What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2022-02-01 · 210 added, 150 removed, 370 unchanged (49% of the section changed)

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Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that may cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements, including pandemic-related risks, market and volatility risks, investment performance and reputational risks, global operational risks, competition and distribution risks, third-party risks, technology and security risks, human capital risks, cash management risks, and legal and regulatory risks.

The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q and/or discussed under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (“fiscal year 2021”).

The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q, including those discussed under the heading “Risk Factors” below, and/or discussed under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (“fiscal year 2021”).

While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so.

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We may perform services directly or through third parties.

We offer our services and products under our various distinct brand names, including, but not limited to, Franklin ® , Templeton ® , Legg Mason ® , Benefit Street Partners ® , Brandywine Global Investment Management ® , Clarion Partners ® , ClearBridge Investments ® , Fiduciary Trust International™, Franklin Bissett ® , Franklin Mutual Series ® , K2 ® , LibertyShares ® , Martin Currie ® , O’Shaughnessy ® Asset Management, Royce ® Investment Partners and Western Asset Management Company ® .

We offer our services and products under our various distinct brand names, including, but not limited to, Franklin ® , Templeton ® , Legg Mason ® , Benefit Street Partners ® , Brandywine Global Investment Management ® , Clarion Partners ® , ClearBridge Investments ® , Fiduciary Trust International™, Franklin Bissett ® , Franklin Mutual Series ® , K2 ® , Lexington Partners ® , LibertyShares ® , Martin Currie ® , O’Shaughnessy ® Asset Management, Royce ® Investment Partners and Western Asset Management Company ® .

We offer a broad product mix of fixed income, equity, alternative, multi-asset and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for individual and institutional investors.

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As of the time of this filing, as the COVID-19 pandemic continues to evolve, it is not possible to predict the full extent to which the pandemic may adversely impact our business, liquidity, capital resources, financial results and operations, which impacts will depend on numerous developing factors that remain uncertain and subject to change.

During our first fiscal quarter, the global equity markets continued to provide strong positive returns, reflecting among other factors, strong earnings growth and economic stability, despite the emergence of the Omicron variant of COVID-19 and concerns regarding inflation and central banks monetary policies.

The S&P 500 Index and MSCI World Index increased 11.0% and 7.9% for the quarter.

The global bond markets turned negative as the Bloomberg Global Aggregate Index decreased 0.7% during the quarter.

Our total AUM at December 31, 2021 was $1,578.1 billion, 3% higher than at September 30, 2021 and 5% higher than at December 31, 2020.

Monthly average AUM (“average AUM”) for the three months ended December 31, 2021 increased 8% from the same period in the prior fiscal year.

During our second fiscal quarter, global equity markets declined driven by concerns about the global economic impacts of the Russian invasion of Ukraine, rising inflation and central banks’ monetary policies, including expectations about the pace of future interest rate increases.

The S&P 500 Index and MSCI World Index decreased 4.6% and 5.0% for the quarter, and increased 5.9% and 2.4% for the fiscal year to date.

The global bond markets had negative returns, with the Bloomberg Global Aggregate Index decreasing 6.2% during the quarter and 6.8% for the fiscal year to date, as the Federal Reserve and other developed market central banks began increasing interest rates in an effort to combat inflation.

Our total AUM at March 31, 2022 was $1,477.5 billion, 3% lower than at September 30, 2021 and 1% lower than at March 31, 2021.

Monthly average AUM (“average AUM”) for the three and six months ended March 31, 2022 increased 1% and 4% from the same periods in the prior fiscal year.

On April 1, 2022, we acquired all of the outstanding ownership interests in Lexington Partners L.P.

(“Lexington”), a leading global manager of secondary private equity and co-investment funds, for cash consideration of $1.0 billion and additional payments totaling $750.0 million to be paid in cash over the next three years.

In connection with the acquisition, we are granting a 25% ownership stake in Lexington and performance-based cash retention awards that both vest over approximately five years.

On December 31, 2021, we acquired all of the outstanding ownership interest in O’Shaughnessy Asset Management, LLC (“OSAM”), a leading quantitative asset management firm, for cash consideration paid of approximately $300 million, excluding future payments to be made subject to the attainment of certain performance measures.

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We are subject to various laws, rules and regulations globally that impose restrictions, limitations, registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations.

Uncertainties regarding the global economy remain for the foreseeable future.

As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients.

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We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships.

The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2021.

The success of these and other strategies may be influenced by the factors discussed under the heading “Risk Factors” below and in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2021.

RESULTS OF OPERATIONS

Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions, except per share data) 2022 2021 2022 2021

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See “Supplemental Non-GAAP Financial Measures” for definitions and reconciliations of these measures.

Operating income increased $148.6 million for the three months ended December 31, 2021, as compared to the same period in the prior fiscal year, as an 11% increase in operating revenues was partially offset by a 5% increase in operating expenses.

Net income attributable to Franklin Resources, Inc.

increased $107.9 million for the three months ended December 31, 2021 primarily due to the increase in operating income, partially offset by lower other income, net, less the portion attributable to noncontrolling interests.

Diluted earnings per share increased for the three months ended December 31, 2021, consistent with the increase in net income attributable to common stockholders.

Adjusted operating income increased $136.0 million for the three months ended December 31, 2021 primarily due to a 17% increase in investment management fees, partially offset by a 17% increase in compensation and benefits expense.

Adjusted net income increased $180.2 million for the three months ended December 31, 2021 due to the increase in adjusted operating income and higher other income, net, less the portion attributable to noncontrolling interests, partially offset by higher taxes on income.

Adjusted diluted earnings per share increased for the three months ended December 31, 2021, consistent with the increase in adjusted net income.

ASSETS UNDER MANAGEMENT

AUM by asset class was as follows:

(in billions) December 31,

2021 December 31,

(in billions) March 31,

2022 March 31,

Fixed Income $ 595.0 $ 642.3 (7 %)

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Change Mix of Average AUM

for the three months ended December 31, 2021 2020 2021 2020

for the three months ended March 31, 2022 2021 2022 2021

Fixed Income $ 619.0 $ 658.6 (6 %) 41 % 44 %

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Total $ 1,516.1 $ 1,497.9 1 % 100 % 100 %

(in billions) Average AUM Percent

Change Mix of Average AUM

for the six months ended March 31, 2022 2021 2022 2021

Fixed Income $ 629.0 $ 658.7 (5 %) 41 % 45 %

Equity 535.5 475.0 13 % 35 % 32 %

Alternative 152.2 125.9 21 % 10 % 9 %

Multi-Asset 151.3 140.2 8 % 10 % 10 %

Cash Management 61.0 67.2 (9 %) 4 % 4 %

Total $ 1,529.0 $ 1,467.0 4 % 100 % 100 %

Components of the change in AUM are shown below.

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(in billions) Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

2022 2021 2022 2021

Beginning AUM $ 1,578.1 $ 1,498.0 5 % $ 1,530.1 $ 1,418.9 8 %

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Total net flows (18.8) (3.0) 527 % 11.1 (17.7) NM

Acquisitions 7.7 — NM

Net market change, distributions and other 10.4 93.8 (89 %)

Acquisitions — — NM 7.7 — NM

Net market change, distributions and other (81.8) 3.9 NM (71.4) 97.7 NM

Ending AUM $ 1,477.5 $ 1,498.9 (1 %) $ 1,477.5 $ 1,498.9 (1 %)

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for the three months ended

December 31, 2021

March 31, 2022

AUM at January 1, 2022 $ 642.1 $ 563.4 $ 154.3 $ 154.0 $ 64.3 $ 1,578.1

Long-term inflows 33.3 29.8 4.6 8.4 — 76.1

Long-term outflows (41.2) (35.9) (4.6) (6.1) — (87.8)

Long-term net flows (7.9) (6.1) — 2.3 — (11.7)

Cash management net flows — — — — (7.1) (7.1)

Total net flows (7.9) (6.1) — 2.3 (7.1) (18.8)

Net market change, distributions and other

(39.2) (41.9) 3.6 (4.4) 0.1 (81.8)

AUM at March 31, 2022 $ 595.0 $ 515.4 $ 157.9 $ 151.9 $ 57.3 $ 1,477.5

AUM decreased $100.6 billion or 6% during the three months ended March 31, 2022 due to $81.8 billion of net market change, distributions and other, $11.7 billion of long-term net outflows and $7.1 billion of cash management net outflows.

Net market change, distributions and other primarily consists of $77.0 billion of market depreciation and $4.6 billion of long-term distributions.

The market depreciation occurred primarily in the equity and fixed income asset classes.

AUM decreased $21.4 billion or 1%, as compared to the prior year period.

Long-term inflows decreased 25% to $76.1 billion, driven by lower inflows in fixed income institutional separate accounts and equity and fixed income open-end funds.

Long-term outflows decreased 17% to $87.8 billion driven by lower redemptions in fixed income institutional separate accounts related to a single fixed income institutional redemption of nearly $6 billion and $1.3 billion of outflows from our India credit funds that did not earn management fees, which are in the process of winding up.

(in billions) Fixed Income Equity Alternative Multi-Asset Cash

Management Total

for the three months ended

March 31, 2021

AUM at January 1, 2021 $ 669.9 $ 495.7 $ 127.1 $ 141.1 $ 64.2 $ 1,498.0

Long-term inflows 53.5 32.4 6.2 9.6 — 101.7

Long-term outflows (56.1) (38.0) (3.3) (8.5) — (105.9)

Long-term net flows (2.6) (5.6) 2.9 1.1 — (4.2)

Cash management net flows — — — — 1.2 1.2

Total net flows (2.6) (5.6) 2.9 1.1 1.2 (3.0)

Net market change, distributions and other

(25.0) 21.8 1.1 6.0 — 3.9

AUM at March 31, 2021 $ 642.3 $ 511.9 $ 131.1 $ 148.2 $ 65.4 $ 1,498.9

AUM increased $0.9 billion during the three months ended March 31, 2021 due to $3.9 billion of net market change, distributions and other, and $1.2 billion of cash management net inflows, partially offset by $4.2 billion of long-term net outflows.

Net market change, distributions and other consists of $12.7 billion of market appreciation, partially offset by a $4.8 billion decrease from foreign exchange revaluation and $4.0 billion of long-term distributions.

The market appreciation occurred primarily in the equity and multi-asset asset classes, partially offset by depreciation in the fixed income asset class, and reflected positive returns in global equity markets and negative returns in fixed income markets.

Long-term outflows included outflows of $8.6 billion from three institutional products, including a single fixed income institutional redemption of $5.9 billion, $2.7 billion from two equity funds, $2.7 billion from six fixed income funds, including $1.3 billion from five India credit funds that were non-management fee earning which are in the process of winding up and $1.7 billion from a multi-asset fund, partially offset by inflows of $3.0 billion in a multi-asset fund, $1.8 billion in a fixed income fund, $1.1 billion in an equity fund and $1.1 billion in an institutional separate account.

Additionally, long-term outflows in the equity asset class included $2.1 billion of exchanges that are included as long-term inflows in the multi-asset asset class.

The foreign exchange revaluation was primarily due to the strengthening of the U.S.

dollar against the Japanese Yen, Euro and Brazilian Real.

(in billions) Fixed Income Equity Alternative Multi-Asset Cash

Management Total

for the six months ended

March 31, 2022

AUM at October 1, 2021 $ 650.3 $ 523.6 $ 145.2 $ 152.4 $ 58.6 $ 1,530.1

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(55.5) (19.4) 8.9 (5.4) — (71.4)

AUM at December 31, 2021 $ 642.1 $ 563.4 $ 154.3 $ 154.0 $ 64.3 $ 1,578.1

AUM increased $48.0 billion or 3% during the three months ended December 31, 2021 due to $24.1 billion of long-term net inflows, $10.4 billion of net market change, distributions and other, $7.7 billion from acquisitions and $5.8 billion of cash management net inflows.

Net market change, distributions and other consists of $41.8 billion of market appreciation, partially offset by $30.1 billion of long-term distributions and a $1.3 billion decrease from foreign exchange revaluation.

The market appreciation occurred primarily in the equity asset class, partially offset by depreciation in the fixed income asset class.

The foreign exchange revaluation resulted from AUM in products that are not U.S.

dollar denominated, which represented 11% of total AUM as of December 31, 2021, and was primarily due to the strengthening of the U.S.

dollar against the Japanese Yen, Euro and Brazilian Real, partially offset by weakening of the U.S.

dollar against Australian dollar.

Long-term inflows increased 29% to $107.0 billion, as compared to the prior-quarter period, due to higher inflows in all long-term asset classes including $7.4 billion in net client accounts related to the newly joined Investment Grade Credit team as well as $23.5 billion of reinvested distributions.

Long-term outflows decreased 11% to $82.9 billion due to lower outflows in the fixed income and equity asset classes.

Long-term outflows in the multi-asset asset class included a $3.6 billion institutional redemption.

AUM at March 31, 2022 $ 595.0 $ 515.4 $ 157.9 $ 151.9 $ 57.3 $ 1,477.5

AUM decreased $52.6 billion or 3% during the six months ended March 31, 2022 due to $71.4 billion of net market change, distributions and other and $1.3 billion of cash management net outflows, partially offset by $12.4 billion of long-term net inflows and $7.7 billion from acquisitions.

Net market change, distributions and other primarily consists of $35.2 billion of market depreciation, $34.7 billion of long-term distributions.

The market depreciation occurred primarily in the fixed income and equity asset classes, partially offset by appreciation in the alternative asset class.

Long-term inflows decreased 7% to $183.1 billion, as compared to the prior-year period, driven by lower inflows in the equity and fixed income asset classes related to decreased sales in institutional separate accounts and open-end funds, partially offset by higher reinvested distributions in equity and multi-asset open-end funds.

Long-term outflows decreased 17% to $170.7 billion due to lower outflows in fixed income institutional separate accounts.

(in billions) Fixed Income Equity Alternative Multi-Asset Cash

Management Total

for the three months ended

December 31, 2020

for the six months ended

March 31, 2021

AUM at October 1, 2020 $ 656.9 $ 438.1 $ 122.1 $ 129.4 $ 72.4 $ 1,418.9

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(6.1) 78.1 5.7 18.0 2.0 97.7

AUM at December 31, 2020 $ 669.9 $ 495.7 $ 127.1 $ 141.1 $ 64.2 $ 1,498.0

AUM increased $79.1 billion or 6% during the three months ended December 31, 2020 due to $93.8 billion of net market change, distributions and other, partially offset by $10.2 billion of cash management net outflows and $4.5 billion of long-term net outflows.

Net market change, distributions and other consists of $101.1 billion of market appreciation and an $8.2 billion increase from foreign exchange revaluation, partially offset by $15.5 billion of long-term distributions.

The market appreciation occured in all asset classes, most significantly in the equity and fixed income asset classes, and reflected positive returns in global equity and fixed income markets.

Long-term net outflows included outflows of $10.9 billion from six institutional products, $3.5 billion from two fixed income funds and $1.4 billion from a multi-asset fund, partially offset by inflows of $3.9 billion in an institutionl separate account, $3.6 billion in two fixed income funds and $2.4 billion in two equity funds.

AUM at March 31, 2021 $ 642.3 $ 511.9 $ 131.1 $ 148.2 $ 65.4 $ 1,498.9

AUM increased $80.0 billion or 6% during the six months ended March 31, 2021 due to $97.7 billion of net market change, distributions and other, partially offset by $9.0 billion of cash management net outflows and $8.7 billion of long-term net outflows.

Net market change, distributions and other consists of $113.8 billion of market appreciation and a $3.4 billion increase from foreign exchange revaluation, partially offset by $19.5 billion of long-term distributions.

The market appreciation occured primarily in the equity and multi-asset asset classes, and reflected positive returns in global equity markets.

Long-term net outflows included outflows of $19.8 billion from eight institutional products, including a single fixed income institutional redemption of $5.9 billion, $7.1 billion from seven fixed income funds, including $1.3 billion from five India credit funds that were non-management fee earning which are in the process of winding up, $3.2 billion from two equity funds and $3.1 billion from a multi-asset fund, partially offset by inflows of $6.3 billion in two fixed income funds, $5.3 billion in two institutional separate accounts, $3.1 billion in a multi-asset fund and $2.4 billion in an equity fund.

Additionally, long-term outflows in the equity asset class included $2.1 billion of exchanges that are included as long-term inflows in the multi-asset asset class.

The foreign exchange revaluation was primarily due to weakening of the U.S.

dollar against the Australian dollar, Pound Sterling, Euro and Canadian dollar.

dollar against the Australian dollar, Canadian dollar and Pound Sterling, partially offset by strengthening of the U.S.

dollar against the Japanese Yen.

AUM by sales region was as follows:

(in billions) December 31,

2021 December 31,

(in billions) March 31,

2022 March 31,

United States $ 1,107.2 $ 1,100.5 1 %

International

Europe, Middle East and Africa 156.2 152.8 2 %

Asia-Pacific 148.3 164.5 (10 %)

Latin America 51.4 55.6 (8 %)

Canada 29.0 25.8 12 %

Total international 391.6 409.5 (4 %)

Total $ 1,578.1 $ 1,498.0 5 %

Average AUM by sales region was as follows:

Three Months Ended

December 31, Percent

(in billions) 2021 2020

United States $ 1,163.2 $ 1,046.2 11 %

International

Europe, Middle East and Africa 143.4 150.1 (4 %)

Asia-Pacific 155.5 170.3 (9 %)

Latin America 53.2 56.5 (6 %)

Canada 27.7 25.2 10 %

Americas, excl.

78.6 83.8 (6 %)

Total international 370.3 398.4 (7 %)

Total $ 1,477.5 $ 1,498.9 (1 %)

The region in which investment products are sold may differ from the geographic area in which we provide investment management and related services to the products.

Investment Performance Overview

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We compare the relative performance of our mutual funds against peers, and of our strategy composites against benchmarks.

Approximately half of our total mutual fund AUM exceeded the peer group median comparison and at least 61% of our total strategy composite AUM exceeded the benchmark for all periods presented, primarily driven by the performance of our fixed income products.

More than half of our total mutual fund AUM exceeded the peer group median comparison for the 1-, 5- and 10-year periods and more than half of our total strategy composite AUM exceeded the benchmark for the 3-, 5- and 10-year periods.

The performance of our mutual fund products against peer group medians and of our strategy composites against benchmarks is presented in the table below.

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Exceeding Benchmark

as of December 31, 2021 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year

as of March 31, 2022 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year

Fixed Income 38 % 41 % 60 % 65 % 42 % 88 % 90 % 95 %

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1 Mutual fund performance is sourced from Morningstar and measures the percent of ranked AUM in the top two quartiles versus peers.

Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 41%, 41%, 41% and 38% of our total AUM as of December 31, 2021.

Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 41%, 41%, 40% and 38% of our total AUM as of March 31, 2022.

2 Strategy composite performance measures the percent of composite AUM beating its benchmark.

The benchmark comparisons are based on each account’s/composite’s (strategy composites may include retail separately managed accounts and mutual fund assets managed as part of the same strategy) return as compared to a market index that has been selected to be generally consistent with the asset class of the account/composite.

Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 69%, 68%, 68% and 62% of our total AUM as of December 31, 2021.

3 Total mutual fund AUM includes performance of our alternative and multi-asset AUM, and total strategy composite AUM includes performance of our alternative AUM.

Alternative and multi-asset AUM each represent 10% of our total AUM at December 31, 2021.

Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 68%, 68%, 67% and 63% of our total AUM as of March 31, 2022.

3 Total mutual fund AUM includes performance of our alternative and multi-asset funds, and total strategy composite AUM includes performance of our alternative composites.

Alternative and multi-asset AUM represent 11% and 10% of our total AUM at March 31, 2022.

Mutual fund performance data includes U.S.

and cross-border domiciled mutual funds and exchange-traded funds, and excludes cash management and fund of funds.

These results assume the reinvestment of dividends, are based on data available as of January 10, 2022, and are subject to revision.

While we remain focused on achieving strong long-term performance, our future peer group and benchmarking rankings may vary from our past performance.

These results assume the reinvestment of dividends, are based on data available as of April 8, 2022, and are subject to revision.

Past performance is not indicative of future results.

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individual separate account and investment fund performance may differ.

The information in this

presentation is provided solely for use in connection with this document, and is not directed toward existing or potential clients of Franklin.

The information in this presentation is provided solely for use in connection with this document, and is not directed toward existing or potential clients of Franklin.

OPERATING REVENUES

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(in millions) Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

2022 2021 2022 2021

Investment management fees $ 1,649.2 $ 1,598.4 3 % $ 3,409.7 $ 3,138.8 9 %

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Investment Management Fees

Investment management fees increased $220.1 million for the three months ended December 31, 2021 primarily due to an 8% increase in average AUM and higher performance fees.

Investment management fees increased $50.8 million and $270.9 million for the three and six months ended March 31, 2022 primarily due to higher performance fees and, for the six-month period, a 4% increase in average AUM.

The increase in average AUM occurred primarily in the equity, alternative and multi-asset asset classes, partially offset by decreases in the fixed income asset class.

Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) was 41.4 basis points and 41.2 basis points for the three months ended December 31, 2021 and 2020.

Performance-based investment management fees were $139.9 million and $41.8 million for the three months ended December 31, 2021 and 2020, with the increase due to strong performance by our alternative specialist investment managers reflecting strong markets.

Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) were 41.3 and 41.5 basis points for the three and six months ended March 31, 2022, and 42.1 and 41.7 basis points for the same periods in the prior fiscal year.

The decreases were due to a shift in assets from higher-fee international sales regions to the lower-fee U.S.

sales region.

Performance-based investment management fees were $105.1 million and $245.0 million for the three and six months ended March 31, 2022, and $45.3 million and $87.1 million for the same periods in the prior fiscal year, with the increase due to strong performance by our alternative specialist investment managers reflecting strong markets.

Sales and Distribution Fees

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(in millions) Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

2022 2021 2022 2021

Asset-based fees $ 296.1 $ 322.2 (8 %) $ 618.0 $ 639.2 (3 %)

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Sales and Distribution Fees $ 370.2 $ 413.6 (10 %) $ 768.4 $ 810.5 (5 %)

Asset-based distribution fees increased $4.9 million for the three months ended December 31, 2021 primarily due to $17.0 million from a 6% increase in the related average AUM, partially offset by $10.7 million from a higher mix of lower-fee assets.

Sales-based fees decreased $1.0 million for the three months ended December 31, 2021 primarily due to $2.5 million from lower commissionable sales, partially offset by $2.1 million from a higher mix of equity sales, which typically generate higher sales fees than fixed income products.

Other revenue increased $9.2 million for the three months ended December 31, 2021 primarily due to an increase in real estate transaction fees earned by certain of our alternative asset managers.

Asset-based distribution fees decreased $26.1 million and $21.2 million for the three and six months ended March 31, 2022 primarily due to $13.4 million and $24.9 million from a higher mix of lower-fee assets and for the three-month period $9.8 million from a 3% decrease in the related average AUM.

Sales-based fees decreased $15.8 million and $16.8 million for the three and six months ended March 31, 2022 primarily due to $16.7 million and $19.8 million from lower commissionable sales, partially offset by $3.0 million from a higher mix of equity sales for the six-month period, which typically generate higher sales fees than fixed income products.

Other revenue increased $9.8 million for the six months ended March 31, 2022 primarily due to an increase in real estate transaction fees earned by certain of our alternative asset managers.

OPERATING EXPENSES

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Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2022 2021 2022 2021

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Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2022 2021 2022 2021

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Compensation and Benefits Expenses $ 752.5 $ 732.3 3 % $ 1,555.1 $ 1,457.8 7 %

Salaries, wages and benefits decreased $12.0 million for the three months ended December 31, 2021 primarily due to decreases of $10.5 million from lower average staffing levels and $7.4 million related to lower termination benefits in the current year, partially offset by a $5.0 million increase in annual merit salary adjustments.

Incentive compensation increased $97.3 million for the three months ended December 31, 2021 primarily due to increases of $50.1 million related to higher bonuses at the specialist investment managers due to higher revenue, $20.2 million in stock and stock unit award amortization and $17.9 million related to bonus expense primarily due to higher performance in the quarter.

Acquisition-related retention expenses decreased $3.5 million for the three months ended December 31, 2021.

Special termination benefits decreased $4.7 million for the three months ended December 31, 2021 primarily due to workforce optimization initiatives related to the acquisition of Legg Mason, Inc.

(“Legg Mason”).

Salaries, wages and benefits decreased $15.1 million for the six months ended March 31, 2022 primarily due to a decrease of $14.0 million related to lower termination benefits in the current year.

Incentive compensation increased $41.8 million and $139.1 million for the three and six months ended March 31, 2022 primarily due to increases of $33.3 million and $83.4 million related to higher bonuses at the specialist investment managers due to higher revenue, $8.3 million and $28.5 million in stock and stock unit award amortization and $15.3 million related to bonus expense primarily due to stronger performance in the six-month period.

Acquisition-related retention expenses decreased $12.4 million and $15.9 million for the three and six months ended March 31, 2022.

Special termination benefits decreased $6.1 million and $10.8 million for the three and six months ended March 31, 2022 primarily due to workforce optimization initiatives related to the acquisition of Legg Mason, Inc.

(“Legg Mason”) in the prior year periods.

We expect to incur additional acquisition-related retention expenses of approximately $130 million during the remainder of the current fiscal year, and annual amounts beginning at approximately $240 million in the fiscal year ending September 30, 2023 and decreasing over the following two fiscal years by approximately $30 million and $70 million.

At December 31, 2021, our global workforce had decreased to approximately 10,400 employees from approximately 11,400 at December 31, 2020.

At March 31, 2022, our global workforce had decreased to approximately 9,500 employees from approximately 11,100 at March 31, 2021.

Sales, Distribution and Marketing

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Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2022 2021 2022 2021

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Sales, Distribution and Marketing $ 482.4 $ 541.8 (11 %) $ 992.5 $ 1,048.3 (5 %)

Asset-based expenses increased $5.3 million for the three months ended December 31, 2021 primarily due to $14.8 million from a 4% increase in related average AUM, partially offset by $3.0 million from a higher mix of lower-fee assets.

Asset-based expenses decreased $41.1 million and $35.8 million for the three and six months ended March 31, 2022 primarily due to $11.9 million and $18.2 million from a higher mix of lower-fee assets and, for the three-month period, $15.4 million from a 4% decrease in related average AUM.

Distribution expenses are generally not directly correlated with distribution fee revenues due to certain fee structures that do not provide full recovery of distribution costs.

Sales-based expenses decreased $1.1 million for the three months ended December 31, 2021 primarily due to $2.3 million from lower commissionable sales, partially offset by $1.3 million increase in marketing support expenses.

Sales-based expenses decreased $15.5 million and $16.6 million for the three and six months ended March 31, 2022 substantially all due to lower commissionable sales.

Information Systems and Technology

Information systems and technology expenses increased $7.3 million for the three months ended December 31, 2021 primarily due to higher consulting and external data service costs.

Information systems and technology expenses increased $9.4 million and $16.7 million for the three and six months ended March 31, 2022 primarily due to higher costs incurred for consulting and software.

General, Administrative and Other

General, administrative and other operating expenses decreased $8.4 million for the three months ended December 31, 2021, primarily due to a $9.1 million decrease in professional fees.

General, administrative and other operating expenses increased $25.9 million and $17.5 million for the three and six months ended March 31, 2022, primarily due to $15.7 million in non-recurring costs incurred in connection with the outsourcing of our global transfer agent functions, as well as increases of $11.4 million and $14.3 million in advertising and promotion expenses, largely related to our global brand campaign, offset in part by a $10.3 million credit adjustment to increase the fair value of a contingent consideration asset.

OTHER INCOME (EXPENSES)

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Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2022 2021 2022 2021

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Other Income, Net $ 3.2 $ 157.2 (98 %) $ 141.4 $ 285.4 (50 %)

Investment and other income, net decreased $20.2 million for the three months ended December 31, 2021, primarily due to lower income from equity method investees and lower gains on investments held by the Company, partially offset by foreign currency exchange gains.

Equity method investees generated income of $24.7 million for the three months ended December 31, 2021, as compared to income of $38.5 million in the prior year, primarily related to various global equity funds.

Investments held by the Company generated net gains of $25.8 million for the three months ended December 31, 2021, as compared to net gains of $48.7 million in the prior year.

The current year gains were primarily from investments measured at cost adjusted for observable price changes and assets invested for deferred compensation plans, while the prior year gains were primarily from various nonconsolidated funds, assets invested for deferred compensation plans, and separate accounts.

Net foreign currency exchange gains were $3.9 million for the three months ended December 31, 2021, as compared to net losses of $16.5 million in the prior year period.

Investment and other income, net decreased $39.4 million and $59.6 million for the three and six months ended March 31, 2022 primarily due to the impact of declines in market valuations amid global market volatility in the current year periods.

Income from equity method investees decreased $18.9 million and $32.7 million for the three and six months ended March 31, 2022, primarily due to losses in the three-month period, as compared to gains in the prior year, and lower income in the six-month period, largely related to various global equity and alternative funds.

The decrease in both periods was partially offset by a $52.6 million gain recognized on the sale of our investment in Embark in the current year.

Investments held by the Company generated net losses of $23.1 million for the three-month period as compared to net gains of $10.2 million in the prior year, and for the six-month period generated net gains of $2.7 million as compared to net gains of $58.9 million in the prior year, primarily from assets invested for deferred compensation plans, separate accounts and nonconsolidated funds, partially offset in the six-month period by gains from investments measured at cost adjusted for observable price changes.

Net foreign currency exchange gains were $9.7 million for the six months ended March 31, 2022, as compared to net losses of $10.0 million for the six months ended March 31, 2021.

The increase was primarily due to the impact of the strengthening of the U.S.

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dollars held in Europe.

Interest expense decreased $10.4 million, primarily due to the redemptions in fiscal year 2021 of the junior notes issued by Legg Mason, partially offset by interest expense recognized on the senior unsecured unsubordinated notes issued in August 2021.

Investment and other income of consolidated investment products, net, increased $13.6 million for the three months ended December 31, 2021, primarily due to a $27.8 million increase in net gains on investments held by CIPs, largely related to holdings of various alternative funds, partially offset by losses on holdings of various equity funds, as compared to gains in the prior year, and higher losses on holdings of fixed income funds.

This increase was partially offset by a $14.2 million decrease in dividend and interest income of CIPs.

Expenses of consolidated investments products decreased $6.2 million for the three months ended December 31, 2021, primarily due to lower expenses incurred by an alternative fund.

Our cash, cash equivalents and investments portfolio by asset class and accounting classification at December 31, 2021, excluding third-party assets of CIPs, was as follows:

Derivatives generated $6.7 million of gains and $2.3 million of losses for the three- and six-month periods ended March 31, 2022 as compared to losses of $6.1 million and $16.1 million in the prior year three- and six-month periods.

Interest expense increased $7.0 million for the three months ended March 31, 2022 and decreased $3.4 million for the six months ended March 31, 2022.

The increase for the three-month period was primarily due to $3.0 million of interest expense recognized on the senior unsecured unsubordinated notes issued in August 2021 and a $3.0 million increase in interest recognized on tax reserves in the current year period.

The decrease for the six-month period was primarily due to the redemptions in fiscal year 2021 of the junior notes issued by Legg Mason, partially offset by interest expense recognized on the senior unsecured unsubordinated notes issued in August 2021.

Investment and other income of consolidated investment products, net, decreased $108.2 million and $94.6 million for the three and six months ended March 31, 2022.

Investments held by CIPs generated losses of $14.2 million in the three-month period, as compared to gains of $88.7 million in the prior year period, and for the six-month period generated gains of $74.5 million, as compared to gains of $149.6 million in the prior year period, largely related to losses on holdings of various equity funds and fixed income funds, partially offset by higher gains on holdings of various alternative funds.

The three-month period included $17.2 million of dividend and interest income of CIPs, as compared to $22.5 million in the prior year period, and the six-month period included $33.2 million, as compared to $52.7 million in the prior year period.

Expenses of consolidated investments products decreased $6.8 million for the six months ended March 31, 2022, primarily due to lower expenses incurred by an alternative fund.

Our cash, cash equivalents and investments portfolio by asset class and accounting classification at March 31, 2022, excluding third-party assets of CIPs, was as follows:

Accounting Classification 1

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Cash and Cash Equivalents $ 4,411.6 $ — $ — $ — $ — $ 4,411.6

Fixed Income — 293.4 67.2 36.8 222.1 619.5

Equity — 309.8 347.4 101.3 222.2 980.7

Alternative — 94.7 346.3 61.9 457.9 960.8

Equity — 227.8 208.9 116.9 199.6 753.2

Fixed Income — 226.7 24.1 37.3 280.6 568.7

Multi-Asset — 40.1 13.7 — 84.6 138.4

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TAXES ON INCOME

Our effective income tax rate was 21.7% and 26.5% for the three months ended December 31, 2021 and 2020.

The rate decrease was primarily due to tax benefits related to stock-based compensation and the release of tax reserves due to statute of limitation expiration.

Our effective income tax rate was 23.0% and 22.2% for the three and six months ended March 31, 2022, as compared to 20.9% and 23.5% for the three and six months ended March 31, 2021.

The rate increase for three-month period was primarily due to a decrease in net income attributable to noncontrolling interests and a decrease in foreign earnings.

The rate decrease for the six-month period was primarily due to tax benefits from stock-based compensation and the release of tax reserves due to statute of limitation expiration partially offset by a decrease in net income from noncontrolling interests.

Our effective income tax rate reflects the relative contributions of earnings in the jurisdictions in which we operate, which have varying tax rates.

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• Impact on compensation and benefits expense from gains and losses on investments related to deferred compensation plans and seed investments, which is offset in investment and other income (losses), net.

• Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration liabilities.

• Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.

• Amortization and impairment of intangible assets, if any.

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• Acquisition-related retention compensation.

• Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration liabilities.

• Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.

• Amortization and impairment of intangible assets, if any.

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(in millions) Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

Operating income $ 463.0 $ 456.3 $ 1,020.7 $ 865.4

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Elimination of operating revenues upon consolidation of investment products 1

17.2 5.8 25.5 11.5

Acquisition-related retention

Compensation and benefits expense from gains on deferred compensation and seed investments, net 4.2 14.1

34.2 46.6 74.2 90.1

Compensation and benefits expense from gains (losses) on deferred compensation and seed investments, net (15.3) 0.2 (11.1) 14.3

Other acquisition-related expenses 12.7 3.8 27.4 15.7

Amortization of intangible assets

60.4 57.9 118.7 116.1

Special termination benefits

4.4 10.5 7.1 17.9

Adjusted operating income $ 576.6 $ 581.1 $ 1,262.5 $ 1,131.0

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Acquisition-related pass through performance fees

— (9.3) (0.4) (25.3)

Sales and distribution fees

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Elimination of operating revenues upon consolidation of investment products 1

17.2 5.8 25.5 11.5

Adjusted operating revenues $ 1,615.8 $ 1,531.2 $ 3,337.6 $ 3,009.5

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(in millions, except per share data) Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

Net income attributable to Franklin Resources, Inc.

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Add (subtract):

Net loss of consolidated investment products 1

Net (income) loss of consolidated investment products 1

0.1 (6.3) 10.1 14.9

Acquisition-related retention

34.2 46.6 74.2 90.1

Other acquisition-related expenses 12.7 3.7 27.8 13.8

Amortization of intangible assets

60.4 57.9 118.7 116.1

Special termination benefits

Net gains on deferred compensation plan investments not offset by compensation and benefits expense (0.3) (1.2)

4.4 10.5 7.1 17.9

Net (gains) losses on deferred compensation plan investments not offset by compensation and benefits expense 2.8 (0.2) 2.5 (1.4)

Unrealized investment losses (gains) 70.3 (60.6) 72.1 (156.5)

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0.96 0.79 2.04 1.51

__________________

1 The impact of CIPs is summarized as follows:

(in millions) Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

Elimination of operating revenues upon consolidation $ (17.2) $ (5.8) $ (25.5) $ (11.5)

Other income, net 9.9 95.6 82.4 115.9

income attributable to noncontrolling interests 74.2 35.8

Net loss $ (10.0) $ (21.2)

income (loss) attributable to noncontrolling interests (7.2) 83.5 67.0 119.3

Net income (loss) $ (0.1) $ 6.3 $ (10.1) $ (14.9)

LIQUIDITY AND CAPITAL RESOURCES

Cash flows were as follows:

Three Months Ended

Six Months Ended

(in millions) 2022 2021

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Financing cash flows 1,275.9 1,330.8

Net cash provided by operating activities decreased during the three months ended December 31, 2021 primarily due to payments of accrued compensation and benefits and an increase in receivables and other assets, partially offset by higher net income.

Net cash used in investing activities decreased primarily due to lower net purchases of investments by CLOs and net liquidations of investments as compared to net purchases in the prior year, partially offset by cash paid for acquisitions in the current year and a decrease in loans receivable, net.

Net cash provided by financing activities decreased primarily due to proceeds from issuance of debt in the prior year, partially offset by higher net proceeds from debt of CIPs and higher net subscriptions in CIPs by noncontrolling interests.

Net cash provided by operating activities decreased during the six months ended March 31, 2022 primarily due to payments of accrued compensation and benefits and decreases in accounts payable, accrued expenses and other liabilities as compared to increases in the prior year.

Net cash used in investing activities decreased primarily due to net liquidations of our investments as compared net purchases in the prior year, partially offset by cash paid for acquisitions in the current year.

Net cash provided by financing activities decreased primarily due to proceeds from the issuance of debt in the prior year, partially offset by higher net proceeds from the debt of CIPs, a prior-year debt payment and higher net subscriptions in CIPs by noncontrolling interests.

The assets and liabilities of CIPs attributable to third-party investors do not impact our liquidity and capital resources.

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Our liquid assets and debt consisted of the following:

(in millions) December 31,

(in millions) March 31,

2022 September 30,

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Liquid assets consist of cash and cash equivalents, receivables and certain investments.

Cash and cash equivalents at December 31, 2021 primarily consist of money market funds and deposits with financial institutions.

Cash and cash equivalents at March 31, 2022 primarily consist of money market funds and deposits with financial institutions.

Liquid investments consist of investments in sponsored and other funds, direct investments in redeemable CIPs, other equity and debt securities, and time deposits with maturities greater than three months.

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On January 10, 2022, the Company entered into a bi-lateral credit agreement with Bank of America, N.A.

to establish a 364 day revolving credit facility with aggregate commitments of $500.0 million.

to establish a 364 day revolving credit facility with an aggregate commitment of $500.0 million.

As of the time of this filing, there were no amounts outstanding.

In prior fiscal years, we issued senior unsecured unsubordinated notes for general corporate purposes and to redeem outstanding notes.

At December 31, 2021, Franklin’s outstanding senior notes had an an aggregate principal amount due of $1,900.0 million.

At March 31, 2022, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,900.0 million.

The notes have fixed interest rates from 1.600% to 2.950% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized discounts and debt issuance costs, of $1,882.2 million.

At December 31, 2021, Legg Mason’s outstanding senior notes had an aggregate principal amount due of $1,250.0 million.

The notes have fixed interest rates from 3.950% to 5.625% with interest payable semi-annually for senior notes, and have an aggregate carrying value, inclusive of unamortized premium and debt issuance costs, of $1,512.1 million at December 31, 2021.

At March 31, 2022, Legg Mason’s outstanding senior notes had an aggregate principal amount due of $1,250.0 million.

Effective August 2, 2021, Franklin agreed to unconditionally and irrevocably guarantee all of the outstanding notes issued by Legg Mason.

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In addition, the indentures include requirements that must be met if we consolidate or merge with, or sell all of our assets to, another entity.

We were in compliance with all debt covenants at December 31, 2021.

At December 31, 2021, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated.

We were in compliance with all debt covenants at March 31, 2022.

At March 31, 2022, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated.

Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets.

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We typically declare cash dividends on a quarterly basis, subject to approval by our Board of Directors.

We declared regular dividends of $0.29 per share during the three months ended December 31, 2021 and $0.28 per share during the three months ended December 31, 2020.

We declared regular dividends of $0.58 per share during the six months ended March 31, 2022 and $0.56 per share during the six months ended March 31, 2021.

We currently expect to continue paying comparable regular dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.

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The size and timing of these purchases will depend on business conditions, price, market and other factors.

During the three months ended December 31, 2021, we repurchased 0.7 million shares of our common stock at a cost of $21.7 million and we repurchased 2.1 million shares of our common stock at a cost of $45.6 million in the prior year period.

At December 31, 2021, 30.2 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018.

We redeemed $4.2 million, net of investments, into our sponsored products during the three months ended December 31, 2021 and invested $29.1 million, net of redemptions, in the prior year period.

During the three and six months ended March 31, 2022, we repurchased 2.7 million and 3.4 million shares of our common stock at a cost of $80.8 million and $102.5 million.

At March 31, 2022, 27.5 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018.

During the three and six months ended March 31, 2021, we repurchased 1.7 million and 3.8 million shares of our common stock at a cost of $45.8 million and $91.4 million.

We redeemed $122.6 million, net of investments, into our sponsored products during the six months ended March 31, 2022 and invested $171.9 million, net of redemptions, in the prior year period.

On April 1, 2021, we acquired all of the outstanding ownership interests in Lexington, a leading global manager of secondary private equity and co-investment funds, for cash consideration of approximately $1.0 billion, excluding future payments to be made subject to the attainment of certain performance measures.

In connection with the acquisition, we are granting a 25% ownership stake in Lexington and performance-based cash retention awards that both vest over approximately five years.

We paid the purchase price from our existing cash.

On December 31, 2021, we acquired all of the outstanding ownership interests in OSAM, a leading quantitative asset management firm, for cash consideration of approximately $300 million, excluding future payments to be made subject to the attainment of certain performance measures.

We paid the purchase price from our existing cash.

On November 1, 2021, we entered into an acquisition agreement to acquire all of the outstanding ownership interests in Lexington Partners L.P.

for cash consideration of approximately $1.0 billion to be paid at closing and additional cash payments totaling $750 million to be paid over the next three years.

The acquisition is expected to close on or around April 1, 2022.

The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit.

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The loans were fully repaid during the second quarter of fiscal year 2021.

See Note 9 – Commitments and Contingencies in the notes to consolidated financial statements in Item 1 of Part I of this Form 10-Q for further information.

We did not provide financial or other support to our sponsored funds during the three months ended December 31, 2021.

See Note 16 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for fiscal year 2021 for further information.

We did not provide financial or other support to our sponsored funds during the six months ended March 31, 2022.

CRITICAL ACCOUNTING POLICIES

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These estimates, judgments and assumptions are affected by our application of accounting policies.

Further, global concerns about the COVID-19 pandemic have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management.

Further, global concerns about the Russian invasion of Ukraine and the COVID-19 pandemic have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management.

Actual results could differ from the estimates.

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Our VIEs are primarily investment products and our variable interests consist of our equity ownership interests in and investment management fees earned from these products.

As of December 31, 2021, we were the primary beneficiary of 52 investment product VIEs.

As of March 31, 2022, we were the primary beneficiary of 55 investment product VIEs.

Business Combinations

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We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole.

During the three months ended December 31, 2021, there were no events or circumstances which would indicate that goodwill, indefinite-lived intangible assets or definite-lived intangible assets might be impaired.

During the six months ended March 31, 2022, there were no events or circumstances which would indicate that goodwill, indefinite-lived intangible assets or definite-lived intangible assets might be impaired.

While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment.

Fair Value Measurements

Our investments are primarily recorded at fair value or amounts that approximate fair value on a recurring basis.

A substantial amount of our investments are recorded at fair value or amounts that approximate fair value on a recurring basis.

We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable.

As of December 31, 2021, Level 3 assets represented 10% of total assets measured at fair value, which primarily related to CIPs’ investments in equity and debt securities.

There were insignificant transfers into and out of Level 3 during the three months ended December 31, 2021.

We earn revenue primarily from providing investment management and related services to our customers.

In addition to investment management, services include fund administration, sales and distribution, and shareholder servicing.

Revenues are recognized when our obligations related to the services are satisfied and it is probable that a significant reversal of the revenue amount would not occur in future periods.

The obligations are satisfied over time as the services are rendered, except for the sales and distribution obligations for the sale of shares of sponsored funds, which are satisfied on trade date.

Multiple services included in customer contracts are accounted for separately when the obligations are determined to be distinct.

Investment management fees, other than performance-based fees, and distribution fees are determined based on a percentage of AUM, primarily on a monthly basis using daily average AUM.

Performance-based investment management fees are generated when investment product performance exceeds targets established in customer contracts.

AUM is generally based on the fair value of the underlying securities held by investment products and is calculated using fair value methods derived primarily from unadjusted quoted market prices, unadjusted independent third-party broker or dealer price quotes in active markets, or market prices or price quotes adjusted for observable price movements after the close of the primary market.

The fair values of securities for which market prices are not readily available are valued internally using various methodologies which incorporate significant unobservable inputs as appropriate for each security type.

As of March 31, 2022, Level 3 assets represented 10% of total assets measured at fair value, which primarily related to CIPs’ investments in equity and debt securities.

There were insignificant transfers into and out of Level 3 during the six months ended March 31, 2022.

Quantitative and Qualitative Disclosures About Market Risk.

During the three months ended December 31, 2021, there were no material changes from the market risk disclosures in our Form 10‑K for the fiscal year ended September 30, 2021.

During the six months ended March 31, 2022, there were no material changes from the market risk disclosures in our Form 10‑K for the fiscal year ended September 30, 2021.

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-Q

Item 2. Management’s Discussion and Analysis