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Item 1. Business

2023-02-24 compared with 2022-02-25 · 634 added, 809 removed, 293 unchanged (83% of the section changed)

ITEM 1 – BUSINESS

Federated Hermes, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated Hermes), was formerly known as Federated Investors, Inc.

Effective January 31, 2020, Federated Investors, Inc.'s name was changed to Federated Hermes, Inc.

Federated Hermes is a leading provider of investment management products and related financial services.

Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States (U.S.) with $668.9 billion in assets under management (AUM or managed assets) at December 31, 2021.

Federated Hermes, Inc.

a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated Hermes) is a global leader in active, responsible investing with $668.9 billion in assets under management (AUM or managed assets) at December 31, 2022.

Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States (U.S.).

Federated Hermes also provides stewardship services to customers seeking a range of solutions for engagement, advocacy, active ownership and impact.

In seeking to enhance long-term investment performance for its customers and clients, Federated Hermes has taken steps to integrate the proprietary insights from fundamental environmental, social and governance (ESG) factors and engagement research into nearly all of its investment strategies.

Federated Hermes operates in one operating segment, the investment management business.

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See Item 1A - Risk Factors - Specific Risk Factors - Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements for additional information on Federated Hermes’ advisory agreements.

Of the 168 Federated Hermes Funds as of December 31, 2021, Federated Hermes' investment advisory subsidiaries managed 23 money market funds with $312.8 billion in AUM, 55 fixed-income funds with $59.9 billion in AUM, 42 equity funds with $57.0 billion in AUM, 43 alternative/private markets funds with $14.8 billion in AUM and five multi-asset funds with $3.6 billion in AUM.

Of the 174 Federated Hermes Funds, Federated Hermes’ investment advisory subsidiaries managed 23 money market funds with $335.9 billion in AUM, 45 equity funds with $43.3 billion in AUM, 55 fixed-income funds with $43.2 billion in AUM, 46 alternative/private markets funds with $13.1 billion in AUM and five multi-asset funds with $2.9 billion in AUM.

As of December 31, 2022, Federated Hermes provided investment advisory services to $230.5 billion in Separate Account assets.

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These services, for which Federated Hermes receives fees pursuant to agreements with the Federated Hermes Funds, include administrative services and shareholder servicing.

On July 2, 2018, Federated Hermes completed, effective as of July 1, 2018, the acquisition of a 60% controlling interest in Hermes Fund Managers Limited (HFML) from BT Pension Scheme (BTPS) (2018 HFML Acquisition).

On August 31, 2021, Federated Hermes completed the acquisition of the 29.5% noncontrolling interests in HFML from BTPS (2021 Acquisition of HFML Noncontrolling Interests).

As a result of the 2018 HFML Acquisition, Federated Hermes provides stewardship services and environmental, social and governance (ESG) integrated investment strategies.

Through the stewardship services, Federated Hermes offers customers a range of solutions for engagement, advocacy, active ownership and impact and delivers effective engagement with the companies in which its customers may invest.

In order to continue to seek and enhance long-term performance for its customers and clients, Federated Hermes continues to take steps to integrate the proprietary insights from fundamental ESG factors and engagement research into nearly all of its investment strategies.

On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of HGPE Capital Limited (HCL Acquisition).

The principal activity of HGPE Capital Limited is that of a holding company for an infrastructure and private equity investment management business.

As a result of the acquisition of HGPE Capital Limited, Federated Hermes gained control of Hermes GPE LLP (HGPE) (collectively with HGPE Capital Limited, HCL).

The addition of London-based HCL provides the opportunity to further accelerate and broaden Federated Hermes' global growth.

Assets Under Management

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Alternative / Private Markets 21,799 20,754 18,206 5 14

20,754 18,206 17,896 14 2

Multi-Asset 3,273 3,879 3,813 (16) 2

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Total Average Managed Assets $ 632,633 $ 632,799 $ 613,908 0 % 3 %

1 The average balance for the year ended December 31, 2019 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in wh ich Federated Hermes held an equity method investment.

Effective March 1, 2020, HGPE became a consolidated subsidiary.

See Note (2) to the Consolidated Financial Statements for additional information.

Changes in Federated Hermes’ average asset mix year-over-year across both asset classes and product/strategy types have a direct impact on Federated Hermes’ operating income.

Asset mix impacts Federated Hermes’ total revenue due to the difference in the fee rates earned on each asset class and product/strategy type per invested dollar.

Generally, advisory fees charged for services provided to equity and multi-asset products and strategies are higher than advisory fees charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than advisory fees charged to money market products and strategies.

Generally, advisory fees charged for services provided to multi-asset and equity products and strategies are higher than advisory fees charged to alternative/private markets and fixed-income products and strategies, which in turn are higher than advisory fees charged to money market products and strategies.

Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts.

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Federated Hermes’ equity assets totaled $81.5 billion at December 31, 2022 and are managed across a wide range of categories including:

international/global ($36.5 billion);

value and income ($37.4 billion);

international/global ($27.1 billion);

growth ($12.9 billion);

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high-yield ($13.8 billion);

corporate ($6.3 billion);

municipal (or tax-exempt) ($7.4 billion);

corporate ($4.4 billion);

government ($3.9 billion);

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Financial intermediaries use Federated Hermes’ products to meet the needs of their customers, who are often retail investors.

Federated Hermes offers a full range of products to these customers, including Federated Hermes Funds, Separate Accounts and private funds.

Federated Hermes offers a full range of products to these customers, including Federated Hermes Funds and Separate Accounts (including private funds).

As of December 31, 2022, managed assets in the U.S.

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As of December 31, 2022, managed assets in the U.S.

institutional market included $131.9 billion in money market assets, $40.7 billion in fixed-income assets, $3.9 billion in equity assets, $0.5 billion in multi-asset and $0.5 billion in alternative/private markets assets.

institutional market included $144.0 billion in money market assets, $42.5 billion in fixed-income assets, $2.9 billion in equity assets, $0.6 billion in alternative/private markets assets and $0.4 billion in multi-asset.

International Federated Hermes manages assets from non-U.S.

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In addition to competition from other mutual fund managers, ETF providers and investment advisors, Federated Hermes competes with investment alternatives offered by insurance companies, commercial banks, broker/dealers, deposit brokers, private markets/alternative product managers and other financial institutions.

Federated Hermes launched its first ETFs - two fixed-income, fully transparent ETFs - in mid-December 2021.

Federated Hermes launched its first ETFs - two fixed-income, fully transparent ETFs - in December 2021 and a dividend income equity ETF in November 2022.

Competition for sales of investment products and strategies is influenced by various factors, including investment performance, attainment of stated objectives, yields and total returns, fees and expenses, advertising and sales promotional efforts, investor confidence and preference, relationships with intermediaries and other customers and type and quality of services.

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Federated Hermes and its products, such as t he Federated Hermes Funds, and strategies are subject to:

federal securities laws, principally the Securities Act of 1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act), the 1940 Act and the Advisers Act;

various federal securities laws, such as the Securities Act of 1933 (1933 Act), the Securities Act of 1934 (1934 Act), 1940 Act, and Advisers Act;

state laws regarding securities fraud and registration;

regulations or other rules promulgated by various regulatory authorities, self-regulatory organizations or exchanges;

and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities.

regulations or other rules promulgated by various regulatory authorities, or other authorities.

Various laws and regulations that have or are expected to be re-examined, modified, or reversed, or that become effective, and any new proposed laws, rules, regulations and directives or consultations (collectively, both domestically and internationally, as applicable, Regulatory Developments) continue to impact the investment management industry generally, and will continue to impact, to various degrees, Federated Hermes’ business, results of operations, financial condition, cash flows and/or stock price (collectively, Financial Condition).

See Item 1A - Risk Factors - General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.

Current Regulatory Environment - Domestic

In 2021, as the Pandemic continued, the regulatory environment in the U.S.

and globally shifted away from the adoption of measures intended to provide regulatory flexibility.

Despite the Pandemic, the SEC (among other regulatory authorities, self-regulatory organizations or exchanges) continued to advance rulemaking initiatives, conduct risk-based examinations, bring enforcement actions, and review and comment on issuer and fund filings.

In the fourth quarter of 2021, the SEC issued five final, and nine proposed, rules or regulations, including a final rule on performance-based advisory fees and proposed rules on money market fund reforms, share repurchase disclosure modernization, securities lending disclosure and insider trading.

As 2022 begins, the impact of the continuing Pandemic on the regulatory environment in the U.S., and globally, remains uncertain.

It is possible that the impact of the Pandemic could continue to decrease (but likely not completely dissipate) as 2022 progresses due to the continued distribution of vaccines on a larger scale, the potential for continued, but lessened, market intervention from the U.S.

Federal Reserve Board (Fed), and the possibility of additional stimulus packages, similar to the $900 billion Consolidated Appropriations Act, 2021, passed by Congress in December 2020 and the $1.9 trillion American Rescue Plan Act of 2021 passed by Congress in March 2021.

and global regulators continued in 2021, and continue in 2022, to focus on the impact of the Pandemic on the markets.

As of December 31, 2021, the Fed's balance sheet was approaching $8.76 trillion.

With several facilities established by the Fed in 2020 winding down, on July 28, 2021, the Federal Open Market Committee (FOMC) announced the establishment of two standing repurchase agreement (repo) facilities—a domestic repo facility against Treasury securities, agency debt securities, and agency mortgage-backed securities with a $500 billion daily limit, and a repo facility for foreign and international monetary authorities against their holdings of Treasury securities maintained in custody at the Federal Reserve Bank of New York with a $60 billion per counterparty limit.

Primary dealers are counterparties to the domestic facility and depository institutions began to be added as counterparties in the fourth quarter of 2021.

These facilities, among others, were adopted to address market inefficiencies and provide financial backstops.

In March 2020, in response to disrupted economic activity as a result of the Pandemic, the FOMC also decreased the federal funds target rate range to 0% - 0.25%.

The federal funds target rate drives short-term interest rates.

These low interest rates, and the possibility of negative interest rates, caused the investment management industry to engage with the SEC (and other regulators globally) to discuss ways to address a negative interest rate environment.

In its December 15, 2021 proposed rule on money market fund reforms, the SEC refused to allow the implementation of reverse distribution mechanisms or share cancellation methodologies to maintain the stability of stable net asset value (NAV) money market funds in a negative rate environment.

Any solution to the difficulties presented by a potential negative interest rate environment can require significant internal and external resources to implement necessary changes, including system programming and implementing disclosure changes, both for money market funds and their service providers or vendors (service providers).

and global regulators also continue to re-examine existing and propose new laws, rules, and regulations.

With the SEC's aggressive 54 item rulemaking schedule announced in its Fall 2021 Unified Agenda of Regulatory and Declaratory Actions (Fall Reg Flex Agenda), the expectation is that the pace of new proposed and final laws, rules and regulations and other regulatory activity will increase in 2022.

For example, the SEC's Fall Reg Flex Agenda signals upcoming proposals on Rule 35d-1 under the 1940 Act (Names Rule), climate change disclosures, human capital management disclosures, corporate board diversity, reporting of proxy votes on executive compensation, special purpose acquisition companies (SPACs), and proxy voting advice, among other proposals.

The regulatory actions to address the Pandemic, any other laws and regulations that have or are expected to be re-examined, modified or reversed, or that become effective, and any new proposed laws, rules and regulations, continue to impact the investment management industry (collectively, both domestically and internationally, as applicable, Regulatory Developments).

and global regulators also continue to focus on the market conditions that existed in March 2020, and their impact on open-end funds, including institutional prime and municipal (or tax-exempt) money market funds.

On October 5, 2021, while testifying before the House Financial Services Committee, SEC Chair Gensler indicated that he had asked SEC staff for recommendations to address the challenges to money market funds experienced in the spring of 2020, and stated that he believes "it is time to reflect upon the reforms of 2014 and 2010 to see if we can further improve resiliency, particularly in times of stress." It has been reported that Financial Stability Oversight Council (FSOC) Chairperson Yellen fully supported the SEC's reform efforts.

In the FSOC's Statement on Money Market Fund Reform, the FSOC indicated that "the [FSOC] is encouraged by the SEC's engagement on this critical issue" and, "[g]iven the interconnectedness of financial institutions and markets, the [FSOC] will continue to monitor this initiative in the broader context of efforts by financial regulators to strengthen short-term funding markets and support orderly market functioning, including during periods of heightened market stress."

Building on the December 22, 2020 report by the President's Working Group on Financial Markets (PWG) entitled, "Overview of Recent Events and Potential Reform Options for Money Market Funds" (PWG Report), on April 15, 2021, the SEC Division of Investment Management's Analytics Office issued an article, "Prime MMFs at the Onset of the Pandemic:

Asset Flows, Liquidity Buffers, and NAVs," which concluded (among other things) that March 2020 outflows reduced prime money market funds' liquidity buffers and that volatility of prime money market funds' NAV per share increased at the onset of the Pandemic.

Contrary to the focus placed by the PWG Report and regulators on money market funds as a cause of the market turmoil in March 2020, the Investment Company Institute (ICI) had issued a report entitled, "Experiences of U.S.

Money Market Funds During the Covid-19 Crisis" (ICI MMF Report), in November 2020 that supports the view that the Treasury securities markets, rather than money market funds, triggered the market turmoil.

The ICI MMF Report rebuked suggestions that money market funds, particularly institutional prime money market funds, were a primary, if not the sole, cause of market distress in March 2020, noting that, "[t]hese suggestions are inconsistent with the data and early press reports." The ICI MMF Report points to the fact that the market dislocations were widespread, including in markets in which institutional prime money market funds are not significant players, such as the U.S.

Treasury bonds, longer-term U.S.

agency securities, municipal securities, corporate bonds, and foreign exchange markets.

The ICI MMF Report also studied institutional prime money market fund asset flows and spreads in the Treasury bond market, concluding, "by March 11[, 2020] these spreads had widened substantially, yet prime money market funds had seen virtually no outflows." The ICI MMF Report also noted that, "press reports do not support the theory that money market funds were at the forefront of the market stress" and that, "Treasury markets were in the news several days before any real mention of money market funds .

In response to requests for comments by the SEC's Division of Investment Management regarding aspects of the PWG Report and potential money market fund reforms, Federated Hermes, along with the ICI and other industry participants, submitted comment letters that strongly disagree with the conclusions reached in the PWG Report.

In its first comment letter, dated April 12, 2021, Federated Hermes emphasized, among other points, that money market funds did not cause or exacerbate the turmoil in the financial markets in March 2020, and money market funds have no "structural vulnerabilities" warranting the more significant policy options outlined in the PWG Report, such as capital buffers and holdbacks.

Federated Hermes stressed that the market turmoil in March 2020 was created by the Pandemic and the unprecedented global government response and economic shut-down to stem the spread of the coronavirus.

In its comment letter, Federated Hermes supported the SEC in eliminating the requirement for a fund's board to consider imposing redemption gates and liquidity fees if weekly liquid assets drop below 30% of the fund's total assets.

This is one of the requirements that was imposed under the SEC's structural, operational and other money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (2014 Money Fund Rules) and related guidance (collectively, the 2014 Money Fund Rules and Guidance).

Compliance with the 2014 Money Fund Rules and Guidance was required by October 14, 2016.

In its second comment letter, dated June 1, 2021, Federated Hermes recommended certain structural reforms that address the root causes of the failure of critical funding markets in March 2020 and the consequent systematic risks, including:

(1) the provision of liquidity in stressed markets, as well as reforms to promote market-making in stressed conditions;

(2) amendments to rule 2a-7 to delink the consideration of redemption gates and liquidity fees from the 30% of a fund's total assets threshold;

(3) reforms to the short-term market structure itself to improve liquidity in times of stress;

and (4) considerations for balancing the SEC's statutory mandate with liquidity and financial stability concerns.

In a third comment letter, dated September 21, 2021, Federated Hermes expressed its belief that the combination of delinking the potential imposition of redemption gates and liquidity fees with a money market fund's weekly liquid asset requirements, adoption of certain liquidity fee procedures, and enhancements to money market funds' ability to "know their customer" via an amendment to Rule 22c-2 under the 1940 Act, when combined with consideration of, and improvements in, the short-term markets generally, can address the concerns identified in the PWG Report without adversely impacting the viability of money market funds and their benefits to investors, issuers and capital formation.

On December 15, 2021, the SEC Commissioners voted to propose new amendments to money market fund rules.

In his statement announcing the proposals, SEC Chair Gensler cited the PWG Report, international regulatory concern, the prior FSOC statements, SEC comments and public responses to the SEC's requests for comment, as evidence for the systemic risk posed by money market funds.

According to the SEC, the proposed amendments would improve the resilience and transparency of money market funds by:

(1) increasing minimum liquidity requirements for daily and weekly liquid assets to 25% and 50%, respectively, to provide a more substantial buffer in the event of rapid redemptions;

(2) removing the ability of money market funds to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, which would eliminate an incentive for preemptive redemptions;

(3) requiring certain money market funds ( e.g.

, institutional prime and institutional municipal (or tax-exempt) money market funds) to implement swing pricing, which involves a process of adjusting a fund's current NAV such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders, so that they bear the liquidity costs of their redemptions;

(4) enhancing certain reporting requirements ( e.g.

, Form N-MFP and Form N-CR) to improve the SEC's ability to monitor and analyze money market fund data;

and (5) requiring stable

NAV money market funds to convert to a floating NAV if future market conditions result in negative money market fund yields.

The comment period on the SEC's proposed rule will end on April 11, 2022.

At its February 4, 2022 meeting, the FSOC recognized that open-end funds were not the sole or primary cause of market turmoil in 2020, but mistakenly noted that the size of their asset liquidations indicates that they were one of the significant contributors to the market stress.

At the same meeting, the FSOC reviewed the SEC's proposed money market fund reforms and indicated that the FSOC supports the SEC's efforts to reform money market funds and to strengthen short-term funding markets.

FSOC's conclusion that open-end funds were significant contributors to the March 2020 turmoil contradicts the conclusion of the ICI MMF Report, as well as Federated Hermes' April 12, 2021 comment letter, (each discussed above) which demonstrate that the March 2020 market turmoil was caused by the Pandemic and the unprecedented global response and economic shut-down, not open-end funds.

Federated Hermes is currently reviewing the proposed rule to assess any potential impact to Federated Hermes' business, and intends to participate in the comment process.

Federated Hermes believes that swing pricing is not a workable alternative for institutional prime and municipal (or tax-exempt) money market funds because it creates uncertainty around redemption proceeds and requires significant system changes for money market funds, investors and their respective service providers.

Federated Hermes also opposes increasing the liquidity requirements for daily and weekly assets because of the negative effect such increased requirements will have on money market fund yields.

Federated Hermes also opposes the elimination of liquidity fees and redemption gates, and believes money market funds should have a choice between imposing liquidity fees and redemption gates and implementing swing pricing.

Finally, Federated Hermes disagrees with the SEC's refusal to permit money market funds to use reverse distribution mechanisms or share cancellation methodologies to maintain a stable NAV in a negative rate environment.

If swing pricing and the other money market fund reforms proposed by the SEC are adopted as proposed, Federated Hermes believes that they could result in a shift of assets from institutional prime and municipal (or tax-exempt) money market funds to government money market funds.

The comment period ends 60 days after the proposed rule is published in the Federal Register.

Federated Hermes has expended, and will continue to expend, significant internal and external resources to engage with regulators on potential money market fund reforms, including through additional comment letters and meetings with U.S.

and global regulators and legislators, the ICI and other industry participants.

Management believes money market funds provide a more attractive investment opportunity than other competing products, such as insured deposit account alternatives.

Management also believes that money market funds are resilient investment products that have proven their resiliency during the Pandemic.

While Federated Hermes believes that some regulations could be improved, such improvements should be measured and appropriate, preserving investors' ability to invest in all types of money market funds.

Federated Hermes believes that regulators should look closely at the 2014 Money Fund Rules and Guidance and supports efforts to reduce regulation, including the PWG Report's recommendation, and the SEC's proposal, to eliminate the link between the 30 percent liquid asset requirement and redemption gates and liquidity fees.

Federated Hermes also continues to support efforts to permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the 2014 Money Fund Rules and Guidance for, institutional and municipal (or tax-exempt) money market funds.

Legislation has been re-introduced in the Senate and in the House of Representatives in a continuing effort to get these revisions to money market fund reform regarding the use of amortized cost passed and signed into law.

The SEC also has been adjusting, or terminating, the targeted, temporary Pandemic-related relief and assistance it provided to the investment management industry.

The SEC staff is considering issuing updated guidance to enable broader use of electronic delivery of disclosure documents and indicated support for related issues such as remote work, e-authorization and dematerialization of physical security certificates.

Federated Hermes supports many of these recommended actions, particularly allowing for increased use of electronic delivery of disclosure documents.

In addition to the anticipated proposed regulations included in the SEC's Fall Reg Flex Agenda discussed above, the SEC has also increased its focus on ESG-related disclosure.

On March 4, 2021, the SEC announced the creation of a Climate Change and ESG Task Force in the SEC's Division of Enforcement (DOE) to develop initiatives to proactively identify ESG-related misconduct, with an initial focus on identifying any material gaps or misstatements in issuers' disclosure of climate risks under existing rules.

The task force will also analyze disclosure and compliance issues relating to investment advisors' and funds' ESG strategies.

On April 9, 2021, the SEC's Division of Examinations issued a risk alert to highlight observations from recent exams of investment advisors, registered investment companies, and private funds offering ESG products and services.

On March 15, 2021, SEC Commissioner and then acting SEC Chair Allison Herren Lee issued a statement reminding issuers of the SEC's 2010 climate change disclosure guidance and soliciting public comment on the SEC's disclosure rules and guidance as they apply to climate change and other ESG-related disclosures.

In its June 4, 2021 comment letter, the ICI called on the SEC to mandate disclosure of greenhouse gas emissions and workforce diversity to give fund managers the consistent, comparable, and reliable data they need to better assess current and future sustainability-related risks.

However, the ICI also warned against an overly prescriptive approach to ESG disclosure, stating that the SEC should develop a regulatory framework that is flexible

enough to allow disclosure practices to develop organically over time.

In its June 14, 2021 comment letter, Federated Hermes urged the SEC to:

(1) supplement, not replace, its principles-based disclosure regime with prescriptive metrics;

The pace of new proposed and final laws, rules and regulations and other regulatory activity increased in 2022 and is expected to continue at a rapid pace in 2023.

Despite receiving criticism for the expedited pace of new regulation, the Securities and Exchange Commission (SEC) (among other regulatory authorities, self-regulatory organizations, or exchanges) has continued to advance its robust rulemaking initiatives.

The SEC’s Fall 2022 Unified Agenda of Regulatory and Declaratory Actions (SEC Fall Reg Flex Agenda) identified 52 rulemaking initiatives.

Within it the SEC indicated that it expects to issue 21 final rules and an additional 13 proposed rules by April 2023, and another eight final rules and nine proposed rules by October 2023.

These final and proposed rules are expected to impose significant new requirements in important areas on the investment management industry, including Federated Hermes.

Examples of final rules that are expected to be issued in 2023 include money market fund reform, climate change disclosure, cybersecurity risk governance, investment company names, and loan or borrowing of securities, among other topics.

Examples of proposed rules expected to be issued in 2023 include human capital management disclosure, corporate board diversity, amendments to the custody rule for investment advisors, open-end fund liquidity and dilution management, outsourcing by investment advisors, exchange-traded products, and cybersecurity, among other topics.

The SEC Fall Reg Flex Agenda follows an active fourth quarter 2022 that saw the SEC issue seven final rules and seven proposed rules, some of which are discussed below.

The SEC and other regulators also continued in 2022, and are expected to continue in 2023, to conduct risk-based, for cause and sweep examinations, bring enforcement actions, and review and comment on issuer and fund filings.

In addition to routine and for cause examinations conducted on individual firms, SEC sweep exams have included, or are expected to include examinations regarding the investment advisor marketing rule, ETF revenue sharing payments, ESG practices and disclosures, and approval of registered investment company advisory fees, among others.

It has been reported that the SEC’s examination priorities in 2023 are anticipated to include private funds, ESG investing, Regulation Best Interest (Reg BI), information security and operational resiliency, cryptocurrency, recordkeeping, financial reporting and disclosure violations, investment fraud, insider trading, and emerging technologies and digital assets, among others.

In its February 7, 2023, Press Release announcing the publication of its 2023 Examination Priorities, the SEC’s Division of Enforcement (DOE) specifically identified as areas of examination focus, among others:

(1) compliance with new investment advisor and investment company rules, including the marketing rule (Advisers Act Rule 206(4)-1), the derivatives rule (1940 Act Rule 18f-4), and the fair valuation rule (1940 Act Rule 2a-5);

(2) investment advisors to private funds;

(3) Reg BI and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place the investment advisor’s own interests ahead of retail investors' interests;

(4) information security and operational resiliency, including registrant visibility into the security and integrity of third-party service providers, and their products and services, and whether there has been an unauthorized use of third-party service providers;

and (5) emerging technologies and crypto-assets.

including whether a firm met and followed applicable standards of care when making recommendations, referrals, or providing investment advice, and whether a firm routinely reviewed, updated, and enhanced their compliance, disclosure, and risk management practices.

In 2022, the SEC filed 760 enforcement actions, a nine percent increase over 2021.

These enforcement actions included 462 new, or “stand alone,” enforcement actions, 129 actions against issuers who were allegedly delinquent in making required filings with the SEC;

and 169 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders.

Civil money penalties, disgorgement, and pre-judgment interest from these enforcement actions totaled approximately $6.4 billion, the most on record in SEC history and up from approximately $3.9 billion in 2021.

In addition to the SEC’s aggressive “regulation by enforcement” posture in 2022, the SEC staff has become more aggressive in commenting on issuer and fund filings, imposing new interpretations of certain requirements and taking firm positions, resulting in “regulation by the comment process.”

After nearly three years of analysis and debate, regulators maintain their focus on the market conditions that existed in March 2020, and their impact on open-end funds, including institutional prime and municipal (or tax-exempt) money market funds.

For example, like other regulatory or government bodies, in its November 2022 “Financial Stability Report,” the Board of Governors of the Federal Reserve System (Governors) reported that certain money market funds have structural vulnerabilities that make them prone to “runs,” an apparent reference to the withdrawal of assets and redemption risks.

The Financial Stability Oversight Council (FSOC) also discussed money market and other open-end funds at its November 4, 2022 meeting.

Chairperson Yellen, in discussing vulnerabilities in money market funds, open-end funds, and hedge funds, stated that these funds continue to pose risks to financial stability and can amplify shocks, transmitting stress to important counterparties and markets.

She further stated that member agencies should act to address these concerns.

The comment period for the SEC’s proposed money market fund reforms ended on November 1, 2022, and as noted above, the

SEC indicated in the SEC Fall Reg Flex Agenda that it intended to finalize its proposed money market fund reforms by April 2023.

Federated Hermes has continued, and will continue, to actively participate in the debate surrounding money market fund reforms.

Consistent with prior comment letters and meetings with SEC Commissioners and SEC staff, Federated Hermes maintains its position that:

(1) swing pricing will regulate institutional prime money market funds out of existence;

(2) discretionary fees and gates administered by fund boards through the exercise of their fiduciary duty are the best alternatives for money market funds;

(3) eliminating the link between mandatory fees and gates and a 30% liquid asset requirement is most appropriate;

and (4) a four-digit Net Asset Value (NAV) for government money market funds to deal with the possibility of negative interest rates is not a better solution than allowing the use of a reverse distribution mechanism (RDM).

Federated Hermes expressed these views in its letters to the SEC and to SEC Commissioners, including those letters dated June 9, 2022, June 14, 2022, August 10, 2022, and September 22, 2022, which were submitted to SEC Commissioners Peirce, Crenshaw, Uyeda, and Lizárraga after meetings with them on June 3, 2022, June 7, 2022, August 2, 2022, and September 20, 2022, respectively.

In a November 1, 2022 comment letter, among other comments, Federated Hermes reiterated its concerns that:

(1) the SEC’s proposed amendments to Form N-MFP, stress testing requirements, and four-digit NAV will further harm money market funds and their investors and intermediaries without corresponding benefits;

(2) the SEC has not developed and put forward data to support the more radical aspects of its proposal, in particular swing pricing;

and (3) swing pricing tied to a specific metric could itself trigger mass redemptions or serve as an opening for market timers to game the rule.

Federated Hermes believes that, once unencumbered from the perils of an inappropriate linkage between liquidity levels and liquidity fees and redemption gates, money market funds have sufficient liquidity levels currently to protect investors from dilution.

Federated Hermes supports the use of a RDM in a negative rate environment.

Federated Hermes has opposed the SEC’s prohibition on the use of a RDM to maintain the stable NAVs of government money market funds because, among other reasons, the SEC’s prohibition on the use of a RDM:

(1) does not reflect any formal investment management industry feedback;

and (2) will eliminate the use of government money market funds as sweep investments.

Federated Hermes also has asserted that, due to the significant technology investments that would be necessary for market participants to modify transaction systems to process transactions in a hypothetical negative yield scenario without using a RDM, the absence of a RDM could lead to material outflows in U.S.

government money market funds to bank deposits or non-regulated investment products, consistent with the notion of regulating government money market funds out of existence.

Federated Hermes has argued that the use of a RDM is the clear investor preference and would preserve money market funds as an investment product for all stakeholders, and that the SEC’s concerns over investor confusion regarding the operation of a RDM can be adequately addressed through disclosure.

In a letter dated November 4, 2022, Federated Hermes commented that providing fund boards with the option to utilize either a RDM or a four-digit NAV is the right solution.

In a letter to SEC Commissioner Crenshaw dated December 16, 2022, Federated Hermes also expressed its concern that the SEC’s proposal to mandate U.S.

government money market funds move to a four-digit NAV in a negative rate environment did not properly consider the use of a RDM and could lead to a loss of at least $1 trillion in U.S.

government money market assets that are invested via traditional sweep accounts and up to an additional $1 trillion in assets invested into U.S.

government money market funds which are made as position trades entered into the cash sweep system manually at the end of the day.

Management believes money market funds provide a more attractive investment opportunity compared to other competing products, such as insured deposit account alternatives.

Management also believes that money market funds are resilient investment products that have proven their resiliency.

While Federated Hermes agrees that certain regulations could be improved such improvements should be measured and appropriate, preserving investors’ ability to invest in all types of money market funds.

Federated Hermes also supports efforts to permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations on July 23, 2014, and related guidance, for institutional and municipal (or tax-exempt) money market funds.

Legislation is being re-introduced in both the Senate and the House of Representatives in a continuing effort to get these money market fund reform revisions regarding the use of amortized cost passed and signed into law.

On November 2, 2022, the SEC issued a proposing release in which it proposes amendments to Rule 22c-1 (the voluntary swing pricing rule) and Rule 22e-4 (the liquidity rule) under the 1940 Act and certain disclosure forms under the 1940 Act for open-end management investment companies, other than money market funds and exchange-traded funds.

The amendments outlined in the proposing release include, among others:

(1) mandating swing pricing for such funds during times of stressed market conditions;

(2) implementing a “hard close” for such funds, whereby purchase and redemption orders must be received by a fund, its transfer agent or a registered clearing agency by an established cut-off time to receive

the applicable day’s price;

(3) eliminating the “less liquid” investment category from the existing four category liquidity classification framework under Rule 22e-4 of the 1940 Act, and thereby broadening the “illiquid” investment category;

(4) requiring such funds to classify all portfolio investments daily instead of monthly;

(5) mandating such funds to determine and maintain a highly liquid investment minimum (HLIM) equal to at least 10% of net assets;

and (6) imposing expanded Form N-PORT reporting and disclosure obligations on such funds.

In the proposing release the SEC contends that the proposed amendments would “enhance funds’ liquidity risk management to help better prepare them for stressed market conditions and to require the use of swing pricing for certain funds in certain circumstances to limit dilution” and also “enhance open-end fund resilience in periods of market stress by promoting funds’ ability to meet redemptions in a timely manner while limiting dilution of remaining shareholders’ interests in the fund.” In its comment letter dated February 14, 2023, Federated Hermes supported the comments and recommendations of the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA) on the proposal, including strongly opposing the use of swing pricing because the implementation of swing pricing is unnecessary to achieve the SEC’s desired objective, would be extremely costly, would be very difficult for the industry to implement, would be difficult for investors to understand and would represent an unwarranted change in the character of a hugely popular investment vehicle which provides investors with the benefits of professional management, diversification and access to the capital markets to help them meet their financial goals.

Federated Hermes noted that there are less onerous alternatives to mandating swing pricing in those limited circumstances where material dilution is a real concern, such as discretionary liquidity fees to be applied at a fund’s board’s discretion in the exercise of its fiduciary duty to a fund and its shareholders.

Federated Hermes strongly opposes a hard close concept, which was proposed to ensure fund managers have the appropriate data necessary to determine whether a fund’s NAV should be adjusted via swing pricing, but which would result in unintended consequences to third-party intermediaries and underlying investors and would be particularly detrimental to retirement plan participants in 401(k) plans using open-end mutual funds on their menu.

Federated Hermes strongly opposes eliminating the “less liquid” investment category from the existing four category liquidity classification framework under the liquidity rule because funds investing primarily in bank loans will not be able to comply with the 15% limit on illiquid investments under the 1940 Act, subjecting these funds to undeserving harm.

The comment period for this proposal ended on February 14, 2023.

As indicated in the SEC Fall Reg Flex Agenda discussed above, the SEC has increased its focus on ESG-related disclosures.

In an October 17, 2022, speech, SEC Commissioner Lizárraga discussed the SEC’s proposals regarding enhanced climate risk disclosures by issuers, enhanced ESG disclosures by registered funds and investment advisors and modernized rules governing ESG-related fund names ( i.e.

, Rule 35d-1 under the 1940 Act (Names Rule)), noting that the SEC is seeking to ensure that investors receive the information they need to make the most informed investment decisions.

He explained that the corporate issuer proposed rule would require public companies to disclose climate-related risks that have a material impact on their business, operations, and financial condition and to disclose certain related quantitative information.

He explained that the SEC’s proposal for registered funds and investment advisors is designed to provide investors with decision-useful qualitative and quantitative information on how funds and investment advisors consider ESG factors in decision-making.

He also explained that the proposal regarding ESG-related fund names focuses on how funds label themselves and would prohibit funds that consider ESG factors alongside other non-ESG factors from using ESG-related terms in their name.

Specifically, the corporate issuer proposal mandates, among other things, certain climate risk disclosures by public companies, such as Federated Hermes, including on Form 10-K, about a company’s governance, risk management, and strategy with respect to climate-related risks.

The proposal incorporates certain concepts and vocabulary from the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol) as part of the proposed disclosure regime.

For example, the proposal would require disclosure of quantitative metrics to assess a company’s exposure to greenhouse gas emissions.

A company would be required to disclose its Scope 1 and Scope 2 greenhouse gas emissions, which would be emissions under the GHG Protocol that “result directly or indirectly from facilities owned or activities controlled by a registrant.” Certain registrants also would be required to disclose Scope 3 emissions, which would be the emissions from upstream and downstream activities in a company’s value chain, if such emissions were material to investors or if the company had made a commitment that included reference to Scope 3 emissions.

Consistent with its previously submitted comment letter, Federated Hermes continues to support the ICI’s comments to the SEC on the proposal, including, among others, that:

(1) any final rule should only require companies to provide material climate risk-related information in a company’s Form 10-K, with any non-material information required by any amendments to Regulation S-K to be provided in a new climate report;

(2) the SEC not amend Regulation S-X to require a company to provide material financial metrics in footnotes to its financial statements;

and (3) it is premature to require disclosure of Scope 3 emissions data.

Federated Hermes also continues to support the retention of the current approach under the Names Rule for the 80% investment policy requirement and temporary investment exceptions.

On October 3, 2022, the FSOC established the Climate-related Financial Risk Advisory Committee to aid in the assessment of climate-related financial risk.

This followed FSOC Chairperson Yellen’s praise for the SEC’s climate risk disclosure proposal on March 21, 2022:

“The SEC’s proposal is an important step to protect investors and strengthen the overall resilience of the financial system.

Investors and businesses have for years asked for reliable information that can be used to assess climate-related risks and opportunities.

I commend Chair Gensler and the SEC for their work on this critical issue.” On April 5, 2022, certain Republican senators, including members of the Senate Banking and Environment and Public Works Committees, issued a letter to SEC Chair Gensler calling on the SEC to withdraw the climate risk disclosure proposal.

Consistent with its June 14, 2021 comment letter submitted in response to then acting SEC Chair Allison Herren Lee’s request for public comment on the SEC’s disclosure rules and guidance as they apply to climate change and other ESG-related disclosures, Federated Hermes believes that any SEC rule on climate disclosure should:

(1) supplement its principles-based disclosure regime, not replace it with prescriptive metrics;

(2) focus on material disclosures;

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capital markets.

Hermes Equity Ownership Services (d/b/a EOS at Federated Hermes), a subsidiary of HFML, also submitted a comment letter that supported the SEC requiring companies to report on material climate-related information that may impact the long-term value of companies to allow investors the ability to access timely, accurate, comprehensive, consistent and comparable information.

In a July 28, 2021 speech, SEC Chair Gensler outlined his views on likely components of the SEC's forthcoming climate disclosure rulemaking proposal.

Chair Gensler discussed that the proposal could include:

(1) mandatory climate risk disclosure;

(2) qualitative and quantitative data disclosures;

(3) climate-related risk management and strategy disclosures;

and (4) disclosure of metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals.

Chair Gensler indicated that he asked the SEC staff to consider recommendations regarding emission disclosures, industry-specific disclosures, whether fund managers should disclose the criteria and underlying data they use to make ESG-related claims about their products, and whether the SEC should review the Names Rule holistically.

Chair Gensler also indicated that the proposal may consider which data or metrics companies might use to inform investors about how they are meeting their climate-related pledges.

He also noted that the SEC will likely develop its own disclosure requirements rather than rely on external standard setters, and may look to existing frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) for guidance.

On September 1, 2021, Chair Gensler stated that he has instructed SEC staff to prepare a "proposal for climate risk disclosure requirements" and that the proposal should be informed by other frameworks, including the TCFD.

On September 14, 2021, Chair Gensler reiterated that "[t]oday's investors are looking for consistent, comparable, and decision-useful disclosures around climate risk," and that the SEC should "step in" when there is high demand for relevant information.

Chair Gensler further noted that proposals developed by the SEC will be "informed by economic analysis" and will be available for public comment.

On September 22, 2021, the SEC's Division of Corporation Finance published a sample comment letter that the SEC staff intends to issue to public companies regarding their climate change disclosures in SEC filings.

In his remarks to the House Financial Services Committee at the October 5, 2021 SEC oversight hearing, SEC Chair Gensler signaled a phased-in climate disclosure approach that would take into account company size and the types of disclosure required.

In his fireside chat on October 19, 2021, SEC Chair Gensler reaffirmed his previous remarks to the UN Principles for Responsible Investment that the SEC may look to international standard setters when setting climate change disclosure requirements, but will promulgate US-specific disclosure requirements.

On October 20, 2021, in remarks at the PRI/LSEG Investor Action on Climate Webinar, SEC Commissioner Allison Herren Lee indicated that the forthcoming climate disclosure rule proposal would be built upon prior and existing disclosure regimes, and that the SEC would seek consistency with other jurisdictions in climate-related disclosure.

As noted above, climate change disclosure is on the SEC' s 2021 Fall Reg Flex Agenda.

On October 21, 2021, the FSOC released a report on climate-related risks to financial stability in which it recognized that climate change is an emerging and increasing threat to U.S.

financial stability and, among other recommendations, recommended that the FSOC's members issuing requirements for climate-related disclosures consider whether such disclosures should include disclosure of greenhouse gas emissions, as appropriate and practicable, to help determine exposure to material climate-related financial risks.

On December 17, 2021, the Chair of the House Committee on Financial Services issued a statement in response to the Office of the Comptroller of the Currency's releasing principles on climate-related financial risk and the FSOC establishing a Climate-related Financial Risk Committee within the FSOC, in which she emphasized that the FSOC report recommended that all of its members and their agencies take action to guard against climate risk.

On that same date, the FSOC issued its 2021 Annual Report in which, among other things, it highlighted both the physical risks to institutions and collateral risks associated with weather patterns, natural disasters and climate conditions, and the transition risk associated with shifts to new technologies or changes in public policy, as well as elevated risks relating to corporate debt, vulnerabilities in short-term wholesale funding markets, real estate and the transition away from the London Interbank Offered Rate (LIBOR).

In addition to the SEC and the FSOC, regulations adopted, and actions taken, by the Department of Labor (DOL) impact the investment management industry, including Federated Hermes.

The DOL's April 2016 fiduciary rule was vacated in June 2018 by the United States Court of Appeals for the Fifth Circuit.

On December 15, 2020, the DOL issued the final version of a re-proposed fiduciary rule to regulate "investment advice fiduciaries" (Final DOL Fiduciary Rule), which became effective on February 16, 2021.

With the transition of Presidential administrations, and new agency leadership, certain regulations promulgated by the SEC or DOL prior to 2021 are being re-examined.

On February 12, 2021, the DOL announced that its temporary enforcement policy, under which the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently on compliance with relevant components of the Final DOL Fiduciary Rule, would remain in place until December 20, 2021.

In Field Assistance Bulletin No.

2021-02, the DOL provided further transition relief by extending its position on pursuing prohibited transaction claims through January 31, 2022.

The DOL also stated that it would

not enforce the specific documentation and disclosure requirements for individual retirement account rollovers through June 30, 2022, but that all other requirements of the Final DOL Fiduciary Rule would be subject to full enforcement as of February 1, 2022.

In its Fall Reg Flex Agenda, the DOL indicated that it would be proposing another new fiduciary rule.

According to the DOL's Fall Reg Flex Agenda, the new proposed fiduciary rule will amend the regulatory definition of the term "fiduciary" to more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual retirement accounts are fiduciaries for purposes of ERISA and the Internal Revenue Code.

As of December 31, 2021, a new fiduciary rule has not yet been proposed.

It has been reported that a proposed new fiduciary rule will be issued following the appointment of a new Assistant Secretary of Labor for the Employee Benefits Security Administration.

In January 2022, President Biden's nominee for the position advanced through the Senate Health, Education, Labor, and Pensions Committee.

As of February 25, 2022 the nominee has not yet been approved by a full Senate vote.

On October 13, 2021, the DOL issued for comment, its proposed "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" rule (New DOL Proposed ESG/Proxy Voting Rule), which would replace the DOL's final proxy voting and shareholder rights rule (Final DOL Proxy Voting Rule), which was issued on December 11, 2020, and its final rule restricting fiduciaries from selecting plan investments on the basis of non-pecuniary factors, such as ESG factors (Final DOL ESG Rule), which was issued on October 30, 2020.

Previously, on March 10, 2021, the DOL issued an indefinite non-enforcement policy with respect to the Final DOL ESG Rule and the Final DOL Proxy Voting Rule.

The New DOL Proposed ESG/Proxy Voting Rule would amend the "Investment Duties" regulation, which addresses the duties of prudence and loyalty in selecting plan investments and exercising of shareholder rights, including proxy voting.

The New DOL Proposed ESG/Proxy Voting Rule would retain the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on material risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan, but clarify that, when considering investment returns, a fiduciary's duty of prudence may require an evaluation of the economic effects of climate change and other ESG factors on a particular investment or investment course of action.

The New DOL Proposed ESG/Proxy Voting Rule also would apply the same standards to qualified default investment alternatives as apply to other investments.

In a change from the Final DOL ESG Rule, the New DOL Proposed ESG/Proxy Voting Rule also would amend the "tie-breaker" standard by:

(1) imposing a standard that would require a fiduciary to conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon;

and (2) permitting a fiduciary to select an investment, or an investment course of action, based on economic or non-economic benefits other than investment returns.

The New DOL Proposed ESG/Proxy Voting Rule also would adjust the Final DOL Proxy Voting Rule's requirements for the exercise of shareholder rights, including proxy voting, by:

(1) removing from the current regulation the statement that "the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right";

(2) removing from the current regulation safe harbors relating to proxy voting that permit (a) a policy to limit voting resources to particular types of proposals that a fiduciary has prudently determined are substantially related to the issuer's business activities or are expected to have a material effect on the value of the investment and (b) a policy of refraining from voting on proposals or particular types of proposals when a plan's holding in a single issuer relative to the plan's total investment assets is below a quantitative threshold;

and (3) eliminating from the current regulation the requirement that, when deciding whether to exercise, and in exercising, shareholder rights, a plan fiduciary must maintain records on proxy voting activities and other exercises of shareholder rights.

In a December 10, 2021 comment letter, Federated Hermes commented on the New DOL Proposed ESG/Proxy Voting Rule with respect to, among other points, the interrelationship between the Final DOL Fiduciary Rule and New DOL Proposed ESG/Proxy Voting Rule and the exclusive benefit rule under relevant fiduciary law in the U.S.

In its comment letter, Federated Hermes generally supported the DOL's proposal but suggested modifications to certain language that could be read to require ERISA fiduciaries to consider ESG factors independent of the fiduciary's own prudent analysis, which in Federated Hermes' view would unnecessarily subject fiduciaries to regulatory and litigation risk and expose any final rulemaking to further scrutiny over time.

The SEC’s aggressive rulemaking, particularly regarding money market fund reform and climate/ESG disclosure, could be challenged by legislators and in the courts by investment management industry participants and other industry groups.

Particularly in the context of climate/ESG disclosures, the likely success of any challenge could be bolstered in light of the U.S.

Supreme Court’s recent decision in West Virginia vs.

Environmental Protection Agency, in which the Supreme Court weakened the deference given to an administrative agency’s regulatory authority by applying the “Major Questions Doctrine,” which the Supreme Court has used to require courts to defer to Congress rather than administrative agencies regarding matters that it concludes have significant economic and/or political impact if it believes that Congress did not specifically grant such powers to an agency.

Federated Hermes, like other investment managers, is complying with Rule 2a-5 under the 1940 Act.

Rule 2a-5 establishes an updated regulatory framework for fund valuation practices by establishing requirements for determining fair value in good faith for purposes of the 1940 Act.

The rule expressly permits boards, subject to continued board oversight and certain other conditions, to designate certain parties, such as fund investment advisors, to perform fair value determinations.

The rule also defines when market quotations are “readily available” for purposes of the 1940 Act, the threshold under Rule 2a-4 under the 1940 Act for determining whether a fund must fair value a security.

Under Rule 2a-5, a market quotation is “readily available” only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the fund can access at the measurement date.

The rule further provides that a quotation will not be readily available if it is not reliable.

This definition contradicts common practices for cross-trades between affiliated funds under Rule 17a-7 under the 1940 Act.

Rule 17a-7 permits cross trades of securities for which market quotations are readily available between affiliated funds, which allows funds to transfer such securities without incurring trading costs.

The definition of “readily available” in Rule 2a-5 essentially limits Rule 17a-7 to equity securities because fixed-income securities are not traded on an exchange and would not have a “quoted price (unadjusted) in active markets.” Federated Hermes is relying on previously issued SEC no-action letters to continue to conduct cross trades in its fixed-income funds (unless and until the SEC rescinds those no-action letters).

The inability to conduct cross-trades between Federated Hermes fixed-income funds can increase trading expenses and have a negative impact on fund performance.

In addition to the SEC and the FSOC, regulations proposed or adopted, and actions taken, by the Department of Labor (DOL) impact the investment management industry, including Federated Hermes.

In its Fall 2022 Agency Rule List (DOL Fall Agency Rule List), the DOL indicated that it would be proposing another new fiduciary rule by December 2022, however, the new fiduciary rule has not yet been issued and it has been reported that a proposed new fiduciary rule will not be forwarded to the Office of Management and Budget (OMB) for consideration until the first quarter 2023.

According to the DOL Fall Agency Rule List, the new proposed fiduciary rule will amend the regulatory definition of the term “fiduciary” to more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual retirement accounts (IRA) are fiduciaries for purposes of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986, as amended.

The DOL also has indicated that, in conjunction with this rulemaking, the Employee Benefits Security Administration (EBSA) will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.

On November 22, 2022, the DOL issued its “Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (New DOL ESG/Proxy Voting Rule) substantially as proposed with a few clarifications.

The chief clarification sought by the DOL, as evinced in the new preamble and by the removal of various examples, is that

the New DOL ESG/Proxy Voting Rule is intended to ensure that “plan fiduciaries do not misinterpret the final rule as a mandate to consider the economic effects of climate change and other ESG factors under all circumstances.” The New DOL ESG/Proxy Voting Rule replaces the DOL’s final proxy voting and shareholder rights rule (Final DOL Proxy Voting Rule), which was issued on December 11, 2020, and its final rule restricting fiduciaries from selecting plan investments based on non-pecuniary factors, such as ESG factors (Final DOL ESG Rule), which was issued on October 30, 2020.

The New DOL ESG/Proxy Voting Rule:

(1) amends the “Investment Duties” regulation, which addresses the duties of prudence and loyalty in selecting plan investments and exercising of shareholder rights, including proxy voting;

(2) retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on material risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan, but clarifies that, when considering investment returns, a fiduciary’s duty of prudence can require an evaluation of the economic effects of climate change and other ESG factors on a particular investment or investment course of action;

and (3) applies the same standards to qualified default investment alternatives as apply to other investments.

In a change from the Final DOL ESG Rule, the New DOL ESG/Proxy Voting Rule also:

(1) amends the “tie-breaker” standard by:

(a) imposing a standard that would require a fiduciary to conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon;

and (b) permitting a fiduciary to select an investment, or an investment course of action, based on economic or non-economic benefits other than investment returns;

and (2) adjusts the Final DOL Proxy Voting Rule’s requirements for the exercise of shareholder rights, including proxy voting, by:

(a) removing from the current regulation the statement that “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right;” (b) removing from the current regulation safe harbors relating to proxy voting that permit (i) a policy to limit voting resources to particular types of proposals that a fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the investment and (ii) a policy of refraining from voting on proposals or particular types of proposals when a plan’s holding in a single issuer relative to the plan’s total investment assets is below a quantitative threshold;

and (c) eliminating the requirement that, when deciding whether to exercise, and in exercising, shareholder rights, a plan fiduciary must maintain records on proxy voting activities and other exercises of shareholder rights.

On January 26, 2023, Attorneys General from 25 states filed a lawsuit against the DOL seeking to postpone the January 30, 2023 effective date for the New DOL ESG/Proxy Voting Rule and to have it declared unlawful on the basis that it violates ERISA and runs afoul of the Administrative Procedures Act because it is allegedly arbitrary and capricious.

Federated Hermes is monitoring this lawsuit.

On January 6, 2023, Federated Hermes filed a comment letter to the DOL’s July 26, 2022, proposed amendments to the Class Prohibited Transaction Exemption 84-14, also known as the Qualified Professional Asset Manager (QPAM) Exemption.

The DOL proposed the amendments to purportedly ensure the exemption continues to protect plans, participants and beneficiaries, individual retirement account owners and their interests.

The QPAM Exemption, which is commonly relied upon by investment advisors, including Federated Hermes, permits various parties who are related to ERISA plans to engage in transactions involving plan and individual retirement account assets if, among other conditions, the assets are managed by QPAMs that are independent of the parties in interest and that meet specified financial standards.

Federated Hermes opposed a proposed amendment that would require a QPAM to have “sole” responsibility for transactions as being contrary to SEC and Office of the Comptroller of the Currency guidance that allows delegation of investment management authority and only requires the trustee of an ERISA plan to maintain substantial investment responsibility over a collective investment trust, a common investment vehicle for ERISA plans.

Federated Hermes also proposed:

(1) removing the proposed registration requirement, where each QPAM must report its reliance to the DOL;

(2) reducing the scope of the proposed expansions to disqualification from the QPAM Exemption;

and (3) removing the proposal’s requirement for certain contract provisions in every investment management agreement.

Since the beginning of the fourth quarter 2022, other proposed rules, new guidance and other actions have been issued or taken that impact U.S.

investment management industry participants, including Federated Hermes.

• On February 14, 2022, the DOL published a Request for Information (RFI), in furtherance of the Executive Order on Climate-Related Financial Risk, to solicit public comment on the DOL's future work relating to retirement savings and climate-related financial risk.

The request contains 22 questions, including whether the DOL should publish research to improve data and analytics that ERISA plan fiduciaries could use to evaluate climate-related financial risks and

whether ERISA plan administrators should be required to publicly report on the steps they take to manage climate-related financial risks.

The comment period will end on May 16, 2022.

• On February 9, 2022, the SEC proposed new Rule 206(4)-9 under the Advisers Act and new Rule 38a-2 under the 1940 Act, as well as other amendments, which constitute new cybersecurity risk management rules and amendments that purport to enhance cybersecurity preparedness and improve the resilience of investment advisors and investment management companies against cybersecurity threats and attacks.

The new rules and amendments would:

(1) require investment advisors and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks;

(2) require investment advisors to report significant cybersecurity incidents to the SEC on proposed Form ADV-C;

(3) enhance investment advisor and fund disclosures related to cybersecurity risks and incidents;

and (4) require investment advisors and funds to maintain, make, and retain certain cybersecurity-related books and records.

The comment period will end 30 days after the proposed rules are published in the Federal Register or on April 11, 2022 (which is 60 days after issuance by the SEC), whichever is later.

• On February 9, 2022, the SEC proposed new rules and amendments under the Advisers Act intended to enhance the regulation of private fund advisors.

The proposed new rules would:

(1) require private fund advisors registered with the SEC to provide investors with quarterly statements detailing information about private fund performance, fees and expenses;

(2) require registered private fund advisors to obtain an annual audit for each private fund and cause the private fund's auditor to notify the SEC upon certain events occurring;

(3) require registered private fund advisors, in connection with an advisor-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the advisor and the opinion provider;

(4) prohibit all private fund advisors, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors;

and (5) prohibit all private fund advisors from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.

The SEC is also proposing to require all registered advisors, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

The comment period will end 30 days after the proposed rules and amendments are published in the Federal Register or on April 11, 2022 (which is 60 days after issuance by the SEC), whichever is later.

• On February 9, 2022, the SEC proposed to reduce risks in the clearance and settlement of securities.

The proposed changes would:

(1) shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one business day after trade date (T+1);

(2) eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;

(3) improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisors intended to improve the rate of same-day affirmations;

and (4) facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers.

The comment period will end 30 days after publication in the Federal Register or on April 11, 2022 (which is 60 days after issuance by the SEC), whichever is later.

• On January 27, 2022, the SEC reopened the comment period for the pay versus performance proposing release, which was issued in 2015.

The proposed rule would amend Item 402 of Regulation S-K to implement Section 14(i) of the Exchange Act, as added by Section 953 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Section 14(i) of the Exchange Act requires the SEC to adopt rules relating to how executive compensation actually paid by a registrant relates to the financial performance of the registrant.

The comment period will end on March 4, 2022.

• On January 25, 2022, the SEC proposed amendments to Form PF, which is a confidential reporting form for certain SEC-registered investment advisors that manage private funds.

The proposed amendments would:

(1) require new current reporting of certain events for large hedge fund advisors and advisors to private equity funds;

(2) decrease the reporting threshold for large private equity advisors;

and (3) revise reporting requirements for large private equity advisors and large liquidity fund advisors.

The comment period will end on March 21, 2022.

• On January 15, 2022, the SEC proposed amendments to Rule 10b-5 under the Exchange Act that would:

(1) add new conditions to the availability of the affirmative defense under Exchange Act Rule 10b5-1(c)(1) which allows trading on behalf of a director, officer or issuer while in possession of material nonpublic information provided certain conditions are satisfied;

(2) creates new disclosure requirements regarding issuers' insider trading policies and regarding the adoption, modification and termination of Rule 10b5-1 and certain other trading arrangements by directors, officers and issuers;

(3) creates new disclosure requirements for executive and director compensation

regarding the timing of certain equity compensation awards;

and (4) updates Form 4 and Form 5 to require corporate insiders subject to Section 16 of the Exchange Act to identify transactions made pursuant to Rule 10b5-1(c)(1) trading arrangements and to disclose all gifts of securities on Form 4 (rather than on Form 5).

The comment period will end on April 1, 2022.

• On December 15, 2021, the SEC proposed amendments to its share repurchase disclosure rules that would require an issuer (such as Federated Hermes) to provide disclosure on a new Form SR regarding repurchases of the issuer's equity securities for each day that the issuer, or an affiliate, makes a share repurchase.

The proposed amendments also would enhance the existing periodic disclosure requirements about share repurchases in an issuer's annual report on Form 10-K and periodic (quarterly) Form 10-Q.

Federated Hermes believes that daily reporting of share repurchases is excessive and burdensome.

The comment period will end on April 1, 2022.

• On November 18, 2021, the SEC proposed a new rule that would require lenders of securities to provide the material terms of securities lending transactions within 15 minutes of "being effected" or modified.

The terms must be reported to a registered national securities association, such as FINRA, which would then make the data available publicly.

On January 7, 2022, Federated Hermes submitted a comment letter to the SEC in which it expressed concern that the proposed rule imposes impractical reporting requirements that are likely to increase transaction costs and undermine an important source of potential fund income ( i.e.

, securities lending).

The comment period ended on January 7, 2022.

• On November 17, 2021, the SEC proposed amendments to its rules governing proxy voting advice in an effort to enhance proxy advisory firms' ability to deliver independent proxy voting advice to their clients in a timely manner.

The proposed amendments would rescind two rules applicable to proxy advisory firms that the SEC adopted in 2020.

The proposed amendments rescind conditions to the availability of two exemptions from the proxy rules' informational and filing requirements on which proxy advisory firms often rely.

Those conditions require that:

(1) registrants that are the subject of proxy voting advice have such advice made available to them at or before the time proxy advisory firms make the advice available to their clients, and (2) clients of proxy advisory firms are provided with a means of becoming aware of any written responses by registrants to proxy voting advice.

The proposed amendments also would rescind the 2020 changes made to the proxy rules' liability provisions.

The comment period ended on December 27, 2021.

• On November 4, 2021, the SEC issued a final rule amending Rule 205-3 under the Advisers Act, which addresses performance-based advisor compensation, to streamline the process relating to the adjustment of the assets under management and net worth tests for "qualified client" status, and ensure that the rule's text remains at all times consistent with the inflation adjustment orders periodically issued by the SEC.

• On October 14, 2021, the SEC re-opened the comment period for its proposal to implement the provisions of Section 954 of the Dodd-Frank Act.

The proposed rule and rule amendments would direct the national securities exchanges and national securities associations to establish listing standards that would require each issuer to develop and implement a policy providing for the recovery (or claw back), under certain circumstances, of incentive-based compensation that is received by current or former executive officers based on financial information required to be reported under the securities laws, and require disclosure of the policy.

The proposal was initially issued by the SEC in 2015.

The comment period ended on November 22, 2021.

Investment management industry participants, such as Federated Hermes, also continued, and will continue, to monitor, plan for and implement certain changes in response to previously-issued, new, proposed or adopted rules and guidance.

Previously proposed and final rules and guidance included, among others:

(1) final rules and amendments to the investment advisor advertising and solicitation rules;

(2) a final rule providing an updated regulatory framework for fund valuation practices;

(3) a final rule regulating the use of derivatives in mutual funds and other funds registered under the 1940 Act;

(4) final rules and amendments to the existing regulatory framework governing fund of funds arrangements among investment funds governed by the 1940 Act;

(5) proposed extensive changes to fund shareholder reports and other fund disclosure documents;

(6) SEC staff statements and other communications related to registered investment companies investing in Bitcoin futures;

(7) rule changes intended to enhance the ability to clear certain trades, particularly those involving repurchase agreements through the Fixed Income Clearing Corporation;

(8) the Presidential executive order prohibiting investment in companies linked to the Republic of China's military and state security apparatus, and related SEC risk alerts and other staff statements;

and (9) changes to Form N-PX to enhance disclosure for mutual fund and ETF proxy voting records.

On December 14, 2021, Federated Hermes submitted a comment letter to the SEC regarding the proposed changes to Form N-PX in which Federated Hermes raised concerns about several elements of the proposed changes that raise operational challenges, may not achieve the SEC's objectives and that would place a higher emphasis on voting of proxies relative to an asset manager's fiduciary duty to

The SEC also has requested comment on the Names Rule to determine whether it can be improved to help ensure that fund names inform and do not mislead investors.

Federated Hermes has submitted three comment letters regarding the Names Rule's application to cash and cash equivalent investments when held for temporary or defensive purposes and its application to ESG-integrated, impact and other ESG or sustainable funds.

Please refer to our prior public filings for more detailed discussions of these, and other, previously-issued proposed and final rules and guidance.

In addition to the above Regulatory Developments, the SEC staff continues to engage in a series of investigations, enforcement actions and/or examinations involving investment management industry participants, including investment advisors and investment management companies such as Federated Hermes' investment advisory subsidiaries and the Federated Hermes Funds.

It has been reported that the SEC's enforcement focus under the current administration could shift back to publicly-traded company matters (such as insider trading, issuer reporting, and accounting fraud), and to a more aggressive investor protection stance.

On November 18, 2021, the SEC's DOE released its results for fiscal year 2021, highlighting a seven percent increase in enforcement actions over 2020.

The report notes enforcement actions across all areas of the securities industry, as well as emerging new actions, including in respect of digital asset exchanges and SPACs.

According to the DOE's annual report, the SEC filed 697 total enforcement actions in fiscal year 2021, including 434 new actions, 120 actions against issuers who were delinquent in making required filings with the SEC, and 143 "follow-on" administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.

On October 13, 2021, the SEC's new Director of Enforcement announced that he intends to recommend aggressive use of available remedies in enforcement actions, including, among other remedies, requiring admissions of wrongdoing in certain cases.

It also has been reported that the SEC Division of Examinations is significantly expanding the scope of its examinations involving private markets fund managers.

On March 3, 2021, the SEC's DOE released its examination priorities for 2021, which included, among other priorities:

(1) compliance with Regulation Best Interest and Form CRS, as well as investment advisor fiduciary duties;

(2) information security and operational resilience;

(3) financial technology innovation;

(4) anti-money laundering programs;

(5) the transition from LIBOR to an alternate reference rate;

(6) investment advisor and fund ESG disclosures and practices;

(7) fund valuation and other disclosures and fund governance practices;

(8) the design, implementation and maintenance of investment advisor and fund compliance programs and fund liquidity risk management programs;

and (9) money market fund compliance with stress-testing requirements.

In addition to routine examinations, additional sweep examinations addressing various topics have been conducted.

For example, as previously announced in June 2021, the SEC conducted a sweep exam regarding the cyberattack involving the compromise of software created by the SolarWinds Corp.

In addition to its Pandemic-related actions and guidance, the SEC staff has also issued various guidance statements and risk alerts on a variety of compliance issues, including, among others, fixed-income principal and cross trades, managing client assets in wrap programs, ESG investing and product offerings, anti-money laundering, suspicious activity monitoring and reporting, digital assets, securities issued by SPACs, the Executive Order on Securities Investments that Finance Communist Chinese Military Companies, cyber-security, large trader obligations, investment advisor compliance and the transition from LIBOR.

• On February 15, 2023, the SEC proposed to exercise its authority under section 411 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) by amending and redesignating Rule 206(4)-2 under the Advisers Act (Custody Rule) to enhance investor protections relating to custody of advisory client assets.

The proposed amendments, if adopted as proposed, would, among other things:

(1) explicitly include an investment advisor’s discretionary authority to trade client assets and the ability to transfer client assets within the definition of “custody” under the Custody Rule;

(2) expand the Custody Rule to cover a broader array of advisory activities and client assets beyond “client funds and securities”, which would include digital assets;

(3) require investment advisors to enter into written agreements with each qualified custodian that maintains possession or control of client assets and obtain reasonable assurances in writing that the custodian will take certain actions, including responding to SEC

information requests;

and (4) update related recordkeeping and reporting requirements for investment advisors.

Federated Hermes is reviewing the proposed rule and its impact on Federated Hermes’ business.

The comment period for the proposed rule will end 60 days following publication of the proposing release in the Federal Register.

• On February 15, 2023, the SEC adopted rule amendments and new rules to, among other things:

(1) shorten the standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1);

(2) shorten the separate standard settlement cycle for firm commitment offerings priced after 4:30 p.m.

from four business days after trade date (T+4) to T+2;

(3) purportedly improve the processing of institutional trades through new requirements for broker-dealers and registered investment advisors related to same-day affirmations;

and (4) facilitate straight-through processing via new requirements applicable to clearing agencies that are central matching service providers.

The final amendments and new rules will become effective 60 days following the date of publication of the adopting release in the Federal Register, and the compliance date for each is May 28, 2024.

Federated Hermes is currently reviewing the final amendments and new rules and their impact on its business.

• On January 25, 2023, the SEC issued a proposed rule to prohibit conflicts of interest in certain securitization transactions as required by Congress in the Dodd-Frank Act.

The proposed rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an asset-backed security (ABS) in a way that would put the securitization participant’s interests ahead of those of ABS investors.

Federated Hermes is reviewing the proposed rule and its impact on Federated Hermes’ business.

The public comment period ends on March 27, 2023.

• On January 5, 2023, the Federal Trade Commission (FTC) released a proposed rule that, if adopted, would ban employers from using noncompetition agreements to restrict the mobility of paid or unpaid employees, independent contractors, interns, volunteers, and apprentices.

The proposed rule broadly defines a “non-compete clause” as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule would apply to explicit noncompetition agreements as well as “de facto” noncompetition agreements which have the effect of prohibiting workers from seeking or accepting new employment.

The FTC maintains that the proposed rule is not intended to prohibit reasonably tailored non-solicitation agreements.

As support for its proposed rule, the FTC maintains that noncompetition agreements suppress wages, stifle innovation, and make it harder for entrepreneurs to start new businesses.

The only exception is for noncompetition agreements used as part of a sale-of-business contract with a 25% or more owner of the business being sold.

Federated Hermes is reviewing the proposed rule and its impact on its business.

The public comment period ends on March 10, 2023.

• On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the 1934 Act.

Rule 10b5-1 allows issuers and company insiders to set up predetermined plans to transact in the issuer’s stock in compliance with insider trading laws.

The amendments:

(1) add new conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1), including cooling-off periods for directors, officers, and persons other than issuers;

(2) create new disclosure requirements regarding issuers’ insider trading policies and procedures and the adoption and termination (including modification) of Rule 10b5-1 and certain other trading arrangements by directors and officers;

(3) create new disclosure requirements for executive and director compensation regarding certain equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information;

and (4) update Forms 4 and 5 to require filers subject to Section 16 of the 1934 Act to identify transactions made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and to disclose all bona fide gifts of securities on Form 4.

The final amendments will become effective on February 27, 2023.

Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023.

Issuers will be required to comply with the new disclosure requirements in 1934 Act periodic reports on Forms 10-Q, 10-K, and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.

The final amendments also defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies.

Federated Hermes is currently reviewing the final amendments and their impact on its business.

• On December 14, 2022, the SEC proposed to create the first SEC-established rule concerning best execution for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers (collectively, broker-dealers).

This proposed Regulation Best Execution would require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard.

Further, the proposal would require these policies and procedures to address how broker-dealers will comply with the best execution standard and how they will determine the best market and make routing or execution decisions

for customer orders.

The policies and procedures would also be required to address additional factors for conflicted transactions with retail customers.

Moreover, the proposal would require broker-dealers to review the execution quality of customer orders at least quarterly and their best execution policies and procedures at least annually.

Broker-dealers would need to document such reviews and present written reports detailing the results of such reviews to their boards of directors or equivalent governing bodies.

Federated Hermes is reviewing the proposed Regulation Best Execution and its impact on its business.

The public comment period ends on March 31, 2023.

• On December 14, 2022, the SEC proposed a rule that would require certain orders of individual investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.

On December 14, 2022, the SEC also proposed amendments that would update the disclosure required under Rule 605 of Regulation NMS for order executions in national market system stocks, which are stocks listed on a national securities exchange.

The proposed amendments would expand the scope of entities subject to Rule 605, modify the information required to be reported under the rule, and change how orders are categorized for the purposes of the rule.

Among other things, the proposal would expand the scope of entities that must produce monthly execution quality reports to include broker-dealers with a larger number of customers.

In addition, the proposal would modify the definition of “covered order” to include certain orders submitted outside of regular trading hours and certain orders submitted with stop prices.

The proposed amendments would capture more relevant execution quality information for these orders by requiring statistics to be reported from the time such orders become “executable.” The proposed amendments to how orders are categorized would require the reporting of execution quality information for fractional share orders, odd-lot orders, and larger-sized orders.

Further, the proposal would require that the time of order receipt and time of order execution be measured in increments of a millisecond or finer and that realized spread be calculated at both 15 seconds and one minute.

The proposal would also require new statistical measures of execution quality, such as average effective over quoted spread (a percentage-based metric that represents how much price improvement orders received) and a size improvement benchmark.

Finally, the proposal would enhance the accessibility of the required reports by requiring all entities subject to the rule to make a summary report available to the public.

Federated Hermes is reviewing the proposed rule and its impact on its business.

The public comment periods end on March 31, 2023.

• On December 7, 2022, the SEC reopened the comment period for its proposal, “Share Repurchase Disclosure Modernization,” until January 11, 2023, to give interested persons the opportunity to analyze and comment on the effect of the new excise tax on share repurchases that was signed into law in December 2022.

The proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase.

The proposed amendments purportedly would also enhance the existing periodic disclosure requirements about these purchases.

• On November 2, 2022, the SEC adopted amendments to Form N-PX to:

(1) enhance the information registered funds currently report on Form N-PX about their proxy votes;

and (2) require institutional investment managers to report on Form N-PX how they voted proxies relating to certain executive compensation matters, or “say-on-pay” votes, as required by the Dodd-Frank Act.

The final amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.

Federated Hermes is reviewing the final amendments and their impact on its business.

• On October 26, 2022, the SEC adopted final rules requiring the recovery of erroneously-awarded compensation as required by Congress in the Dodd-Frank Act.

The rules will, among other things, require national securities exchanges to establish listing standards that would require listed issuers to adopt and comply with a compensation recovery policy, often known as a clawback policy, and require listed issuers to provide disclosure about such policies and how they are being implemented.

The rules and amendments will become effective on January 27, 2023.

Exchanges will be required to file proposed listing standards no later than February 26, 2023, and the listing standards must be effective no later than one year following such publication.

Issuers subject to such listing standards will be required to adopt a recovery policy no later than 60 days following the date on which the applicable listing standards become effective and must begin to comply with these disclosure requirements in proxy and information statements and the issuer’s annual report filed on or after the issuer adopts its recovery policy.

On January 27, 2023, the SEC posted four Compliance and Disclosure Interpretations that address certain disclosure form, named executed officer identification and scope questions concerning this new rule.

Federated Hermes is reviewing the final rules, and will review the final listing standards when issued, and their impact on its business.

• On October 26, 2022, the SEC adopted amendments to the requirements for annual and semi-annual shareholder reports provided by mutual funds and ETFs to highlight key information for investors.

The amendments require open-

end management investment companies to transmit concise and visually engaging annual and semi-annual reports directly to shareholders that highlight key information for investors and amend certain advertising rules for registered investment companies and business development companies.

The SEC adopted the rule largely as proposed although with some changes from the proposal, most notably the SEC did not adopt proposed amendments to registration statement disclosures.

The SEC adopted a “layered approach” to disclosure, whereby registered funds are required to make available summary information to retail shareholders directly, while providing more detailed information online (e.g., schedule of investments, other financial statement elements) that can be more relevant to investors and financial professionals who desire more in-depth information.

These amendments fundamentally change the annual and semi-annual reporting process and reports and will require extensive efforts to comply.

Federated Hermes is reviewing the final amendments and their impact on its business.

• On October 26, 2022, the SEC proposed a new rule and related amendments to prohibit SEC-registered investment advisors from outsourcing certain services or functions to service providers without meeting certain minimum requirements.

The proposal includes:

(1) new requirements for advisors to conduct due diligence before outsourcing and to periodically monitor service providers’ performance and reassess whether to retain them;

(2) related requirements for advisors to make and/or keep books and records related to the due diligence and monitoring requirements;

(3) amendments to the investment advisor registration form, Form ADV, to collect census-type information about advisors’ use of service providers;

and (4) a requirement for advisors to conduct due diligence and monitoring for third-party recordkeepers, along with a requirement to obtain reasonable assurances that the third-party will meet certain standards.

In its December 27, 2022 comment letter, Federated Hermes generally supported the comments of the ICI and SIFMA on the proposal, particularly with respect to (1) the SEC’s failure to provide any evidence that the proposal is required or that harm is being caused to investors given that an investment advisor’s fiduciary duties and obligations sufficiently govern their use of service providers;

(2) the definition of “covered function” being overly broad and too subjective;

and (3) the proposal’s attempt to legislate contractual relationships with service providers that, in many cases, are outside of the regulatory remit of the SEC.

The public comment period ended on December 27, 2022.

• On October 13, 2022, the SEC staff issued a Frequently Asked Questions (FAQ) relating to investment advisor consideration of diversity, equity, and inclusion (DEI) factors when recommending or selecting other investment advisors for clients.

The FAQ states that an advisor can consider DEI factors among a variety of factors, provided that the use of such factors is consistent with a client’s objectives, the scope of the relationship, and the advisor’s disclosures.

The SEC staff also stated that advisors are not required to pre-qualify consideration of DEI factors based on minimum AUM or length of track record.

• On October 12, 2022, the SEC adopted amendments to the electronic recordkeeping requirements for broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs) purportedly to modernize recordkeeping requirements and make the requirements adaptable to new technologies in electronic recordkeeping.

The amendments are also intended to facilitate examinations of broker-dealers, SBSDs, and MSBSPs.

The final amendments became effective on January 1, 2023.

The compliance dates for the new requirements will be May 3, 2023, in the case of broker-dealers, and November 3, 2023, in the case of SBSDs and MSBSPs.

Federated Hermes is reviewing the final amendments and their impact on its business.

Federated Hermes continues to monitor developments regarding previously issued regulatory proposals and developments, including, among others:

(1) the SEC’s proposed rule on “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices” (SEC ESG Disclosure Rule);

(2) as discussed above, the SEC’s proposed amendments to the Names Rule;

(3) the SEC’s request for comment on certain information providers acting as investment advisors;

(4) guidance from the SEC’s DOE regarding upcoming review areas during examinations focused on amended Advisers Act Rule 206(4)-1 (Marketing Rule), which came into effect on November 4, 2022;

(5) the SEC's proposed amendments to the standards applicable to covered clearing agencies for U.S.

Treasury securities;

(6) the SEC's recently adopted rules amending Item 402 of Regulation S-K to implement the “pay versus performance” requirement;

(7) the SEC and Commodity Futures Trading Commission’s (CFTC) joint proposed amendments to Form PF;

(8) the DOL's proposed amendments to the QPAM Exemption;

(9) the SEC's recently adopted amendments to the proxy rules governing proxy voting advice;

and (10) the SEC staff's proposed amendments to Exchange Act Rule 14a-8 (the shareholder proposal rule).

Federated Hermes submitted comment letters on many of these prior proposals.

Please refer to our prior quarterly reports on Form 10-Q and annual reports on Form 10-K for further information regarding other Regulatory Developments that can affect Federated Hermes’ Financial Condition.

In addition to the above Regulatory Developments, as noted above, the SEC staff continues to engage in a series of investigations, enforcement actions and/or examinations involving investment management industry participants, including investment advisors and investment management companies such as Federated Hermes’ investment advisory subsidiaries and the Federated Hermes Funds.

The FINRA staff also continues to engage in such investigations, enforcement actions and examinations of registered broker-dealers.

In October 2022, shortly after the SEC filed its first Reg BI enforcement action, FINRA filed its first disciplinary action under Reg BI, where it fined a broker $5,000 and issued a six-month suspension arising from allegations that the broker engaged in excessive trading that resulted in outsized commissions to the broker.

In November 2022, FINRA announced a targeted sweep exam of crypto-related communications.

According to its “2023 Report on FINRA’s Examination and Risk Monitoring Program,” FINRA’s examination priorities for 2023 include, among others:

(1) manipulative trading practices;

(2) fixed income fair pricing;

(3) ESG terminology in communications with the public;

(4) off-channel communications;

(5) anti-money laundering;

(7) cybersecurity;

(8) complex products and options;

(9) order handling, best execution and conflicts of interest;

and (10) liquidity risk management.

These investigations, examinations and actions have led, and can lead, to further regulation, guidance statements and scrutiny of the investment management industry.

The degree to which regulatory investigations, actions and examinations will continue, as well as their frequency and scope, can vary and is uncertain.

Regulation or potential regulation by regulators other than the SEC and DOL also continued, and can continue, to affect investment management industry participants, including Federated Hermes.

For example, on December 20, 2021, the Financial Industry Regulatory Authority (FINRA) filed with the SEC a proposed rule change to amend the provisions of FINRA Rule 2251 (Processing and Forwarding of Proxy and Other Issuer-Related Materials) relating to reimbursement from issuers for forwarding proxy and other materials and make minor conforming revisions.

On October 8, 2021, FINRA issued a regulatory notice encouraging FINRA member firms to incorporate government-wide anti-money laundering and countering financing of terrorism priorities into their anti-money laundering programs.

FINRA examinations have included, among others, options trading, bank sweep programs, zero commission and cyber-security sweep examinations.

In a 2021 Report on its Examination and Risk Monitoring Program, FINRA identified, among other areas of concern, anti-money laundering, outside business activities, private securities transactions, Regulation Best Interest and Form CRS compliance, misrepresentations relating to cash management accounts and digital assets, best execution and liquidity risk management controls as areas of focus and potential examination.

In addition to federal regulation, various state legislatures or regulators also have adopted or are beginning to adopt state-specific cyber-security and/or privacy requirements that can apply to varying degrees to investment management industry participants, including Federated Hermes.

The activities of the FSOC also continue to be monitored by the investment management industry, including Federated Hermes.

In December 2019, the FSOC changed its systemically important designation approach for non-bank financial companies from an entity-based approach to an activities-based approach under which an individual firm would only be so designated if it were determined that efforts to address the financial stability risks of that firm's activities by its primary federal and state regulators

have been insufficient.

Since then, the FSOC has been required first to focus on regulating activities that pose systemic risk through actions by primary regulators.

The FSOC has focused on potential risks in the asset management industry, including money market funds, and other types of cash management vehicles (such as local government investment pools), that continue to use amortized cost or have a stable NAV but are not subject to the 2014 Money Fund Rules and Guidance.

As discussed above, the market volatility and liquidity stress on money market funds experienced as a result of the Pandemic beginning in March 2020 has drawn the attention of U.S.

and global regulators, including the FSOC.

Certain policy advocates have called for the FSOC to reverse its 2019 decision to change its approach as outlined above in order to better fulfill its statutory mandate to mitigate risks to financial stability.

Any possibility of the FSOC reverting to its pre-December 2019 systemically important designation practices, and recommending new or heightened regulation for non-bank financial companies, which the Fed's Board of Governors (Governors) have indicated can include open-end investment companies, such as money market funds and other mutual funds, increases the potential for further regulation of the investment management industry, including Federated Hermes and the Federated Hermes Funds.

As a candidate, the current President stated that he is open to the idea of a financial transactions tax (FTT) on securities transactions, an idea proposed by certain former Democratic candidates, including the current Vice President.

The Wall Street Tax Act, introduced in the House of Representatives on January 15, 2021 together with its companion Senate bill introduced on March 18, 2021, would impose, if enacted, a 0.1% tax on stock, bond and derivatives transactions and reportedly would raise an estimated $777 billion over a decade.

The Tax on Wall Street Speculation Act, introduced in the Senate and House of Representatives on April 21, 2021, would impose an FTT of 0.5% on stock trades, 0.1% on bond trades, and 0.005% on derivative transactions.

These proposals are being introduced for a variety of reasons, including to fund infrastructure programs and college education programs or in an attempt to reduce speculation on Wall Street.

While Congressional hearings have taken place during which the FTT proposals have been discussed, none of the bills introduced to date have progressed in Congress.

The President initially proposed (and the House Ways and Means Committee approved a reconciliation tax bill) raising the corporate income tax rate to 26.5%;

although the White House later abandoned the proposal in favor of a new separate 15% minimum tax on firms with more than $1 billion in profit.

The President has also proposed a "wealth tax" on the unrealized investment income of Americans with at least $1 billion in assets, which reportedly is supported by certain Senators who initially opposed the President's budget proposals.

A 1% percent excise tax on the value of stock repurchased by publicly-traded U.S.

corporations also has been proposed.

While these tax increases, among others, are being proposed to fund infrastructure plans and the proposed budget, the President has not signaled an intent to include an FTT in any tax proposals.

Legislation also has been introduced in various states, such as New York, New Jersey, and Illinois, that, if enacted, would have imposed FTTs on various types of securities, commodities or other financial transactions.

In March 2021, a bill was re-introduced into the U.S.

House of Representatives that would prohibit states from imposing FTTs on security industry participants.

As of December 31, 2021, that bill has not progressed in Congress.

Management believes that an FTT, particularly if enacted with broad application, would be detrimental to investors and Federated Hermes' business and could adversely affect, potentially in a material way, Federated Hermes' business, results of operations, financial condition, cash flows and/or stock price (collectively Financial Condition).

The regulatory environment has impacted, and will continue to impact, to various degrees, Federated Hermes' Financial Condition.

For example, Regulatory Developments can result in shifts in product structures, as well as changes in asset flows and mix and customer relationships.

It also remains uncertain the degree to which previously issued Regulatory Developments will be rescinded or changed.

It also remains unclear whether, or to what degree, investment advisors, broker/dealers or other intermediaries will roll-back, modify or continue changes made prior to the original, vacated DOL fiduciary rule, or make new or additional changes in light of the Final DOL Fiduciary Rule, the DOL's final investment duty amendments, Final DOL Proxy Voting Rule, Final DOL ESG Rule, New DOL Proposed ESG/Proxy Voting Rule, Regulation Best Interest, Form CRS, or SEC fiduciary duty interpretations.

As noted above, the DOL has taken non-enforcement positions with respect to the Final DOL Fiduciary Rule, and has proposed the New DOL Proposed ESG/Proxy Voting Rule, which increases this uncertainty.

If intermediaries continue to reduce the number of Federated Hermes Funds offered on their platforms, mutual fund-related sales and distribution fees earned by Federated Hermes can decrease.

In that case, similar to other investment management industry participants, Federated Hermes could experience a further shift in asset mix and AUM, and a further impact on revenues and operating income.

On the other hand, management continues to believe that Federated Hermes' business can be positively affected because separately managed account/wrap-fee strategies work well in level wrap-fee account structures and can provide transparency and potential tax advantages to clients, while Federated Hermes' experience with bank trust departments and fiduciary experience and resources presents an opportunity to add value for customers.

Federated Hermes continues to analyze the potential impact of these Regulatory Developments on Federated Hermes' Financial Condition.

Federated Hermes has dedicated, and continues to dedicate, significant and additional internal and external resources to monitor, analyze and address regulatory responses to the impact from the Pandemic and Regulatory Developments generally,

and their effect on Federated Hermes' Financial Condition.

Additional internal and external resources have been, and will continue to be, devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters.

These efforts included, and will continue to include, having conversations internally, and with intermediaries, customers, service providers, counsel and other advisors regarding Regulatory Developments, and analyzing and/or affecting legislative, regulatory, product offering, development and structure adjustments, technology or information system development, reporting capabilities, business processes and other options, in an effort to comply, and/or to assist Federated Hermes' intermediaries and other customers to comply, with new Regulatory Developments or minimize the potential impact of any adverse consequences stemming therefrom.

As appropriate, Federated Hermes also participated, and will continue to participate, either individually or with industry groups, in the comment process for proposed regulations.

Federated Hermes continues to expend legal and compliance resources to examine corporate governance, public company, ESG, climate change, and other disclosure proposals and final rules issued by the SEC and other regulators, to adopt, revise and/or implement policies and procedures, and to respond to examinations, inquiries and other matters involving its regulators, including the SEC, customers or other third parties.

Federated Hermes also has devoted, and will continue to devote, resources to technology and system investment, business continuity, cybersecurity and information governance, and the development of other investment management and compliance tools, to enable Federated Hermes to, among other benefits, be in a better position to address Regulatory Developments.

In connection with the Pandemic, Federated Hermes has devoted internal and external resources to endeavor to comply with the requirements of federal and state orders imposing work- and travel-related restrictions, and the requirements under the CDC's and state and local health departments' guidance, as well as enhanced disinfection and contamination procedures.

Federated Hermes is unable to fully assess at this time whether, or the degree to which, any continuing efforts or potential options being evaluated in connection with modified or new Regulatory Developments ultimately will be successful.

The degree of impact of Regulatory Developments on Federated Hermes' Financial Condition can vary, including in a material way, and is uncertain.

Management also continues to monitor and assess the potential impact of the Pandemic generally, and the impact of the low interest rate environment and anticipated increasing interest rate environment on money market fund and other fund asset flows, and related asset mixes, as well as the degree to which these factors impact Federated Hermes' institutional prime and municipal (or tax-exempt) money market business and Federated Hermes' Financial Condition.

Management also continues to monitor, and expend resources in connection with, the potential for additional regulatory scrutiny of money market funds, including prime and municipal (or tax-exempt) money market funds.

The Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or can impact, Federated Hermes' intermediaries, other customers and service providers, their preferences and their businesses.

For example, these developments have caused, and/or can cause, certain product line-up, structure, pricing and product development changes, as well as money market, equity, fixed-income, alternative/private markets or multi-asset fund products to be less attractive to institutional and other investors, reductions in the number of Federated Hermes Funds offered by intermediaries, changes in the fees Federated Hermes, retirement plan advisors and intermediaries will be able to earn on investment products and services sold to retirement plan clients, changes in work arrangements and facility-related expenses, and reductions in AUM, revenues and operating profits.

In addition, these developments have caused, and/or can cause, changes in asset flows, levels and mix, as well as customer and service provider relationships.

Federated Hermes will continue to monitor regulatory actions in response to the Pandemic and other Regulatory Developments as necessary and can implement additional changes to its business and practices as it deems necessary or appropriate.

Further analysis and planning, or additional refinements to Federated Hermes' product line and business practices, can be required in response to market conditions, customer preferences or new or modified Regulatory Developments, such as the new investment advisor advertising, valuation, derivatives, and fund of funds rules, any proposed changes to the Final DOL Fiduciary Rule, the New DOL Proposed ESG/Proxy Voting Rule and other Regulatory Developments, or any additional regulation or guidance issued by the SEC, DOL or other regulatory authorities.

In addition to the impact on Federated Hermes' AUM, revenues, operating income and other aspects of Federated Hermes' business described above, Federated Hermes' regulatory, product development and restructuring, and other efforts in response to the Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had, and can continue to have, on a cumulative basis, a material impact on Federated Hermes' expenses and, in turn, financial performance.

As of December 31, 2021, given the regulatory environment, the Pandemic and the possibility of future additional regulation or oversight, Federated Hermes is unable to fully assess the impact of regulatory actions in response to the Pandemic or other

Regulatory Developments, and Federated Hermes' efforts related thereto, on its Financial Condition.

Modified or new Regulatory Developments in the current regulatory environment, and Federated Hermes' efforts in responding to them, could have a material and adverse effect on Federated Hermes' Financial Condition.

As of December 31, 2021, management also believes that any designation as a systemically important non-bank financial company, or any reforms ultimately put into effect by the FSOC, would be detrimental to Federated Hermes' money market fund business and could materially and adversely affect Federated Hermes' Financial Condition.

Regulation or potential regulation by regulators other than the SEC and DOL, as well as state or federal lawmakers, also continued, and can continue, to affect investment management industry participants, including Federated Hermes.

For example, various state legislatures or regulators have adopted or are beginning to adopt state-specific cybersecurity and/or privacy requirements that can apply to varying degrees to investment management industry participants, including Federated Hermes.

Large index asset managers are garnering attention from the Senate Banking Committee, with certain members of the Committee asserting that these asset managers exercise outsized influence over the market (via proxy voting power) and use that influence to advance ESG and diversity, equity, and inclusion goals that are not connected to financial performance.

Recent actions taken by federal and state political representatives have suggested that asset managers participating in certain ESG initiatives could violate antitrust laws.

For example, on August 4, 2022, 19 Republican Attorneys General published a letter stating that, among other things, a large asset manager’s “coordinated conduct with other financial institutions” because of its membership in certain ESG initiatives, among others, raises antitrust concerns because it “appear[s] to intentionally restrain and harm the competitiveness of the energy markets.” On November 21, 2022, 15 Democratic Attorneys General published a response supporting fund managers’ consideration of ESG factors.

The response letter states that the claim that asset managers that consider ESG factors could be violating antitrust and competition laws is unsupported.

In November 2022, House Judiciary Committee Republicans launched an investigation aimed at assessing whether major climate groups that spearhead ESG initiatives are violating antitrust laws when they coordinate groups to achieve ESG-related policy goals, which aids anticompetitive and unlawful agreements and behavior (e.g., withdrawing investment from the oil and gas industry (or particular companies) or mandating that companies adhere to certain ESG related principles (through the proxy voting process)).

financial transactions tax (FTT), an increase to a 28% corporate income tax, and a wealth tax on unrealized investment income on individuals with net wealth over $100 million continue to be discussed to varying degrees, as of December 31, 2022, none of these proposed tax changes have been enacted.

As part of the Inflation Reduction Act of 2022, however, among other tax reforms, a 15 percent minimum tax on corporate book income for corporations with average annual adjusted financial statement income that exceeds $1 billion for any three consecutive prior tax years and a one percent tax on corporate share repurchases have been enacted.

These taxes will apply beginning in 2023.

The law also includes a large expansion and modernization effort for the Internal Revenue Service (IRS).

On December 27, 2022, the IRS and Treasury issued Notice 2023-2, which provides guidance relating to the application of the new excise tax on repurchases of corporate stock.

Among other things, the notice provides detailed rules for calculating the amount of the excise tax as well as rules relating to the reporting and payment of the tax.

Under the notice, the excise tax applies broadly to stock repurchases (including repurchases of preferred stock) of corporate stock by publicly traded U.S.

corporations (covered corporations), or certain of their affiliates, after December 31, 2022, and to certain “economically similar” transactions.

The term “repurchase” is defined broadly and generally includes any acquisition of stock by a corporation in exchange for cash or property other than its own stock or stock rights.

The notice defines certain “economically similar” transactions to include only (i) certain types of reorganization transactions, (ii) split-off transactions (as opposed to pro rata “spin-off” transactions), and (iii) certain complete liquidations.

Current Regulatory Environment - International

Similar to the situation in the U.S., in 2021, as the Pandemic continued, the regulatory environment globally shifted away from the adoption of measures intended to provide regulatory flexibility.

In its October 27, 2021 Annual Report, the Financial Stability Board (FSB) noted that the outlook for financial stability continued to be dominated by the Pandemic, with the recovery being uneven across economies and sectors and financial vulnerabilities related to stretched asset valuations and high non-financial sector debt.

In an October 28, 2021 final report to the G20, the FSB highlighted market and institutional resilience, operational resilience and crisis preparedness as key policy objectives.

While the full impact of the Pandemic remains unclear as of the first quarter of 2022, regulators in the UK and EU have continued to allow certain regulatory relief granted in 2020 to expire, while extending other relief, continue policy efforts to address the effects of the Pandemic and related market instability, and advance new and proposed consultations, directives, regulations and laws.

These Regulatory Developments continue to impact the investment management industry in the UK and EU.

In the UK, the transition period under the European Union Withdrawal Agreement Bill (Withdrawal Agreement Bill), which implemented the agreement reached between the UK and the other 27 EU Member States and set out the arrangements for the UK's withdrawal from the EU (Brexit), ended on December 31, 2020.

On December 30, 2020, the EU–UK Trade and Cooperation Agreement (TCA) became effective.

Among other things, the TCA provides for free trade for goods and limited mutual market access for services, removes any role for the European Court of Justice in the UK, and eliminates the requirement for the UK to comply with EU data protection directives.

The TCA also provides for cooperation between the UK and EU regarding a range of policy areas and UK participation in certain EU programs.

Political, economic, legal and regulatory uncertainty continues regarding the impact of Brexit on a post-Brexit UK.

See Item 1A - Risk Factors - General Risk Factors - Economic and Market Risks - Potential Adverse Effects of a Decline or Disruption in the Economy or Markets and General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for further discussion of the risks of political instability, currency abandonment and other market disruptions on Federated Hermes and its business.

Brexit has affected, and will likely continue to affect, the requirements and/or timing of implementation of legislation and regulations applicable to doing business in the EU and UK, including the laws and regulations applicable to Federated Hermes, as well as to the sponsoring, management, operation and distribution of Federated Hermes' products and services, both within and outside the EU and UK.

On March 24, 2021, the European Securities and Markets Authority (ESMA) issued an updated statement on the consequences of Brexit under the Benchmark Regulation, which indicates that EU-supervised entities can continue to use third-country UK benchmarks until December 31, 2023 and that this transition period is also recognized in the UK.

On September 20, 2021, the UK House of Commons Treasury Committee published the UK Government's response (Response) to its report on the Future Regulatory Framework of Financial Services, which was published on June 30, 2021.

Among other key points, the Response expresses support for incorporating into UK law EU financial services rules that were "on-shored" into the UK as a result of Brexit.

UK regulators are continuing with the process of rationalizing the EU legislation and regulatory requirements that were quickly "on-shored" upon Brexit taking effect.

In October 2020, the UK Financial Conduct Authority (FCA), the Bank of England (BoE) and other UK regulators granted firms until March 31, 2022 to comply with certain of these regulatory changes including, among others, certain reporting obligations and market abuse requirements.

On November 9, 2021, Her Majesty's Treasury (HM Treasury) published, "Financial Services Future Regulatory Framework Review:

Proposals for Reform," its second consultation on the UK government's proposals for adapting the UK regulatory framework for financial services following Brexit.

The consultation builds on a previous consultation, and seeks to build on the strengths of the UK's financial services regulatory framework and the UK's existing model of regulation established by the Financial Services and Markets Act 2000.

It sets forth proposals:

(1) to include changes to regulators' statutory objectives, including giving HM Treasury and the FCA broader rule-making powers to establish new UK financial conduct standards as EU regulation is gradually repealed;

(2) for enhanced mechanisms for accountability, scrutiny and oversight of the regulators by UK Parliament, HM Treasury and stakeholders;

and (3) as to how HM Treasury intends to return responsibility for designing and implementing regulatory requirements to the UK regulators, a break from the approach under EU law.

The consultation period ended on February 9, 2022.

While the TCA addresses the financial services industry, it does so on a limited basis and does not provide for passporting rights nor address equivalence decisions.

Passporting ended at the expiration of the Brexit transition period and firms now must rely on temporary permission regimes and comply with the local laws of each country.

Regarding providing a replacement for passporting, the FCA has implemented a temporary permissions regime that allows European Economic Area (EEA)-domiciled investment funds that were marketed in the UK under a passport to continue temporarily to be marketed in the UK, and allows EEA-based firms that passported into the UK to continue new and existing regulated business within the scope of their permissions in the UK for up to five years, while they seek full FCA authorization.

On March 4, 2021, the FCA provided further guidance on the UK temporary permissions regime by advising firms of the opening and closing dates (or landing slot) during which firms must either apply for full permission or cancel their temporary permission and then cease any regulated financial conduct in the UK.

On January 18, 2022, the FCA issued a statement indicating that it would seek to ensure that firms relying on the temporary permissions regime, where appropriate, cannot expand their UK business while in the temporary permissions regime.

The FCA also indicated that, if firms miss their landing slot, fail to respond to mandatory information requests, do not intend to apply for full authorization, or have their authorization application refused, and do not voluntarily leave the temporary permissions regime, the FCA will take action to remove them.

The UK also has created a financial services contracts regime that allows, for a limited time, EEA-based firms not taking advantage of the temporary permissions regime in the UK to continue to service UK customers under contracts entered into prior to the end of the transition period in order for them to conduct an orderly exit from the UK.

In addition to the UK, EU governments, such as, among others, France, the Netherlands, Italy and Germany, also have adopted similar temporary permission regimes or other laws to permit UK products to be sold, and EU-UK financial transactions to continue, for a period of time in their countries.

Pursuant to amendments implemented by the Withdraw of the United Kingdom from the European Union (Consequential Provisions) Bill 2020, a firm that is authorized in the UK and/or Gibraltar, which has previously passported into Ireland, will be deemed to be authorized for specific and limited purposes in Ireland for a 15-year period following the end of the transition period, subject to the fulfillment of certain conditions.

In March 2020, HM Treasury released a consultation paper proposing an Overseas Fund Regime (OFR) which is targeted at Undertakings for the Collective Investment in Transferable Securities (UCITS) and would be a long-term replacement to the temporary permissions regime which enabled Federated Hermes' Irish UCITS funds to continue to be marketed in the UK after December 31, 2020.

HM Treasury proposed this equivalence regime which will determine countries which are equivalent to the UK.

HM Treasury used the Financial Services Act 2021 to formally introduce the OFR as an equivalence regime for overseas retail funds to be able to market to UK investors, including retail investors, on appropriate terms.

HM Treasury has also proposed a separate regime for money market funds to be able to market to all investors, noting that the process will be different if the fund wants to market to retail or professional investors.

These regimes will function similarly to the existing EU approach to equivalence.

HM Treasury is working with the FCA to undertake equivalence assessments for different countries and different fund types in order to identify those that can take advantage of the OFR.

The FCA is continuing to consider the requirements that will apply under the OFR and whether those funds will need to put in place some form of value assessment process.

Federated Hermes has received permission from the FCA to allow certain Irish-domiciled UCITS funds and Luxembourg-based direct lending funds to continue to be marketed in the UK under the temporary permissions regime.

Regarding equivalency, the FCA, ESMA and EU regulators previously signed memoranda of understandings (MoUs) covering cooperation and exchange of information that came into effect at the end of the transition period (i.e., on December 31, 2020) and provide for some level of regulatory coordination and mutual equivalence until a new regime is agreed and in place.

On March 26, 2021, HM Treasury announced that technical discussions had concluded, and that the UK and the EU agreed to another MoU that creates a framework for voluntary regulatory cooperation in financial services and establishes a Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services matters.

The MoU, however, does not reflect progress on equivalency determinations.

In addition to a few other equivalency decisions, such as two time-limited equivalency decisions in connection with the UK relating to central counterparty clearing and settlement of Irish securities, on June 26, 2021, the European Commission issued two adequacy decisions recognizing the level of protection of the UK's data protection laws as "essentially equivalent" with EU laws.

These adequacy decisions allow EU to UK data flow to continue after Brexit.

In September 2021, as part of a broader announcement on the future of the UK's data protection regime, the UK Government announced plans to work on granting adequacy decisions regarding the data protection laws of other countries, including the U.S., Australia, Singapore and others.

HM Treasury has granted over 25 equivalency decisions to the EU, in addition to those granted to 32 other jurisdictions.

Despite these developments, there remains a risk of regulatory divergence between the UK and the EU.

On July 1, 2021, Rishi Sunak, the UK Chancellor of the Exchequer, called an end to negotiations with the EU on regulatory equivalence (or common regulations) with EU financial services regulation.

This decision means that the UK has elected to have its own financial rules.

EU investment firms in EU Member States were required to comply with the Investment Firms Directive (IFD) and Investment

Firms Regulation (IFR) by June 26, 2021, the effective date of the IFD and IFR in the EU.

The IFD and IFR, however, do not bind the UK, and a new UK prudential regime for Markets in Financial Instruments (MiFID) firms titled Investment Firms Prudential Regime (IFPR) was included in the Financial Services Bill 2019-2021, which was based on the IFD and IFR.

On April 29, 2021, the Financial Services Bill 2019-2021 received Royal Assent and became UK law as the Financial Services Act 2021.

Among other things, this Act:

(1) introduced the IFPR as a new UK prudential regime for investment firms;

(2) amended the UK's on-shored Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) to provide the FCA with additional powers to clarify the scope of the regulations and amend the requirements within the PRIIPs Key Information Document (KID);

(3) increased the power of the FCA to ensure a smooth transition away from LIBOR;

(4) simplified the process enabling non-UK investment funds to be marketed in the UK;

and (5) required the FCA to consult on whether it should make general rules providing that authorized persons owe a duty of care to consumers.

On June 29, 2021, the FCA issued its first of three policy statements based on a prior consultation on the IFPR that set forth "near final" rules on consolidation, own-fund requirements, and concentration risk, which will apply to UK-authorized MiFID firms.

On July 26, 2021, the FCA issued its second policy statement, which set forth industry feedback to the first policy statement, and additional "near-final" rules to supplement and amplify those rules that were set forth in the first policy statement.

On August 6, 2021, the FCA published another consultation on the IFPR with additional disclosure requirements and other technical changes.

The consultation period closed on September 17, 2021.

On November 26, 2021, the FCA published its final policy statement setting out its final rules on the IFPR, which implement most of the policy proposals set forth in the FCA's consultation papers.

The IFPR, which became effective on January 1, 2022, introduced a single prudential regime and represents a significant change for FCA-authorized investment firms in the UK that are authorized under MiFID, including alternative investment fund managers with MiFID top-up permissions.

As another example, EU regulators have previously issued or proposed directives, rules and laws regarding sustainable finance, including the Sustainability-Related Disclosures Regulation or Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation.

(1) an EU Taxonomy Climate Delegated Act, which aims to support sustainable investment by clarifying which economic activities most contribute to meet the EU's environmental objectives;

(2) a proposal for a Corporate Sustainability Reporting Directive (CSRD) and revisions to the Non-Financial Reporting Directive, which aim to make sustainability reporting by companies more consistent, so that financial firms, investors, and the broader public can use comparable and reliable sustainability information;

and (3) amendments to delegated acts to better reflect sustainability preferences in insurance and investment advice and sustainability considerations in product governance and fiduciary duties.

The amendments provide for a 12-month implementation period that is expected to end in October 2022.

On May 7, 2021, the European Commission published a draft delegated act setting out definitive standards for the disclosure of information on environmental sustainability that certain large companies must make, as required under the Taxonomy Regulation.

On June 8, 2021, ESMA published a "Trends, Risks and Vulnerabilities (TRV) Report" in which it assessed EU investment funds' exposure to climate-sensitive economic sectors and identified certain key risks.

On July 6, 2021, the European Commission adopted a delegated regulation that supplemented certain disclosure requirements under the Taxonomy Regulation which specified the content, methodology and presentation of information that certain large financial and non-financial entities must disclose concerning their environmentally-sustainable economic activities.

By letter dated July 23, 2021, addressed to the European Supervisory Authorities (ESAs), the European Commission stated that, due to the length and technical detail of the Level 2 technical standards, their late submissions, and forthcoming amendments to the draft Level 2 technical standards, the European Commission will bundle all of the regulatory technical standards in a single delegated act and defer the date of application from January 1, 2022 to July 1, 2022.

On July 26, 2021, the European Commission published updated Questions and Answers concerning a number of questions raised by the ESAs regarding the application of the SFDR, including the application of the SFDR to Alternative Investment Fund Managers (AIFM) and Accredited Investment Fiduciaries (AIF).

On August 2, 2021, the European Commission published additional regulations and a directive as part of its sustainable finance initiatives regarding sustainability risks and sustainability factors to be taken into account by AIFs, UCITS and investment firms, among other regulated entities.

On August 3, 2021, the Platform on Sustainable Finance:

Technical Working Group published a draft report on preliminary recommendations for technical screening criteria for the Taxonomy Regulation.

Comments on the report were due by September 24, 2021, with the results analyzed and submitted to the European Commission in November 2021.

On October 7, 2021, the European Parliament issued a press release announcing the rejection of a supplement to the Taxonomy Regulation that would have specified the technical screening criteria under which certain economic activities qualify as contributing substantially to climate change mitigation and climate change adaptation and for determining whether those activities cause significant harm to any other relevant environmental objectives.

On October 22, 2021, the ESAs published their final report on the draft taxonomy regulatory technical standards for financial product

disclosures under the SFDR.

The final regulatory technical standards aim to create a single "rulebook" for sustainability-related disclosures for SFDR pre-contractual and periodic product disclosures.

These final rules for taxonomy reporting for financial products diverge from those for financial undertakings themselves for which the Delegated Act for Taxonomy Article 8 apply.

The European Commission notified the European Parliament and the European Council of a further six-month delay (from July 2022 to January 1, 2023) to the application of the delegated act regulatory technical standards that will set out the detailed requirements regarding the form and content of disclosures to be made for financial products under the SFDR.

Rather than adopt the SFDR, the UK announced on November 9, 2020 that it will introduce ESG disclosure rules aligning with the TCFD, making the UK the first country to adopt that approach.

On December 22, 2020, the FSB issued a statement encouraging the International Financial Reporting Standards Foundation and financial authorities to use the TCFD's recommendations as the basis for standards for climate-related financial disclosures.

In a consultation launched on March 24, 2021, the UK government solicited views on proposals to require that UK companies with more than 500 employees that are traded on a UK-regulated market disclose TCFD-aligned climate-related information.

The consultation stated that new regulations would come into force on April 6, 2022.

On June 22, 2021, the FCA published "Consultation Paper 21/17:

Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulation pension providers" in which the FCA proposed to introduce TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers, with a focus on the information needs of clients and consumers.

The FCA also proposed to extend the TCFD-aligned climate disclosure requirements to all companies with standard listed equity shares, except for standard listed investment entities and shell companies.

The consultation period ended on September 10, 2021.

Based on its June 2021 consultation, on December 10, 2021, the FCA published a Policy Statement, "Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers," in which the FCA introduced a new ESG sourcebook containing rules and guidance for asset managers and certain FCA-regulated asset owners to make disclosures at an entity level and product or portfolio level consistent with TCFD recommendations on an annual basis.

On December 10, 2021, the FCA also published a Policy Statement on "Enhancing client-related disclosures by standard listed companies" in which the FCA extended the application of its climate-related disclosure requirements to issuers of standard listed shares and Global Depositary Receipts representing equity shares (but not listed investment entities and shell companies).

On November 3, 2021, the FCA published a discussion paper, "Sustainability Disclosure Requirements (SDR) and investment labels" in which the FCA sought views on new sustainability disclosure requirements for asset managers and FCA-regulated asset owners, as well as a new classification and labelling system for sustainable investment products.

The consultation period ended on January 7, 2022.

On June 7, 2021, the TCFD began to seek public comment on two documents, "Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans," and the associated, "Measuring Portfolio Alignment:

Technical Supplement," in order to update its final recommendations on climate-related financial disclosures as disclosure practices and the use of disclosures by financial and non-financial organizations continued to progress.

In a July 10, 2021 statement, the G20 Finance Ministers indicated that, "[w]e will work to promote implementation of disclosure requirements or guidance, building on the [TCFD] framework, in line with domestic regulatory frameworks, to pave the way for future global coordination efforts, taking into account jurisdictions' circumstances, aimed at developing a baseline global reporting standard." Based on its June 2021 consultations, on October 14, 2021, the TCFD released a new guidance document on climate-related metrics, targets, and transition plans.

This new guidance seeks to support organizations that make TCFD-aligned disclosures in preparing decision-useful metrics, targets, and transition plan information and linking that information to estimates of financial impact.

Despite a continuing possibility of negative deposit interest rates, euro-denominated European money market funds have successfully operated and provided investors with high quality diversified investments which continue to provide same day liquidity, first through the use of an approved share cancellation methodology and more recently through the use of accumulating share classes.

Federated Hermes has worked with the FCA and the Central Bank of Ireland (CBI) on appropriate permissions to operate in each jurisdiction, in a manner similar to euro-denominated money market funds, should official rates in U.S.

dollars or British pound sterling become negative.

Like the U.S., the pace of regulation in the EU and UK increased in 2022 and is expected to maintain an increased pace in 2023.

In the fourth quarter 2022 alone, the UK Financial Conduct Authority (FCA) issued 14 consultation papers and discussion papers, the Central Bank of Ireland (CBI) issued one consultation paper, and the European Securities and

Markets Authority (ESMA) issued three consultation papers, among other calls for input, guidance, handbook changes and other regulatory publications.

The Financial Stability Board (FSB) also issued five consultation papers and the International Organization of Securities Commissions (IOSCO) issued six consultation papers and final reports in the fourth quarter 2022.

Investment management-related topics covered by these consultation papers and other publications included, among others:

the future disclosure framework in the UK;

sustainability disclosure requirements and investment labels in the UK;

own funds requirements for Irish management companies and Undertakings for the Collective Investment in Transferable Securities (UCITS) authorized for discretionary investment management;

guidelines on fund names using ESG or sustainability-related terms in the EU;

amendments to the regulatory technical standards (RTS) under Article 34 of Markets in Financial Instruments Directive II (MiFID II) (relating to passporting);

call for evidence on greenwashing;

call for evidence on the implementation of the Shareholders Rights Directive 2;

achieving greater convergence on cyber incident reporting;

supervisory and regulatory approaches to climate-related risks;

regulation, supervision, and oversight of crypto-asset activities and markets;

and a thematic review on liquidity risk management recommendations.

These regulators and supervisory authorities are expected to continue to address these topics, and publish additional consultation papers and other regulatory documents, in 2023.

The FCA and CBI, and other international regulatory authorities, also continue to conduct regulatory investigations, enforcement actions, and examinations and inquiries.

It has been reported that FCA compliance priorities in 2023 will likely include, among others, implementation of the new Consumer Duty, reviews of financial promotion activities, fraud risk, maintenance of systems and controls to mitigate financial crime, and financial resilience.

On January 25, 2023, the FCA published its multi-form review of Consumer Duty implementation plans, in which the FCA indicated that it had identified many examples of good practice, but believes more work is required in the areas of effective risk-based prioritization of components of implementation plans, embedding detailed substantive requirements into implementation plans, and sharing of information with other firms in the distribution chain in order to implement the consumer duty on a timely basis.

The FCA indicated that it expects boards and management bodies to focus and provide challenges in the three key areas above before the implementation deadline on July 31, 2023, and that it will be sending a survey to a sample of firms to understand the progress they are making in implementing the Consumer Duty.

The CBI also has been more proactive in recent years, including in 2022, in examining and submitting inquiries to firms it regulates, including Federated Hermes.

It also has been reported that EU regulatory authorities’, including ESMA’s, regulatory priorities in 2023, and beyond, will include, among others, financial stability, ESG developments, sustainable finance, packaged retail investment and insurance-based products (PRIIPS) regulation, and the continuing impact of Brexit.

UK regulators continue to rationalize the EU legislation and regulatory requirements that were quickly “on-shored” upon Brexit taking effect.

As of December 31, 2022, the Retained EU Law (Revocation and Reform) Bill (i.e., the Brexit Freedoms Bill), among other legislation, continued to progress through UK Parliament.

The Brexit Freedoms Bill is intended to implement a renewed regulatory framework in the UK.

Among other things, under the Brexit Freedoms Bill, if enacted as proposed, all EU legislation will be amended, repealed or replaced, which will end the special status of all retained EU law and re-categorize all remaining retained EU law as “assimilated law” by December 31, 2023, and enable the UK government to create regulations to fit the UK’s needs, cut administrative obstacles to support business investment and stimulate the UK economy.

The December 31, 2023, deadline, which has been subject to political criticism as being arbitrary and nonsensical, can be extended until June 23, 2026.

The Brexit Freedoms Bill applies to all EU law, including certain areas impacting financial services, with exceptions that exclude certain legislation identified in the 2022-23 Financial Services and Markets Bill (FSM Bill) and certain amendments to revoked instruments from the revocation deadline.

The revocation deadline also will not apply to any rules of the Prudential Regulation Authority (PRA), FCA or Bank of England (BoE) or to any Payment Systems Regulator that are generally applicable requirements or directions of general application.

The Brexit Freedoms Bill will ensure that it is no longer possible for EU case law to override UK legislation, subject to a relevant national authority’s right to reinstate certain rights, powers, or obligations, including to apply interpretative principles to produce an effect that is equivalent to the effects of EU interpretive principles.

The Brexit Freedoms Bill also grants relevant national authorities the power until June 23, 2026, to specify that certain UK laws are to be read in a way which is “compatible” with retained EU law and subject to retained EU law to the extent “incompatible.” Absent any use of the power to require compatibility with retained EU legislation, the Brexit Freedoms Bill would impose a new priority rule under which standard UK legislation will trump retained EU legislation.

The Brexit Freedoms Bill also will end free movement between the UK and other European nations.

The Brexit Freedoms Bill will maintain all of the UK’s international commitments and build on the UK government’s progress post-Brexit, which include, among others, restoring democratic control over law making within the UK Parliament, restoring the UK Supreme Court as the final arbiter of the law that applies to the UK, striking new trade agreements with over 70 countries, and certain value-added-tax reforms.

The Brexit Freedoms Bill also prescribes a new test to be applied by higher courts when considering whether to depart from retained EU case law or whether to depart from retained UK case law, establishes a new reference procedure

enabling a lower court which is bound by retained case law to refer a point of law to a higher court (which is not so bound) to decide, and establishes a new procedure for a law officer of the UK government or the devolved administrations to refer a point of retained case law to a relevant higher court and certain rights of intervention.

As of December 31, 2022, the previously introduced FSM Bill also continued to progress through the UK Parliament, and it has been reported that it is expected to receive Royal Assent in Spring 2023.

The FSM Bill would revoke retained EU law relating to financial services and empower His Majesty’s Treasury (HM Treasury), relevant national authorities (i.e., financial service regulators, such as the FCA and PRA), and the BoE to modify or replace existing retained EU laws or to prepare new transitional amendments to bring about a new UK-specific regulatory regime.

Among other things, the FSM Bill is intended to:

(1) implement the outcomes of the Future Regulatory Framework (FRF) Review, which included consultations that concluded on February 9, 2022, (2) maintain the UK’s position as an open and global financial hub, (3) harness the opportunities of innovative technologies in financial services, and (4) bolster the competitiveness of UK markets and promote the effective use of capital.

The overseas funds regime (OFR) also has been established.

The OFR is targeted at UCITS and is a long-term replacement to the temporary permissions regime which enables Federated Hermes’ Irish UCITS funds to continue to be marketed in the UK post-Brexit.

HM Treasury is working with the FCA to undertake equivalence assessments for different countries and different fund types to identify those that can take advantage of the OFR.

An assessment of the European Economic Area’s (EEA) assessment commenced in October 2022.

The FCA is engaging with HM Treasury on the disclosure requirements that would apply in the event of an equivalence decision on the OFR.

The FCA also is continuing to consider the other requirements that will apply under the OFR and whether those funds will need to put in place some form of value assessment process.

The post-Brexit regulatory environment (particularly the need to obtain full authorizations on a country-by-country basis) also creates a level of uncertainty regarding the ability and requirements to distribute products and provide investment management services between the UK and EU, increasing regulatory burdens and compliance and other costs for UK funds being distributed in the EU and EU funds (such as Irish-domiciled funds) being distributed in the UK.

The ability to engage investment managers for EU funds and UK funds also could be impacted, resulting in structural and other changes for UK- and EU-domiciled funds.

The impact of Brexit on Federated Hermes' UK domiciled funds is difficult to quantify and remains uncertain given the overlap with the Pandemic and recent surge in the number of ESG-related money market funds in both the EU and UK.

As of December 31, 2021, Brexit has not had a material adverse effect on Federated Hermes' Financial Condition.

The impact of Brexit on Federated Hermes’ UK domiciled funds is difficult to quantify and remains uncertain given the overlap with the coronavirus pandemic (Pandemic) and recent surge in the number of ESG-related money market funds in both the EU and UK.

As of December 31, 2022, EU-resident shareholders in Federated Hermes’ UK domiciled funds and the UK-resident shareholders in Federated Hermes’ Irish-domiciled funds were permitted to remain in the funds.

Subscriptions also can continue as long as there

is not a proactive sales effort.

Regarding the regulatory environment for money market funds post-Brexit, UK-domiciled money market funds remain on par with current EU regulatory requirements;

however, it is possible that the UK may deviate from - or simply not adopt - any new or amended EU money market fund laws, rules or regulations that may be adopted in the future.

The activities of the IOSCO and the FSB also continue to be monitored by the investment management industry, including Federated Hermes.

Building on consultations and other reports published from 2015 through 2021 regarding methodologies for identifying non-bank, non-insurance company global systemically important financial institutions, recommendations to address structural vulnerabilities from asset management activities, and liquidity risk management, IOSCO and FSB have continued, and will continue, to assess, recommend and implement regulatory reforms affecting money market funds, liquidity risk management, derivatives, leverage, and other aspects of the investment management industry.

In its October 27, 2021 Annual Report, the FSB highlighted the FSB's policy work to foster global financial stability in response to the Pandemic and emerging risks, including, among others, work to:

(1) enhance the resiliency of non-bank financial intermediaries;

(2) enhance cyber incident response and recovery;

(3) address "global stablecoin" arrangement risks;

(4) enhance cross-border payments;

and (5) address climate-related financial risks.

The FSB's statements in its Annual Report on cyber incidents followed an October 19, 2021 report issued by the FSB on "Cyber Incident Reporting:

Existing Approaches and Next Steps for Broader Convergence" in which the FSB identified three ways that it will work to achieve greater convergence in cyber incident reporting:

(1) the development of best practices that authorities could consider when developing their cyber incident reporting regime;

(2) the identification of common types of information to be shared, including identifying and reducing legal and operational impediments to sharing such information;

and (3) the creation of common terminologies for cyber incident reporting, including a common definition of "cyber incident."

In its 2021-2022 work program, published February 26, 2021, IOSCO indicated that its priorities include financial stability and systemic risks of non-bank financial intermediation activities, as well as risks exacerbated by the Pandemic, such as misconduct risks, fraud, and operational resilience.

IOSCO also indicated that, among other efforts, it will continue efforts (headed by the Sustainable Finance Task Force) to improve the completeness, consistency, and comparability of sustainability reporting.

Based on a prior consultation, on November 2, 2021, IOSCO published its Final Report setting forth its "Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management," which aims to improve sustainability-related practices, policies, procedures and disclosures in the asset management industry through five recommendations for securities regulators and policymakers.

The five recommendations are:

(1) setting regulatory and supervisory expectations for asset managers in respect of the development and implementation of practices, policies and procedures relating to material sustainability-related risks and opportunities, as well as related disclosure;

(2) clarifying or expanding on existing, or adopting new, regulatory requirements to improve product-level disclosure to help investors understand sustainability-related products and material sustainability-related risks for all products;

(3) providing securities regulators and policymakers access to supervisory tools to assess whether asset managers and sustainability-related products are in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements;

(4) securities regulators and policymakers encouraging asset management industry participants to develop common sustainable finance-related terms and definitions, including related to ESG approaches, to ensure consistency throughout the global asset management industry;

and (5) securities regulators and policymakers considering to promote financial and investor education initiatives relating to sustainability or enhance existing sustainability-related initiatives.

Based on a prior consultation, on November 23, 2021, IOSCO issued a Final Report on "Environmental, Social and Governance (ESG) Ratings and Data Providers" in which IOSCO noted that "the use of environmental, social and governance (ESG) ratings and data products has grown considerably .

." and sets forth 10 recommendations.

The recommendations are:

(1) regulators could consider focusing more attention on the use of ESG ratings and data products and ESG ratings and data products providers that may be subject to their jurisdiction;

(2) ESG ratings and data products providers could consider adopting and implementing written procedures designed to help ensure the issuance of high quality ESG ratings and data products based on publicly disclosed data sources where possible and other information sources where necessary, using transparent and defined methodologies;

(3) ESG ratings and data products providers could consider adopting and implementing written policies and procedures designed to help ensure their decisions are independent, free from political or economic interference, and appropriately address potential conflicts of interest that may arise from, among other things, the ESG ratings and data products providers' organizational structure, business or financial activities, or the financial interests of the ESG ratings and ESG data products providers and their officers and employees;

(4) ESG ratings and data products providers could consider identifying, avoiding or appropriately managing, mitigating and disclosing potential conflicts of interest that may compromise the independence and objectivity of the ESG ratings and ESG data products provider's operations;

(5) ESG ratings and data products providers could consider making adequate levels of public disclosure and transparency a priority for their ESG ratings and data products, including their methodologies and processes to enable the users of the product to understand what the product is and how it is produced, including any potential conflicts of interest, while maintaining a balance with respect to

proprietary or confidential information, data and methodologies;

(6) ESG ratings and data products providers could consider adopting and implementing written policies and procedures designed to address and protect all non-public information received from or communicated to them by any entity, or its agents, related to their ESG ratings and data products, in a manner appropriate in the circumstances;

(7) market participants could consider conducting due diligence or gathering and reviewing information on the ESG ratings and data products that they use in their internal processes, including understanding what is being rated or assessed by the product, how it is being rated or assessed and, limitations and the purposes for which the product is being used;

(8) ESG ratings and data products providers could consider improving information gathering processes with entities covered by their products in a manner that leads to more efficient information procurement for both the providers and these entities;

(9) where feasible and appropriate, ESG ratings and data products providers could consider responding to and addressing issues flagged by entities covered by their ESG ratings and data products while maintaining the objectivity of these products;

and (10) entities subject to assessment by ESG ratings and data products providers could consider streamlining their disclosure processes for sustainability related information to the extent possible, bearing in mind applicable jurisdictions' regulatory and other legal requirements.

On November 20, 2020, IOSCO published its final report providing a thematic review of the consistency in implementation of money market reforms across the nine largest money market fund jurisdictions.

In this report, IOSCO concluded that these jurisdictions generally implemented money market fund reforms in line with 2012 IOSCO policy recommendations for money market funds, but that market conditions in March 2020 highlighted continuing vulnerabilities in certain types of money market funds and the need for further reforms.

Similar to the PWG Report in the U.S., IOSCO issued a paper, "Money Market Funds during the March-April Episode," (IOSCO Paper) in November 2020.

The IOSCO Paper called for further consideration of the functioning of money market funds, investor behavior and elements of the existing regulatory framework for money market funds which could have played a role in accelerating the outflow of assets from non-government money market funds in March 2020.

Following prior speeches and reports on the need for money market fund reforms, including the "Holistic Review of Money Market Turmoil" (FSB Report) published in November 2020, on June 30, 2021, the FSB published a consultation report, "Policy Proposals to Enhance Money Market Fund Resilience," in which it identified characteristics of money market funds that, in their view, make them susceptible to vulnerabilities, such as sudden and disruptive redemptions and the forced sale of assets to meet significant redemptions.

The FSB also evaluated policy proposals purporting to enhance funds' resilience, including:

(1) swing pricing;

(2) minimum balance at risk;

(3) capital buffers;

(4) removing ties between regulatory thresholds and imposition of fees and gates;

(5) removing stable NAVs;

(6) limiting eligible assets;

and (7) imposing additional liquidity requirements and escalation procedures.

The FSB held a virtual workshop on the policy proposals on July 12, 2021.

In an August 16, 2021 comment letter to the FSB, among other comments, Federated Hermes expressed its belief that the combination of delinking the potential imposition of redemption gates and liquidity fees from a money market fund's weekly liquid asset requirements and enhancing money market funds' ability to "know their customer", when combined with consideration of, and improvements in, the short-term funding markets generally, can address the FSB's concerns without adversely impacting the viability of money market funds and their benefits to investors, issuers and capital formation.

As a result of these IOSCO and FSB reports, similar to the SEC in the U.S., UK and EU regulators are re-examining existing money market fund regulation.

On March 26, 2021, ESMA published a consultation paper on the legislative review of the EU money market regulation.

Similar to the PWG Report, IOSCO Paper and FSB Review, this consultation reviewed the role played by money market funds in the March 2020 market turmoil, perceived structural vulnerabilities of money market funds and possible money market fund regulatory reforms that could be adopted.

Most of the proposed reforms are similar to those set forth in the PWG Report, including decoupling the link between regulatory liquid asset thresholds and redemption fees and gates.

The consultation period closed on June 30, 2021.

Among other comments, Federated Hermes provided to ESMA similar comments to those provided to the FSB in response to its consultation discussed above.

The BoE also published a May 12, 2021 speech by BoE Governor Andrew Bailey in which he advocated for reforms to money market regulations in response to the March 2020 "dash for cash".

The proposals outlined by Mr.

Bailey in that speech align to the proposals of other global regulators, including U.S.

The five proposals discussed were:

(1) redemption terms should be aligned with the underlying liquidity of assets;

(2) running minimal maturity mismatch risk;

(3) money market funds should not hold less liquid assets on a scale that would make them more suitable to be traditional investment funds;

(4) money market funds should not be designed with regulatory thresholds or cliff-edges which create adverse incentives and amplify first-mover advantage behavior;

and (5) reforms should improve the ability of funds to support short-term funding markets, including by making them more resilient.

On July 13, 2021, the BoE published a report, "Assessing the resilience of market-based finance," which set forth the conclusions from a joint BoE and FCA review of the vulnerabilities associated with liquidity mismatches in open-end funds, including money market funds.

Regarding money market funds, the report stated:

"To address vulnerabilities in the global money market fund sector, a robust and coherent package of international reforms needs to be

As noted in a speech by the Governor of the BoE, it is important that any package removes the adverse incentives introduced by liquidity thresholds related to the use of suspensions, gates and redemption fees." The report identified the following three priorities for remediating vulnerabilities in market-based finance:

(1) limiting the demand for liquidity rising unduly in stress periods;

(2) increasing the resilience of the supply of liquidity in stress periods;

and (3) agreeing upon appropriate options for central banks to backstop market function.

The report also discussed possible frameworks for consistently and realistically classifying the liquidity of fund assets and enhancing the calculation and use of swing pricing.

On July 1, 2021, the European Systemic Risk Board (ESRB) published an "Issues note on systemic vulnerabilities of and preliminary policy considerations to reform money market funds (MMFs)," in which the ESRB provided an overview of the money market fund sector in the EU, set out its analysis of systemic vulnerabilities in money market funds, and identified a broad set of preliminary policy options for money market fund reform.

The Issues note, which primarily focused on non-public debt money market funds (i.e., non-Government money market funds), identified the following systemic vulnerabilities:

(1) the large footprint for these money market funds in the commercial paper and certificate of deposit markets;

(2) high portfolio overlap;

(3) lack of reliable asset liquidity in the commercial paper and certificate of deposit markets;

and (4) interconnectedness and the pressure a low interest rate environment places on liquidity.

The Issues note also identified the following initial policy options for money market fund reform, among others:

(1) decoupling regulatory thresholds;

(2) capital requirements and buffers;

(3) implementing redemption holdbacks;

(4) imposing notice periods for redemptions;

(5) removing stable NAV money market funds;

and (6) improved availability and use of swing pricing.

On July 26, 2021, the European Banking Authority (EBA) published a consultation paper "Draft Regulatory Technical Standards on criteria for the identification of shadow banking entities under Article 394(4) of Regulation (EU) No 575/2013" that purported to set out criteria for the identification of shadow banking entities for the purposes of reporting large exposures.

In the consultation, the EBA discussed money market UCITS funds as conducting shadow banking, which the EBA defined as entities that offer banking services and perform banking activities as defined in the draft regulatory technical standards but are not regulated and are not being supervised in accordance with any of the acts that form the regulated framework for banking.

Among other things, the consultation solicited comments on whether money market funds should be considered shadow banking entities.

The consultation period ended on October 26, 2021.

On September 17, 2021, the Managing Director of the International Monetary Fund (IMF) released a report stating that the March 2020 global financial crisis exposed fundamental vulnerabilities that could affect global financial stability, and advocating that global financial regulators work together to boost the resilience of investment funds.

The Managing Director identified money market funds as particularly vulnerable to redemptions triggered by economic shocks and advocated for certain policy measures to address the identified vulnerabilities.

In a November 2, 2021 comment letter to the IMF, Federated Hermes noted that the problems experienced in March 2020 in the short-term markets did not relate to the regulation or structure of money market funds, but rather resulted from the government-imposed lockdown of global economies.

In addition to other points discussed below, Federated Hermes' comment letter to the IMF suggested that enhancing regulation surrounding "know your customer" requirements in both the U.S.

and EU would significantly improve a money market fund's ability to manage its liquidity in all market conditions.

Based on the prior consultation, on October 11, 2021, the FSB issued its "Policy Proposals to Enhance Money Market Fund Resilience:

Final Report" ("FSB Final Report") in which the FSB set forth its final policy proposals for money market fund reform.

In the FSB Final Report, the FSB found that money market funds are subject to two broad types of vulnerabilities that can be mutually reinforcing:

(1) susceptibility to sudden and disruptive redemptions;

and (2) challenges in selling assets, particularly under stressed conditions.

The proposals included mechanisms to:

(1) impose on redeeming fund investors the cost of their redemptions (i.e., swing pricing);

(2) absorb credit losses;

(3) address regulatory thresholds that may give rise to cliff effects;

and (4) reduce liquidity transformation.

In the FSB Final Report, the FSB noted that it will be working with IOSCO to review progress made by member jurisdictions in adopting reforms to enhance money market fund resilience, which are to be completed by the end of 2023, and then to assess the effectiveness of those measures in addressing risks to financial stability by 2026.

Based on its prior consultation, on November 1, 2021, the FSB also published its Progress Report on "Enhancing the Resilience of Non-Bank Financial Intermediation" in which it summarized the progress of, and key findings from, its work on, among other things, policies to enhance money market fund resilience, including with respect to the appropriate structure of the sector and of underlying short-term funding markets and to assess liquidity risk, and its management in open-end funds, including the redemption pressures faced by such funds in March 2020 and their drivers, the availability and effectiveness of liquidity risk management tools, and the extent to which fund vulnerabilities impacted the financial system and wider economy.

Regarding improving money market fund resilience, the FSB reiterated in its Progress Report that options include:

(1) swing pricing or economically equivalent measures (to impose on redeeming investors the cost of their redemptions);

(2) minimum balance at risk and a capital buffer (to absorb losses);

(3) removal of ties between regulatory thresholds and imposition of redemption fees and gates and removal of the stable NAV (to reduce threshold effects);

and (4) limits on eligible assets, and

additional liquidity requirements and escalation procedures (to reduce liquidity transformation).

In a November 15, 2021 comment letter to the FSB, Federated Hermes:

(1) supported the FSB's objectives of financial stability, sound functioning of securities markets, and improved market reforms which, when supported by data, enhance the safety and stability of markets, including the functioning of short-term funding markets;

(2) supported the FSB's acknowledgement of a need for a jurisdiction-specific, targeted approach to future money market fund reforms;

(3) supported the FSB's recommendation to delink liquidity and the potential imposition of redemption fees and gates;

(4) disagreed with requiring money market funds to hold higher amounts of liquid securities;

(5) supported the FSB's recommendation that regulatory reforms should aim to increase the range of liquidity management tools available to money market fund managers, provided that a fund's board retains discretion as to what liquidity management tools to use and when to implement them;

(6) disagreed with the FSB's assessment on the potential application of swing pricing to money market funds;

and (7) advocated for retaining stable-NAV money market funds.

In a December 15, 2021 comment letter to the FSB, Federated Hermes discussed regulatory reforms to address structural issues supporting market liquidity, including, among others, permanent access to the Central Bank discount windows, a standing bank repurchase agreement facility, a complete review of regulations affecting market making, and improved secondary market trading infrastructure.

On December 2, 2021, the ESRB adopted a recommendation on money market funds to the European Commission and an accompanying report.

The recommendation aims to ensure the resilience and functioning of money market funds while minimizing the likelihood of central banks needing to step in during times of crisis.

The recommendation is consistent with the proposals of the FSB, but does not envisage capital buffers or a minimum balance at risk for money market funds.

The ESRB also believes own-fund requirements are not needed provided that deposit-like features of money market funds are reduced and fund-like features of money market funds are increased.

The recommendation aims to reduce threshold effects that accentuate first-mover advantages, including by reducing deposit-like features of money market funds, reducing liquidity transformation by improving and diversifying asset portfolio liquidity via requirements to hold public debt assets and by making sure this liquidity can be used when needed, facilitating the use of tools that impose trading costs on redeeming investors (i.e., swing pricing), and enhancing monitoring and stress-testing frameworks.

On February 16, 2022, ESMA published a final report, "ESMA Opinion on the review of Money Market Fund Regulation," which makes recommendations to improve the resiliency of money market funds.

Among other recommendations, it recommends:

(1) addressing the threshold effects for constant NAV money market funds by removing the possibility to use amortized cost for low volatility NAV money market funds and decoupling regulatory thresholds from suspensions, gates and redemption fees for low volatility NAV and constant NAV money market funds;

(2) addressing liquidity concerns by ensuring mandatory availability of at least one liquidity management tool for all money market funds;

(3) amending daily liquid asset and weekly liquid asset ratios;

(4) adjusting the pool of eligible assets to require money market funds to hold public debt assets, which could be used to satisfy the daily and weekly asset liquidity ratios;

(5) reinforcing the possibility of temporarily using liquidity buffers in times of stress;

and (6) enhancing reporting and disclosure requirements and the stress testing framework for money market funds.

On February 14, 2022, ESMA published a separate final report, "Guidelines on stress test scenarios under the MMF Regulation," in which it sets forth updated guidelines and specifications on the types of money market fund stress tests and their calibration in order to allow managers of money market funds to have the information needed to complete the reporting required under the EU Money Market Fund Regulation.

Federated Hermes does not believe money market funds are shadow banking entities.

As discussed above, Federated Hermes believes that money market funds are resilient investment products that have proven their resiliency during the Pandemic.

Federated Hermes intends to continue to engage with UK and EU (as well as U.S.) regulators in 2022, both individually and through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the erosion of benefits that money market funds provide.

Since the beginning of the fourth quarter 2021, UK and EU regulators issued, proposed or adopted other new consultations, directives, rules, laws and guidance that impact UK and EU investment management industry participants, including Federated Hermes.

• On January 27, 2022, ESMA published a consultation paper, "Guidelines on certain aspects of the MiFID II suitability requirements," in which ESMA requests comments on proposed updates to its November 2018 Guidelines on certain aspects of the MiFID II suitability requirements.

MiFID II is the Markets in Financial Instruments Directive II (MiFID II).

The consultation period closes on April 27, 2022.

ESMA expects to then publish a final report followed by the final guidelines in the third quarter 2022.

ESMA also intends to consult separately on the product governance changes to MiFID II made under the EU's ESG framework in August 2021.

• On January 19, 2022, the FCA published a consultation paper, "Strengthening our financial promotion rules for high-risk investments, including cryptoassets," in which the FCA solicits comments on proposed changes to (1) the FCA's

classification of high-risk investments;

(2) the consumer journey into high-risk investments;

(3) strengthen the role of firms approving and communicating financial promotions;

and (4) apply the FCA's financial promotion rules to qualifying cryptoassets.

The consultation period ends on March 23, 2022.

• On January 13, 2022, IOSCO issued a consultation report, "Operational resilience of trading venues and market intermediaries during the COVID-19 pandemic," in which IOSCO solicits comments on the operational resilience of trading venues and market intermediaries.

The final report highlights a series of "lessons learned" from the Pandemic that may be useful to enhance practices in the future, including:

(1) greater automation and less dependence on physical documents and manual processes;

(2) considering the role of service providers and offshore services;

(3) reviewing, updating and testing business continuity plans, including scenario planning;

and (4) monitoring processes to help ensure information security in order to prevent cyberattacks.

The consultation period ends on March 14, 2022.

• On January 3, 2022, ESMA published a Final Report, "Guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements," based on prior consultations.

The purpose of the Guidelines is to enhance clarity and foster convergence in the application of the appropriateness and execution-only requirements applicable under MiFID II to investment firms providing non-advised services to request information on the knowledge and experience of clients or potential clients to assess whether the investment service or product is appropriate and to issue a warning in case the investment service or product is deemed inappropriate.

• On December 17, 2021, the CBI published cross-industry outsourcing guidance and a feedback statement based on a prior consultation to supplement existing legislation, regulations and guidance on outsourcing, which apply to specific firms.

The guidance:

(1) sets out the CBI's expectations on governance and management of outsourcing risk;

(2) highlights the responsibilities of a company's board of directors and senior management when outsourcing;

and (3) outlines the CBI's expectations for outsourcing frameworks to manage the associated risks.

• On November 30, 2021, the FCA published a final Policy Statement, "Changes to UK MiFID's conduct and organizational requirements," in which the FCA sets forth its policy and rules on changes to UK research rules and the removal of certain best execution reporting that the FCA believes did not appear to benefit users within the FCA's wider reform work being undertaken on capital markets.

The changes being made by the FCA are intended to ensure rules for research and best execution under the UK MiFID are more proportionate to the risks arising and remove unnecessary regulation.

• On November 25, 2021, the European Commission adopted a package of measures to ensure that investors have better access to company and trading data.

The proposals related to several commitments in the 2020 capital markets union (CMU) action plan.

The four legislative proposals that form the package include:

(1) the European Single Access Point, which will offer a single point of access to public information about EU companies and EU investment products;

(2) a Review of the European Long-Term Investment Funds (ELTIFs) Regulation, to increase the attractiveness of ELTIFs and make it easier for retail investors to invest in them;

(3) a Review of the Alternative Investment Fund Managers Directive (AIFMD) to harmonize the rules around loan-originating funds (debt funds), in order to facilitate lending;

and (4) a Review of the Markets in Financial Instruments Regulation (MiFIR), which is intended to adjust the trading rules to ensure more transparency for all parties trading on capital markets.

• On November 18, 2021, ESMA and the EBA published a consultation paper "Draft Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) under IFD" in which they set out the process and criteria for the assessment of the main SREP elements, such as:

(1) business model;

(2) governance arrangements and firm-wide controls;

(3) risks to capital and capital adequacy;

and (4) liquidity risk and liquidity adequacy.

The EBA also is consulting on regulatory technical standards on the policy that could be determined by national competent authorities (NCAs) for investment firms.

Subscriptions also can continue as long as there is not a proactive sales effort.

The regulation of money market funds in the EU and UK is another example of potential divergence between the EU and UK post-Brexit.

EU and UK money market fund regulation is considered “equivalent” until December 31, 2025.

Accordingly, UK-domiciled money market funds currently remain on par with current EU regulatory requirements.

As a result, EU-based funds can still use passports to sell to UK investors.

However, following various consultations, reports, and speeches by representatives of IOSCO and the FSB in 2020, 2021 and 2022, similar to the SEC in the U.S., ESMA, the BoE, the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), and the International Monetary Fund (IMF), among other regulators, have been re-examining existing money market fund regulation, soliciting public comment on proposed money market fund reforms, and issuing reports and recommendations.

While money market fund reform continues to be discussed in the UK and the EU, new proposals for reform have not been promulgated.

It has been reported that, in late January 2023, Andrew Bailey, a governor of the BoE and Chairman of the FSB, expressed concerns regarding money market funds given their perceived impact during the recent financial crisis and the “mini budget” crisis in the UK in September 2022, and indicated that the BoE and FCA will come out with their own money market fund reform proposals in 2023.

It also has been reported that the EU has indicated that it will not be able to work on money market reform proposals until the next European Commission mandate in 2025.

Given the above, it is possible that the EU or UK could deviate from, or simply not adopt, any new or amended UK or EU money market fund laws, rules or regulations that could be adopted in the future.

Management believes that a final SEC rule on money market fund reforms could influence the UK and EU regulators.

As discussed above, Federated Hermes believes that money market funds are investment products that have proven their resiliency.

Federated Hermes intends to continue to engage with UK and EU (as well as U.S.) regulators in 2023 and beyond, both individually and through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the erosion of benefits that money market funds provide.

The sweeping changes contemplated by the Brexit Freedoms Bill and FSM Bill heighten the risk of regulatory divergence between the UK and the EU post-Brexit.

Such divergence has already begun in certain areas of financial services regulation.

For example, EU investment firms in EU Member States are required to comply with the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR);

however, the IFD and IFR do not bind the UK, and a new UK prudential regime for Markets in Financial Instruments (MiFID) firms titled Investment Firms Prudential Regime (IFPR) has been established.

The IFPR, which became effective on January 1, 2022, introduced a single prudential regime, and represents a significant change for FCA-authorized investment firms in the UK that are authorized under MiFID, including alternative investment fund managers (AIFMs) with MiFID top-up permissions.

Following a prior consultation, in its Quarterly Consultation Paper No.

36, issued on October 6, 2022, the FCA proposed updates to its IFPR reporting forms and accompanying guidance for MiFID firms to assist firms in completing the forms, fully conform the forms to the FCA’s systems, and make certain corrections.

As another example of potential divergence, EU regulators have previously issued or proposed directives, rules, and laws regarding sustainable finance, including the Sustainability-Related Disclosures Regulation or Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, as well as proposals on the use of ESG- or sustainability-related terms in fund names.

The Taxonomy Regulation establishes a framework to facilitate sustainable investment, including when Member States establish measures (e.g., labels or standards) setting requirements regarding financial products or corporate bonds presented as “environmentally sustainable.” Pursuant to the Sustainable Finance Package issued by the European Commission, firms had a 12-month period that ended in October 2022 to implement certain sustainability reporting requirements and investment advice and sustainability considerations in connection with product governance and fiduciary duties.

Among other regulatory guidance, the European Supervisory Authorities (ESAs) recommended that national competent authorities (NCAs) and market participants utilize the period to January 1, 2023, to prepare for the application of the European Commission’s delegated regulation.

The European Commission has published the final RTS supplementing the SFDR, specifying the mandatory website, pre-contractual, and periodic reporting templates for financial market participants and in-scope financial products.

The final RTS began to apply beginning on January 1, 2023.

Under the SFDR, in addition to various disclosure requirements, financial products must be classified into separate categories, based on their investment into and their claims regarding sustainability, such that financial products such as investment funds and ETFs must be classified as Article 6, Article 8 or Article 9 funds.

An Article 6 SFDR fund requires asset managers to disclose the level of integration of sustainability in their funds, regardless of how they are labelled.

Funds that have some form of ESG, green or sustainability labelling then go on to be classified as Article 8 or 9.

Article 8 funds are those that promote environmental or social characteristics but do not have them as a core investment objective.

Article 9 funds are those that have sustainability as their core investment objective and require comprehensive and understandable related disclosures.

There are also various delegated directives and regulations arising from SFDR with which AIFMs and MiFID firms must comply.

On November 17, 2022, the ESAs published a “Questions and Answers (Q&A) on the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288)” that provides guidance on various aspects of “principal adverse impact” reporting of the impact of investment decisions or advice that results in a negative effect on sustainability factors, such as ESG, employee, human rights, anti-corruption and anti-bribery concerns or matters.

On November 15, 2022, the ESAs published a “Call for evidence on better understanding greenwashing” to gather input on how to understand the key features, drivers and risks associated with greenwashing and to collect examples of potential greenwashing practices.

The comment period ended on January 10, 2023.

On November 18, 2022, ESMA published a “Consultation on Guidelines on funds’ names using ESG or sustainability-related terms” in which ESMA proposes, and seeks feedback on, among other fund name-related matters:

(1) a quantitative 80% threshold for the use of ESG-related words;

(2) an additional 50% threshold for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;

(3) the application of minimum safeguards to all investments for funds using such terms (i.e., exclusion criteria);

and (4) certain additional considerations for specific types of funds (e.g., index and impact funds).

The comment period ended on February 20, 2023.

Rather than adopt the SFDR, the UK decided to align with the TCFD.

The FCA also has proposed its own guidelines regarding the use of ESG- and sustainability-related terms in fund names.

Building on a prior consultation that closed on July 1, 2022, and upon the TCFD-aligned product and entity-level disclosure rules previously introduced by the FCA, on October 25, 2022, the FCA published a Consultation Paper on “Sustainability Disclosure Requirements (SDR) and investment labels” in which it proposed a package of measures aimed at clamping down on greenwashing, including sustainable investment labels, consumer-facing disclosure requirements, broader disclosure requirements, restrictions on the use of sustainability-related terms in product naming and marketing, requirements for distributors and a general “anti-greenwashing” rule.

In its January 25, 2022 comment letter to this Consultation Paper, among other comments, Federated

(1) requested the FCA to clarify and confirm that funds eligible for a “Sustainable Improver Label” include those which are committed to delivering sustainable outcomes in 70% of the assets in a portfolio either through self-improvement by the investee or through meaningful and outcome-achieving investor engagement;

(2) encouraged the FCA not to require that funds sustainability objective be part of a fund’s investment objective, but rather to take a holistic approach that would permit a fund to have its sustainability objective be part of either its investment objective, its investment policy or its investment strategy;

(3) commented that the term “responsible” should not be limited to those products with a sustainable label, and should be able to be used for products that have ESG integration, ESG analytical capabilities and resources and demonstrable stewardship;

and (4) commented that the term “impact” should not be restricted to the “Sustainable Impact” category.

The comment period for this Consultation Paper ended on January 25, 2022.

In addition to potential divergence between UK and EU law and regulation, the possibility of divergence exists between the laws of the EU, UK, U.S., and other jurisdictions, including, among others, in the areas of climate disclosures, ESG and fund naming requirements and other reforms.

For example, on December 12, 2022, the Australian Government published its own consultation seeking views on key considerations for the design and implementation of the Government’s commitment to standardized, internationally‑aligned requirements for disclosure of climate‑related financial risks and opportunities in Australia.

The consultation period ended on February 17, 2023.

• On November 9, 2021, HM Treasury and the BoE issued a statement announcing next steps on the development of a UK Central Bank Digital Currency that would exist alongside cash and bank notes.

• On November 1, 2021, the FCA decided to delay publishing its policy statement in response to its July 20, 2021 consultation titled "PRIIPs - Proposed scope rules and amendments to Regulatory Technical Standards," in which the FCA requested comments on proposed amendments to the PRIIPs disclosure regime.

The amendments are intended to, among other things, clarify the scope of PRIIPs and address misleading performance scenarios and summary risk indicators.

The consultation period ended on September 30, 2021.

The policy statement is delayed until the first quarter of 2022 to consider the implementation date of the new requirements.

• On October 25, 2021, the FCA finalized rules that create a Long-Term Asset Fund (LTAF) regime for a new type of authorized open-end fund designed to invest efficiently in long-term assets, such as infrastructure, private equity, real estate, private debt and venture capital.

The FCA indicated that the LTAF is aimed at defined contribution pension funds, sophisticated investors and some high-net worth individuals, and that it would be consulting in 2022 on the potential for widening the distribution of the LTAF to certain retail investors.

Investment management industry participants, such as Federated Hermes, also have continued and will continue, to monitor, plan for and implement certain changes in response to previously issued new, proposed or adopted consultations, directives, rules, laws and guidance.

Previously proposed and final consultations, directives, rules, laws and guidance included, among others:

(1) the ongoing amendment and implementation of MiFID II;

(2) HM Treasury's ongoing review of the UK retail disclosure regime and the PRIIPs Regulation;

(3) efforts by ESMA to update and modify collection of information for monitoring systemic risk among AIFMs;

(4) ESMA guidance on marketing communications under the Regulation on Cross-Border Distribution of Funds;

(5) ESMA's regulation of financial institutions, including AIFMs, UCITs management companies, and MiFID investment firms, outsourcing to cloud service providers;

(6) ESMA's updated guidelines for money market fund stress tests under the Money Market Fund Regulation;

(7) the FCA's proposed rules on the IFPR, which is the new prudential regime for UK firms authorized under MiFID II;

(8) ESMA's report regarding the preparedness of investment funds with significant exposure to corporate debt and real estate assets for potential future adverse liquidity conditions and valuation shocks;

(9) a call for input from HM Treasury on its review of the UK funds regime to identify options that will make the UK a more attractive location to set up, manage and administer funds;

(10) a review by ESMA of the MiFID II framework on best execution reports;

(11) a systematic review by ESMA of the Short Selling Regulation;

(12) a "Dear CEO" letter from the FCA and Prudential Regulation Authority (PRA) to firms that carry on trade finance activity to reiterate the FCA's and PRA's expectations of such firms, including an expectation to demonstrate that they have taken a risk sensitive approach to their control environment to ensure that the inherent risks within trade finance activity are effectively mitigated;

(13) European Commission amendments to the technical standards regarding the KIIDs for retail and insurance-based investment products;

(14) an IOSCO Final Report on the use of artificial intelligence and machine learning by market intermediaries and asset managers;

(15) ESMA's final guidelines applicable to market data providers;

(16) ESMA's final guidelines for marketing communications under the new EU Cross-Border Distribution of Funds Regulation, which applies to EU UCITS and AIFs;

(17) the FCA's "Dear Chair" letter to AFMs setting forth the FCA's guidance on the design, delivery and disclosures of ESG and sustainable investment funds;

(18) ESMA's request for comments on certain aspects of the MiFID II remuneration requirements for the purposes of enhancing clarity and fostering convergence in the application of the requirements;

(19) the FCA's 2021-2022 business plan, which indicated that the FCA's priorities, including, among other things:

(a) adapting the regulatory framework to facilitate a market-based transition to net-zero carbon emissions;

(b) amendments to the regulatory framework for money market funds;

and (d) LIBOR transition;

(20) the European Commission draft directive that would extend the exemption from the KIID requirement under the PRIIPs Regulation for an additional six months from December 31, 2021 to June 30, 2022;

and (21) the FSB's considerations regarding climate-related financial risks to support and promote international coordination on disclosures, data collection, vulnerabilities analysis and regulation.

The activities of the FSB and the IOSCO also continue to be monitored by the investment management industry, including Federated Hermes.

Building on consultations and other reports published from 2015 through 2022, the FSB and the IOSCO continue to focus on, among other topics:

(1) non-bank financial intermediation (NBFI);

(2) financial stability, market and product liquidity and liquidity risk management;

(3) cyber incident reporting;

(4) crypto-related risks and regulation, including stablecoin arrangements;

(5) retail distribution and digitalization;

and (6) financial reporting and disclosure during economic uncertainty.

These activities by the FSB and the IOSCO are discussed below.

Given the role of the FSB and the IOSCO in making recommendations and setting standards for regulations globally for implementation by regulatory authorities in individual jurisdictions, the activities of the FSB and the IOSCO provide insight into future or additional current Regulatory Developments.

Since the beginning of the fourth quarter 2022, UK and EU regulators and supervisory authorities issued, proposed, or adopted other new consultations, directives, rules, laws, and guidance that impact or could impact UK and EU investment management industry participants, including Federated Hermes.

• On January 27, 2023, the ESMA published its “Guidelines on stress test scenarios under the MMF Regulation,” (i.e., Money Market Fund Regulation (MMF Regulation)), which followed the ESMA’s publication on November 30, 2022, of its Final Report on “Guidelines on stress test scenarios under the MMF Regulation.” In these new Guidelines, the ESMA provides updated specifications on the types of money market fund stress tests and their calibration.

Upon the new Guideline becoming effective on March 27, 2023, managers of money market funds will need to use them to conduct stress tests and complete required reporting under Article 37 of the MMF Regulation.

Federated Hermes is reviewing these new Guidelines and their impact on its money market fund business.

• On December 31, 2022, the FCA published a report on approaches to diversity and inclusion in financial services, encouraging firms to use the data in developing their current diversity and inclusion strategies but did not indicate any potential future rulemaking developments.

Federated Hermes is reviewing this report and its impact on its business.

• On December 27, 2022, the EU Council adopted the Digital Operational Resilience Act (Regulation (EU) 2022/2554) (DORA).

This regulation, which will apply beginning on January 17, 2025, sets uniform requirements for the security of network and information systems of companies and organizations operating in the financial sector as well as critical third parties which provide Information Communication Technologies (ICT)-related services, such as cloud platforms or data analytics services.

The DORA creates a regulatory framework on digital operational resilience whereby firms will need to make sure they can withstand, respond to, and recover from all types of ICT-related disruptions and threats.

These requirements are homogenous across all EU Member States with the core aim to prevent and mitigate cyber threats.

The UK government is also looking to enact a similar UK-equivalent to the DORA.

Federated Hermes is reviewing the DORA and its impact on its business.

• On December 21, 2022, the ESMA published a final report outlining the RTS and Implementing Technical Standards (ITS) specifying the information to be provided, and the templates to be used, to inform competent authorities of the cross-border marketing and management of investment funds and the cross-border provision of services by fund managers.

The RTS specify the information to be provided by management companies and AIFMs wishing to carry out their activities in host Member States, while the ITS contain the templates to be used by management companies.

These standards will normalize the content and format of the information being provided by management companies, UCITS, and AIFMs situated in the EU only and look to support the process for notifying cross-border marketing and management activities in relation to UCITS and alternative investment funds as well the cross-border provision of services by fund managers.

• On December 19, 2022, the European Commission issued two draft notices containing guidance on environmental performance reporting under green taxonomy.

The first notice contains responses to FAQs on the technical screening criteria for the taxonomy’s first two environmental objectives of climate change mitigation and climate change adaptation, and the second notice contains responses to FAQs on the disclosure obligation under Article 8 of the Taxonomy Regulation, the details of which are set out in the Disclosures Delegated Act.

• On December 16, 2022, the ESMA published an updated Q&A on the application of the Alternative Investment Fund Managers Directive (AIFMD) and on the MiFID II and the Markets in Financial Instruments Regulation market structures topics.

The topics include whether managers of special purpose acquisition companies are subject to AIFMD.

• On December 14, 2022, ESMA published a final report on the Guidelines for reporting under European Market Infrastructure Regulation (EMIR) Refit Regulation (the final report).

The final report clarifies the reporting and data management requirements applicable under EMIR Refit Regulation to (i) counterparties to over-the-counter derivatives contracts, (ii) central counterparties, and (iii) the trade repositories.

The final report has been published with new validation rules as well as outgoing and ingoing reporting instructions.

• On December 14, 2022, ESMA published a supervisory briefing on ensuring convergence across the EU with respect to the supervision of investment firms’ cross-border activities under MiFID II.

The supervisory briefing is relevant to investment firms that provide cross-border services, particularly to retail clients, under the passporting regime set out in Article 34 of MiFID II.

• On December 14, 2022, the FSB published an “Assessment of the Effectiveness of the FSB’s 2017 Recommendations on Liquidity Mismatch in Open-End Funds” (Assessment), which is part of the FSB’s work program to enhance the resilience of NBFI.

The Assessment finds that regulatory authorities have made meaningful progress in implementing the 2017 FSB recommendations based on progress in four key areas:

(1) reducing structural liquidity mismatch;

(2) reducing shock amplification and transmission using liquidity management tools;

(3) enhancing regulatory reporting, data availability and public disclosure;

and (4) ensuring adequacy of stress testing.

The Assessment concludes that certain policy enhancements would strengthen the current framework and liquidity management practices, including:

(1) providing a clearer and more specific articulation of the intended outcome of policies to reduce structural liquidity mismatch in open-end funds;

(2) ensuring that investors bear the costs of liquidity associated with fund subscriptions and redemptions, and enhancing the use, and consistency of use, of liquidity management tools by fund managers;

(3) requiring clearer public disclosures from fund managers on the availability and use of liquidity management tools, including by enhancing their engagement with investors;

(4) closing identified data gaps to improve regulatory authorities’ ability to monitor liquidity mismatch in open-end funds and its management from a financial stability perspective;

and (5) further promoting the use of fund- and system-level stress testing.

The FSB, in conjunction with IOSCO, will continue to follow-up on the Assessment’s findings, including by revising the FSB’s recommendations, and will monitor the progress of regulatory authorities in implementing the recommendations across jurisdictions.

• On December 13, 2022, the FCA published a Discussion Paper regarding the “Future Disclosure Framework” in which it invites feedback on how it can design and deliver a good disclosure regime for retail investments, particularly considering the Consumer Duty in the UK.

This Discussion Paper follows a December 9, 2022, Consultation Paper issued by HM Treasury regarding PRIIPs and UK Retail Disclosure, which also relates to the future of retail disclosure in the UK.

This Consultation Paper sets out the UK Government’s intentions to revoke the PRIIPs regulation and to remove the UCITS disclosure requirements, so that the FCA will become responsible for establishing a future disclosure regime with future disclosure requirements to sit only in the FCA Handbook.

Federated Hermes is reviewing the FCA’s Discussion Paper and HM Treasury’s Consultation Paper and their respective impacts on its business.

The comment period on the Discussion Paper ended on February 7, 2023.

The comment period on the Consultation Paper ends on March 3, 2023.

• On December 9, 2022, the UK Chancellor of the Exchequer announced a wide-ranging set of reforms for the financial services sector, referred to as the “Edinburgh Reforms.” The package will include further proposals relating to the

Packaged Retail Investment and Insurance-Based Products Regulation (1286/2014), the Payment Account Regulations 2015 (SI 2015/2038), plans to establish a regulatory regime by 2024 that will support a consolidated tape for market data, and plans to consult in the first quarter 2023 on bringing ESG ratings providers within regulatory oversight and publish an updated Green Finance Strategy in early 2023 that includes an update on plans to make secondary legislation under the UK Taxonomy Regulations.

• On December 2, 2022, the FCA published its Quarterly Consultation, which contains certain proposed changes and clarifications with respect to the Consumer Duty, including the important clarification that with respect to occupational pension schemes, the term “retail customer” will be amended to make clear that it includes any client of a firm who is or would be a beneficiary of the scheme rather than a beneficiary of the underlying investments held in the scheme.

The comment period ended on January 9, 2023.

• On December 1, 2022, the CBI published a Consultation Paper regarding “Own Funds Requirements for UCITS management companies and AIFMs authorized to perform discretionary portfolio management” in which the CBO proposes to introduce bespoke own funds requirements for UCITS management companies and AIFMs authorized to provide discretionary portfolio management and additional non-core services as a condition to authorization to maintain a “level playing field” because such entities are not subject to own funds requirements at the EU level related to the provision of such services.

Under these proposed requirements, UCITS management companies and AIFMs authorized to provide discretionary portfolio management services and non-core services that do not meet conditions to be a “small and non-interconnected firm” (modelled on similar conditions under the IFR) will be required to apply the higher of the own funds requirement under the UCITS Regulations/AIFM Regulations, as applicable, or, a Risk to Client K-factor own fund requirement modeled on the Risk to Client K-Factor applicable to MiFID investment firms under the IFR.

UCITS management companies and AIFMs authorized to provide discretionary portfolio management services will continue to be required to undertake an Internal Capital Adequacy and Assessment Program in line with a similar requirement applicable to all MiFID investment firms.

Federated Hermes is reviewing this Consultation Paper and its impact on its business.

The comment period ended on February 23, 2023.

• On November 30, 2022, the FCA published a Consultation Paper regarding “Broadening access to financial advice for mainstream investments” in which it sets forth proposals for a new core investment advice regime that would allow firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on investment into mainstream products, specifically within stocks and share investment savings accounts (or ISAs).

Federated Hermes is reviewing this Consultation Paper and its impact on its business.

The comment period ends on February 28, 2023.

• On November 28, 2022, the Council of the European Union gave its final approval to the Corporate Sustainability Reporting Directive (CSRD), and, on December 16, 2022, the CSRD was published in the Official Journal of the European Union.

It entered into force on January 5, 2023, and Member States are required to transpose the CSRD into national law by July 6, 2024.

• On November 17, 2022, the ESMA published a Consultation Paper regarding “Review of the technical standards under Article 34 of MiFID II” in which it proposes amendments to the information requirements that investment firms applying to passport a product and provide cross-border services without the establishment of a branch in a particular jurisdiction are required to satisfy.

The proposed amendments would add the following to such information requirements:

(1) the marketing means the investment firm will use in host-Member States;

(2) the language(s) for which the investment firm has the necessary arrangements to deal with complaints from clients from each of the host Member States in which it provides services;

(3) the Member States in which the investment firm will actively use its passport as well as the categories of clients targeted;

and (4) the investment firm’s internal organization in relation to the cross-border activities of the investment firm.

Federated Hermes is reviewing this Consultation Paper and its impact on its business.

The consultation period ended on February 17, 2023.

• On November 16, 2022, IOSCO published a “Thematic Review on Liquidity Risk Management Recommendations” in which it assesses the implementation of selected recommendations issued in 2018 to strengthen the liquidity risk management practices for collective investment schemes globally.

Among other things, this Review found that:

(1) larger jurisdictions show a high degree of implementation of regulatory requirements consistent with the objectives of the recommendations;

(2) challenges exist for collective investment schemes with respect to dealing frequency, dealing arrangements and disclosure practices;

(3) some jurisdictions need to improve the process of identification of a liquidity shortage before it occurs and provide more guidance on aligning the investment strategy, liquidity profile and redemption policy;

(4) jurisdictions should further address the availability of liquidity management tools and

supplement the current rules and regulations to include requirements that are more specific regarding the use of such tools;

(5) asset managers have a high degree of implementation of the recommendations at the level of policies and practices;

and (6) weaknesses exist regarding operationalizing contingency plans and activation of liquidity risk management tools.

The findings from this Review informed the FSB’s assessment of the effectiveness of the FSB’s 2017 policy recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds.

• On November 15, 2022, the FSB published its “Climate Scenario Analysis by Jurisdictions:

Initial findings and lessons” in which the FSB synthesizes findings from climate scenario analysis exercises undertaken by financial authorities at the individual firm level, at the financial sector level, and at the overall financial system level, with the goal of drawing lessons for effective scenario analysis and sketching out a global approach.

The publication also attempts to evaluate the implications of climate change-related developments for financial systems with the goal of advancing a common understanding of the impact of climate change on financial stability.

• On November 14, 2022, the IOSCO published a “Statement on Financial Reporting and Disclosure during Economic Uncertainty” in which, among other things, it highlighted the importance of high quality and transparent disclosures that clearly explain significant management judgments, key assumptions, the identification of known risks, and explanations of how changes in these factors can affect the amounts and trends reported in historical financial statements.

• On November 10, 2022, the FSB published a Progress Report on “Enhancing the resilience of Non-Bank Financial Intermediation” in which the FSB reviews prior and planned work by it and other global regulators to enhance the resilience of NBFI under the FSB’s work program, which has involved money market funds, open-end funds, margining practices, bond market liquidity and fragilities in United States Dollar (USD) cross-border funding.

The Progress Report sets out policy proposals to address systemic risk in NBFI that focus on key amplifiers and seeks to:

(1) reduce liquidity demand spikes;

(2) enhance the resilience of liquidity supply in times of stress;

and (3) enhance risk monitoring and the preparedness of regulatory authorities and market participants.

According to the FSB, the main focus of these proposals is to reduce excessive spikes in the demand for liquidity by addressing the vulnerabilities that drove those spikes (e.g., by reducing liquidity mismatch or the build up of leverage) or by mitigating their financial stability impact (e.g., by ensuring that redeeming investors pay the cost of liquidity (e.g., through swing pricing) and by enhancing the liquidity preparedness of market participants to meet market calls).

• On October 20, 2022, the FSB published a “Report on Liquidity in Core Government Bond Markets,” which is part of the FSB’s work program to enhance the resilience of NBFI.

In this Report, the FSB analyzes the liquidity, structure, and resilience of core government bond markets.

Building on relevant analysis by FSB member authorities and other international bodies, the Report:

(1) reviews recent changes in the structure and liquidity of core government bond markets;

(2) analyzes the changes in government bond market liquidity (and related repurchase agreement and futures markets) in March 2020, including the behavior of various market participants (particularly dealers);

(3) examines the drivers of market participants’ behaviors;

and (4) identifies factors that promote the resilience of government bond markets.

• On October 17, 2022, the FSB published a Consultative Document on “Achieving Greater Convergence in Cyber Incident Reporting,” in which the FSB sets out recommendations to address impediments to achieving convergence among regulators and jurisdictions, advances work on establishing common terminologies related to cyber incidents and proposes the development of a common format for incident reporting exchange.

The comment period ended on December 31, 2022.

• On October 13, 2022, the FSB’s Task Force on Climate-Related Financial Disclosures issued its “2022 Status Report” in which it provided an overview of current disclosure practices in terms of their alignment with the TCFD’s prior recommendations and highlights progress firms are making toward disclosures aligned with the TCFD over the past five years.

Based on a prior April 2022 consultation, on October 13, 2022, the FSB also published a Final Report on “Supervisory and Regulatory Approaches to Client-related Risks” in which the FSB seeks to assist global supervisory and regulatory authorities in developing approaches to monitor, manage and mitigate risks arising from climate change and promote consistent approaches across sectors and jurisdictions.

In this Final Report, among other things, the FSB acknowledges that supervisory goals and approaches differ and that “climate change is likely to represent a systemic risk for the financial sector.”

• On October 13, 2022, the FSB published a “Progress Report on Climate-Related Disclosures” and a “Final Report on supervisory and regulator approaches to client-related risks.” In the Progress Report, the FSB covers, among other

(1) the progress made by the International Sustainability Standards Board (ISSB) in developing its global baseline climate reporting standard and the work of other international standard-setters on assurance over sustainability-related reporting;

(2) the progress made in the area of assurance, including the work of the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA), and the work by IOSCO to support the work on both disclosure and assurance standards;

(3) the progress made by jurisdictions on climate-related disclosure practices, including implementing FSB recommendations, as well as steps being taken by jurisdictions to prepare for adopting, applying or otherwise making use of the ISSB climate-related disclosure reporting standard;

and (4) the progress made by firms on disclosure and reporting.

In the Final Report, the FSB provides recommendations regarding, among other topics:

(1) the collection of climate-related data from financial institutions;

(2) system-wide supervisory and regulatory approaches and the extent to which supervisory and regulatory tools and policies address climate-related risk;

and (3) early considerations of other potential macroprudential policies and tools relating to client risk and disclosure.

• On October 12, 2022, the IOSCO published a Final Report entitled “Report on Retail Distribution and Digitalisation” in which IOSCO considered recent developments in online marketing and distribution to retail investors by financial firms, sets out examples of how some jurisdictions have addressed these issues, and, among other proposals, considers proposals for firm level rules for online marketing and distribution.

In the Final Report, IOSCO also recommends that IOSCO-member regulatory authorities should continue to monitor developments in online marketing, including social media, and consider changes in their respective requirements.

• On October 11, 2022, the ESMA published a Call for Evidence regarding the “Implementation of [Shareholder Rights Directive 2 (SRD2)] provisions on proxy advisors and the investment chain,” in which it seeks to gather information on how market participants perceive the appropriateness of the scope and the effectiveness of the SRD2 provisions on the identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights, as well as on transparency of proxy advisors.

The comment period ended on November 28, 2022.

• On October 11, 2022, the FSB published a Consultative Document regarding “Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets,” a Consultation Report regarding “Review of the FSB High-level recommendations of the Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements,” and a related request for comment regarding “International Regulation of Crypto-asset activities:

A proposed framework – questions for consultation,” in which the FSB:

(1) analyzes the interconnectedness of crypto-asset markets;

(2) provides an overview of applicable international standards and regulatory and supervisory approaches;

(3) identifies issues, challenges and gaps, and provides high-level recommendations, relating to supervisory and oversight approaches to crypto-asset activities;

and (4) proposes revisions to the FSB’s high-level recommendations regarding stablecoin arrangements to address financial stability risks more effectively.

The FSB also invited comments on:

(1) proposed recommendations to promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto-asset activities and markets and to strengthen international cooperation, coordination, and information sharing;

and (2) a review of the previous 10 FSB high-level recommendations from 2020 for the regulation, supervision, and oversight of “global stablecoin” arrangements.

The comment period ended on December 15, 2022.

• On October 3, 2022, the FCA issued a Consultation Paper regarding “Creation of baseline financial resilience regulatory return,” in which it seeks to rationalize and standardize baseline financial resilience data collection with a view to increasing the quality and consistency of financial resilience data.

The FCA seeks to reduce the burden of the existing survey by changing the collection of financial resilience data from an ad-hoc survey to a specific (and shortened) quarterly return within the FCA’s data collection system.

The consultation period ended on December 2, 2022.

Federated Hermes continues to monitor developments regarding previously issued regulatory proposals and developments, including, among others:

(1) the EU PRIIPs Regulation under the UCITs directive, which came into effect on January 1, 2023;

and (2) the UK climate-related disclosure regime based on TCFD recommendations, which came into effect for firms with assets greater than £5 billion on January 1, 2023.

Please refer to our prior quarterly reports on Form 10-Q and annual reports on Form 10-K for further information regarding other international Regulatory Developments that can affect Federated Hermes’ Financial Condition.

In addition to the above Regulatory Developments, the FCA, CBI and other global regulators continue to monitor investment management industry participants by examining various reports, financial statements and annual reports and conducting regular review meetings and inspections.

They also continue to take enforcement action when determined necessary.

Examples of recent reviews include reviews regarding closet index fund managers, CP86 compliance, fitness and probity, best execution, client asset arrangements, and operational resilience.

FCA enforcement priorities have included financial crime, market abuse, non-financial misconduct and alternative investment managers.

In a recent speech, the Chief Executive of the FCA echoed the priorities set forth in the FCA's 2021/22 Business Plan and indicated that the FCA wants to be a regulator that "tests [its] powers to their limits" to ensure market integrity, and that over time it plans to "become as much a data regulator as a financial one".

In terms of its approach to enforcement actions, it has been reported that these statements follow the ongoing narrative that the FCA will be willing to take more risks and to act quickly.

It also has been reported that the FCA is focusing on what it considers to be the six most important cross-market issues:

(2) financial resilience;

(3) operational resilience;

(4) diversity and inclusion;

(5) ESG work;

and (6) international cooperation.

On February 8, 2021, the CBI published a Securities Market Risk Outlook Report that identifies key conduct risks to securities markets, actions investment firms should take to identify, mitigate and manage those risks, and the CBI's supervisory priorities.

The CBI's priorities include, among others, dealing with the Pandemic and Brexit, fund governance, money market fund reform, diversity and inclusion, climate change, and bolstering systems to identify, mitigate and manage misconduct risk, including market abuse risk.

Federated Hermes continues to analyze the potential impact of these Regulatory Developments on Federated Hermes' Financial Condition.

Please refer to our prior public filings for more detailed discussions of these, and other, previously proposed and final rules and guidance.

They also continue to take enforcement action when determined

For example, the FCA has recently fined broker-dealers and other investment-related firms for failures relating to the detection of market abuse and financial crime controls.

An EU FTT also continues to be discussed, although it remains unclear if or when an agreement will be reached regarding its adoption.

Since the European Commission first proposed an EU FTT in 2011, proponents of the FTT have sought the widest possible application of the FTT with low tax rates.

In December 2019, Germany proposed a draft directive that would have imposed a 0.2% tax on purchases of shares of large companies worth more than €1 billion, which would cover over 500 companies.

Initial public offerings (IPOs) would have been excluded, and each Member State would have been free to tax equity funds and similar products for private pensions.

Under the German proposal, the five countries with the highest incomes would have shared a small part of their revenues with the other countries, so that each participating country would receive at least €20 million of FTT revenue.

No formal action has been taken on this German proposal.

On February 24, 2021, Portugal, the successor to the German Presidency of the EU Council, proposed at a meeting of the Working Party on Tax Questions to begin discussions at the EU level regarding the design of an EU FTT involving a gradual implementation by Member States based on the FTTs already implemented in France and Italy.

The last proposal was to begin discussions at the EU level regarding the design of an EU FTT involving a gradual implementation by Member States based on the FTTs already implemented in France and Italy.

Member States that would want to implement an FTT more quickly would have been permitted to do so.

Member States were invited to provide input on the proposed approach to the EU FTT design, whether the FTTs in France and Italy would be a solid basis for an EU FTT, and whether an EU FTT should apply to equity derivative transactions.

Subject to certain exemptions, the French FTT levies a tax of up to 0.3% on stock purchases of French publicly traded companies with a market value over €1 billion, American and European depository receipts of covered company securities, high frequency trades, credit default swaps against EU sovereign debt, and certain corporate actions.

Subject to certain exemptions, the Italian FTT levies a tax on equity transactions, certain derivative transactions on equities and certain high frequency trades of up to 0.2% of the value of the net balance of purchase and sale transactions executed on the same day on the same financial instrument by the same party.

The Italian FTT applies to shares issued by Italian companies with a capitalization of at least €500 million, cash equity contracts, equity derivative contracts, and certain other equity transactions.

It has been reported that Austria's Finance Minister has spoken out against the Portuguese proposal on the basis that an EU FTT would harm business.

The Portuguese proposal on an EU FTT invited Member States electing not to participate in the enhanced cooperation initiative to provide input on whether the need to find additional sources for financing the EU recovery effort might increase their interest in further working on an EU FTT.

As attention turns to a post-Pandemic economy and as the EU and EU Member States look to fund their budgets and the Pandemic-related measures that have been adopted, an EU FTT on securities transactions, or even bank account transactions, remains a potential additional source of revenue.

On May 18, 2021, the European Commission issued a communication on "Business Taxation for the 21st Century," in which it indicated that, after July 2021, it would make certain additional proposals, which could include an FTT.

In a meeting of the Council of the EU on June 3, 2021, the Council recognized that the European Commission recently clarified that, if there is no agreement by the end of 2022, the European Commission will, based on impact assessments, propose a new resource for the EU budget based on a new FTT and that the European Commission will endeavor to make those proposals by June 2024 with the FTT's planned introduction by January 1, 2026.

The Council also indicated at its June 3, 2021 meeting that further work will be required before final policy choices are made and an agreement on a possible FTT can be reached.

As attention continues on a post-Pandemic economy and as the EU and EU Member States continue to look to fund their budgets and the Pandemic-related measures that have been adopted, an EU FTT on securities transactions, or even bank account transactions, remains a potential additional source of revenue.

The Council of the EU has recognized that the European Commission has clarified that, if there is no agreement by the end of 2022 (which there was not), the European Commission will, based on impact assessments, propose a new resource for the EU budget based on a new FTT and that the European Commission will endeavor to make those proposals by June 2024 with the FTT’s planned introduction by January 1, 2026.

The Council also has indicated that further work will be required before final policy choices are made and an agreement on a possible FTT can be reached.

The exact time needed to reach a final agreement on an EU FTT, implement any agreement and enact legislation is not known at this time.

As discussed above, certain individual EU Member States, such as Italy and France, have implemented FTTs at the Member State-level.

Spain's 0.2% FTT on certain securities transactions, effective on January 16, 2021, is another example.

It has been reported that Spain's FTT tax revenues were only approximately 31% of projections.

The weakened economy in Europe can increase the risk that additional jurisdictions propose to implement FTTs.

The Labour Party in the UK has also previously proposed a UK FTT (in addition to the existing UK stamp duty), but it has not been advanced to date.

The Pandemic also could further delay agreement on, and the implementation of, an FTT in the EU, UK or other European countries.

Notwithstanding the impact of the Pandemic, global securities regulators urged the adoption of new risk free reference rates as alternatives to LIBOR.

Separate working groups were formed in the UK, the U.S., the EU, and other jurisdictions (e.g., Japan and Switzerland) to recommend an alternative to LIBOR for their respective markets.

The FCA, the BoE and the PRA, as well as other global regulators, continued efforts started in September 2018 regarding the proposed transition from LIBOR to the Sterling Overnight Index Average (SONIA) by the end of 2021.

On March 5, 2021, Intercontinental Exchange, Inc.

(ICE) published a feedback statement from ICE Benchmark Administration Limited, a wholly-owned subsidiary of ICE and the administrator of LIBOR, formally confirming its intention to:

(1) cease the publication of the one-week and two-month USD LIBOR after December 31, 2021;

(2) cease publication of the EUR, CHF, JPY and GBP LIBOR for all tenors after December 31, 2021;

and (3) cease the publication of all other tenors of USD LIBOR after June 30, 2023.

On June 2, 2021,

IOSCO issued a statement in which it urged all global market participants to "discontinue new use of USD LIBOR-linked contracts, as soon as practicable and no later than the end of 2021, to avoid the safety and soundness risks associated with the continued use." On June 2, 2021, the FSB released statements and reports that set out recommendations for financial and non-financial sector firms, as well as the authorities, to consider as they seek to transition away from LIBOR by the end of 2021.

The statements and reports included:

(1) a summary of high-level steps firms will need to take now and over the course of 2021 to complete their transition;

(2) a paper reviewing overnight risk-free rates and term rates;

(3) a statement on the use of the International Swaps and Derivatives Association's (ISDA) spread adjustments in cash products;

and (4) a statement that encouraged authorities to set globally consistent expectations that regulated entities should cease the new use of USD LIBOR in line with the relevant timelines for that currency, regardless of where those trades are booked.

In September 2021, the FCA issued a "Feedback Statement:

FCA use of powers over use of critical benchmarks," in which the FCA discussed, among other topics, its authority to prohibit some or all new uses of a critical benchmark, which includes LIBOR in the UK.

On September 9, 2021, the FCA also updated its website, and issued a consultation, "Proposed decisions on the use of LIBOR (Articles 23C and 21A BMR)," setting forth further guidance and requests for comment regarding further arrangements for the orderly wind-down of LIBOR by the end of 2021.

Although the FCA found that market participants have made good progress in actively transitioning contracts away from LIBOR, the FCA concluded that it will not be practicable to convert all outstanding sterling and Japanese yen LIBOR contracts by the end of 2021.

Consequently, to avoid disruption to legacy contracts that reference the 1 month, 3 month and 6 month sterling and Japanese yen LIBOR tenors, the FCA required the LIBOR benchmark administrator to publish these tenors under a 'synthetic' methodology, based on term risk-free rates, for the duration of 2022.

The synthetic panels are not intended for new issues, as the FCA also proposed to prohibit new use of overnight, 1 month, 3 month, 6 month and 12 month U.S.

dollar LIBOR, which will continue to be published through June 30, 2023.

On November 22, 2021, the FSB issued a statement urging swift action to ensure preparedness for LIBOR cessation and to reinforce the message and timeline from supervisors globally to ensure there is no interruption to new business and financing.

On December 10, 2021, the FCA also issued final guidance on the transition to LIBOR, including a feedback statement on its "Decisions on the use of LIBOR" (Articles 23C and 21A BMR) summarizing the results of its prior consultation discussed above.

The weakened economy in Europe can increase the risk that additional jurisdictions propose to implement single-country FTTs.

As of December 31, 2022, the transition from LIBOR is nearly complete, with publication of the few remaining tenors of USD LIBOR ceasing after June 30, 2023.

On December 16, 2022, the FSB issued a “Progress Report on LIBOR and Other Benchmarks Transition Issues:

Reaching the finish line of LIBOR transition and securing robust reference rates for the future” in which it, among other things:

(1) acknowledges that significant progress was made especially among FSB jurisdictions where exposure to LIBOR is the highest;

(2) cautions that there could be residual risk arising from relatively low awareness of the transition among users of USD LIBOR in jurisdictions where LIBOR exposure is low;

and (3) encourages market participants to use the most robust reference rates to achieve intended benefits and avoid the need to repeat another reference rate transition.

On November 23, 2022, the FCA released a further “Consultation on ‘synthetic’ USD LIBOR and feedback to CP22/11” to solicit views on:

(1) its proposal to require the administrator of LIBOR to publish a synthetic version of 1-, 3-, and 6-month USD LIBOR settings for a temporary period until the end of September 2024;

(2) its proposed methodology for building these synthetic USD LIBOR settings;

and (3) the permitted uses of them.

The FCA made clear that its primary purpose in requiring the publication of synthetic USD LIBOR is to facilitate an orderly transition of legacy contracts that are governed by UK or other non‑U.S.

law and that have no realistic prospect of being amended by the time LIBOR is no longer published in its current form after June 30, 2023.

The comment period ended on January 6, 2023.

Legislators and regulators in the U.S.

and other countries are also working on the transition from LIBOR, with particular emphasis on legacy financial agreements that lack sufficient “fallback” language to transition to a new reference rate in the event of LIBOR’s cessation.

The SEC and other regulators in the U.S.

have undertaken efforts to identify risks and prepare for the proposed transition from LIBOR to the Secured Overnight Financing Rate (SOFR) or another alternative reference rate by the end of 2021.

The SOFR was selected as the preferred LIBOR replacement in the U.S.

by the Alternative Reference Rates Committee (ARRC) at the Federal Reserve Bank of New York.

On May 6, 2021, the ARRC published market indicators that would support a recommendation of term SOFR and confirmed that "a recommended term rate is now in clear sight" and the recent guidance "would allow the ARRC to recommend a SOFR-based term rate relatively soon." Despite the extension of the transition deadline to June 30, 2023 for certain tenors of USD LIBOR, U.S.

regulators continued to urge financial institutions to stop entering into new LIBOR transactions by the end of 2021.

The Governors have indicated that, "[n]ew contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR's discontinuation." On October 23, 2020, ISDA published its ISDA 2020 IBOR Fallbacks Protocol, which enables parties to protocol-covered documents to amend their terms to:

(1) regarding a protocol-covered document which incorporates, or references, a rate as defined in a Covered ISDA Definitions Booklet, include either the terms of, or a particular defined term included in, the Supplement to the 2006 ISDA Definitions;

and (2) in respect of a protocol-covered document which otherwise references a relevant interbank lending rate (IBOR), include new "fallbacks" for that relevant IBOR.

This protocol became effective January 25, 2021.

On March 24, 2021, New York passed a law that implements fallback provisions that favor the transition to SOFR plus a spread adjustment for contracts without effective fallback provisions that are written under New York law.

The New York law also provides a safe harbor from litigation where SOFR is selected as a replacement rate for USD LIBOR.

Regulators have also taken note of the growing market demand for credit sensitive rates as alternatives to SOFR because credit sensitive rates have a term component built in, which is operationally similar to LIBOR.

During the open session of the June 11, 2021 FSOC meeting, SEC Chair Gensler delivered prepared remarks regarding the LIBOR transition in which he specifically condemned one such rate, the Bloomberg Short Term Bank Yield Index (BSBY), as featuring many of the same flaws as LIBOR, and generally advocated for term SOFR over BSBY.

On December 7, 2021, the SEC Staff released a statement providing guidance for registered broker-dealers and investment advisors reminding firms of their obligations to disclose the steps that they have taken to reduce LIBOR exposure (particularly those tenors that expire on December 31, 2021), mitigate risks, address fallback provisions, and avoid new obligations.

The phase-out of LIBOR can cause the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which investment management industry participants, including Federated Hermes and its products, customers or

service providers, are parties, alter the accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among other effects, could require additional internal and external resources, and can increase operating expenses.

The extent of such renegotiation or re-pricing could be mitigated by the adoption of, or advocacy for, a historical five-year median difference spread adjustment methodology by certain regulators, self-regulatory organizations and trade groups (including, for example, the ARRC and ISDA).

Among other efforts, in the U.S., the Adjustable Interest Rate (LIBOR) Act of 2021 was the first U.S.

federal law addressing the cessation of LIBOR and is similar to New York legislation passed in 2021 that implements fallback provisions that favor the transition to the Secured Overnight Financing Rate (SOFR)-plus a spread adjustment for contracts without effective fallback provisions to provide for a smooth transition process to replace the LIBOR reference rate in legacy contracts.

The final Regulations Implementing the Adjustable Interest Rate (LIBOR) Act were published in the Federal Register on January 26, 2023 and will become effective February 27, 2023.

The phase-out of LIBOR has caused, and can cause, the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which investment management industry participants, including Federated Hermes and its products, customers or service providers, are parties, alter the accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among other effects, could require additional internal and external resources, and can increase operating expenses.

The extent of such renegotiation or re-pricing could be mitigated by the adoption of, or advocacy for, a historical five-year median difference spread adjustment methodology by certain regulators, self-regulatory organizations, and trade groups (including, for example, the Alternate Reference Rates Committee and ISDA).

Federated Hermes has closely monitored regulatory statements and industry developments regarding the obligations of registered investment advisors and funds when recommending and purchasing securities or other investments that use LIBOR as a reference rate or benchmark.

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and tranches of securitizations, including collateralized loan obligations.

With respect to LIBOR-linked securities or other investments with maturities after the applicable LIBOR tenor cessation date, Federated Hermes has sought to proactively address transition-related questions with the issuers or lead arrangers of such securities and other investments, as applicable, including, for example, questions regarding transition events, benchmark replacement, and benchmark replacement adjustments.

With respect to LIBOR-linked securities or other investments with maturities after the applicable LIBOR tenor cessation date, Federated Hermes has sought to proactively

address transition-related questions with the issuers or lead arrangers of such securities and other investments, as applicable, including, for example, questions regarding transition events, benchmark replacement, and benchmark replacement adjustments.

As necessary, Federated Hermes has sought to negotiate modifications to benchmark fallback language for such securities and other instruments to contemplate the permanent cessation of LIBOR.

Federated Hermes will be continuing these efforts with respect to any remaining securities or other investments held by Federated Hermes' products and strategies that continue to use a U.S.

LIBOR tenor with a cessation date of June 30, 2023.

Federated Hermes also negotiated fall back language that provides for the use of an alternative reference rate or benchmark in its corporate credit facility and its U.S.-registered Federated Hermes Funds' credit facility.

Federated Hermes continues to monitor the impact that the transition from LIBOR will have on Federated Hermes and Federated Hermes' products and strategies, customers and service providers.

While Brexit has not had a significant impact on Federated Hermes' business as of December 31, 2021, given the post-Brexit regulatory environment and potential continuing impact of the Pandemic, Federated Hermes remains unable to fully assess the degree that any potential Brexit impact and resulting changes could have on Federated Hermes' Financial Condition.

The 2018 HFML Acquisition and the 2021 Acquisition of HFML Noncontrolling Interest (together the HFML Acquisition), the HCL Acquisition, and HFML's acquisition of MEPC Limited effective as of January 1, 2020 (MEPC Acquisition), each increased the potential Brexit impact to Federated Hermes.

Management also believes that a UK FTT or EU FTT, particularly if enacted with broad application, would be detrimental to Federated Hermes' business and could adversely affect, potentially in a material way, Federated Hermes' Financial Condition.

Management continues to monitor and evaluate the impact of Regulatory Developments (including potential new money market fund reforms) on Federated Hermes' Financial Condition.

Regulatory changes stemming from Brexit, money market fund reform, a EU or UK FTT, or FCA, CBI, ESMA, FSB, IOSCO or other initiatives or Regulatory Developments, as well as the potential political and economic uncertainty surrounding Brexit and the continuing Pandemic, also can adversely affect, potentially in a material way, Federated Hermes' Financial Condition.

Similar to its efforts in the U.S., Federated Hermes has dedicated, and continues to dedicate, significant internal and external resources to analyze and address UK, EU and other international Regulatory Developments that impact Federated Hermes' investment management, stewardship and real estate development businesses.

UK, EU and other international Regulatory Developments, and Federated Hermes' efforts relating thereto, have had, and can continue to have, an impact on Federated Hermes' expenses and, in turn, financial performance.

As of December 31, 2021, Federated Hermes is unable to fully assess the potential impact that an FTT or other international Regulatory Developments can have on its Financial Condition.

Federated Hermes also is unable to fully assess at this time whether, or the degree to which, Federated Hermes, any of its investment advisory subsidiaries or any of the Federated Hermes Funds, including money market funds, or any of its other products, could ultimately be determined to be a non-bank, non-insurance company global systemically important financial institution.

The HFML Acquisition, HCL Acquisition and MEPC Acquisition each increased the potential impact that the above matters can have on Federated Hermes' Financial Condition.

Federated Hermes will be continuing these efforts with respect to any remaining securities or other investments held by Federated Hermes’ products and strategies that continue to use a USD LIBOR tenor with a cessation date of June 30, 2023.

For example, Federated Hermes sent over 550 letters to issuers or lead arrangers setting forth its expectations regarding the transition from LIBOR.

Federated Hermes also negotiated fall back language that provides for the use of an alternative reference rate or benchmark in its corporate credit facility and has an interest rate based on SOFR-plus a spread in its U.S.-registered Federated Hermes Funds’ credit facility.

While management believes that Federated Hermes’ LIBOR transition efforts are substantially completed, Federated Hermes continues to monitor the impact that the transition from LIBOR will have on Federated Hermes and Federated Hermes’ products and strategies, customers, and service providers.

EU, UK and other global policymakers and regulators have also sought to establish a global corporate tax rate of 15 percent.

It has been reported that legislation for a 15 percent minimum corporate tax is expected to be adopted in the UK in Spring 2023 and in many EU Member States by no later than the end of 2024.

With market conditions, including continuing market volatility and high inflation rates, regulators, and other government bodies, including the BoE and the UK Government, have taken actions aimed at addressing market and economic concerns.

For example, on September 28, 2022, the BoE launched a market intervention plan aimed at restoring order to the UK’s bond market by increasing its purchase of UK government bonds.

These measures can be expected to remain in effect until these regulators and governmental bodies determine that market conditions no longer warrant them.

The degree of impact of Regulatory Developments on Federated Hermes' Financial Condition can vary, including in a material way, and is uncertain.

Management continues to monitor and assess any lingering potential impact of the Pandemic generally, particularly on the workforce, and the impact of the increasing interest rate environment on asset values and money market fund and other fund asset flows, and related asset mixes, as well as the degree to which these factors impact Federated Hermes' institutional prime and municipal (or tax-exempt) money market business and Federated Hermes' Financial Condition.

Management also continues to monitor, and expend internal and external resources in connection with, the potential for additional regulatory scrutiny of money market funds, including prime and municipal (or tax-exempt) money market funds.

In addition, these developments have caused, and/or can cause, changes in asset flows, levels, and mix, as well as customer and service provider relationships.

Federated Hermes will continue to monitor Regulatory Developments as necessary and can implement additional changes to its business and practices as it deems necessary or appropriate.

The difficulty in, and cost of, complying with applicable Regulatory Developments increases with the number, complexity, and differing (and potentially conflicting) requirements of new or amended laws, rules, regulations, directives, and other Regulatory Developments, among other factors.

As of December 31, 2022, given the regulatory environment, and the possibility of future additional Regulatory Developments and oversight, Federated Hermes is unable to fully assess the impact of modified or new future Regulatory Developments, and Federated Hermes' efforts related thereto, on its Financial Condition.

Modified or new Regulatory Developments in the current regulatory environment, and Federated Hermes' efforts in responding to them, could have further material and adverse effects on Federated Hermes' Financial Condition.

Human Capital Resource Management

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Like other companies, Federated Hermes experiences employee turnover which is tracked at various levels within the company, and conducts exit interviews with departing employees.

The information derived from these interviews, as well as our employee

development initiatives described below and succession planning, allows Federated Hermes to cultivate leaders, manage turnover and retain talented and qualified individuals.

The information derived from these interviews, as well as our employee development initiatives described below and succession planning, allows Federated Hermes to cultivate leaders, manage turnover and retain talented and qualified individuals.

Federated Hermes’ ability to attract, retain and properly motivate highly qualified professionals across the company is a critical factor in maintaining its competitive position within the investment management industry and positioning Federated Hermes for future success.

See Item 1A - Risk Factors - General Risk Factors - Other General Risks - Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk) for more information on the risks to Federated Hermes if it is unable to attract and retain talented and qualified employees.

For additional information on remote and hybrid working arrangements, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations – Business Developments – The Pandemic.

For additional information on current hybrid working arrangements, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Developments – The Pandemic.

Competitive Compensation

Understanding that Federated Hermes’ business success depends on its ability to attract, retain, and incentivize talented and qualified individuals, Federated Hermes’ compensation programs across the company strive to meet this goal.

Federated Hermes endeavors to reward individual contribution, as demonstrated by the delivery of long-term sustainable results.

Federated Hermes endeavors to reward individual contributions, as demonstrated by the delivery of long-term sustainable results.

Federated Hermes’ compensation programs are also designed to align the interests of its officers and employees with its business strategy, values, and objectives, including the interests of its clients, shareholders and stakeholders, while affording the business the opportunity to grow.

For employees managed from the U.S., Federated Hermes' compensation programs are comprised of competitive levels of cash compensation together with equity and other components for certain positions.

Generally, for employees directly managed from the U.S., Federated Hermes’ compensation programs are comprised of competitive levels of cash compensation together with equity, a profit sharing/401(k) plan, and other corporate benefits/components for certain positions.

Compensation is structured in the form of:

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and, where appropriate, long-term incentives.

For employees managed from the UK, compensation is based on fixed and variable compensation.

Fixed compensation can include base salary, a retirement plan and other corporate benefits, and is designed to provide competitive fixed compensation at a level that reflects market-compensation.

Generally, for employees directly managed from the UK, compensation is based on fixed and variable compensation.

Fixed compensation can include base salary, a retirement plan together with equity and other corporate benefits/components for certain positions, and is designed to provide competitive fixed compensation at a level that reflects market compensation.

Variable compensation is discretionary based on, among other factors, an employee’s performance, and behavior, as well as team and overall company performance.

Across Federated Hermes, the mix of overall salary, bonus and long-term incentives varies by division, position and employee.

Across Federated Hermes, the mix of overall salary, bonus, long-term incentives and other corporate benefits/components for certain positions varies by division, position, and employee.

Across Federated Hermes, national and industry-specific compensation surveys are utilized to monitor competitive pay levels.

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Sales, Investment Management, Administration and Executive.

The employee category and seniority of position generally drives the mix of fixed versus variable compensation, bonus structure/opportunity and long-term incentive structure/opportunity.

The employee’s category, position and performance generally drive the mix of fixed versus variable compensation, bonus structure/opportunity and long-term incentive structure/opportunity.

Across the company (unless otherwise noted below):

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• The pay mix for Investment Management employees is more heavily weighted in variable compensation in the form of discretionary bonuses and, among other factors deemed relevant, takes into account investment product performance from one- through five-year periods.

For employees managed from the U.S., all or a portion of any annual performance bonus can be paid in cash or a combination of cash and annual bonus restricted stock.

For employees managed directly from the U.S., all or a portion of any annual performance bonus can be paid in cash or a combination of cash and annual bonus restricted stock.

Investment Management employees are also eligible for periodic restricted stock awards.

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Management employees are eligible for periodic restricted stock awards and senior management employees are also eligible for annual bonus restricted stock awards.

• The components of Federated Hermes' executive compensation programs are designed to be competitive within the investment management industry.

Federated Hermes' executive compensation programs are designed to reward outcomes related to a variety of factors including Federated Hermes' financial, investment, sales and customer service performance as measured against other similar companies within the investment management industry.

• The components of Federated Hermes’ executive compensation programs are designed to be competitive within the investment management industry and reward outcomes related to a variety of factors including Federated Hermes’ financial, investment, sales and customer service performance as measured against other similar companies within the investment management industry.

Financial factors include, for example, Federated Hermes’ operating profits (as defined in Federated Hermes Stock Incentive Plan), assets under management (or AUM), gross product sales, net product sales, total revenue (including net revenues after taking into account the net pre-tax impact of voluntary yield-related fee waivers), net income and net income per diluted share.

Please refer to the Compensation Discussion and Analysis section of Federated Hermes’ Information Statement for additional information regarding executive compensation.

Federated Hermes’ Stock Incentive Plan is designed to support its retention and attraction objectives.

Under this program, executive officers and certain employees are eligible to receive periodic restricted stock awards that vest over specified vesting

periods (e.g., for U.S.

employees, a ten- year period).

Under this program, executive officers and certain employees are eligible to receive periodic restricted stock awards that vest over specified vesting periods (e.g., for U.S.

employees, over a ten-year period, and for non-U.S.

employees, over a five-year period).

The restrictions on the vested portion of an award typically lapse on specified anniversary dates of an award (e.g., for U.S.

employees, the award's fifth- and tenth-year anniversaries).

Additionally, for certain groups of U.S.

employees, a portion of their bonus awards are paid in the form of bonus restricted stock with a three-year ratable vesting schedule with restrictions lapsing on each vesting date.

For all employees managed from the UK, discretionary bonus awards above a certain threshold are subject to deferral.

employees, the award’s fifth- and tenth-year anniversaries, and for non-U.S.

employees, generally the award’s sixth, seventh and eighth anniversaries which extend beyond the five-year vesting period in an effort to continue to align the employees’ and Federated Hermes’ interests during the restriction period).

Additionally, for certain groups of employees, a portion of their bonus awards are paid in the form of bonus restricted stock with a three-year ratable vesting schedule with restrictions lapsing on each vesting date.

For all employees directly managed from the UK, discretionary bonus awards above a certain threshold are subject to deferral.

Under the deferred bonus scheme, a portion of the bonus is deferred, notionally tracks the performance of certain Federated Hermes Funds and vests over three years.

Employees have also been eligible to receive awards under a long-term incentive plan (LTIP) that offers certain employees the chance to acquire beneficial ownership of ordinary shares in HFML.

These shares normally vest over a five-year period.

Subject to certain approvals and contingencies, as part of a tender offer intended to acquire the remaining approximately 10% interest in HFML not owned by Federated Hermes, Federated Hermes intends to issue awards of restricted Federated Hermes Class B common stock under its Stock Incentive Plan to HFML employees in the first quarter of 2022 in exchange for the beneficial interests in these HFML shares awarded under the LTIP and issue treasury shares of Federated Hermes Class B common stock in exchange for the remaining interests in the HFML shares that are held by a former employee and those that have not yet been awarded to employees and are held by an employee benefit trust that was established in connection with the LTIP.

These awards of restricted Federated Hermes stock, as well as the treasury Federated Hermes stock, will have the same vesting schedule and similar transfer restrictions as the awards granted under the LTIP.

See Note (22) to the Consolidated Financial Statements for additional information.

The Private Equity and Infrastructure businesses of Federated Hermes also operate carried interest and share of performance fee programs typical to such asset classes.

For 2021, Federated Hermes' total compensation expense was $532.5 million and included salary, bonus and stock-based compensation expense.

The Private Equity and Infrastructure businesses of Federated Hermes also operate carried interest and share of performance fee programs typical in the management of such asset classes.

For 2022, Federated Hermes’ total compensation expense was $512.7 million and included, among other items, salary, bonus and stock-based compensation expense.

Federated Hermes’ benefit offerings across the company are designed to reflect the local market and equip Federated Hermes’ employees with resources and services to help them stay healthy, balance the demands of work and personal life, develop their careers, and meet their financial goals, as well as to further employee engagement and retention.

Along with the traditional health and welfare benefits, such as medical and dental coverage, an employee assistance program, disability, paid time off and retirement programs, the company also offers flexible work arrangements, education assistance, paid parental leave, adoption benefits, paid volunteer time, employee discounts and other programs and services.

Federated Hermes also has introduced a range of resources to provide employees with information and support to remain physically and emotionally healthy during the Pandemic.

See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations – Business Developments – The Pandemic for additional information on the steps Federated Hermes has taken to safeguard the health and safety of employees.

Along with the traditional health and welfare benefits, such as medical and dental coverage, an employee assistance program, wellness program focusing on employee mindfulness, health and well-being, disability, paid time off and retirement programs, the company also offers flexible work arrangements which include hybrid work schedules, education assistance, paid parental leave, adoption benefits, paid volunteer time, employee discounts and other programs and services.

Effective January 1, 2023, Federated Hermes implemented additional paid time off in its vacation and paid parental leave programs.

Employee Development

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technical (systems) topics;

and general professional development.

and general professional

The attraction, training, and retention of qualified employees across the company supports Federated Hermes’ succession planning at all levels.

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Federated Hermes’ Board has approximately 17% women, and approximately 13% of Federated Hermes’ executives are women.

In the United States, approximately 7% of Federated Hermes' employees are minorities, 33% of business managers are women and/or minorities, 27% of investment professionals are women and/or minorities, and approximately 89% of AUM managed from the United States are in products that have at least one portfolio manager that is a woman and/or minority.

In the U.S., approximately 7% of Federated Hermes’ employees are minorities, 31% of business managers are women and/or minorities, and 27% of investment professionals are women and/or minorities.

As of December 31, 2022, approximately 90% of AUM managed from the U.S.

are in products that have at least one portfolio manager that is a woman and/or a minority.

Federated Hermes recognizes that a diverse and inclusive workplace benefits employees and supports stronger long-term business performance.

Federated Hermes developed its diversity and inclusion strategy with the mission of fostering a diverse, inclusive and respectful workplace where employees across the company are encouraged to be innovative and creative and

where unique perspectives and experiences are recognized and appreciated for the contributions they bring to the company.

Federated Hermes developed its diversity and inclusion strategy with the mission of fostering a diverse, inclusive, and respectful workplace where employees across the company are encouraged to be innovative and creative and where unique perspectives and experiences are recognized and appreciated for the contributions they bring to the company.

Federated Hermes has made a long-term commitment to enhancing the diversity of the company’s workforce and providing an inclusive environment.

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and ensuring program sustainability by evaluating results and implementing enhancements.

Federated Hermes cultivates the benefits of workplace diversity throughout the company through its recruitment process, the onboarding of new employees, and the ongoing education and training of employees.

In the U.S., the company implemented several programs to advance diversity and inclusion, which include:

launching a Women in Investing Employee Resource Business Group with the mission of supporting and advancing the professional development and representation of women within the company, the investment management industry and the community;

implementing an internship program with a local high school for underrepresented students;

and implementing a University Ambassador Program, enabling employees to serve as liaisons between the company and universities to facilitate building a diverse, early-career talent pipeline and enhance the company's brand recognition.

In London, a number of diversity and inclusion initiatives have been launched, including:

Federated Hermes cultivates the benefits of workplace diversity throughout the company through its recruitment process, onboarding of new employees, and employees’ ongoing education and training.

In the U.S., the company implemented several programs and initiatives to advance diversity and inclusion, which include (in addition to other previously established programs and initiatives):

launching a New Employee Buddy Program;

expanding the list of diversity-focused job advertisements, diverse colleges and affinity groups with whom we share our entry level job postings;

expanding the firm’s internship program with a local high school for underrepresented students;

partnering with a Pittsburgh-based college-prep school whose mission is to break the cycle of generational poverty to offer educational sessions and job shadow opportunities;

and expanding its partnership with a New York City based organization whose vision is to empower students to overcome many of the structural barriers that typically limit upward social-economic mobility by providing specialized training, paid internships or one-on-one mentorships.

In London, a number of diversity and inclusion initiatives have been launched, including (in addition to other previously established programs and initiatives):

inclusive leadership training for management;

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as well as any other prohibited criteria under law applicable to Federated Hermes.

Federated Hermes encourages its employees across the company to raise human resources questions or concerns with their managers or the Human Resources Department in the U.S.

Federated Hermes encourages its employees across the company to raise human resource questions or concerns with their managers or the Human Resources Department in the U.S.

Separately, the company also provides a phone line and website portal through a third-party service provider for employees to report, anonymously should they so choose, various compliance matters.

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Novak Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes, Inc.

Nusseibeh Chief Executive Officer, Hermes Fund Managers Limited 60

Nusseibeh Chief Executive Officer, Federated Hermes Limited 61

Uhlman Vice President of Federated Hermes, Inc.

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Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company and Federated MDTA LLC, each wholly owned by Federated Hermes.

Christopher Donahue has served as director, President and Chief Executive Officer of Federated Hermes since 1998 and was elected as Chairman effective April 2016.

Christopher Donahue has served as director, President and Chief Executive Officer (CEO) of Federated Hermes since 1998 and was elected as Chairman effective April 2016.

He also serves as a director, trustee or officer of various Federated Hermes subsidiaries.

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Ceresino has served as Vice Chairman of Federated Hermes since 2007.

He is Chairman and President of Federated International Management Limited and Federated International Securities Corp.

He is President of Federated International Management Limited and Federated International Securities Corp.

and Vice Chairman of Federated MDTA LLC, each of which are wholly-owned subsidiaries of Federated Hermes.

He serves as a director of Hermes Fund Managers Limited.

Ceresino also serves as a director, trustee, President or Chief Executive Officer of certain other wholly-owned subsidiaries of Federated Hermes focusing on Federated Hermes' non-U.S.

Ceresino also serves as a director, trustee, President or CEO of certain other wholly-owned subsidiaries of Federated Hermes involved in Federated Hermes’ non-U.S.

Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated Hermes since 1998.

1 unchanged sentence

He also serves as an Assistant Secretary of Federated Hermes and is a director and President of FII Holdings, Inc., a wholly-owned subsidiary of Federated Hermes.

He serves as a director of Hermes Fund Managers Limited.

He serves as a director of Federated Hermes Limited (FHL, formerly Hermes Fund Managers Limited) .

He also serves as a director, trustee or officer of various other Federated Hermes subsidiaries.

1 unchanged sentence

Donahue is the brother of J.

Christopher Donahue who serves as President, Chief Executive Officer, Chairman and director of Federated Hermes.

Dudiak has served as Vice President of Federated Hermes, Inc.

since February 2021.

Christopher Donahue who serves as President, CEO, Chairman and director of Federated Hermes.

Dudiak has served as Vice President of Federated Hermes since February 2021.

She has served as Director, Human Resources since November 1997.

She also has served as an officer of various Federated Hermes, Inc.

subsidiaries since 1994, holding the title Senior Vice President since July 2002.

In these capacities, she is responsible for the Human Resources Department at Federated Hermes, Inc., including Total Compensation Management, Employment Services/Employee Relations, Organization Development, and Human Resources Information Management, as well as the company's response to the Pandemic.

She also has served as an officer of various Federated Hermes subsidiaries since 1994, holding the title Senior Vice President since July 2002.

In these capacities, she is responsible for the Human Resources Department at Federated Hermes, including Total Compensation Management, Employment Services/Employee Relations, Organization Development, and Human Resources Information Management.

Fisher has served as Vice President of Federated Hermes since 1998.

He previously served as a member of the Board from May 1998 to April 2004 and was re-elected to the Board in April 2016.

He has also been President and Chief Executive Officer of Federated Advisory Companies since 2006 and serves as a board member for each of these wholly-owned subsidiaries of Federated Hermes.

He serves as a director of Hermes Fund Managers Limited.

He has also been President and CEO of Federated Advisory Companies since 2006 and serves as a board member for each of these wholly-owned subsidiaries of Federated Hermes.

He also serves as a director, trustee or officer of certain other Federated Hermes subsidiaries.

9 unchanged sentences

Prior to that time, he served as Fund Treasurer of Federated Hermes’ U.S.-based mutual funds beginning in 2006 and served as the Controller of Federated Hermes from 1997 through 2005.

He serves as a director of Hermes Fund Managers Limited.

He also serves as director or officer for various subsidiaries of Federated Hermes.

Novak is a Certified Public Accountant.

Nusseibeh is a director and Chief Executive Officer of Hermes Fund Managers Limited, a majority-owned subsidiary of Federated Hermes beginning July 1, 2018.

He joined Hermes Fund Managers Limited in 2009 and was appointed Chief Executive Officer in May 2012, having served as acting Chief Executive Officer since November 2011.

Nusseibeh is a director and CEO of FHL, a wholly -owned subsidiary of Federated Hermes.

He joined FHL in 2009 and was appointed CEO in November 2011, having previously served as Chief Investment Officer from 2009 through November 2011.

He formerly served as Global Head of Equities at Fortis Investments USA, having initially been appointed as Head of Global Equities in 2005.

He also serves as a director of Hermes Fund Managers Limited and as a director or officer of certain subsidiaries of Hermes Fund Managers Limited .

He also serves as a director of F HL and as a director or officer of certain of its subsidiaries.

Uhlman has served as Vice President of Federated Hermes, and President and a director of Federated Securities Corp., a wholly-owned subsidiary of Federated Hermes, since June 2016.

2 unchanged sentences

He had previously served as a Vice President of Federated Securities Corp.

from 1995 through 2010, and most recently served as Executive Vice President of Federated Securities Corp.

from 1995 through 2010, and served as Executive Vice President of Federated Securities Corp.

from 2010 through June 2016.

Uhlman also held the position of National Sales Director, Institutional Sales, from 2007 through June 2016.

3 unchanged sentences

Between September 2003 and October 2007, Mr.

Van Meter served as Senior Counsel in the SEC's Division of Enforcement.

Van Meter served as Senior Counsel in the SEC’s DOE.

Available Information

5 unchanged sentences

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 1. Business