average interest rates of 2.0% and 1.2%, respectively.

AB, a private limited partnership, is not subject to federal or state corporate income taxes.

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Foreign corporate subsidiaries generally are subject to taxes in the jurisdictions where they are located.

Income tax expense increased $3.9 million, or 9.3%, in 2020 compared to 2019.

This increase is due to higher pre-tax book income, offset by a slightly lower effective tax rate in 2020 of 5.0% compared to 5.1% in 2019.

The decrease in our effective tax rate was driven by a reduction of one-time discrete items.

Income tax expense decreased $4.1 million, or 8.9%, in 2019 compared to 2018.

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The decrease in our effective tax rate was driven by a more favorable mix of earnings across the AB tax filing groups and a reduction of one-time discrete items.

Income tax expense decreased $7.3 million, or 13.7%, in 2018 compared to 2017.

This decrease is due to a lower effective tax rate in 2018 of 5.6% compared to 6.9% in 2017 and higher pre-tax income.

The decrease in our effective tax rate was driven by the impact of tax reform in the prior year, offset by one-time discrete items.

Net Income (Loss) of Consolidated Entities Attributable to Non-Controlling Interests

Net income (loss) of consolidated entities attributable to non-controlling interests primarily consists of limited partner interests owned by other investors in our consolidated company-sponsored investment funds.

In 2019, 2018 and 2017, we had $29.6 million, $21.9 million and $58.4 million, respectively, of net gains of consolidated entities attributable to non-controlling interests, primarily due to gains on investments held by our consolidated company-sponsored investment funds.

In 2020, we had $4.2 million of net losses of consolidated entities attributable to non-controlling interests, primarily due to losses on investments held by our consolidated company-sponsored investment funds.

In 2019 and 2018, we had $29.6 million and $21.9 million, respectively, of net gains of consolidated entities attributable to non-controlling interests, primarily due to gains on investments held by our consolidated company-sponsored investment funds.

Fluctuations period-to-period result primarily from the number of consolidated company-sponsored investment funds and their respective market performance.

Capital Resources and Liquidity

Cash flows from operating activities primarily include the receipt of investment advisory and services fees and other revenues offset by the payment of operating expenses incurred in the normal course of business.

Our cash flows from operating activities have historically been positive and sufficient in supporting our operations.

We do not anticipate this to change in the foreseeable future.

Cash flows from investing activities generally consist of small capital expenditures and, when applicable, business acquisitions.

Cash flows from financing activities primarily consist of issuance and repayment of debt and the repurchase of AB Holding units to fund our long-term deferred compensation plans.

We are required to distribute all of our Available Cash Flow to our Unitholders and the General Partner.

During 2020, net cash provided by operating activities was $1.5 billion, compared to $827.5 million during 2019.

The change primarily was due to net activity of our consolidated company-sponsored investment funds of $468.2 million, an increase in broker-dealer related payables (net of receivable and segregated U.S.

Treasury Bills activity) of $368.0 million, a decrease in other assets of $92.3 million, an increase in accounts payable and accrued expenses of $67.2 million and an increase in accrued compensation of $54.4 million, partially offset by higher net purchases of broker-dealer investments of $454.1 million.

During 2019, net cash provided by operating activities was $827.5 million, compared to $1.3 billion during 2018.

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Treasury Bills activity) of $754.8 million and net activity of our consolidated company-sponsored investment funds of $427.6 million, offset by lower net purchases of broker-dealer investments of $754.7 million.

During 2018, net cash provided by operating activities was $1.3 billion, compared to $645.5 million during 2017.

The change primarily was due to an increase in broker-dealer payables (net of receivable and segregated U.S.

Treasury Bills activity) of $618.8 million, a decrease in net activity of our consolidated company-sponsored investment funds of $467.3 million and higher cash provided by net income of $75.5 million, offset by higher net purchases of broker-dealer investments of $294.7 million and an increase in broker dealer deposits with clearing organizations of $150.5 million.

During 2020, net cash used in investing activities was $59.1 million, compared to $23.0 million during 2019.

The change is primarily due to the acquisition of Autonomous, net of cash acquired, of $5.3 million.

The change is primarily due to $13.6 millions paid for acquisitions, net of cash acquired, $4.1 million paid for equity method investments and higher purchases of furniture, equipment and leasehold improvements of $13.2 million.

During 2019, net cash used in investing activities was $23.0 million, compared to $32.8 million during 2018.

The change primarily reflects lower purchases of furniture, equipment and leasehold improvements of $6.6 million.

The change is primarily due to the acquisition of Autonomous, net of cash acquired, of $5.3 million.

During 2020, net cash used in financing activities was $1.1 billion, compared to $775.0 million during 2019.

The change reflects higher redemptions of non-controlling interests of consolidated company-sponsored investment funds of $369.1 million and higher distributions to the General Partner and Unitholders of $133.4 million, partially offset by higher net proceeds of debt of $112.9 million and an increase in overdrafts payable of $47.3 million.

During 2019, net cash used in financing activities was $775.0 million, compared to $1.6 billion during 2018.

The change reflects the net purchases of non-controlling interests of consolidated company-sponsored investment funds in 2019 as compared to net redemptions of non-controlling interests of consolidated company-sponsored investment funds in 2018 (impact of $622.2 million), lower distributions to the General Partner and Unitholders of $154.7 million and lower net purchases of AB Holding Units to fund long-term incentive compensation plan awards of $95.5 million.

During 2018, net cash used in financing activities was $1.6 billion, compared to $623.9 million during 2017.

The change reflects the net redemptions of non-controlling interests of consolidated company-sponsored investment funds in 2018 as compared to net purchases of non-controlling interests of consolidated company-sponsored investment funds in 2017 (impact of $635.3 million), higher distributions to the General Partner and Unitholders of $214.1 million and net repayments of bank loans in 2018 as compared to net proceeds from bank loans in 2017 (impact of $125.0 million).

As of December 31, 2019, AB had $679.7 million of cash and cash equivalents (excluding cash and cash equivalents of consolidated company-sponsored investment funds), all of which is available for liquidity but consist primarily of cash on deposit for our broker-dealers related to various customer clearing activities, and cash held by foreign subsidiaries of $448.4 million.

As of December 31, 2020, AB had $1.0 billion of cash and cash equivalents (excluding cash and cash equivalents of consolidated company-sponsored investment funds), all of which is available for liquidity but consist primarily of cash on deposit for our broker-dealers related to various customer clearing activities, and cash held by foreign subsidiaries of $586.3 million.

Debt and Credit Facilities

AB has an $800.0 million committed, unsecured senior revolving credit facility (the " Credit Facility ") with a group of commercial banks and other lenders, which matures on September 27, 2023.

The Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $200.0 million;

any such increase is subject to the consent of the affected lenders.

The Credit Facility is available for AB and Sanford C.

Bernstein & Co., LLC (" SCB LLC ") business purposes, including the support of AB’s commercial paper program.

Both AB and SCB LLC can draw directly under the Credit Facility and management may draw on the Credit Facility from time to time.

AB has agreed to guarantee the obligations of SCB LLC under the Credit Facility.

The Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio.

As of December 31, 2019, we were in compliance with these covenants.

The Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated.

Also, under such provisions, upon the occurrence of certain insolvency- or bankruptcy-related events of default, all amounts payable under the Credit Facility would automatically become immediately due and payable, and the lender’s commitments automatically would terminate.

Amounts under the Credit Facility may be borrowed, repaid and re-borrowed by us from time to time until the maturity of the facility.

Voluntary prepayments and commitment reductions requested by us are permitted at any time without a fee (other than customary breakage costs relating to the prepayment of any drawn loans) upon proper notice and subject to a minimum dollar

Borrowings under the Credit Facility bear interest at a rate per annum, which will be, at our option, a rate equal to an applicable margin, which is subject to adjustment based on the credit ratings of AB, plus one of the following indices:

London Interbank Offered Rate;

a floating base rate;

or the Federal Funds rate.

As of December 31, 2019 and 2018, we had no amounts outstanding under the Credit Facility.

During 2019 and 2018, we did not draw upon the Credit Facility.

In addition to the Credit Facility, on November 4, 2019, AB established a $900.0 million committed, unsecured senior credit facility (“ EQH Facility ”) with EQH.

The EQH Facility matures on November 4, 2024 and is available for AB's general business purposes.

Borrowings under the EQH Facility generally bear interest at a rate per annum based on prevailing overnight commercial paper rates.

The EQH Facility contains affirmative, negative and financial covenants which are substantially similar to those in AB’s committed bank facilities.

The EQH Facility also includes customary events of default substantially similar to those in AB’s committed bank facilities, including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or the lender’s commitment may be terminated.

Amounts under the EQH Facility may be borrowed, repaid and re-borrowed by us from time to time until the maturity of the facility.

AB or EQH may reduce or terminate the commitment at any time without penalty upon proper notice.

EQH also may terminate the facility immediately upon a change of control of our general partner.

As of December 31, 2019, AB had $560.0 million outstanding under the EQH Facility with an interest rate of approximately 1.6%.

Average daily borrowings on the EQH Facility during 2019 for the 57 days it was available were $358.6 million with a weighted average interest rate of approximately 1.6%.

As of December 31, 2019, we had no commercial paper outstanding.

As of December 31, 2018, AB had $523.2 million in commercial paper outstanding with a weighted average interest rate of approximately 2.7%.

The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value (and considered a Level 2 security in the fair value hierarchy).

Average daily borrowings of commercial paper for the 317 days commercial paper was outstanding in 2019 was $438.6 million with a weighted average interest rate of 2.6%.

Average daily borrowings for 2018 were $350.3 million with a weighted average interest rate of approximately 2.0%.

AB has a $200.0 million committed, unsecured senior revolving credit facility (the " Revolver ") with a leading international bank, which matures on November 16, 2021.

The Revolver is available for AB's and SCB LLC's business purposes, including the provision of additional liquidity to meet funding requirements primarily related to SCB LLC's operations.

Both AB and SCB LLC can draw directly under the Revolver and management expects to draw on the Revolver from time to time.

AB has agreed to guarantee the obligations of SCB LLC under the Revolver.

The Revolver contains affirmative, negative and financial covenants that are identical to those of the Credit Facility.

As of December 31, 2019 we had no amounts outstanding under the Revolver.

As of December 31, 2018, we had $25.0 million outstanding under the Revolver with an interest rate of 3.4%.

Average daily borrowings for 2019 and 2018 were $23.5 million and $19.4 million, respectively, with weighted average interest rates of 3.2% and 2.8%, respectively.

In addition, SCB LLC currently has three uncommitted lines of credit with three financial institutions.

Two of these lines of credit permit us to borrow up to an aggregate of approximately $175.0 million, with AB named as an additional borrower, while the other line has no stated limit.

As of December 31, 2019 and 2018, SCB LLC had no outstanding balance on these lines of credit.

Average daily borrowings on the lines of credit during 2019 and 2018 were $1.9 million and $2.7 million, respectively, with weighted average interest rates of approximately 1.9% and 1.6%, respectively.

See Note 12 to our consolidated financial statements in Item 8 for disclosures relating to our debt and credit facilities.

Our financial condition and access to public and private debt markets should provide adequate liquidity for our general business needs.

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Under various circumstances, AB guarantees the obligations of its consolidated subsidiaries.

AB maintains guarantees in connection with the Credit Facility and Revolver.

AB maintains guarantees in connection with the Credit Facility (the " Credit Facility ") and Revolver (the "Revolver" ).

If SCB LLC is unable to meet its obligations, AB will pay the obligations when due or on demand.

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AB maintains a guarantee with a commercial bank, under which we guarantee the obligations in the ordinary course of business of each of SCB LLC, our U.K.-based broker-dealer and our Cayman subsidiary.

We also maintain four additional guarantees with other commercial banks under which we guarantee approximately $387 million of obligations for our U.K.-based broker-dealer and $99 million of obligations for our India-based broker-dealer.

In the event that any of these four entities is unable to meet its obligations, AB will pay the obligations when due or on demand.

We also maintain three additional guarantees with other commercial banks under which we guarantee approximately $294.7 million of obligations for our U.K.-based broker-dealer and $99.0 million of obligations for our India-based broker-dealer.

In the event that any of these three entities is unable to meet its obligations, AB will pay the obligations when due or on demand.

We also have two smaller guarantees with a commercial bank totaling approximately $2.1 million, under which we guarantee certain obligations in the ordinary course of business of one of our foreign subsidiaries.

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Payments Due by Period

Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years

(in millions)

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Accrued compensation and benefits 309.3 221.7 63.9 10.4 13.3

Unrecognized tax benefits (1)

FIN 48 reserve 2.8 — — 2.8 —

Federal transition tax 14.9 1.6 4.6 8.7 —

(1) See Note 21 to our consolidated financial statements in Item 8 for discussion of unrecognized tax benefits and federal transition tax.

Total $ 1,862.5 $ 987.3 $ 205.7 $ 129.6 $ 539.9

During 2010, as general partner of AllianceBernstein U.S.

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Offsetting our accrued compensation obligations are long-term incentive compensation-related investments and money market investments we funded totaling $67.0 million, which are included in our consolidated statement of financial condition.

Any amounts reflected on the consolidated statement of financial condition as payables (to broker-dealers, brokerage clients and company-sponsored mutual funds) and accounts payable and accrued expenses (excluding the tax obligations above) are excluded from the table above .

Any amounts reflected on the

consolidated statement of financial condition as payables (to broker-dealers, brokerage clients and company-sponsored mutual funds) and accounts payable and accrued expenses (excluding the tax obligations above) are excluded from the table above.

We expect to make contributions to our qualified profit sharing plan of approximately $15 million in each of the next four years.

We do not currently anticipate that we will contribute to the Retirement Plan during 2021.

During October 2018, we signed a lease, which commences in mid-2020, relating to 218,976 square feet of space at our new Nashville headquarters.

The 2017 Tax Act (enacted in the U.S.

on December 22, 2017) imposed a federal transition tax on mandatory deemed repatriation of certain deferred foreign earnings.

Management elected to pay the transition tax in installments over an eight-year period from 2018 to 2025.

The federal transition tax obligation is recorded to income tax payable on our consolidated statement of financial condition.

See Note 20 to our consolidated financial statements in Item 8 for further discussion of our taxes.

During October 2018, we signed a lease, which commenced in the fourth quarter of 2020, relating to 218,976 square feet of space at our newly constructed Nashville headquarters.

Our estimated total base rent obligation (excluding taxes, operating expenses and utilities) over the 15-year initial lease term is $134.0 million.

During April 2019, we signed a lease, which commences in 2024, relating to approximately 190,000 square feet of space in New York City.

During April 2019, we signed a lease, which commences in 2024, relating to approximately 190,000 square feet of newly constructed space in New York City.

Our estimated total base rent obligation (excluding taxes, operating expenses and utilities) over the 20-year lease term is approximately $448.0 million.

During the fourth quarter of 2020, we exercised an option to return a half floor of this space, which reduced our square footage from approximately 190,000 to 166,000 square feet and our base rent obligation from $448.0 million to $393.0 million.

See Note 13 to our consolidated financial statements in Item 8 for discussion of our leases.

See Note 12 to our consolidated financial statements in Item 8 for a discussion of our debt.

Contingencies

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The carrying value of goodwill is also reviewed if facts and circumstances occur that suggest possible impairment, such as significant declines in AUM, revenues, earnings or the price of an AB Holding Unit.

On an annual basis, or when circumstances warrant, we perform step one of our two-step goodwill impairment test.

The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of AB, the reporting unit, with its carrying value, including goodwill.

If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered to be impaired and the second step of the impairment test is not performed.

However, if the carrying value of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.

The second step compares the implied fair value of the reporting unit to the aggregated fair values of its individual assets and liabilities to determine the amount of impairment, if any.

AB estimates its fair value under both the market approach and income approach.

Under the market approach, the fair value of the reporting unit is based on its unadjusted market valuation (AB Units outstanding multiplied by the price of an AB Holding Unit) and adjusted market valuations assuming a control premium and earnings multiples.

On an annual basis, or when circumstances warrant, goodwill is tested for impairment utilizing the market approach where the fair value of the reporting unit is based on its unadjusted market valuation (AB Units outstanding multiplied by AB Holding's Unit price) and earnings multiples.

The price of a publicly-traded AB Holding Unit serves as a reasonable starting point for valuing an AB Unit because each represents the same fractional interest in our underlying business.

Our market approach analysis also includes control premiums, which are based on an analysis of control premiums for relevant recent acquisitions, and comparable industry earnings multiples applied to our earnings forecast.

Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows.

Determining estimated fair value using a discounted cash flow valuation technique consists of applying business growth rate assumptions over the estimated life of the goodwill asset and then discounting the resulting expected cash flows using an estimated weighted average cost of capital of market participants to arrive at a present value amount that approximates fair value.

Our market approach analysis also includes comparable industry earnings multiples applied to our earnings forecast and assumes a control premium (when applicable).

Throughout the year, the carrying value of goodwill is also reviewed for impairment if certain events or changes in circumstances occur, and trigger whether an interim impairment test may be required.

Such changes in circumstances may include, but are not limited to, a sustained decrease in the price of an AB Unit or declines in AB’s market capitalization that would suggest that the fair value of the reporting unit is less than the carrying amount;

significant and unanticipated declines in AB’s assets under management or revenues;

and/or lower than expected earnings per unit.

Any of these changes in circumstances could suggest the possibility that goodwill is impaired, but none of these events or circumstances by itself would indicate that it is more likely than not that goodwill is impaired.

Instead, they are merely recognized as triggering events for the consideration of impairment and must be viewed in combination with any mitigating or positive factors.

A holistic evaluation of all events since the most recent quantitative impairment test must be done to determine whether it is more likely than not that the reporting unit is impaired.

As of January 1, 2020, we adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment .

The guidance removed Step 2 of the goodwill impairment test, which had required a hypothetical purchase price allocation.

As a result of the revised guidance, a goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

Under this guidance, the goodwill impairment test no longer includes a determination by management of whether a decline in fair value is temporary;

however, it is important to consider the impact of changing market conditions, including the severity and anticipated duration, is reflected in management's determination of fair value.

Loss Contingencies

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For further information regarding these forward-looking statements and the factors that could cause actual results to differ, see “Risk Factors” in Item 1A .

Any or all of the forward-looking statements that we make in this

Form 10-K, other documents we file with or furnish to the SEC, and any other public statements we issue, may turn out to be wrong.

Any or all of the forward-looking statements that we make in this Form 10-K, other documents we file with or furnish to the SEC, and any other public statements we issue, may turn out to be wrong.

It is important to remember that other factors besides those listed in “Risk Factors” and those listed below could also adversely impact our revenues, financial condition, results of operations and business prospects.

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• the timing for execution of each phase of our relocation implementation plan.

Our 2020 Margin Target:

We previously adopted a goal of increasing our adjusted operating margin to a target of 30% by 2020, subject to the assumptions, factors and contingencies described as part of our initial disclosure of this target.

Our adjusted operating margin for 2019 was 27.5%.

Our AUM and, therefore, our investment advisory revenues, including performance-based fee revenues, are heavily dependent on the level and volatility of the financial markets.

Based upon our current revenue and expense projections, we do not believe that achieving the 2020 Margin Target is likely.

However, we are taking additional actions to better align our expenses with our expected revenues.

• The Adverse Impact of COVID-19:

The severity of the expected adverse impact on our AUM and revenues of the economic downturn caused by the COVID-19 pandemic will depend on the depth and length of the downturn and its impact on the companies in which we invest.

Our conclusions about the possible continuing significant adverse impact on us is based on our assumptions that the recovery will be gradual and that there will be lasting high unemployment and economic damage.

We believe that these assumptions are reasonable, but they may not be correct and economic conditions likely will differ from our assumptions.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis