FEDERATED HERMES, INC. 10-K

ITEM 1 – BUSINESS General Federated Hermes, Inc. a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated Hermes) is a global leader in active, responsible investing with $668.9 billion in assets under management (AUM or managed assets) at December 31, 2022. Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States (U.S.). Federated Hermes also provides stewardship services to customers seeking a range of solutions for engagement, advocacy, active ownership and impact. In seeking to enhance long-term investment performance for its customers and clients, Federated Hermes has taken steps to integrate the proprietary insights from fundamental environmental, social and governance (ESG) factors and engagement research into nearly all of its investment strategies. Federated Hermes operates in one operating segment, the investment management business. Federated Hermes sponsors, markets and provides investment-related services to various investment products, including sponsored investment companies and other funds (Federated Hermes Funds) and Separate Accounts (which include separately managed accounts (SMAs), institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. In addition, Federated Hermes markets and provides stewardship and real estate development services to various domestic and international companies. Federated Hermes’ principal source of revenue is investment advisory fees earned by various domestic and foreign subsidiaries pursuant to investment advisory contracts and based primarily upon the AUM of the investment products and strategies. Domestic advisory subsidiaries are registered as investment advisors under the Investment Advisers Act of 1940 (Advisers Act), while foreign advisory subsidiaries are registered in the U.S. and/or with foreign regulators. Federated Hermes provides investment advisory services to 174 Federated Hermes Funds as of December 31, 2022. Federated Hermes markets these funds to institutional customers and banks, broker/dealers and other financial intermediaries who use them to meet the needs of customers and/or clients (collectively including intermediaries, customers), including, among others, retail investors, corporations and retirement plans. The Federated Hermes Funds are domiciled in the U.S., as well as Ireland, the United Kingdom (UK), Luxembourg, Guernsey, Jersey and the Cayman Islands. Most of Federated Hermes’ U.S.-domiciled funds are registered under the Investment Company Act of 1940 (1940 Act) and under other applicable federal laws. Each U.S.-domiciled registered fund enters into an advisory agreement that is subject to annual approval by the fund’s board of directors or trustees, a majority of whom are not interested persons, as defined under the 1940 Act, of either the funds or Federated Hermes. In general, material amendments to such advisory agreements must be approved by a fund’s shareholders. These advisory agreements are generally terminable upon 60 days’ notice to the investment advisor. See Item 1A - Risk Factors - Specific Risk Factors - Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements for additional information on Federated Hermes’ advisory agreements. Of the 174 Federated Hermes Funds, Federated Hermes’ investment advisory subsidiaries managed 23 money market funds with $335.9 billion in AUM, 45 equity funds with $43.3 billion in AUM, 55 fixed-income funds with $43.2 billion in AUM, 46 alternative/private markets funds with $13.1 billion in AUM and five multi-asset funds with $2.9 billion in AUM. As of December 31, 2022, Federated Hermes provided investment advisory services to $230.5 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products owned or s ponsored by third parties. Fees for Separate Accounts are typically based on AUM pursuant to investment advisory agreements that are generally terminable upon notice to Federated Hermes (or, in certain cases, after a 30-day, 60-day or similar notice period). Certain Federated Hermes Funds have adopted distribution plans that, subject to applicable law, provide for payment to Federated Hermes for distribution services. These distribution plans are implemented through distribution agreements between Federated Hermes and the Federated Hermes Funds. Although the specific terms of each such agreement vary, the basic terms of the agreements are similar. Pursuant to these agreements, a Federated Hermes subsidiary acts as underwriter for these funds and distributes shares of the funds primarily through unaffiliated broker/dealers. Each distribution plan and agreement is initially approved by the directors or trustees of the respective fund and is reviewed for approval by such directors or trustees annually as required under applicable law. 4 Federated Hermes also provides a broad range of services to support the operation and administration of the Federated Hermes Funds. These services, for which Federated Hermes receives fees pursuant to agreements with the Federated Hermes Funds, include administrative services and shareholder servicing. Assets Under Management Total AUM are composed of Federated Hermes Funds and Separate Accounts and represent the balance of AUM at a point in time. Total managed assets for the past two years were as follows: As of December 31, 2022 vs. 2021 dollars in millions 2022 2021 Equity $ 81,523 $ 96,716 (16) % Fixed-Income 86,743 97,550 (11) Alternative / Private Markets 20,802 22,920 (9) Multi-Asset 2,989 3,780 (21) Total Long-Term Assets 192,057 220,966 (13) Money Market 476,844 447,907 6 Total Managed Assets $ 668,901 $ 668,873 0 % Average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period. Average managed assets for the past three years were as follows: Year Ended December 31, 2022 vs. 2021 2021 vs. 2020 dollars in millions 2022 2021 2020 Equity $ 84,793 $ 98,040 $ 80,591 (14) % 22 % Fixed-Income 89,776 91,564 74,403 (2) 23 Alternative / Private Markets 21,799 20,754 18,206 5 14 Multi-Asset 3,273 3,879 3,813 (16) 2 Total Long-Term Assets 199,641 214,237 177,013 (7) 21 Money Market 432,992 418,562 436,895 3 (4) Total Average Managed Assets $ 632,633 $ 632,799 $ 613,908 0 % 3 % Changes in Federated Hermes’ average asset mix year-over-year across both asset classes and product/strategy types have a direct impact on Federated Hermes’ operating income. Asset mix impacts Federated Hermes’ total revenue due to the difference in the fee rates earned on each asset class and product/strategy type per invested dollar. Generally, advisory fees charged for services provided to multi-asset and equity products and strategies are higher than advisory fees charged to alternative/private markets and fixed-income products and strategies, which in turn are higher than advisory fees charged to money market products and strategies. Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts. Additionally, certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size or structure of the customer relationship. Federated Hermes generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds. 5 Revenue Federated Hermes’ revenue from investment advisory, administrative and other service fees over the last three years were as follows: Year Ended December 31, 2022 vs. 2021 2021 vs. 2020 dollars in thousands 2022 2021 2020 Investment Advisory Fees, net $ 1,011,631 $ 915,984 $ 1,011,467 10 % (9) % Administrative Service Fees, net 294,557 306,639 318,152 (4) (4) Other Service Fees, net 139,626 77,824 118,649 79 (34) Total Revenue $ 1,445,814 $ 1,300,447 $ 1,448,268 11 % (10) % Investment Products and Strategies Federated Hermes offers a wide range of products and strategies, including money market, equity, fixed-income, alternative/private markets and multi-asset investments. Federated Hermes’ offerings include products and strategies expected to be in demand under a variety of economic and market conditions. Federated Hermes has structured its investment process to meet the requirements of fiduciaries and others who use Federated Hermes’ products and strategies to meet the needs of their customers. Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance. Federated Hermes, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers of money market assets, with $476.8 billion in AUM at December 31, 2022. Federated Hermes has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated Hermes also manages retail money market products that are typically distributed through broker/dealers. At December 31, 2022, Federated Hermes managed money market assets across a wide range of categories: government ($322.3 billion); prime ($145.6 billion); and municipal (or tax-exempt) ($8.9 billion). Federated Hermes’ equity assets totaled $81.5 billion at December 31, 2022 and are managed across a wide range of categories including: value and income ($37.4 billion); international/global ($27.1 billion); growth ($12.9 billion); and blended ($4.1 billion). Federated Hermes’ fixed-income assets totaled $86.7 billion at December 31, 2022 and are managed across a wide range of categories including: multisector ($55.6 billion); high-yield ($13.8 billion); municipal (or tax-exempt) ($7.4 billion); U.S. corporate ($4.4 billion); U.S. government ($3.9 billion); international/global ($1.1 billion); and mortgage-backed ($0.5 billion). Federated Hermes’ alternative/private markets and multi-asset investments totaled $20.8 billion and $3.0 billion, respectively, at December 31, 2022. Federated Hermes’ alternative/private markets assets are managed across a wide range of categories including: real estate ($7.8 billion); private equity ($4.6 billion); other alternative ($3.9 billion); infrastructure ($3.7 billion); bear market ($0.6 billion); and market neutral ($0.2 billion). Investment products are generally managed by a team of portfolio managers supported by fundamental and quantitative research analysts. Federated Hermes’ proprietary, independent investment research process is centered on the integration of several disciplines including: fundamental research and credit analysis; ESG integrated investment strategies; quantitative research models; style-consistent and disciplined portfolio construction and management; performance attribution; and trading. See Note (4) to the Consolidated Financial Statements for information on revenue concentration risk. Distribution Channels and Product Markets Federated Hermes’ distribution strategy is to provide investment management products and services to more than 11,000 institutions and intermediaries, including, among others, banks, broker/dealers, registered investment advisors, government entities, corporations, insurance companies, foundations and endowments. Federated Hermes uses its trained sales force of more than 200 representatives and managers, backed by an experienced support staff, to offer its products and strategies, add new customer relationships and strengthen and expand existing relationships. 6 Federated Hermes’ investment products and strategies are offered and distributed in three markets. These markets, and the relative percentage of managed assets at December 31, 2022 attributable to such markets, are as follows: U.S. financial intermediary (63%); U.S. institutional (28%); and international (9%). U.S. Financial Intermediary Federated Hermes offers and distributes its products and strategies in this market through a large, diversified group of over 6,500 national, regional and independent broker/dealers, banks and registered investment advisors. Financial intermediaries use Federated Hermes’ products to meet the needs of their customers, who are often retail investors. Federated Hermes offers a full range of products to these customers, including Federated Hermes Funds and Separate Accounts (including private funds). As of December 31, 2022, managed assets in the U.S. financial intermediary market included $317.9 billion in money market assets, $55.1 billion in equity assets, $39.8 billion in fixed-income assets, $2.6 billion in multi-asset and $0.8 billion in alternative/private markets assets. U.S. Institutional Federated Hermes offers and distributes its products and strategies to a wide variety of domestic institutional customers including, among others, government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and non-Federated Hermes investment companies or other funds. As of December 31, 2022, managed assets in the U.S. institutional market included $144.0 billion in money market assets, $42.5 billion in fixed-income assets, $2.9 billion in equity assets, $0.6 billion in alternative/private markets assets and $0.4 billion in multi-asset. International Federated Hermes manages assets from non-U.S. institutional and financial intermediary customers through subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. As of December 31, 2022, managed assets in the international market included $23.5 billion in equity assets, $19.4 billion in alternative/private markets assets, $15.0 billion in money market assets and $4.5 billion in fixed-income assets. Competition As of December 31, 2022, Federated Hermes had $438.4 billion of Federated Hermes Fund AUM and $230.5 billion of Separate Account AUM. Of the Separate Account AUM, $32.1 billion related to SMAs. The investment management business is highly competitive across all types of investment products and strategies, including mutual funds, exchange traded funds (ETFs), SMAs, institutional accounts, sub-advised funds and other managed products and strategies. Competition is particularly intense among mutual fund and ETF providers. According to the Investment Company Institute (ICI), at the end of 2022, there were over 7,000 open-end mutual funds and over 2,800 ETFs of varying sizes and investment objectives whose shares are currently being offered. In addition to competition from other mutual fund managers, ETF providers and investment advisors, Federated Hermes competes with investment alternatives offered by insurance companies, commercial banks, broker/dealers, deposit brokers, private markets/alternative product managers and other financial institutions. Federated Hermes launched its first ETFs - two fixed-income, fully transparent ETFs - in December 2021 and a dividend income equity ETF in November 2022. Competition for sales of investment products and strategies is influenced by various factors, including investment performance, attainment of stated objectives, yields and total returns, fees and expenses, advertising and sales promotional efforts, investor confidence and preference, relationships with intermediaries and other customers and type and quality of services. Regulatory Matters Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S. Federated Hermes and its products, such as t he Federated Hermes Funds, and strategies are subject to: various federal securities laws, such as the Securities Act of 1933 (1933 Act), the Securities Act of 1934 (1934 Act), 1940 Act, and Advisers Act; state laws regarding securities fraud and registration; regulations or other rules promulgated by various regulatory authorities, or other authorities. Various laws and regulations that have or are expected to be re-examined, modified, or reversed, or that become effective, and any new proposed laws, rules, regulations and directives or consultations (collectively, both domestically and internationally, as applicable, Regulatory Developments) continue to impact the investment management industry generally, and will continue to impact, to various degrees, Federated Hermes’ business, results of operations, financial condition, cash flows and/or stock price (collectively, Financial Condition). See Item 1A - Risk Factors - General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information. 7 Current Regulatory Environment - Domestic The pace of new proposed and final laws, rules and regulations and other regulatory activity increased in 2022 and is expected to continue at a rapid pace in 2023. Despite receiving criticism for the expedited pace of new regulation, the Securities and Exchange Commission (SEC) (among other regulatory authorities, self-regulatory organizations, or exchanges) has continued to advance its robust rulemaking initiatives. The SEC’s Fall 2022 Unified Agenda of Regulatory and Declaratory Actions (SEC Fall Reg Flex Agenda) identified 52 rulemaking initiatives. Within it the SEC indicated that it expects to issue 21 final rules and an additional 13 proposed rules by April 2023, and another eight final rules and nine proposed rules by October 2023. These final and proposed rules are expected to impose significant new requirements in important areas on the investment management industry, including Federated Hermes. Examples of final rules that are expected to be issued in 2023 include money market fund reform, climate change disclosure, cybersecurity risk governance, investment company names, and loan or borrowing of securities, among other topics. Examples of proposed rules expected to be issued in 2023 include human capital management disclosure, corporate board diversity, amendments to the custody rule for investment advisors, open-end fund liquidity and dilution management, outsourcing by investment advisors, exchange-traded products, and cybersecurity, among other topics. The SEC Fall Reg Flex Agenda follows an active fourth quarter 2022 that saw the 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 8 SEC indicated in the SEC Fall Reg Flex Agenda that it intended to finalize its proposed money market fund reforms by April 2023. Federated Hermes has continued, and will continue, to actively participate in the debate surrounding money market fund reforms. Consistent with prior comment letters and meetings with SEC Commissioners and SEC staff, Federated Hermes maintains its position that: (1) swing pricing will regulate institutional prime money market funds out of existence; (2) discretionary fees and gates administered by fund boards through the exercise of their fiduciary duty are the best alternatives for money market funds; (3) eliminating the link between mandatory fees and gates and a 30% liquid asset requirement is most appropriate; and (4) a four-digit Net Asset Value (NAV) for government money market funds to deal with the possibility of negative interest rates is not a better solution than allowing the use of a reverse distribution mechanism (RDM). Federated Hermes expressed these views in its letters to the SEC and to SEC Commissioners, including those letters dated June 9, 2022, June 14, 2022, August 10, 2022, and September 22, 2022, which were submitted to SEC Commissioners Peirce, Crenshaw, Uyeda, and Lizárraga after meetings with them on June 3, 2022, June 7, 2022, August 2, 2022, and September 20, 2022, respectively. In a November 1, 2022 comment letter, among other comments, Federated Hermes reiterated its concerns that: (1) the SEC’s proposed amendments to Form N-MFP, stress testing requirements, and four-digit NAV will further harm money market funds and their investors and intermediaries without corresponding benefits; (2) the SEC has not developed and put forward data to support the more radical aspects of its proposal, in particular swing pricing; and (3) swing pricing tied to a specific metric could itself trigger mass redemptions or serve as an opening for market timers to game the rule. 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 9 the applicable day’s price; (3) eliminating the “less liquid” investment category from the existing four category liquidity classification framework under Rule 22e-4 of the 1940 Act, and thereby broadening the “illiquid” investment category; (4) requiring such funds to classify all portfolio investments daily instead of monthly; (5) mandating such funds to determine and maintain a highly liquid investment minimum (HLIM) equal to at least 10% of net assets; and (6) imposing expanded Form N-PORT reporting and disclosure obligations on such funds. In the proposing release the SEC contends that the proposed amendments would “enhance funds’ liquidity risk management to help better prepare them for stressed market conditions and to require the use of swing pricing for certain funds in certain circumstances to limit dilution” and also “enhance open-end fund resilience in periods of market stress by promoting funds’ ability to meet redemptions in a timely manner while limiting dilution of remaining shareholders’ interests in the fund.” In its comment letter dated February 14, 2023, Federated Hermes supported the comments and recommendations of the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA) on the proposal, including strongly opposing the use of swing pricing because the implementation of swing pricing is unnecessary to achieve the SEC’s desired objective, would be extremely costly, would be very difficult for the industry to implement, would be difficult for investors to understand and would represent an unwarranted change in the character of a hugely popular investment vehicle which provides investors with the benefits of professional management, diversification and access to the capital markets to help them meet their financial goals. Federated Hermes noted that there are less onerous alternatives to mandating swing pricing in those limited circumstances where material dilution is a real concern, such as discretionary liquidity fees to be applied at a fund’s board’s discretion in the exercise of its fiduciary duty to a fund and its shareholders. Federated Hermes strongly opposes a hard close concept, which was proposed to ensure fund managers have the appropriate data necessary to determine whether a fund’s NAV should be adjusted via swing pricing, but which would result in unintended consequences to third-party intermediaries and underlying investors and would be particularly detrimental to retirement plan participants in 401(k) plans using open-end mutual funds on their menu. Federated Hermes strongly opposes eliminating the “less liquid” investment category from the existing four category liquidity classification framework under the liquidity rule because funds investing primarily in bank loans will not be able to comply with the 15% limit on illiquid investments under the 1940 Act, subjecting these funds to undeserving harm. The comment period for this proposal ended on February 14, 2023. As indicated in the SEC Fall Reg Flex Agenda discussed above, the SEC has increased its focus on ESG-related disclosures. In an October 17, 2022, speech, SEC Commissioner Lizárraga discussed the SEC’s proposals regarding enhanced climate risk disclosures by issuers, enhanced ESG disclosures by registered funds and investment advisors and modernized rules governing ESG-related fund names ( i.e. , Rule 35d-1 under the 1940 Act (Names Rule)), noting that the SEC is seeking to ensure that investors receive the information they need to make the most informed investment decisions. He explained that the corporate issuer proposed rule would require public companies to disclose climate-related risks that have a material impact on their business, operations, and financial condition and to disclose certain related quantitative information. He explained that the SEC’s proposal for registered funds and investment advisors is designed to provide investors with decision-useful qualitative and quantitative information on how funds and investment advisors consider ESG factors in decision-making. He also explained that the proposal regarding ESG-related fund names focuses on how funds label themselves and would prohibit funds that consider ESG factors alongside other non-ESG factors from using ESG-related terms in their name. Specifically, the corporate issuer proposal mandates, among other things, certain climate risk disclosures by public companies, such as Federated Hermes, including on Form 10-K, about a company’s governance, risk management, and strategy with respect to climate-related risks. The proposal incorporates certain concepts and vocabulary from the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol) as part of the proposed disclosure regime. For example, the proposal would require disclosure of quantitative metrics to assess a company’s exposure to greenhouse gas emissions. A company would be required to disclose its Scope 1 and Scope 2 greenhouse gas emissions, which would be emissions under the GHG Protocol that “result directly or indirectly from facilities owned or activities controlled by a registrant.” Certain registrants also would be required to disclose Scope 3 emissions, which would be the emissions from upstream and downstream activities in a company’s value chain, if such emissions were material to investors or if the company had made a commitment that included reference to Scope 3 emissions. Consistent with its previously submitted comment letter, Federated Hermes continues to support the ICI’s comments to the SEC on the proposal, including, among others, that: (1) any final rule should only require companies to provide material climate risk-related information in a company’s Form 10-K, with any non-material information required by any amendments to Regulation S-K to be provided in a new climate report; (2) the SEC not amend Regulation S-X to require a company to provide material financial metrics in footnotes to its financial statements; and (3) it is premature to require disclosure of Scope 3 emissions data. 10 Federated Hermes also continues to support the retention of the current approach under the Names Rule for the 80% investment policy requirement and temporary investment exceptions. On October 3, 2022, the FSOC established the Climate-related Financial Risk Advisory Committee to aid in the assessment of climate-related financial risk. This followed FSOC Chairperson Yellen’s praise for the SEC’s climate risk disclosure proposal on March 21, 2022: “The SEC’s proposal is an important step to protect investors and strengthen the overall resilience of the financial system. Investors and businesses have for years asked for reliable information that can be used to assess climate-related risks and opportunities. I commend Chair Gensler and the SEC for their work on this critical issue.” On April 5, 2022, certain Republican senators, including members of the Senate Banking and Environment and Public Works Committees, issued a letter to SEC Chair Gensler calling on the SEC to withdraw the climate risk disclosure proposal. Consistent with its June 14, 2021 comment letter submitted in response to then acting SEC Chair Allison Herren Lee’s request for public comment on the SEC’s disclosure rules and guidance as they apply to climate change and other ESG-related disclosures, Federated Hermes believes that any SEC rule on climate disclosure should: (1) supplement its principles-based disclosure regime, not replace it with prescriptive metrics; (2) focus on material disclosures; and (3) maintain the global competitiveness of U.S. capital markets. The SEC’s aggressive rulemaking, particularly regarding money market fund reform and climate/ESG disclosure, could be challenged by legislators and in the courts by investment management industry participants and other industry groups. Particularly in the context of climate/ESG disclosures, the likely success of any challenge could be bolstered in light of the U.S. Supreme Court’s recent decision in West Virginia vs. Environmental Protection Agency, in which the Supreme Court weakened the deference given to an administrative agency’s regulatory authority by applying the “Major Questions Doctrine,” which the Supreme Court has used to require courts to defer to Congress rather than administrative agencies regarding matters that it concludes have significant economic and/or political impact if it believes that Congress did not specifically grant such powers to an agency. Federated Hermes, like other investment managers, is complying with Rule 2a-5 under the 1940 Act. Rule 2a-5 establishes an updated regulatory framework for fund valuation practices by establishing requirements for determining fair value in good faith for purposes of the 1940 Act. The rule expressly permits boards, subject to continued board oversight and certain other conditions, to designate certain parties, such as fund investment advisors, to perform fair value determinations. The rule also defines when market quotations are “readily available” for purposes of the 1940 Act, the threshold under Rule 2a-4 under the 1940 Act for determining whether a fund must fair value a security. Under Rule 2a-5, a market quotation is “readily available” only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the fund can access at the measurement date. The rule further provides that a quotation will not be readily available if it is not reliable. This definition contradicts common practices for cross-trades between affiliated funds under Rule 17a-7 under the 1940 Act. Rule 17a-7 permits cross trades of securities for which market quotations are readily available between affiliated funds, which allows funds to transfer such securities without incurring trading costs. The definition of “readily available” in Rule 2a-5 essentially limits Rule 17a-7 to equity securities because fixed-income securities are not traded on an exchange and would not have a “quoted price (unadjusted) in active markets.” Federated Hermes is relying on previously issued SEC no-action letters to continue to conduct cross trades in its fixed-income funds (unless and until the SEC rescinds those no-action letters). The inability to conduct cross-trades between Federated Hermes fixed-income funds can increase trading expenses and have a negative impact on fund performance. In addition to the SEC and the FSOC, regulations proposed or adopted, and actions taken, by the Department of Labor (DOL) impact the investment management industry, including Federated Hermes. In its Fall 2022 Agency Rule List (DOL Fall Agency Rule List), the DOL indicated that it would be proposing another new fiduciary rule by December 2022, however, the new fiduciary rule has not yet been issued and it has been reported that a proposed new fiduciary rule will not be forwarded to the Office of Management and Budget (OMB) for consideration until the first quarter 2023. According to the DOL Fall Agency Rule List, the new proposed fiduciary rule will amend the regulatory definition of the term “fiduciary” to more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual retirement accounts (IRA) are fiduciaries for purposes of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986, as amended. The DOL also has indicated that, in conjunction with this rulemaking, the Employee Benefits Security Administration (EBSA) will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors. On November 22, 2022, the DOL issued its “Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (New 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 11 the New DOL ESG/Proxy Voting Rule is intended to ensure that “plan fiduciaries do not misinterpret the final rule as a mandate to consider the economic effects of climate change and other ESG factors under all circumstances.” The New DOL ESG/Proxy Voting Rule replaces the DOL’s final proxy voting and shareholder rights rule (Final DOL Proxy Voting Rule), which was issued on December 11, 2020, and its final rule restricting fiduciaries from selecting plan investments based on non-pecuniary factors, such as ESG factors (Final DOL ESG Rule), which was issued on October 30, 2020. The New DOL ESG/Proxy Voting Rule: (1) amends the “Investment Duties” regulation, which addresses the duties of prudence and loyalty in selecting plan investments and exercising of shareholder rights, including proxy voting; (2) retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on material risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan, but clarifies that, when considering investment returns, a fiduciary’s duty of prudence can require an evaluation of the economic effects of climate change and other ESG factors on a particular investment or investment course of action; and (3) applies the same standards to qualified default investment alternatives as apply to other investments. In a change from the Final DOL ESG Rule, the New DOL ESG/Proxy Voting Rule also: (1) amends the “tie-breaker” standard by: (a) imposing a standard that would require a fiduciary to conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon; and (b) permitting a fiduciary to select an investment, or an investment course of action, based on economic or non-economic benefits other than investment returns; and (2) adjusts the Final DOL Proxy Voting Rule’s requirements for the exercise of shareholder rights, including proxy voting, by: (a) removing from the current regulation the statement that “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right;” (b) removing from the current regulation safe harbors relating to proxy voting that permit (i) a policy to limit voting resources to particular types of proposals that a fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the investment and (ii) a policy of refraining from voting on proposals or particular types of proposals when a plan’s holding in a single issuer relative to the plan’s total investment assets is below a quantitative threshold; and (c) eliminating the requirement that, when deciding whether to exercise, and in exercising, shareholder rights, a plan fiduciary must maintain records on proxy voting activities and other exercises of shareholder rights. On January 26, 2023, Attorneys General from 25 states filed a lawsuit against the DOL seeking to postpone the January 30, 2023 effective date for the New DOL ESG/Proxy Voting Rule and to have it declared unlawful on the basis that it violates ERISA and runs afoul of the Administrative Procedures Act because it is allegedly arbitrary and capricious. Federated Hermes is monitoring this lawsuit. On January 6, 2023, Federated Hermes filed a comment letter to the DOL’s July 26, 2022, proposed amendments to the Class Prohibited Transaction Exemption 84-14, also known as the Qualified Professional Asset Manager (QPAM) Exemption. The DOL proposed the amendments to purportedly ensure the exemption continues to protect plans, participants and beneficiaries, individual retirement account owners and their interests. The QPAM Exemption, which is commonly relied upon by investment advisors, including Federated Hermes, permits various parties who are related to ERISA plans to engage in transactions involving plan and individual retirement account assets if, among other conditions, the assets are managed by QPAMs that are independent of the parties in interest and that meet specified financial standards. Federated Hermes opposed a proposed amendment that would require a QPAM to have “sole” responsibility for transactions as being contrary to SEC and Office of the Comptroller of the Currency guidance that allows delegation of investment management authority and only requires the trustee of an ERISA plan to maintain substantial investment responsibility over a collective investment trust, a common investment vehicle for ERISA plans. Federated Hermes also proposed: (1) removing the proposed registration requirement, where each QPAM must report its reliance to the DOL; (2) reducing the scope of the proposed expansions to disqualification from the QPAM Exemption; and (3) removing the proposal’s requirement for certain contract provisions in every investment management agreement. Since the beginning of the fourth quarter 2022, other proposed rules, new guidance and other actions have been issued or taken that impact U.S. investment management industry participants, including Federated Hermes. For example: • On February 15, 2023, the SEC proposed to exercise its authority under section 411 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) by amending and redesignating Rule 206(4)-2 under the Advisers Act (Custody Rule) to enhance investor protections relating to custody of advisory client assets. The proposed amendments, if adopted as proposed, would, among other things: (1) explicitly include an investment advisor’s discretionary authority to trade client assets and the ability to transfer client assets within the definition of “custody” under the Custody Rule; (2) expand the Custody Rule to cover a broader array of advisory activities and client assets beyond “client funds and securities”, which would include digital assets; (3) require investment advisors to enter into written agreements with each qualified custodian that maintains possession or control of client assets and obtain reasonable assurances in writing that the custodian will take certain actions, including responding to SEC 12 information requests; and (4) update related recordkeeping and reporting requirements for investment advisors. Federated Hermes is reviewing the proposed rule and its impact on Federated Hermes’ business. The comment period for the proposed rule will end 60 days following publication of the proposing release in the Federal Register. • On February 15, 2023, the SEC adopted rule amendments and new rules to, among other things: (1) shorten the standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1); (2) shorten the separate standard settlement cycle for firm commitment offerings priced after 4:30 p.m. from four business days after trade date (T+4) to T+2; (3) purportedly improve the processing of institutional trades through new requirements for broker-dealers and registered investment advisors related to same-day affirmations; and (4) facilitate straight-through processing via new requirements applicable to clearing agencies that are central matching service providers. The final amendments and new rules will become effective 60 days following the date of publication of the adopting release in the Federal Register, and the compliance date for each is May 28, 2024. Federated Hermes is currently reviewing the final amendments and new rules and their impact on its business. • On January 25, 2023, the SEC issued a proposed rule to prohibit conflicts of interest in certain securitization transactions as required by Congress in the Dodd-Frank Act. The proposed rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an asset-backed security (ABS) in a way that would put the securitization participant’s interests ahead of those of ABS investors. Federated Hermes is reviewing the proposed rule and its impact on Federated Hermes’ business. The public comment period ends on March 27, 2023. • On January 5, 2023, the Federal Trade Commission (FTC) released a proposed rule that, if adopted, would ban employers from using noncompetition agreements to restrict the mobility of paid or unpaid employees, independent contractors, interns, volunteers, and apprentices. The proposed rule broadly defines a “non-compete clause” as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule would apply to explicit noncompetition agreements as well as “de facto” noncompetition agreements which have the effect of prohibiting workers from seeking or accepting new employment. The FTC maintains that the proposed rule is not intended to prohibit reasonably tailored non-solicitation agreements. As support for its proposed rule, the FTC maintains that noncompetition agreements suppress wages, stifle innovation, and make it harder for entrepreneurs to start new businesses. The only exception is for noncompetition agreements used as part of a sale-of-business contract with a 25% or more owner of the business being sold. Federated Hermes is reviewing the proposed rule and its impact on its business. The public comment period ends on March 10, 2023. • On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the 1934 Act. Rule 10b5-1 allows issuers and company insiders to set up predetermined plans to transact in the issuer’s stock in compliance with insider trading laws. The amendments: (1) add new conditions to the availability of the affirmative defense under Rule 10b5-1(c)(1), including cooling-off periods for directors, officers, and persons other than issuers; (2) create new disclosure requirements regarding issuers’ insider trading policies and procedures and the adoption and termination (including modification) of Rule 10b5-1 and certain other trading arrangements by directors and officers; (3) create new disclosure requirements for executive and director compensation regarding certain equity compensation awards made close in time to the issuer’s disclosure of material nonpublic information; and (4) update Forms 4 and 5 to require filers subject to Section 16 of the 1934 Act to identify transactions made pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and to disclose all bona fide gifts of securities on Form 4. The final amendments will become effective on February 27, 2023. Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023. Issuers will be required to comply with the new disclosure requirements in 1934 Act periodic reports on Forms 10-Q, 10-K, and 20-F and in any proxy or information statements in the first filing that covers the first full fiscal period that begins on or after April 1, 2023. The final amendments also defer by six months the date of compliance with the additional disclosure requirements for smaller reporting companies. Federated Hermes is currently reviewing the final amendments and their impact on its business. • On December 14, 2022, the SEC proposed to create the first SEC-established rule concerning best execution for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers (collectively, broker-dealers). This proposed Regulation Best Execution would require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard. Further, the proposal would require these policies and procedures to address how broker-dealers will comply with the best execution standard and how they will determine the best market and make routing or execution decisions 13 for customer orders. The policies and procedures would also be required to address additional factors for conflicted transactions with retail customers. Moreover, the proposal would require broker-dealers to review the execution quality of customer orders at least quarterly and their best execution policies and procedures at least annually. Broker-dealers would need to document such reviews and present written reports detailing the results of such reviews to their boards of directors or equivalent governing bodies. Federated Hermes is reviewing the proposed Regulation Best Execution and its impact on its business. The public comment period ends on March 31, 2023. • On December 14, 2022, the SEC proposed a rule that would require certain orders of individual investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition. On December 14, 2022, the SEC also proposed amendments that would update the disclosure required under Rule 605 of Regulation NMS for order executions in national market system stocks, which are stocks listed on a national securities exchange. The proposed amendments would expand the scope of entities subject to Rule 605, modify the information required to be reported under the rule, and change how orders are categorized for the purposes of the rule. Among other things, the proposal would expand the scope of entities that must produce monthly execution quality reports to include broker-dealers with a larger number of customers. In addition, the proposal would modify the definition of “covered order” to include certain orders submitted outside of regular trading hours and certain orders submitted with stop prices. The proposed amendments would capture more relevant execution quality information for these orders by requiring statistics to be reported from the time such orders become “executable.” The proposed amendments to how orders are categorized would require the reporting of execution quality information for fractional share orders, odd-lot orders, and larger-sized orders. Further, the proposal would require that the time of order receipt and time of order execution be measured in increments of a millisecond or finer and that realized spread be calculated at both 15 seconds and one minute. The proposal would also require new statistical measures of execution quality, such as average effective over quoted spread (a percentage-based metric that represents how much price improvement orders received) and a size improvement benchmark. Finally, the proposal would enhance the accessibility of the required reports by requiring all entities subject to the rule to make a summary report available to the public. Federated Hermes is reviewing the proposed rule and its impact on its business. The public comment periods end on March 31, 2023. • On December 7, 2022, the SEC reopened the comment period for its proposal, “Share Repurchase Disclosure Modernization,” until January 11, 2023, to give interested persons the opportunity to analyze and comment on the effect of the new excise tax on share repurchases that was signed into law in December 2022. The proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments purportedly would also enhance the existing periodic disclosure requirements about these purchases. • On November 2, 2022, the SEC adopted amendments to Form N-PX to: (1) enhance the information registered funds currently report on Form N-PX about their proxy votes; and (2) require institutional investment managers to report on Form N-PX how they voted proxies relating to certain executive compensation matters, or “say-on-pay” votes, as required by the Dodd-Frank Act. The final amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024. Federated Hermes is reviewing the final amendments and their impact on its business. • On October 26, 2022, the SEC adopted final rules requiring the recovery of erroneously-awarded compensation as required by Congress in the Dodd-Frank Act. The rules will, among other things, require national securities exchanges to establish listing standards that would require listed issuers to adopt and comply with a compensation recovery policy, often known as a clawback policy, and require listed issuers to provide disclosure about such policies and how they are being implemented. The rules and amendments will become effective on January 27, 2023. Exchanges will be required to file proposed listing standards no later than February 26, 2023, and the listing standards must be effective no later than one year following such publication. Issuers subject to such listing standards will be required to adopt a recovery policy no later than 60 days following the date on which the applicable listing standards become effective and must begin to comply with these disclosure requirements in proxy and information statements and the issuer’s annual report filed on or after the issuer adopts its recovery policy. On January 27, 2023, the SEC posted four Compliance and Disclosure Interpretations that address certain disclosure form, named executed officer identification and scope questions concerning this new rule. Federated Hermes is reviewing the final rules, and will review the final listing standards when issued, and their impact on its business. • On October 26, 2022, the SEC adopted amendments to the requirements for annual and semi-annual shareholder reports provided by mutual funds and ETFs to highlight key information for investors. The amendments require open- 14 end management investment companies to transmit concise and visually engaging annual and semi-annual reports directly to shareholders that highlight key information for investors and amend certain advertising rules for registered investment companies and business development companies. The SEC adopted the rule largely as proposed although with some changes from the proposal, most notably the SEC did not adopt proposed amendments to registration statement disclosures. The SEC adopted a “layered approach” to disclosure, whereby registered funds are required to make available summary information to retail shareholders directly, while providing more detailed information online (e.g., schedule of investments, other financial statement elements) that can be more relevant to investors and financial professionals who desire more in-depth information. These amendments fundamentally change the annual and semi-annual reporting process and reports and will require extensive efforts to comply. Federated Hermes is reviewing the final amendments and their impact on its business. • On October 26, 2022, the SEC proposed a new rule and related amendments to prohibit SEC-registered investment advisors from outsourcing certain services or functions to service providers without meeting certain minimum requirements. The proposal includes: (1) new requirements for advisors to conduct due diligence before outsourcing and to periodically monitor service providers’ performance and reassess whether to retain them; (2) related requirements for advisors to make and/or keep books and records related to the due diligence and monitoring requirements; (3) amendments to the investment advisor registration form, Form ADV, to collect census-type information about advisors’ use of service providers; and (4) a requirement for advisors to conduct due diligence and monitoring for third-party recordkeepers, along with a requirement to obtain reasonable assurances that the third-party will meet certain standards. In its December 27, 2022 comment letter, Federated Hermes generally supported the comments of the ICI and SIFMA on the proposal, particularly with respect to (1) the SEC’s failure to provide any evidence that the proposal is required or that harm is being caused to investors given that an investment advisor’s fiduciary duties and obligations sufficiently govern their use of service providers; (2) the definition of “covered function” being overly broad and too subjective; and (3) the proposal’s attempt to legislate contractual relationships with service providers that, in many cases, are outside of the regulatory remit of the SEC. The public comment period ended on December 27, 2022. • On October 13, 2022, the SEC staff issued a Frequently Asked Questions (FAQ) relating to investment advisor consideration of diversity, equity, and inclusion (DEI) factors when recommending or selecting other investment advisors for clients. The FAQ states that an advisor can consider 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. 15 In addition to the above Regulatory Developments, as noted above, the SEC staff continues to engage in a series of investigations, enforcement actions and/or examinations involving investment management industry participants, including investment advisors and investment management companies such as Federated Hermes’ investment advisory subsidiaries and the Federated Hermes Funds. The FINRA staff also continues to engage in such investigations, enforcement actions and examinations of registered broker-dealers. In October 2022, shortly after the SEC filed its first Reg BI enforcement action, FINRA filed its first disciplinary action under Reg BI, where it fined a broker $5,000 and issued a six-month suspension arising from allegations that the broker engaged in excessive trading that resulted in outsized commissions to the broker. In November 2022, FINRA announced a targeted sweep exam of crypto-related communications. According to its “2023 Report on FINRA’s Examination and Risk Monitoring Program,” FINRA’s examination priorities for 2023 include, among others: (1) manipulative trading practices; (2) fixed income fair pricing; (3) ESG terminology in communications with the public; (4) off-channel communications; (5) anti-money laundering; (6) Reg BI; (7) cybersecurity; (8) complex products and options; (9) order handling, best execution and conflicts of interest; and (10) liquidity risk management. These investigations, examinations and actions have led, and can lead, to further regulation, guidance statements and scrutiny of the investment management industry. The degree to which regulatory investigations, actions and examinations will continue, as well as their frequency and scope, can vary and is uncertain. Regulation or potential regulation by regulators other than the SEC and DOL, as well as state or federal lawmakers, also continued, and can continue, to affect investment management industry participants, including Federated Hermes. For example, various state legislatures or regulators have adopted or are beginning to adopt state-specific cybersecurity and/or privacy requirements that can apply to varying degrees to investment management industry participants, including Federated Hermes. Large index asset managers are garnering attention from the Senate Banking Committee, with certain members of the Committee asserting that these asset managers exercise outsized influence over the market (via proxy voting power) and use that influence to advance ESG and diversity, equity, and inclusion goals that are not connected to financial performance. Recent actions taken by federal and state political representatives have suggested that asset managers participating in certain ESG initiatives could violate antitrust laws. For example, on August 4, 2022, 19 Republican Attorneys General published a letter stating that, among other things, a large asset manager’s “coordinated conduct with other financial institutions” because of its membership in certain ESG initiatives, among others, raises antitrust concerns because it “appear[s] to intentionally restrain and harm the competitiveness of the energy markets.” On November 21, 2022, 15 Democratic Attorneys General published a response supporting fund managers’ consideration of ESG factors. The response letter states that the claim that asset managers that consider ESG factors could be violating antitrust and competition laws is unsupported. In November 2022, House Judiciary Committee Republicans launched an investigation aimed at assessing whether major climate groups that spearhead ESG initiatives are violating antitrust laws when they coordinate groups to achieve ESG-related policy goals, which aids anticompetitive and unlawful agreements and behavior (e.g., withdrawing investment from the oil and gas industry (or particular companies) or mandating that companies adhere to certain ESG related principles (through the proxy voting process)). While a U.S. financial transactions tax (FTT), an increase to a 28% corporate income tax, and a wealth tax on unrealized investment income on individuals with net wealth over $100 million continue to be discussed to varying degrees, as of December 31, 2022, none of these proposed tax changes have been enacted. As part of the Inflation Reduction Act of 2022, however, among other tax reforms, a 15 percent minimum tax on corporate book income for corporations with average annual adjusted financial statement income that exceeds $1 billion for any three consecutive prior tax years and a one percent tax on corporate share repurchases have been enacted. These taxes will apply beginning in 2023. The law also includes a large expansion and modernization effort for the Internal Revenue Service (IRS). On December 27, 2022, the IRS and Treasury issued Notice 2023-2, which provides guidance relating to the application of the new excise tax on repurchases of corporate stock. Among other things, the notice provides detailed rules for calculating the amount of the excise tax as well as rules relating to the reporting and payment of the tax. Under the notice, the excise tax applies broadly to stock repurchases (including repurchases of preferred stock) of corporate stock by publicly traded U.S. corporations (covered corporations), or certain of their affiliates, after December 31, 2022, and to certain “economically similar” transactions. The term “repurchase” is defined broadly and generally includes any acquisition of stock by a corporation in exchange for cash or property other than its own stock or stock rights. The notice defines certain “economically similar” transactions to include only (i) certain types of reorganization transactions, (ii) split-off transactions (as opposed to pro rata “spin-off” transactions), and (iii) certain complete liquidations. Current Regulatory Environment - International Like the U.S., the pace of regulation in the EU and UK increased in 2022 and is expected to maintain an increased pace in 2023. In the fourth quarter 2022 alone, the UK Financial Conduct Authority (FCA) issued 14 consultation papers and discussion papers, the Central Bank of Ireland (CBI) issued one consultation paper, and the European Securities and 16 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 17 enabling a lower court which is bound by retained case law to refer a point of law to a higher court (which is not so bound) 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. 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, which remains effective through December 31, 2025. 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 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. 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. 18 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 19 Hermes: (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. 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. For example: • 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. 20 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 21 Packaged Retail Investment and Insurance-Based Products Regulation (1286/2014), the Payment Account Regulations 2015 (SI 2015/2038), plans to establish a regulatory regime by 2024 that will support a consolidated tape for market data, and plans to consult in the first quarter 2023 on bringing ESG ratings providers within regulatory oversight and publish an updated Green Finance Strategy in early 2023 that includes an update on plans to make secondary legislation under the UK Taxonomy Regulations. • On December 2, 2022, the FCA published its Quarterly Consultation, which contains certain proposed changes and clarifications with respect to the Consumer Duty, including the important clarification that with respect to occupational pension schemes, the term “retail customer” will be amended to make clear that it includes any client of a firm who is or would be a beneficiary of the scheme rather than a beneficiary of the underlying investments held in the scheme. The comment period ended on January 9, 2023. • On December 1, 2022, the CBI published a Consultation Paper regarding “Own Funds Requirements for UCITS management companies and AIFMs authorized to perform discretionary portfolio management” in which the CBO proposes to introduce bespoke own funds requirements for UCITS management companies and AIFMs authorized to provide discretionary portfolio management and additional non-core services as a condition to authorization to maintain a “level playing field” because such entities are not subject to own funds requirements at the EU level related to the provision of such services. Under these proposed requirements, UCITS management companies and AIFMs authorized to provide discretionary portfolio management services and non-core services that do not meet conditions to be a “small and non-interconnected firm” (modelled on similar conditions under the IFR) will be required to apply the higher of the own funds requirement under the UCITS Regulations/AIFM Regulations, as applicable, or, a Risk to Client K-factor own fund requirement modeled on the Risk to Client K-Factor applicable to MiFID investment firms under the IFR. UCITS management companies and AIFMs authorized to provide discretionary portfolio management services will continue to be required to undertake an Internal Capital Adequacy and Assessment Program in line with a similar requirement applicable to all MiFID investment firms. Federated Hermes is reviewing this Consultation Paper and its impact on its business. The comment period ended on February 23, 2023. • On November 30, 2022, the FCA published a Consultation Paper regarding “Broadening access to financial advice for mainstream investments” in which it sets forth proposals for a new core investment advice regime that would allow firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on investment into mainstream products, specifically within stocks and share investment savings accounts (or ISAs). Federated Hermes is reviewing this Consultation Paper and its impact on its business. The comment period ends on February 28, 2023. • On November 28, 2022, the Council of the European Union gave its final approval to the Corporate Sustainability Reporting Directive (CSRD), and, on December 16, 2022, the CSRD was published in the Official Journal of the 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 22 supplement the current rules and regulations to include requirements that are more specific regarding the use of such tools; (5) asset managers have a high degree of implementation of the recommendations at the level of policies and practices; and (6) weaknesses exist regarding operationalizing contingency plans and activation of liquidity risk 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 23 topics: (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 24 necessary. 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. The last proposal was to begin discussions at the EU level regarding the design of an EU FTT involving a gradual implementation by Member States based on the FTTs already implemented in France and Italy. Member States that would want to implement an FTT more quickly would have been permitted to do so. Member States were invited to provide input on the proposed approach to the EU FTT design, whether the FTTs in France and Italy would be a solid basis for an EU FTT, and whether an EU FTT should apply to equity derivative transactions. As attention continues on a post-Pandemic economy and as the EU and EU Member States continue to look to fund their budgets and the Pandemic-related measures that have been adopted, an EU FTT on securities transactions, or even bank account transactions, remains a potential additional source of revenue. The Council of the EU has recognized that the European Commission has clarified that, if there is no agreement by the end of 2022 (which there was not), the European Commission will, based on impact assessments, propose a new resource for the EU budget based on a new FTT and that the European Commission will endeavor to make those proposals by June 2024 with the FTT’s planned introduction by January 1, 2026. The Council also has indicated that further work will be required before final policy choices are made and an agreement on a possible FTT can be reached. The exact time needed to reach a final agreement on an EU FTT, implement any agreement and enact legislation is not known at this time. The weakened economy in Europe can increase the risk that additional jurisdictions propose to implement single-country FTTs. 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. Among other efforts, in the U.S., the Adjustable Interest Rate (LIBOR) Act of 2021 was the first U.S. federal law addressing the cessation of LIBOR and is similar to New York legislation passed in 2021 that implements fallback provisions that favor the transition to the Secured Overnight Financing Rate (SOFR)-plus a spread adjustment for contracts without effective fallback provisions to provide for a smooth transition process to replace the LIBOR reference rate in legacy contracts. The final Regulations Implementing the Adjustable Interest Rate (LIBOR) Act were published in the Federal Register on January 26, 2023 and will become effective February 27, 2023. The phase-out of LIBOR has caused, and can cause, the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which investment management industry participants, including Federated Hermes and its products, customers or service providers, are parties, alter the accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among other effects, could require additional internal and external resources, and can increase operating expenses. The extent of such renegotiation or re-pricing could be mitigated by the adoption of, or advocacy for, a historical five-year median difference spread adjustment methodology by certain regulators, self-regulatory organizations, and trade groups (including, for example, the Alternate Reference Rates Committee and ISDA). Federated Hermes has closely monitored regulatory statements and industry developments regarding the obligations of registered investment advisors and funds when recommending and purchasing securities or other investments that use LIBOR as a reference rate or benchmark. Federated Hermes has focused on identifying LIBOR-linked securities or other investments, including, but not limited to: derivatives contracts; floating-rate notes; municipal securities; and tranches of securitizations, including collateralized loan obligations. With respect to LIBOR-linked securities or other investments with maturities after the applicable LIBOR tenor cessation date, Federated Hermes has sought to proactively 25 address transition-related questions with the issuers or lead arrangers of such securities and other investments, as applicable, including, for example, questions regarding transition events, benchmark replacement, and benchmark replacement adjustments. As necessary, Federated Hermes has sought to negotiate modifications to benchmark fallback language for such securities and other instruments to contemplate the permanent cessation of LIBOR. Federated Hermes will be continuing these efforts with respect to any remaining securities or other investments held by Federated Hermes’ products and strategies that continue to use a USD LIBOR tenor with a cessation date of June 30, 2023. For example, Federated Hermes sent over 550 letters to issuers or lead arrangers setting forth its expectations regarding the transition from LIBOR. Federated Hermes also negotiated fall back language that provides for the use of an alternative reference rate or benchmark in its corporate credit facility and has an interest rate based on SOFR-plus a spread in its U.S.-registered Federated Hermes Funds’ credit facility. While management believes that Federated Hermes’ LIBOR transition efforts are substantially completed, Federated Hermes continues to monitor the impact that the transition from LIBOR will have on Federated Hermes and Federated Hermes’ products and strategies, customers, and service providers. EU, UK and other global policymakers and regulators have also sought to establish a global corporate tax rate of 15 percent. It has been reported that legislation for a 15 percent minimum corporate tax is expected to be adopted in the UK 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. Federated Hermes is unable to fully assess at this time whether, or the degree to which, any continuing efforts or potential options being evaluated in connection with modified or new Regulatory Developments ultimately will be successful. The degree of impact of Regulatory Developments on Federated Hermes' Financial Condition can vary, including in a material way, and is uncertain. Management continues to monitor and assess any lingering potential impact of the Pandemic generally, particularly on the workforce, and the impact of the increasing interest rate environment on asset values and money market fund and other fund asset flows, and related asset mixes, as well as the degree to which these factors impact Federated Hermes' institutional prime and municipal (or tax-exempt) money market business and Federated Hermes' Financial Condition. Management also continues to monitor, and expend internal and external resources in connection with, the potential for additional regulatory scrutiny of money market funds, including prime and municipal (or tax-exempt) money market funds. The Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or can impact, Federated Hermes' intermediaries, other customers and service providers, their preferences, and their businesses. For example, these developments have caused, and/or can cause, certain product line-up, structure, pricing and product development changes, as well as money market, equity, fixed-income, alternative/private markets or multi-asset fund products to be less attractive to institutional and other investors, reductions in the number of Federated Hermes Funds offered by intermediaries, changes in the fees Federated Hermes, retirement plan advisors and intermediaries will be able to earn on investment products and services sold to retirement plan clients, changes in work arrangements and facility-related expenses, and reductions in 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 Developments as necessary and can implement additional changes to its business and practices as it deems necessary or appropriate. Further analysis and planning, or additional refinements to Federated Hermes' product line and business practices, can be required in response to market conditions, customer preferences or new or modified Regulatory Developments. The difficulty in, and cost of, complying with applicable Regulatory Developments increases with the number, complexity, and differing (and potentially conflicting) requirements of new or amended laws, rules, regulations, directives, and other Regulatory Developments, among other factors. In addition to the impact on Federated Hermes' 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. 26 As of December 31, 2022, given the regulatory environment, and the possibility of future additional Regulatory Developments and oversight, Federated Hermes is unable to fully assess the impact of modified or new future Regulatory Developments, and Federated Hermes' efforts related thereto, on its Financial Condition. Modified or new Regulatory Developments in the current regulatory environment, and Federated Hermes' efforts in responding to them, could have further material and adverse effects on Federated Hermes' Financial Condition. Human Capital Resource Management At December 31, 2022, Federated Hermes had 1,961 employees, with 1,181 employees in Pittsburgh, Pennsylvania, and surrounding areas, 510 employees in London, England, 60 employees in New York, New York, 26 employees in Boston, Massachusetts, 153 employees in other U.S. locations and 31 employees in other locations outside the U.S. The investment management business is highly competitive and experienced professionals have significant career mobility. Like other companies, Federated Hermes experiences employee turnover which is tracked at various levels within the company, and conducts exit interviews with departing employees. The information derived from these interviews, as well as our employee development initiatives described below and succession planning, allows Federated Hermes to cultivate leaders, manage turnover and retain talented and qualified individuals. Federated Hermes’ ability to attract, retain and properly motivate highly qualified professionals across the company is a critical factor in maintaining its competitive position within the investment management industry and positioning Federated Hermes for future success. See Item 1A - Risk Factors - General Risk Factors - Other General Risks - Recruiting and Retaining Key Personnel (Human Capital Resource Management Risk) for more information on the risks to Federated Hermes if it is unable to attract and retain talented and qualified employees. For additional information on current hybrid working arrangements, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Developments – The Pandemic. Competitive Compensation Understanding that Federated Hermes’ business success depends on its ability to attract, retain, and incentivize talented and qualified individuals, Federated Hermes’ compensation programs across the company strive to meet this goal. Federated Hermes endeavors to reward individual contributions, as demonstrated by the delivery of long-term sustainable results. Federated Hermes’ compensation programs are also designed to align the interests of its officers and employees with its business strategy, values, and objectives, including the interests of its clients, shareholders and stakeholders, while affording the business the opportunity to grow. Generally, for employees directly managed from the U.S., Federated Hermes’ compensation programs are comprised of competitive levels of cash compensation together with equity, a profit sharing/401(k) plan, and other corporate benefits/components for certain positions. Compensation is structured in the form of: salary, which is competitively evaluated annually; bonus; and, where appropriate, long-term incentives. Generally, for employees directly managed from the UK, compensation is based on fixed and variable compensation. Fixed compensation can include base salary, a retirement plan together with equity and other corporate benefits/components for certain positions, and is designed to provide competitive fixed compensation at a level that reflects market compensation. Variable compensation is discretionary based on, among other factors, an employee’s performance, and behavior, as well as team and overall company performance. Across Federated Hermes, the mix of overall salary, bonus, long-term incentives and other corporate benefits/components for certain positions varies by division, position, and employee. Across Federated Hermes, national and industry-specific compensation surveys are utilized to monitor competitive pay levels. Compensation across the company is generally administered in four employee categories: Sales, Investment Management, Administration and Executive. The employee’s category, position and performance generally drive the mix of fixed versus variable compensation, bonus structure/opportunity and long-term incentive structure/opportunity. Across the company (unless otherwise noted below): • The pay mix for Sales employees is more heavily weighted in variable compensation based on quantitative and qualitative sales metrics. Depending upon the position, U.S. Sales employees are also eligible to receive cash-based long-term incentive awards annually which generally vest after three years, and, for certain levels of Sales employees, annual bonus restricted stock awards and periodic restricted stock awards. 27 • The pay mix for Investment Management employees is more heavily weighted in variable compensation in the form of discretionary bonuses and, among other factors deemed relevant, takes into account investment product performance from one- through five-year periods. For employees managed directly from the U.S., all or a portion of any annual performance bonus can be paid in cash or a combination of cash and annual bonus restricted stock. Investment Management employees are also eligible for periodic restricted stock awards. • Administrative employees have a pay mix more heavily weighted in fixed pay and are eligible for annual discretionary cash bonuses. Management employees are eligible for periodic restricted stock awards and senior management employees are also eligible for annual bonus restricted stock awards. • The components of Federated Hermes’ executive compensation programs are designed to be competitive within the investment management industry and reward outcomes related to a variety of factors including Federated Hermes’ financial, investment, sales and customer service performance as measured against other similar companies within the investment management industry. Financial factors include, for example, Federated Hermes’ operating profits (as 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, over a ten-year period, and for non-U.S. employees, over a five-year period). The restrictions on the vested portion of an award typically lapse on specified anniversary dates of an award (e.g., for U.S. employees, the award’s fifth- and tenth-year anniversaries, and for non-U.S. employees, generally the award’s sixth, seventh and eighth anniversaries which extend beyond the five-year vesting period in an effort to continue to align the employees’ and Federated Hermes’ interests during the restriction period). Additionally, for certain groups of employees, a portion of their bonus awards are paid in the form of bonus restricted stock with a three-year ratable vesting schedule with restrictions lapsing on each vesting date. For all employees directly managed from the 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. 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. Benefits Federated Hermes’ benefit offerings across the company are designed to reflect the local market and equip Federated Hermes’ employees with resources and services to help them stay healthy, balance the demands of work and personal life, develop their careers, and meet their financial goals, as well as to further employee engagement and retention. Along with the traditional health and welfare benefits, such as medical and dental coverage, an employee assistance program, wellness program focusing on employee mindfulness, health and well-being, disability, paid time off and retirement programs, the company also offers flexible work arrangements which include hybrid work schedules, education assistance, paid parental leave, adoption benefits, paid volunteer time, employee discounts and other programs and services. Effective January 1, 2023, Federated Hermes implemented additional paid time off in its vacation and paid parental leave programs. Employee Development Federated Hermes provides a professional work environment for employees across the company that supports employees’ career aspirations and professional development interests through training programs and mentoring initiatives. Training is provided on the job and by Federated Hermes’ training staff and a network of specialist training providers, through a blend of internal/external classroom and online courses. Federated Hermes’ extensive training curriculums focus on Technical, Professional, Leadership & Management, and include, among others, courses on: the securities markets and Federated Hermes’ products; compliance/regulatory requirements; license exam preparation; sales skills; customer service skills; financial, physical and mental health well-being; remote working and hybrid management; dignity and respect in the workplace; individual and team performance; communication skills; technical (systems) topics; and general professional 28 development. The attraction, training, and retention of qualified employees across the company supports Federated Hermes’ succession planning at all levels. Diversity and Inclusion As of December 31, 2022, across the company, approximately 40% of Federated Hermes’ employees are women. Federated Hermes’ Board has approximately 17% women, and approximately 13% of Federated Hermes’ executives are women. In the U.S., approximately 7% of Federated Hermes’ employees are minorities, 31% of business managers are women and/or minorities, and 27% of investment professionals are women and/or minorities. As of December 31, 2022, approximately 90% of AUM managed from the U.S. are in products that have at least one portfolio manager that is a woman and/or a minority. Federated Hermes recognizes that a diverse and inclusive workplace benefits employees and supports stronger long-term business performance. Federated Hermes developed its diversity and inclusion strategy with the mission of fostering a diverse, inclusive, and respectful workplace where employees across the company are encouraged to be innovative and creative and where unique perspectives and experiences are recognized and appreciated for the contributions they bring to the company. Federated Hermes has made a long-term commitment to enhancing the diversity of the company’s workforce and providing an inclusive environment. The company’s diversity and inclusion strategy is centered around four pillars: driving diversity; creating inclusion; expanding outreach; and ensuring program sustainability by evaluating results and implementing enhancements. Federated Hermes cultivates the benefits of workplace diversity throughout the company through its recruitment process, onboarding of new employees, and employees’ ongoing education and training. In the U.S., the company implemented several programs and initiatives to advance diversity and inclusion, which include (in addition to other previously established programs and initiatives): launching a New Employee Buddy Program; expanding the list of diversity-focused job advertisements, diverse colleges and affinity groups with whom we share our entry level job postings; expanding the firm’s internship program with a local high school for underrepresented students; partnering with a Pittsburgh-based college-prep school whose mission is to break the cycle of generational poverty to offer educational sessions and job shadow opportunities; and expanding its partnership with a New York City based organization whose vision is to empower students to overcome many of the structural barriers that typically limit upward social-economic mobility by providing specialized training, paid internships or one-on-one mentorships. In London, a number of diversity and inclusion initiatives have been launched, including (in addition to other previously established programs and initiatives): inclusive leadership training for management; Employee Resource Groups with several Employee Networks; and cultural events such as National Inclusion Week, Mental Health Awareness Week, Pride Week and Black History Month. The company’s diversity and inclusion initiatives are sponsored and endorsed by the Board and executive management. The Compensation Committee of the Board receives periodic updates and reports on the company’s diversity and inclusion strategy and its compensation practices, including an annual pay equity analysis. In collaboration with management and employees at all levels, these initiatives are advanced by various teams and employee resource business groups across the company, including Human Resources and, in the U.S., a dedicated Diversity Officer/Senior Talent Acquisition Manager and, in London, a dedicated Head of Inclusion. Federated Hermes is committed to providing equal employment opportunities across the company to qualified individuals without regard to: race; color; national origin; religion; sex; pregnancy; sexual orientation; gender identity or expression; mental or physical disability; age; familial or marital status; ancestry; military status; veteran status; or genetic information; as well as any other prohibited criteria under law applicable to Federated Hermes. Federated Hermes encourages its employees across the company to raise human resource questions or concerns with their managers or the Human Resources Department in the U.S. or London. Separately, the company also provides a phone line and website portal through a third-party service provider for employees to report, anonymously should they so choose, various compliance matters. 29 Information about our Executive Officers The following section sets forth certain information regarding the executive officers of Federated Hermes as of February 24, 2023: Name Position Age J. Christopher Donahue President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc. 73 Gordon J. Ceresino Vice Chairman of Federated Hermes, Inc., Chairman, Director and President of Federated International Securities Corp. and Vice Chairman of Federated MDTA, LLC 65 Thomas R. Donahue Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc. and President of FII Holdings, Inc. 64 Dolores D. Dudiak Vice President, Director of Human Resources of Federated Hermes, Inc. 64 John B. Fisher Vice President and Director of Federated Hermes, Inc. and President and Chief Executive Officer of Federated Advisory Companies* 66 Peter J. Germain Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes, Inc. 63 Richard A. Novak Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes, Inc. 59 Saker A. Nusseibeh Chief Executive Officer, Federated Hermes Limited 61 Paul A. Uhlman Vice President of Federated Hermes, Inc. and President of Federated Securities Corp. 56 Stephen P. Van Meter Vice President and Chief Compliance Officer of Federated Hermes, Inc. 47 * Federated Advisory Companies include the following: Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company and Federated MDTA LLC, each wholly owned by Federated Hermes. Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer (CEO) of Federated Hermes since 1998 and was elected as Chairman effective April 2016. He also serves as a director, trustee or officer of various Federated Hermes subsidiaries. He is President of 30 investment companies managed by subsidiaries of Federated Hermes. He is also director or trustee of 33 investment companies managed by subsidiaries of Federated Hermes. Mr. Donahue is the brother of Thomas R. Donahue who serves as Vice President, Treasurer, Chief Financial Officer and director of Federated Hermes. Mr. Gordon J. Ceresino has served as Vice Chairman of Federated Hermes since 2007. He is President of Federated International Management Limited and Federated International Securities Corp. and Vice Chairman of Federated MDTA LLC, each of which are wholly-owned subsidiaries of Federated Hermes. Mr. Ceresino also serves as a director, trustee, President or CEO of certain other wholly-owned subsidiaries of Federated Hermes involved in Federated Hermes’ non-U.S. operations. Mr. Thomas R. Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated Hermes since 1998. He previously served as a member of the Board from May 1998 to April 2004 and was re-elected to the Board in April 2016. He also serves as an Assistant Secretary of Federated Hermes and is a director and President of FII Holdings, Inc., a wholly-owned subsidiary of Federated Hermes. He serves as a director of Federated Hermes Limited (FHL, formerly Hermes Fund Managers Limited) . He also serves as a director, trustee or officer of various other Federated Hermes subsidiaries. He is also a director or trustee of seven investment companies managed by subsidiaries of Federated Hermes. Mr. Donahue is the brother of J. Christopher Donahue who serves as President, CEO, Chairman and director of Federated Hermes. Ms. Dolores D. Dudiak has served as Vice President of Federated Hermes since February 2021. She has served as Director, Human Resources since November 1997. She also has served as an officer of various Federated Hermes subsidiaries since 1994, holding the title Senior Vice President since July 2002. In these capacities, she is responsible for the Human Resources Department at Federated Hermes, including Total Compensation Management, Employment Services/Employee Relations, Organization Development, and Human Resources Information Management. 30 Mr. John B. Fisher has served as Vice President of Federated Hermes since 1998. He previously served as a member of the Board from May 1998 to April 2004 and was re-elected to the Board in April 2016. He has also been President and CEO of Federated Advisory Companies since 2006 and serves as a board member for each of these wholly-owned subsidiaries of Federated Hermes. He also serves as a director, trustee or officer of certain other Federated Hermes subsidiaries. He is President of three investment companies managed by subsidiaries of Federated Hermes. He is also director or trustee of 26 investment companies managed by subsidiaries of Federated Hermes. Prior to 2006, Mr. Fisher served as President of the Institutional Sales Division of Federated Securities Corp., a wholly-owned subsidiary of Federated Hermes. Mr. Peter J. Germain has served as Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes since October 2017, as General Counsel from January 2005 through June 2021 and Vice President of Federated Hermes since January 2005. In his capacity as Chief Legal Officer, he oversees the delivery of legal, compliance, internal audit and risk management services to Federated Hermes and its affiliates. He also serves as a director, trustee or officer of various Federated Hermes subsidiaries. Mr. Germain also serves as Chief Legal Officer, Executive Vice President and Secretary of 33 investment companies managed by subsidiaries of Federated Hermes. Mr. Richard A. Novak has served as Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes since April 2013. Prior to that time, he served as Fund Treasurer of Federated Hermes’ U.S.-based mutual funds beginning in 2006 and served as the Controller of Federated Hermes from 1997 through 2005. He also serves as director or officer for various subsidiaries of Federated Hermes. Mr. Novak is a Certified Public Accountant. Mr. Saker A. Nusseibeh is a director and CEO of FHL, a wholly -owned subsidiary of Federated Hermes. He joined FHL in 2009 and was appointed CEO in November 2011, having previously served as Chief Investment Officer from 2009 through November 2011. He formerly served as Global Head of Equities at Fortis Investments USA, having initially been appointed as Head of Global Equities in 2005. He also serves as a director of F HL and as a director or officer of certain of its subsidiaries. Mr. Paul A. Uhlman has served as Vice President of Federated Hermes, and President and a director of Federated Securities Corp., a wholly-owned subsidiary of Federated Hermes, since June 2016. He is also a director, trustee or officer of certain subsidiaries of Federated Hermes. As President of Federated Securities Corp., he is responsible for the marketing and sales efforts of Federated Hermes. He had previously served as a Vice President of Federated Securities Corp. from 1995 through 2010, and served as Executive Vice President of Federated Securities Corp. from 2010 through June 2016. Mr. Uhlman also held the position of National Sales Director, Institutional Sales, from 2007 through June 2016. Mr. Stephen P. Van Meter has served as Vice President and Chief Compliance Officer of Federated Hermes since July 2015. Between October 2011 and July 2015, he served as Compliance Operating Officer at Federated Hermes. Between October 2007 and October 2011, he served as Senior Counsel in the Division of Investment Management, Office of Chief Counsel, at the SEC. Between September 2003 and October 2007, Mr. Van Meter served as Senior Counsel in the SEC’s DOE. Available Information Federated Hermes makes available, free of charge, on its website, www.FederatedHermes.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, annual information statements and amendments to those reports, including those filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act, as soon as reasonably practicable after such information is electronically filed with or furnished to the SEC. Other Information All references to the Notes to the Consolidated Financial Statements in this Form 10-K refer to those in Item 8 - Financial Statements and Supplementary Data (Consolidated Financial Statements). All other information required by this Item is contained in Note (4) to the Consolidated Financial Statements. All cross-references between Items in this 10-K are considered to be incorporated into the Item containing the cross-reference. 31