What changed in this filing

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Item 1. Business

2024-02-23 compared with 2023-02-24 · 440 added, 631 removed, 296 unchanged (78% of the section changed)

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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 also provides stewardship services to customers seeking a range of solutions for engagement, advocacy, active ownership and impact, as well as real estate development services.

In seeking to enhance long-term investment performance for its customers and clients (collectively, including intermediaries, customers), Federated Hermes has taken steps to integrate the proprietary insights from fundamental investment analysis, including environmental, social and governance (ESG) factors and engagement interactions, into many of the products and strategies it manages.

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.

Federated Hermes sponsors, markets and provides investment-related services and strategies (collectively, as applicable, strategies) 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 customers.

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.

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Federated Hermes provides investment advisory services to 180 Federated Hermes Funds as of December 31, 2023.

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.

Federated Hermes markets these funds to institutions, banks, broker/dealers, financial intermediaries, and other customers who use them to meet the needs of their 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.

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Of the 180 Federated Hermes Funds, Federated Hermes’ investment advisory subsidiaries managed 24 money market funds with $406.2 billion in AUM, 41 equity funds with $42.5 billion in AUM, 56 fixed-income funds with $43.9 billion in AUM, 54 alternative/private markets funds with $12.4 billion in AUM and five multi-asset funds with $2.7 billion in AUM.

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

As of December 31, 2023, Federated Hermes provided investment strategies to $249.9 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.

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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.

Federated Hermes also manages retail money market products that are typically distributed through broker/dealers and other financial intermediary customers.

At December 31, 2023, Federated Hermes managed money market assets across a wide range of categories:

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and municipal (or tax-exempt) ($12.7 billion).

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

Federated Hermes’ equity managed assets totaled $79.3 billion at December 31, 2023 and are managed across a wide range of categories including:

value and income ($31.9 billion);

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and blended ($5.1 billion).

Federated Hermes’ fixed-income assets totaled $86.7 billion at December 31, 2022 and are managed across a wide range of categories including:

Federated Hermes’ fixed-income managed assets totaled $94.9 billion at December 31, 2023 and are managed across a wide range of categories including:

multisector ($61.8 billion);

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and mortgage-backed ($0.4 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:

Federated Hermes’ alternative/private markets and multi-asset managed assets totaled $23.4 billion at December 31, 2023 and are managed across a wide range of categories including:

real estate ($8.9 billion);

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infrastructure ($3.0 billion);

bear market ($0.6 billion);

and market neutral ($0.2 billion).

multi-asset ($2.9 billion);

market neutral ($0.3 billion);

and bear market ($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:

Federated Hermes’ proprietary, independent investment research process is centered on the integration of several qualitative and quantitative disciplines including:

fundamental research and credit analysis;

ESG integrated investment strategies;

integration of proprietary insights from fundamental investment analysis, including ESG factors and engagement interactions, (for many of Federated Hermes' products and strategies);

quantitative research models;

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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’ distribution strategy is to provide investment management products and strategies to more than 10,000 institutions, financial intermediaries and other customers, 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.

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and international (9%).

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).

Financial Intermediary Federated Hermes offers and distributes its products and strategies in this market through a large, diversified group of over 6,300 national, regional and independent financial intermediary customers, including broker/dealers, banks and registered investment advisors.

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

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

As of December 31, 2023, managed assets in the U.S.

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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.

As of December 31, 2023, managed assets in the international market included $24.5 billion in equity assets, $19.9 billion in money market assets, $19.4 billion in alternative/private markets assets and $4.9 billion in fixed-income assets.

As of December 31, 2023, Federated Hermes had $507.7 billion of Federated Hermes Fund AUM and $249.9 billion of Separate Account AUM.

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

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

Federated Hermes launched its first ETFs - two fixed-income, fully transparent ETFs in December 2021, a dividend income equity ETF in November 2022 and a third fixed-income ETF in January 2024.

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.

With Federated Hermes’ global operations, Federated Hermes, and certain of its subsidiaries and products (such as the Federated Hermes Funds), are registered with or licensed by, and subject to examination by, various U.S.

and/or non-U.S.

regulators, self-regulatory agencies or exchanges, such as, among others, the U.S.

Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), Commodity Futures Trading Commission (CFTC), Department of Labor (DOL), New York Stock Exchange (NYSE), the UK Financial Conduct Authority (FCA), the Central Bank of Ireland (CBI), the Cayman Island Monetary Authority (CIMA), and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF).

Federated Hermes’ business, and products, strategies, and other services (collectively, as applicable, offerings), also are subject to various U.S.

and/or non-U.S.

laws, regulations, rules, codes, notices, directives, guidelines, listing standards, judicial decisions, orders, circulars and/or conditions (collectively, as applicable, regulatory requirements), such as the Securities Act of 1933 (1933 Act), the Securities Act of 1934 (1934 Act), the 1940 Act, the Advisers Act, the Dodd-Frank Wall Street Reform

and Consumer Protection Act of 2010 (Dodd-Frank Act), and the Sarbanes-Oxley Act of 2002 (SOX), and related regulations;

the NYSE Listed Company Manual;

corporate laws regarding governance, reporting, disclosure and other requirements;

and state or foreign laws regarding securities fraud, securities registrations, reporting, and escheatment of unclaimed or abandoned property.

Federated Hermes, and its business and offerings, are also subject to various other privacy, anti-money laundering, anti-terrorist financing, economic, trade and sanction regulatory requirements, both domestically and internationally, as well as to various cross-border regulatory requirements, such as the anti-bribery and anti-corruption rules under the Foreign Corrupt Practices Act of 1977 (FCPA) and the data protection rules under the General Data Protection Regulation (GDPR) of the European Union (EU).

Federated Hermes, and its business and offerings, are also subject to sanctions programs administered by the Office of Foreign Assets Control of the U.S.

Department of Treasury (USDT), as well as sanctions programs adopted and administered by non-U.S.

jurisdictions where Federated Hermes’ products and strategies are offered.

Certain regulatory requirements, both in the U.S.

and outside the U.S., are extra-territorial.

Federated Hermes also must comply with complex and changing tax regimes in the jurisdictions where it operates.

Federated Hermes also monitors, reviews and assesses proposed new or revised regulatory requirements that are proposed from time to time (collectively, as applicable, regulatory developments).

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

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 legislative and regulatory environment in the U.S.

is dynamic and subject to continual change.

Federated Hermes’ primary regulator in the U.S.

Despite the SEC receiving criticism and an adverse judicial ruling relating to its expedited pace of new proposed regulatory developments and final regulatory requirements, the SEC (among other regulatory authorities, self-regulatory authorities, or exchanges) has continued to advance robust rulemaking initiatives.

Since the beginning of the fourth quarter 2023, the SEC issued proposed rules on, among other topics:

(1) standards for covered clearing agencies for U.S.

treasury securities;

(2) short position and short activity reporting by institutional investment managers;

(3) reporting on securities loans;

and (4) modernization of beneficial ownership reporting.

The SEC’s Fall 2023 Unified Agenda of Regulatory and Declaratory Actions (SEC Fall Reg Flex Agenda) identified 43 other rulemaking initiatives, including eight proposed rules and 26 final rules to be issued by April 2024 and an additional six proposed rules and three final rules to be issued by October 2024.

The SEC Fall Reg Flex Agenda indicates that proposed rules are scheduled to be issued on, among other topics, corporate board diversity, human resource management disclosure, fund fee disclosure and reform, and exchange-traded products, and that final rules are scheduled to be issued on, among other topics, climate change disclosure, safeguarding advisory client assets (i.e., the custody rule), enhanced disclosures about ESG investment practices, open-end liquidity risk management and swing pricing, cybersecurity risk management for investment advisors, registered investment companies and business development companies, Form PF reporting requirements, and outsourcing by investment advisors.

The SEC and other regulators also continued in 2023, and are expected to continue in 2024, to conduct risk-based, for cause, and sweep examinations, bring enforcement actions, and review and comment on issuer and fund filings.

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

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

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

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

(2) investment advisors to private funds;

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

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

and (5) emerging technologies and crypto-assets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For example, according to the SEC, the SEC filed 784 total enforcement actions in 2023, a three percent increase over 2022.

The SEC has announced that its 2024 examination priorities include focusing on areas that pose emerging risks to investors or the markets in addition to core and perennial risk areas, including, among other topics:

(1) Regulation Best Interest;

(2) conflict of interest disclosures;

(3) conflict mitigation practices;

(4) complex, high cost, illiquid or microcap products, including derivatives, exchange-traded funds, variable annuities, real estate investment trusts, and private placements, and related investment advice, recommendations and disclosures;

(5) Form CRS;

(6) the SEC’s marketing rule;

(7) crypto assets;

and (8) emerging financial technologies, such as artificial intelligence, and their usage.

The SEC has emphasized that its published examination priorities are not an exhaustive list, and are in addition to its normal examinations, risk alerts, and other outreach to registrants and investors.

Key recent regulatory requirements and regulatory developments in the U.S.

that significantly impact or relate to Federated Hermes’ business and offerings include, among others, the following.

Please see our prior annual and periodic SEC filings for additional information regarding additional regulatory requirements and regulatory developments that can impact Federated Hermes’ business and offerings, including certain of those discussed below.

Money Market Reform.

In July 2023, the SEC adopted additional rule and form amendments imposing certain reforms on money market funds.

The final rule amendments purport to improve the resiliency and transparency of money market funds by:

(1) de-linking and removing the regulatory tie between the imposition of redemption gates and liquidity fees and the 30% threshold for a money market fund’s weekly liquid assets;

(2) removing provisions from Rule 2a-7 under the 1940 Act that permit a money market fund to temporarily suspend redemptions;

(3) increasing minimum portfolio liquidity requirements from

10% to 25% for daily liquid assets and from 30% to 50% for weekly liquid assets to provide a more substantial buffer in the event of rapid redemptions from money market funds;

(4) requiring institutional prime and institutional tax-exempt money market funds to impose mandatory liquidity fees when such a fund experiences daily net redemptions that exceed 5% of its net assets, unless the fund’s liquidity costs are de minimis;

(5) requiring non-government money market funds to impose a discretionary liquidity fee if the fund’s board (or its delegate) determines that a fee is in the best interest of the fund;

(6) allowing retail and government money market funds to handle a negative interest rate environment either by converting from a stable NAV or share price to a floating NAV or share price or by using a reverse distribution mechanism or share cancellation to reduce the number of shares outstanding to maintain a stable NAV per share, subject to certain board determinations and disclosures to shareholders;

and (7) enhancing certain reporting requirements that are intended to improve the SEC’s ability to monitor and assess money market fund data.

The amendments adopted in the final rule became effective on October 2, 2023.

The compliance date for the discretionary liquidity fee, increased minimum liquidity requirements, changes to the stress testing requirements and amendments specifying the method for calculating weighted average maturity and weighted average life, is April 2, 2024.

The reporting amendments will become effective June 11, 2024.

Money market funds have until October 2, 2024, to comply with the mandatory liquidity fee requirement.

Federated Hermes believes money market funds provide, and will continue to provide, a more attractive investment opportunity compared to other competing products, such as insured and uninsured deposit account alternatives.

Federated Hermes also believes that money market funds are investment products that have proven their resiliency.

Federated Hermes believes, however, that the mandatory liquidity fee required by the rule amendments could precipitate runs on money market funds during periods of high redemptions and have an effect similar to the effect swing pricing would likely have had on money market funds.

The SEC’s action of adopting a mandatory liquidity fee requirement, without specifically proposing it in its money market fund reform proposing release and seeking public comment on it, may be challenged in court due to its unworkability and lack of supporting data.

As of February 23, 2024, Federated Hermes anticipates minimal impact to retail and government money market funds, while institutional prime money market funds and institutional municipal (or tax-exempt) money market funds will be subject to some new or adjusted requirements.

Federated Hermes continues to review and assess the rule amendments, plan for changes to its money market fund business required by the rule amendments and assess the impact of compliance with the rule amendments by the requisite compliance date (including increased costs of compliance) on Federated Hermes’ business, prospects, reputation, results of operations, financial condition, cash flows and/or stock price (collectively, as applicable, Financial Condition).

Also, while Federated Hermes agrees with certain of the money market fund rule amendments adopted by the SEC (such as de-linking the imposition of redemption gates and liquidity fees and the weekly liquid asset threshold) Federated Hermes also supports efforts to permit the use of amortized cost valuation by money market funds, and to override the floating NAV and certain other requirements imposed under prior money market fund rule amendments and related guidance that became effective in 2016 for institutional and municipal (or tax-exempt) money market funds.

In a continuing effort to implement these desired changes, proposed legislation has been re-introduced in the U.S.

House of Representatives, and work continues to re-introduce proposed legislation in the U.S.

Voluntary Swing Pricing and Liquidity.

In November 2022, the SEC proposed to amend Rule 22c-1 (the voluntary swing pricing rule) and Rule 22e-4 (the liquidity rule) under the 1940 Act, as well as certain disclosure forms under the 1940 Act for open-end management investment companies, other than money market funds and ETFs.

The amendments include, among others:

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

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

the applicable day’s price;

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

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

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

(5) mandating such funds to determine and maintain a highly liquid investment minimum 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:

Similar to mutual fund industry trade organizations (such as the ICI and Securities Industry and Financial Markets Association), Federated Hermes strongly opposes 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 believes 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 board’s discretion in the exercise of its fiduciary duty to a fund and its shareholders.

mutual funds.

Federated Hermes also 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.

Federated Hermes continues to monitor these proposed rule amendments.

ESG and Sustainability.

The SEC, the Financial Stability Oversight Council (FSOC) and other federal regulators continue to focus on climate and ESG-related disclosures by corporate issuers, registered investment advisors and registered investment companies.

For example, in July 2023, the FSOC’s Climate-related Financial Risk Committee (CFRC) issued a staff progress report on actions underway to support capacity building and disclosure among FSOC member agencies, address data gaps, and assess climate-related financial risks.

Among other actions, the progress report indicates that the CFRC is developing a framework to identify and assess climate-related financial risk, as well as a set of risk indicators for banking, insurance, and financial markets.

In March 2022, the SEC issued a proposed rule that incorporates certain concepts and vocabulary relating to global greenhouse gas measurement from governmental and non-governmental disclosure standard setters (such as the Task Force on Climate-related Financial Disclosures and the Greenhouse Gas Protocol) as part of a proposed disclosure regime that w ould mandate, among other things, certain climate risk disclosur es 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, as well as Scope 1, Scope 2, and, for certain issuers, Scope 3 emissions data.

Similar to the ICI, Federated Hermes believes 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;

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

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

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

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

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

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

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

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

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

Federated Hermes also continues to believe that any SEC rule on climate disclosure should:

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

2 unchanged sentences

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

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

The New DOL ESG/Proxy Voting Rule:

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

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

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

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

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

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

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

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

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

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

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

Federated Hermes is monitoring this lawsuit.

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

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

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

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

Federated Hermes also proposed:

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

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

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

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

investment management industry participants, including Federated Hermes.

• On February 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 DOL issued final rules in November 2022 clarifying that under the Employee Retirement Income Security Act of 1974, as amended (ERISA), plan fiduciaries can, but are not required to, consider the economic effects of ESG factors for purposes of investing ERISA plan assets and exercising voting rights with respect to plan investments.

Specifically, among other things, the DOL’s final rules clarified that a fiduciary's duty of prudence must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action, including exercising shareholder rights when (among other things) voting on shareholder resolutions and board nominations.

The DOL’s final rules became effective on January 30, 2023, except that the proxy voting provisions apply from and after December 1, 2023.

States also continue to debate the legality of certain types of ESG investing under unfair and deceptive practices laws, antitrust laws, securities laws and other grounds.

There is an ideological battle unfolding at the state level, pitting Republican, conservative-leaning “Red” state governments that would seek to exclude or limit ESG investing against Democratic, liberal-leaning or “Blue” state governments that support ESG-focused investing.

For example, certain U.S.

states and/or state officials have adopted regulatory requirements or proposed legislation or other regulatory developments, or have taken official positions, restricting or prohibiting (or proposing to restrict or prohibit) state government entities from doing certain business with entities (such as investment advisors) identified by the state as “boycotting” or “discriminating” against particular industries or from considering (or engaging entities, such as an investment advisor, that consider) certain (e.g., non-material) ESG factors in their investment processes and proxy voting.

Other states have enacted pro-ESG and/or disclosure-related ESG regulations .

For example, in October 2023, California enacted new climate accountability legislation that will require large businesses doing business in California that were formed in the United States and that have revenues of more than $1 billion to make annual disclosures of certain greenhouse gas emission information (including Scope 3 disclosures) and biennial disclosure of certain climate-related financial risks and mitigation measures, beginning in 2026 (unless such California regulatory requirements are successfully challenged in court).

Federated Hermes observes that much of the tension surrounding ESG is due to the lack of definition of the broad terminology “ESG investing” and the political opportunity to define prohibited or permissible activities.

Federated Hermes believes that it is appropriate within the context of an investment advisor’s fiduciary duty to customers and shareholders to integrate the proprietary insights from fundamental investment analysis, including ESG factors and engagement interactions within other traditional investment analysis of risk/returns for purposes of assessing risks and opportunities within the investment objective and the time horizon of an investment strategy in an effort to obtain long-term risk-adjusted returns for customers and shareholders.

1940 Act Names Rule.

In September 2023, the SEC adopted amendments to Rule 35d-1 under the 1940 Act (Names Rule).

The Names Rule generally requires a fund to invest at least 80% of the value of its assets in the particular type of investments or industry suggested by the fund's name.

The amendments:

(1) broaden the scope of funds that must comply with the current requirement to adopt a policy to invest at least 80% of their assets in accordance with the investment focus the fund’s name

(2) provide enhanced disclosure and reporting requirements related to terms used in fund names;

and (3) establish certain additional recordkeeping requirements.

Specifically, the amendments, among other things:

(1) apply the Names Rule’s 80% investment policy requirement to any fund name with terms suggesting that the fund focuses in investments that have, or investments whose issuers have, particular characteristics, such as “growth” or “value” or certain terms that reference a thematic investment focus, including terms indicating that the fund’s investment decisions incorporate one or more ESG factors;

(2) update funds’ prospectus disclosure requirements to require a fund with an 80% investment policy to define the terms used in its name, including the criteria the fund uses to select the investments that the term describes;

(3) amend Form N-PORT to purportedly enhance transparency regarding how funds’ investments reflect their investment focus as required under the amended Names Rule;

(4) include new recordkeeping provisions related to a fund’s compliance with the Names Rule’s requirements;

(5) retain the Names Rule’s current requirements for a fund to invest in accordance with its 80% investment policy “under normal circumstances,” and for the 80% investment requirement to apply at the time a fund invests its assets, but also add a new requirement that a fund review its portfolio assets’ treatment under its 80% investment policy at least quarterly and specific time frames—generally 90 days—for getting back into compliance if a fund departs from its 80% investment policy;

(6) generally require a registered closed-end fund or business development company whose shares are not listed on a national securities exchange to obtain shareholder approval before changing its 80% investment policy unless the fund conducts a tender or repurchase offer in advance of the change, subject to certain conditions;

and (7) retain the current Names Rule’s requirement that, unless the 80% investment policy is a fundamental policy of the fund, 60 days’ notice must be provided to fund shareholders of any change in the fund’s 80% investment policy, and update the notice requirement to expressly address electronic delivery of the notice and the content of the notice.

Federated Hermes is assessing the impact of the Names Rule amendments on the Federated Hermes Funds registered under the 1940 Act.

The amendments to the Names Rule became effective on December 11, 2023, and such Federated Hermes Funds will be required to comply with the amended Names Rule beginning on December 11, 2025.

Custody Rule.

In August 2023, the SEC reopened the comment period for its proposal to amend and redesignate Rule 206(4)-2 under the Advisers Act (Custody Rule).

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

1 unchanged sentence

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

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

information requests;

(3) require investment advisors to (a) enter into written agreements with each qualified custodian that maintains possession or control of client assets that contain terms prescribing the custodian’s standard of care, requiring indemnification from the custodian, prohibiting certain limitations on liability, imposing asset segregation requirements, and prohibiting rehypothecation, and (b) obtain reasonable assurances in writing that the custodian will take certain actions, including responding to SEC information requests;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The public comment period ends on March 27, 2023.

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

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

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

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

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

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

The public comment period ends on March 10, 2023.

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

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

The amendments:

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

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

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

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

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

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

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

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

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

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

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

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

for customer orders.

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

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

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

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

The public comment period ends on March 31, 2023.

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

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

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

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

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

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

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

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

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

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

The public comment periods end on March 31, 2023.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The amendments require open-

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

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

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

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

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

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

The proposal includes:

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

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

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

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

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

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

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

The public comment period ended on December 27, 2022.

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

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

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

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

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

The final amendments became effective on January 1, 2023.

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

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

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

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

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

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

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

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

Treasury securities;

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

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

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

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

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

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

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

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

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

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

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

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

(1) manipulative trading practices;

(2) fixed income fair pricing;

(3) ESG terminology in communications with the public;

(4) off-channel communications;

(5) anti-money laundering;

(7) cybersecurity;

(8) complex products and options;

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

and (10) liquidity risk management.

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

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

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

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

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

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

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

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

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

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

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

These taxes will apply beginning in 2023.

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

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

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

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

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

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

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

Federated Hermes believes that the SEC would exceed its authority by imposing such terms into private contractual arrangements, as there is no separate statutory authority granted to the SEC under the Advisers Act that provides for such authority.

Federated Hermes is also concerned that investment managers have no efficacious means to implement these requirements.

Custodians are not obligated to agree to such terms, and many may choose not to accept them, potentially leading to greater concentration in the market for custodial services.

New DOL Fiduciary Rule.

In October 2023, the DOL issued its new proposed “Fiduciary Rule” in which it introduces changes to the definition of “investment advice” fiduciary under ERISA, as well as amendments to several prohibited transaction class exemptions (DOL New Fiduciary Rule).

The proposed changes, among other things, broaden the circumstances in which ERISA fiduciary status will apply to investment advisors, broker dealers and other entities with direct or indirect discretionary authority or control, that represent or acknowledge acting as a fiduciary, or that make investment recommendations to investors on a regular basis as part of their business, including recommendations relating to ERISA plan rollover transactions, any other securities transaction, or any investment strategy involving securities or other investment property.

Under the proposal, a “recommendation” is broadly defined to include, among other things, making recommendations as to the advisability of acquiring, holding, disposing, or exchanging securities or other investment property, as to the management of securities or other investment property, or as to rolling over, transferring, or distributing assets from an ERISA plan or individual retirement account.

The proposal also would eliminate several prohibited transaction exemptions (PTE), including, among others, PTE 77-4 (Purchase of Shares of Open-End Investment Companies), and require all investment advice fiduciaries to comply with the “best interest” standard of care and disclosure requirements under PTE 2020-02 in order to receive compensation that would otherwise be prohibited under ERISA in the absence of an exemption, including commissions, 12b-1 fees, revenue sharing, and mark-ups and mark-downs in certain principal transactions.

If finalized as proposed, the DOL New Fiduciary Rule will impact Federated Hermes’ business and the businesses of Federated Hermes’ customers that utilize Federated Hermes’ offerings.

Systematically Important Financial Institution (SIFI) Designation.

The purpose of the FSOC is to provide comprehensive monitoring of the stability of the U.S.

financial system by identifying risks to U.S.

financial stability, promoting market discipline, and responding to emerging threats to U.S.

financial system stability.

The FSOC may designate certain non-bank financial companies (potentially including, for example, money market funds and other investment companies) as SIFIs, which are subject to supervision and regulation by the Board of Governors (Governors) of the Federated Reserve System (Fed).

In July 2023, the FSOC proposed a new analytic framework for financial stability risk identification, assessment, and response, and proposed guidance on nonbank financial company designations as SIFIs.

The proposed new framework is purportedly intended to provide greater transparency to the public about how the FSOC identifies, assesses, and addresses potential risks to financial stability, regardless of whether the risk stems from activities, individual firms or otherwise.

The proposed interpretative guidance on the FSOC’s procedures for designating nonbank financial companies as SIFIs for Fed supervision and enhanced prudential standards (such as capital and liquidity requirements) pursuant to Section 113 of the Dodd-Frank Act would replace the FSOC’s existing guidance issued in 2019 and describes the procedural steps the FSOC would take in considering whether to designate a nonbank financial company as a SIFI.

Importantly, under the FSOC’s proposals, the FSOC would no longer look to federal and state regulators to address risks to financial stability before the FSOC would begin to consider a nonbank financial company for potential designation as a SIFI.

The FSOC’s proposal would separate into two documents the FSOC’s procedures and substantive analysis for considering a nonbank financial company for potential designation.

The FSOC’s proposals would eliminate language added in the FSOC’s 2019 guidance that would have required the FSOC to conduct a cost-benefit analysis and an assessment of the likelihood of a nonbank financial company’s material financial distress prior to deciding whether the firm should be subject to Fed supervision.

The FSOC also would not necessarily need to consider the financial impact of a designation on the entity being designated as a SIFI or the broader market in which the company participates.

Federated Hermes disagrees with FSOC’s authority to dispense with the requirement to conduct a cost-benefit analysis and to no longer defer in any way to the primary regulator of an entity that is subject to designation as a SIFI.

Federated Hermes believes that:

(1) money market funds and other mutual funds are not less regulated and are far more transparent than banks;

(2) money market funds are not interconnected with the financial system in a way that transmits risk and do not pose a threat to the financial stability of the U.S.;

(3) money market funds and other mutual funds did not cause or amplify the 2008 financial crisis, the 2020 shutdown crisis resulting from the outbreak of a novel coronavirus (Pandemic) or the spring 2023 bank panic;

(4) money market funds, other mutual funds and other types of SEC-regulated investment funds, are not “shadow banks;” and (5) money market funds and other mutual funds are not nonbank financial institutions as defined in the Bank Holding Company Act and should not be subject to designation as SIFIs.

Federated Hermes is concerned that FSOC’s proposal could decimate the money market fund industry if money market funds were to be designated as SIFIs and subjected to Fed supervision and enhanced prudential standards under Section 113 of the Dodd-Frank Act.

If Federated Hermes or a Federated Hermes Fund were designated as a SIFI, among other things, they would become subject to enhanced regulatory requirements and direct supervision by the Fed, which could result in increased operating and compliance costs and potentially restrict business activities.

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

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

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

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

the future disclosure framework in the UK;

sustainability disclosure requirements and investment labels in the UK;

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

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

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

call for evidence on greenwashing;

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

achieving greater convergence on cyber incident reporting;

supervisory and regulatory approaches to climate-related risks;

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

and a thematic review on liquidity risk management recommendations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Among other things, the FSM Bill is intended to:

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

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.

Similar to the U.S., the legislative and regulatory environment outside the U.S.

is dynamic and subject to continual change.

Federated Hermes’ primary regulators outside the U.S.

are the FCA, CBI, CSSF and CIMA.

Depending upon where Federated Hermes is doing business, or distributing or marketing its offerings, other prudential regulators in other jurisdictions outside the U.S.

can also regulate Federated Hermes and its business and offerings.

Regulatory developments and regulatory requirements promulgated, or recommended, by the European Commission, European Securities and Markets Authority (ESMA), Bank of England (BoE), His Majesty’s Treasury (HMT), Financial Stability Board (FSB), and International Organization of Securities Commission (IOSCO) can apply to or impact Federated Hermes and its business and offerings.

The pace of proposed and new regulatory developments and regulatory requirements outside the U.S.

also continued in 2023 and is expected to continue in 2024.

In the fourth quarter 2023, the FCA, CBI, CSSF, and CIMA alone issued over 20 consultation papers, discussion papers, reports, statements, regulatory technical standards and other guidance-related documents relevant to the investment management industry.

These included, among others:

(1) a FCA consultation paper regarding updating the regime for money market funds;

(2) FCA consultation guidance on the anti-greenwashing rule;

(3) a FCA policy statement and final rules on Sustainability Disclosure Requirements (SDR) and investment labels;

(4) a FCA consultation paper regarding operational resilience for critical third parties to the UK financial sector;

(5) a CBI consultation paper regarding European long term investment fund rules in the CBI Alternative Investment Fund (AIF) Rulebook;

(6) a CBI consultation paper regarding own fund requirements for Undertakings for the Collective Investment in Transferable Securities (UCITS) management companies and AIF managers (AIFMs) authorized for discretionary portfolio management;

(7) ESMA’s consolidated questions and answers (Q&A) on the Sustainable Finance Disclosure Regulation (SFDR);

(8) ESMA’s public

statement on guidelines on fund names;

and (9) ESMA’s update of its Brexit statement on provisions of the Benchmark Regulation

In its Business Plan 2023/24, the FCA set forth an ambitious program, including:

(1) a focus on putting consumer needs first, particularly with the UK Consumer Duty coming into force in July 2023;

(2) preparing financial services for the future, through implementing the outcomes of the Future Regulatory Framework (FRF) review and delivering the commitments set out under the Edinburgh Reforms;

(3) strengthening the UK’s position in global wholesale markets by welcoming new technology and innovation;

and (4) reducing and preventing financial crime.

The FCA’s Business Plan follows the publication of its Strategy:

2022-2025, in which the FCA indicated it would focus on reducing and preventing serious harm, setting, and testing higher standards, and promoting competition and positive change.

The CBI disclosed that its key regulation and supervision priorities include, among other areas, (1) assessing and managing risks to the financial and operational resilience of firms;

(2) addressing systemic risks generated by non-banks;

(3) consulting and engaging on the review of the Consumer Protection Code and the Individual Accountability Framework;

(4) ensuring that the EU Anti-Money Laundering Plan results in a consistent and robust EU-wide framework;

(5) implementing new EU regulations on digital operational resilience (DORA) and markets in crypto assets;

and (6) strengthening the resilience of the financial system to climate risks.

Key recent regulatory requirements and regulatory developments outside the U.S.

that significantly impact or relate to Federated Hermes’ business and offerings include, among others, the following.

Retained EU Law (Revocation and Reform) Act 2023, Financial Services and Markets Act 2023, and Remaining Impacts of Brexit.

The Retained EU Law (Revocation and Reform) Act 2023 became effective on June 29, 2023, (the Brexit Freedoms Act).

The Brexit Freedoms Act implements a renewed regulatory framework in the UK.

Among other things, under the Brexit Freedoms Act:

(1) a large amount of EU legislation (approximately 600 retained laws) were automatically revoked at the end of 2023 and the principle of supremacy and other general principles of EU law was abolished after December 31, 2023;

(2) any remaining retained EU laws became “assimilated law” after December 31, 2023, and it is no longer necessary to interpret assimilated law in accordance with corresponding EU law;

(3) any secondary retained EU law, or the same categories of assimilated law, can be revoked or replaced and alternative provisions made, so long as no regulatory burden is increased, up until June 23, 2026;

(4) certain retained EU laws can be modified by statutory instrument to take account of changes in technology and developments in scientific understanding;

(5) certain retained EU law can be more easily restated, reproduced or updated;

and (6) it is easier for UK domestic courts to depart from retained EU case law.

In June 2023, the Financial Services and Markets Act 2023 (FSM Act) became effective in the UK.

The FSM Act contains significant reforms to the UK’s regulatory framework for financial services, aims to establish an enhanced regulatory regime better tailored to UK markets, and provides certain updated objectives for financial services regulators aimed at focusing on long-term growth and international competitiveness.

Among other things, the FSM Act provides for a phased revocation of retained EU law relating to financial services and empowers HMT, relevant national authorities (i.e., financial service regulators, such as the FCA and Prudential Regulation Authority), and the BoE to modify or replace existing retained EU laws with new UK-specific regulation and migrate much of these from the statute book into the regulators’ rulebooks.

In June 2023, HMT, on behalf of the UK Government, and the European Commission on behalf of the EU, entered into a memorandum of understanding (MOU) establishing a framework for financial services regulatory cooperation between the UK and EU.

Premised on an objective of preserving financial stability, market integrity, and the protection of investors and consumers, the MOU provides for:

(1) the bilateral exchanges of views and analysis relating to regulatory developments and other issues of common interest;

(2) transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions;

(3) bilateral exchanges of views and analysis relating to market developments and financial stability issues;

and (4) enhanced cooperation and coordination, including in international bodies as appropriate.

The MOU also provides that each participant will endeavor to share information on regulatory developments to allow for a timely identification of potential cross-border implementation issues, to the extent that such information is available and can be shared.

The MOU also established a Joint EU-UK Financial Regulatory Forum between the EU and UK (EU-UK Forum).

The first meeting of the EU-UK Forum took place in London in October 2023.

Topics discussed included, among others:

(1) financial stability risks;

(2) implementation of relevant international regulatory standards in the financial services sector;

(3) regulatory developments in financial services;

(4) the respective policies, rules and processes concerning deference regimes, such as equivalence, or other tools used to address cross-border issues;

and (5) efforts to prevent and combat money laundering and terrorist financing.

Federated Hermes continues to have 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 marketing permissions regime (TMPR), which is scheduled to end on or before December 31, 2026, or on or before December 31, 2027 in relation to temporary recognized EU money market funds.

The TMPR is to be replaced by the UK’s overseas funds regime (OFR).

The primary legislation establishing the OFR is in place, but further secondary legislation is required before the OFR will become operative.

In December 2023, the FCA issued a consultation paper on how the OFR will operationally function for firms.

In January 2024, the UK Government issued a statement confirming that the European Economic Area (EEA), including EU member states, will be deemed equivalent for the purposes of the OFR, and that UCITS funds established in an EEA member state will be able to avail of the OFR, except for those that are money market funds, due to separate ongoing regulatory developments in this area.

The post-Brexit regulatory environment (particularly the need to obtain full authorizations on a country-by-country basis) also continues to create 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.

The impact of Brexit on Federated Hermes’ UK domiciled funds is difficult to quantify and remains uncertain given the number of regulatory developments.

As of December 31, 2023, 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.

Subscriptions also can continue.

UCITS Directive and AIFMD Review.

Two EU directives regulate the EU collective investment funds industry:

the directive relating to UCITS and the Alternative Investment Funds Manager Directive (AIFMD).

The UCITS directive, which covers mutual funds, establishes uniform rules, allowing them to be offered cross-border, while the AIFMD covers alternative funds, including private equity, private credit and hedge funds, and establishes the rules for authorizing, supervising, and overseeing AIFMs.

The European Commission has proposed amendments to the UCITS directive and AIFMD, which the EU Parliament is expected to vote on in February 2024.

If approved by EU Parliament, the Council of the EU (Council) will formally adopt the measures and member states must implement the measures within two years.

The proposed amendments would require, among other things, AIFs and UCITS management companies to provide more information when applying for authorization and create stricter requirements for individuals serving as officers of such entities.

The proposed amendments would also require, among other things:

(1) EU and non-EU AIFMs to make certain required pre-contractual disclosures to investors about the AIF’s liquidity risk management framework;

and (2) AIFMs to annually report all direct and indirect fees and charges incurred by the AIF.

The proposed amendments also encourage, but do not require, the boards of AIFMs to have at least one non-executive board member.

One of ESMA’s objectives for 2024 is to issue regulatory technical standards/implementing technical standards, guidelines, and technical advice based on mandates from the review of the AIFMD and the UCITS directive.

Separately, ESMA has also set out its objective to issue technical advice in 2024 on possible revisions to the UCITS Eligible Assets Directive (EAD).

The EAD prescribes the eligibility criteria for assets in which a UCITS is permitted to invest, designed to ensure UCITS comply with relevant obligations, among others, dealing with portfolio liquidity and net asset value.

Given the passage of time since the EAD’s introduction, the European Commission has asked ESMA to review, clarify and advise on certain items under the EAD.

ESMA has been tasked with issuing technical advice by October 31, 2024, after which a public consultation will take place.

Money Market Fund Reform.

The regulation of money market funds in the EU and UK is another example of potential divergence between the EU and UK post-Brexit.

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As a result, EU-based funds can still use passports to sell to UK investors.

However, following various consultations, reports, and speeches by representatives of IOSCO and the FSB in 2020, 2021 and 2022, similar to the SEC in the U.S., ESMA, the BoE, the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), and the International Monetary Fund (IMF), among other regulators, have been re-examining existing money market fund regulation, soliciting public comment on proposed money market fund reforms, and issuing reports and recommendations.

While money market fund reform continues to be discussed in the UK and the EU, new proposals for reform have not been promulgated.

It has been reported that, in late January 2023, Andrew Bailey, a governor of the BoE and Chairman of the FSB, expressed concerns regarding money market funds given their perceived impact during the recent financial crisis and the “mini budget” crisis in the UK in September 2022, and indicated that the BoE and FCA will come out with their own money market fund reform proposals in 2023.

It also has been reported that the EU has indicated that it will not be able to work on money market reform proposals until the next European Commission mandate in 2025.

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

Management believes that a final SEC rule on money market fund reforms could influence the UK and EU regulators.

As discussed above, Federated Hermes believes that money market funds are investment products that have proven their resiliency.

Federated Hermes intends to continue to engage with UK and EU (as well as U.S.) regulators in 2023 and beyond, both individually and through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the erosion of benefits that money market funds provide.

The sweeping changes contemplated by the Brexit Freedoms Bill and FSM Bill heighten the risk of regulatory divergence between the UK and the EU post-Brexit.

Such divergence has already begun in certain areas of financial services regulation.

For example, EU investment firms in EU Member States are required to comply with the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR);

however, the IFD and IFR do not bind the UK, and a new UK prudential regime for Markets in Financial Instruments (MiFID) firms titled Investment Firms Prudential Regime (IFPR) has been established.

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

Following a prior consultation, in its Quarterly Consultation Paper No.

36, issued on October 6, 2022, the FCA proposed updates to its IFPR reporting forms and accompanying guidance for MiFID firms to assist firms in completing the forms, fully conform the forms to the FCA’s systems, and make certain corrections.

As another example of potential divergence, EU regulators have previously issued or proposed directives, rules, and laws regarding sustainable finance, including the Sustainability-Related Disclosures Regulation or Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation, as well as proposals on the use of ESG- or sustainability-related terms in fund names.

The Taxonomy Regulation establishes a framework to facilitate sustainable investment, including when Member States establish measures (e.g., labels or standards) setting requirements regarding financial products or corporate bonds presented as “environmentally sustainable.” Pursuant to the Sustainable Finance Package issued by the European Commission, firms had a 12-month period that ended in October 2022 to implement certain sustainability reporting requirements and investment advice and sustainability considerations in connection with product governance and fiduciary duties.

Among other regulatory guidance, the European Supervisory Authorities (ESAs) recommended that national competent authorities (NCAs) and market participants utilize the period to January 1, 2023, to prepare for the application of the European Commission’s delegated regulation.

The European Commission has published the final RTS supplementing the SFDR, specifying the mandatory website, pre-contractual, and periodic reporting templates for financial market participants and in-scope financial products.

The final RTS began to apply beginning on January 1, 2023.

Under the SFDR, in addition to various disclosure requirements, financial products must be classified into separate categories, based on their investment into and their claims regarding sustainability, such that financial products such as investment funds and ETFs must be classified as Article 6, Article 8 or Article 9 funds.

An Article 6 SFDR fund requires asset managers to disclose the level of integration of sustainability in their funds, regardless of how they are labelled.

Funds that have some form of ESG, green or sustainability labelling then go on to be classified as Article 8 or 9.

Article 8 funds are those that promote environmental or social characteristics but do not have them as a core investment objective.

Article 9 funds are those that have sustainability as their core investment objective and require comprehensive and understandable related disclosures.

There are also various delegated directives and regulations arising from SFDR with which AIFMs and MiFID firms must comply.

On November 17, 2022, the ESAs published a “Questions and Answers (Q&A) on the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288)” that provides guidance on various aspects of “principal adverse impact” reporting of the impact of investment decisions or advice that results in a negative effect on sustainability factors, such as ESG, employee, human rights, anti-corruption and anti-bribery concerns or matters.

On November 15, 2022, the ESAs published a “Call for evidence on better understanding greenwashing” to gather input on how to understand the key features, drivers and risks associated with greenwashing and to collect examples of potential greenwashing practices.

The comment period ended on January 10, 2023.

On November 18, 2022, ESMA published a “Consultation on Guidelines on funds’ names using ESG or sustainability-related terms” in which ESMA proposes, and seeks feedback on, among other fund name-related matters:

(1) a quantitative 80% threshold for the use of ESG-related words;

(2) an additional 50% threshold for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;

(3) the application of minimum safeguards to all investments for funds using such terms (i.e., exclusion criteria);

and (4) certain additional considerations for specific types of funds (e.g., index and impact funds).

The comment period ended on February 20, 2023.

Rather than adopt the SFDR, the UK decided to align with the TCFD.

The FCA also has proposed its own guidelines regarding the use of ESG- and sustainability-related terms in fund names.

Building on a prior consultation that closed on July 1, 2022, and upon the TCFD-aligned product and entity-level disclosure rules previously introduced by the FCA, on October 25, 2022, the FCA published a Consultation Paper on “Sustainability Disclosure Requirements (SDR) and investment labels” in which it proposed a package of measures aimed at clamping down on greenwashing, including sustainable investment labels, consumer-facing disclosure requirements, broader disclosure requirements, restrictions on the use of sustainability-related terms in product naming and marketing, requirements for distributors and a general “anti-greenwashing” rule.

In its January 25, 2022 comment letter to this Consultation Paper, among other comments, Federated

(1) requested the FCA to clarify and confirm that funds eligible for a “Sustainable Improver Label” include those which are committed to delivering sustainable outcomes in 70% of the assets in a portfolio either through self-improvement by the investee or through meaningful and outcome-achieving investor engagement;

(2) encouraged the FCA not to require that funds sustainability objective be part of a fund’s investment objective, but rather to take a holistic approach that would permit a fund to have its sustainability objective be part of either its investment objective, its investment policy or its investment strategy;

(3) commented that the term “responsible” should not be limited to those products with a sustainable label, and should be able to be used for products that have ESG integration, ESG analytical capabilities and resources and demonstrable stewardship;

and (4) commented that the term “impact” should not be restricted to the “Sustainable Impact” category.

The comment period for this Consultation Paper ended on January 25, 2022.

In addition to potential divergence between UK and EU law and regulation, the possibility of divergence exists between the laws of the EU, UK, U.S., and other jurisdictions, including, among others, in the areas of climate disclosures, ESG and fund naming requirements and other reforms.

For example, on December 12, 2022, the Australian Government published its own consultation seeking views on key considerations for the design and implementation of the Government’s commitment to standardized, internationally‑aligned requirements for disclosure of climate‑related financial risks and opportunities in Australia.

The consultation period ended on February 17, 2023.

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

Building on consultations and other reports published from 2015 through 2022, the FSB and the IOSCO continue to focus on, among other topics:

(1) non-bank financial intermediation (NBFI);

(2) financial stability, market and product liquidity and liquidity risk management;

(3) cyber incident reporting;

(4) crypto-related risks and regulation, including stablecoin arrangements;

(5) retail distribution and digitalization;

and (6) financial reporting and disclosure during economic uncertainty.

These activities by the FSB and the IOSCO are discussed below.

Given the role of the FSB and the IOSCO in making recommendations and setting standards for regulations globally for implementation by regulatory authorities in individual jurisdictions, the activities of the FSB and the IOSCO provide insight into future or additional current Regulatory Developments.

Since the beginning of the fourth quarter 2022, UK and EU regulators and supervisory authorities issued, proposed, or adopted other new consultations, directives, rules, laws, and guidance that impact or could impact UK and EU investment management industry participants, including Federated Hermes.

• On January 27, 2023, the ESMA published its “Guidelines on stress test scenarios under the MMF Regulation,” (i.e., Money Market Fund Regulation (MMF Regulation)), which followed the ESMA’s publication on November 30, 2022, of its Final Report on “Guidelines on stress test scenarios under the MMF Regulation.” In these new Guidelines, the ESMA provides updated specifications on the types of money market fund stress tests and their calibration.

Upon the new Guideline becoming effective on March 27, 2023, managers of money market funds will need to use them to conduct stress tests and complete required reporting under Article 37 of the MMF Regulation.

Federated Hermes is reviewing these new Guidelines and their impact on its money market fund business.

• On December 31, 2022, the FCA published a report on approaches to diversity and inclusion in financial services, encouraging firms to use the data in developing their current diversity and inclusion strategies but did not indicate any potential future rulemaking developments.

Federated Hermes is reviewing this report and its impact on its business.

• On December 27, 2022, the EU Council adopted the Digital Operational Resilience Act (Regulation (EU) 2022/2554) (DORA).

This regulation, which will apply beginning on January 17, 2025, sets uniform requirements for the security of network and information systems of companies and organizations operating in the financial sector as well as critical third parties which provide Information Communication Technologies (ICT)-related services, such as cloud platforms or data analytics services.

The DORA creates a regulatory framework on digital operational resilience whereby firms will need to make sure they can withstand, respond to, and recover from all types of ICT-related disruptions and threats.

These requirements are homogenous across all EU Member States with the core aim to prevent and mitigate cyber threats.

The UK government is also looking to enact a similar UK-equivalent to the DORA.

Federated Hermes is reviewing the DORA and its impact on its business.

• On December 21, 2022, the ESMA published a final report outlining the RTS and Implementing Technical Standards (ITS) specifying the information to be provided, and the templates to be used, to inform competent authorities of the cross-border marketing and management of investment funds and the cross-border provision of services by fund managers.

The RTS specify the information to be provided by management companies and AIFMs wishing to carry out their activities in host Member States, while the ITS contain the templates to be used by management companies.

These standards will normalize the content and format of the information being provided by management companies, UCITS, and AIFMs situated in the EU only and look to support the process for notifying cross-border marketing and management activities in relation to UCITS and alternative investment funds as well the cross-border provision of services by fund managers.

• On December 19, 2022, the European Commission issued two draft notices containing guidance on environmental performance reporting under green taxonomy.

The first notice contains responses to FAQs on the technical screening criteria for the taxonomy’s first two environmental objectives of climate change mitigation and climate change adaptation, and the second notice contains responses to FAQs on the disclosure obligation under Article 8 of the Taxonomy Regulation, the details of which are set out in the Disclosures Delegated Act.

• On December 16, 2022, the ESMA published an updated Q&A on the application of the Alternative Investment Fund Managers Directive (AIFMD) and on the MiFID II and the Markets in Financial Instruments Regulation market structures topics.

The topics include whether managers of special purpose acquisition companies are subject to AIFMD.

• On December 14, 2022, ESMA published a final report on the Guidelines for reporting under European Market Infrastructure Regulation (EMIR) Refit Regulation (the final report).

The final report clarifies the reporting and data management requirements applicable under EMIR Refit Regulation to (i) counterparties to over-the-counter derivatives contracts, (ii) central counterparties, and (iii) the trade repositories.

The final report has been published with new validation rules as well as outgoing and ingoing reporting instructions.

• On December 14, 2022, ESMA published a supervisory briefing on ensuring convergence across the EU with respect to the supervision of investment firms’ cross-border activities under MiFID II.

The supervisory briefing is relevant to investment firms that provide cross-border services, particularly to retail clients, under the passporting regime set out in Article 34 of MiFID II.

• On December 14, 2022, the FSB published an “Assessment of the Effectiveness of the FSB’s 2017 Recommendations on Liquidity Mismatch in Open-End Funds” (Assessment), which is part of the FSB’s work program to enhance the resilience of NBFI.

The Assessment finds that regulatory authorities have made meaningful progress in implementing the 2017 FSB recommendations based on progress in four key areas:

(1) reducing structural liquidity mismatch;

(2) reducing shock amplification and transmission using liquidity management tools;

(3) enhancing regulatory reporting, data availability and public disclosure;

and (4) ensuring adequacy of stress testing.

The Assessment concludes that certain policy enhancements would strengthen the current framework and liquidity management practices, including:

(1) providing a clearer and more specific articulation of the intended outcome of policies to reduce structural liquidity mismatch in open-end funds;

(2) ensuring that investors bear the costs of liquidity associated with fund subscriptions and redemptions, and enhancing the use, and consistency of use, of liquidity management tools by fund managers;

(3) requiring clearer public disclosures from fund managers on the availability and use of liquidity management tools, including by enhancing their engagement with investors;

(4) closing identified data gaps to improve regulatory authorities’ ability to monitor liquidity mismatch in open-end funds and its management from a financial stability perspective;

and (5) further promoting the use of fund- and system-level stress testing.

The FSB, in conjunction with IOSCO, will continue to follow-up on the Assessment’s findings, including by revising the FSB’s recommendations, and will monitor the progress of regulatory authorities in implementing the recommendations across jurisdictions.

• On December 13, 2022, the FCA published a Discussion Paper regarding the “Future Disclosure Framework” in which it invites feedback on how it can design and deliver a good disclosure regime for retail investments, particularly considering the Consumer Duty in the UK.

This Discussion Paper follows a December 9, 2022, Consultation Paper issued by HM Treasury regarding PRIIPs and UK Retail Disclosure, which also relates to the future of retail disclosure in the UK.

This Consultation Paper sets out the UK Government’s intentions to revoke the PRIIPs regulation and to remove the UCITS disclosure requirements, so that the FCA will become responsible for establishing a future disclosure regime with future disclosure requirements to sit only in the FCA Handbook.

Federated Hermes is reviewing the FCA’s Discussion Paper and HM Treasury’s Consultation Paper and their respective impacts on its business.

The comment period on the Discussion Paper ended on February 7, 2023.

The comment period on the Consultation Paper ends on March 3, 2023.

• On December 9, 2022, the UK Chancellor of the Exchequer announced a wide-ranging set of reforms for the financial services sector, referred to as the “Edinburgh Reforms.” The package will include further proposals relating to the

Packaged Retail Investment and Insurance-Based Products Regulation (1286/2014), the Payment Account Regulations 2015 (SI 2015/2038), plans to establish a regulatory regime by 2024 that will support a consolidated tape for market data, and plans to consult in the first quarter 2023 on bringing ESG ratings providers within regulatory oversight and publish an updated Green Finance Strategy in early 2023 that includes an update on plans to make secondary legislation under the UK Taxonomy Regulations.

• On December 2, 2022, the FCA published its Quarterly Consultation, which contains certain proposed changes and clarifications with respect to the Consumer Duty, including the important clarification that with respect to occupational pension schemes, the term “retail customer” will be amended to make clear that it includes any client of a firm who is or would be a beneficiary of the scheme rather than a beneficiary of the underlying investments held in the scheme.

The comment period ended on January 9, 2023.

• On December 1, 2022, the CBI published a Consultation Paper regarding “Own Funds Requirements for UCITS management companies and AIFMs authorized to perform discretionary portfolio management” in which the CBO proposes to introduce bespoke own funds requirements for UCITS management companies and AIFMs authorized to provide discretionary portfolio management and additional non-core services as a condition to authorization to maintain a “level playing field” because such entities are not subject to own funds requirements at the EU level related to the provision of such services.

Under these proposed requirements, UCITS management companies and AIFMs authorized to provide discretionary portfolio management services and non-core services that do not meet conditions to be a “small and non-interconnected firm” (modelled on similar conditions under the IFR) will be required to apply the higher of the own funds requirement under the UCITS Regulations/AIFM Regulations, as applicable, or, a Risk to Client K-factor own fund requirement modeled on the Risk to Client K-Factor applicable to MiFID investment firms under the IFR.

UCITS management companies and AIFMs authorized to provide discretionary portfolio management services will continue to be required to undertake an Internal Capital Adequacy and Assessment Program in line with a similar requirement applicable to all MiFID investment firms.

Federated Hermes is reviewing this Consultation Paper and its impact on its business.

The comment period ended on February 23, 2023.

• On November 30, 2022, the FCA published a Consultation Paper regarding “Broadening access to financial advice for mainstream investments” in which it sets forth proposals for a new core investment advice regime that would allow firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on investment into mainstream products, specifically within stocks and share investment savings accounts (or ISAs).

Federated Hermes is reviewing this Consultation Paper and its impact on its business.

The comment period ends on February 28, 2023.

• On November 28, 2022, the Council of the European Union gave its final approval to the Corporate Sustainability Reporting Directive (CSRD), and, on December 16, 2022, the CSRD was published in the Official Journal of the European Union.

It entered into force on January 5, 2023, and Member States are required to transpose the CSRD into national law by July 6, 2024.

• On November 17, 2022, the ESMA published a Consultation Paper regarding “Review of the technical standards under Article 34 of MiFID II” in which it proposes amendments to the information requirements that investment firms applying to passport a product and provide cross-border services without the establishment of a branch in a particular jurisdiction are required to satisfy.

The proposed amendments would add the following to such information requirements:

(1) the marketing means the investment firm will use in host-Member States;

(2) the language(s) for which the investment firm has the necessary arrangements to deal with complaints from clients from each of the host Member States in which it provides services;

(3) the Member States in which the investment firm will actively use its passport as well as the categories of clients targeted;

and (4) the investment firm’s internal organization in relation to the cross-border activities of the investment firm.

Federated Hermes is reviewing this Consultation Paper and its impact on its business.

The consultation period ended on February 17, 2023.

• On November 16, 2022, IOSCO published a “Thematic Review on Liquidity Risk Management Recommendations” in which it assesses the implementation of selected recommendations issued in 2018 to strengthen the liquidity risk management practices for collective investment schemes globally.

Among other things, this Review found that:

(1) larger jurisdictions show a high degree of implementation of regulatory requirements consistent with the objectives of the recommendations;

(2) challenges exist for collective investment schemes with respect to dealing frequency, dealing arrangements and disclosure practices;

(3) some jurisdictions need to improve the process of identification of a liquidity shortage before it occurs and provide more guidance on aligning the investment strategy, liquidity profile and redemption policy;

(4) jurisdictions should further address the availability of liquidity management tools and

supplement the current rules and regulations to include requirements that are more specific regarding the use of such tools;

(5) asset managers have a high degree of implementation of the recommendations at the level of policies and practices;

and (6) weaknesses exist regarding operationalizing contingency plans and activation of liquidity risk management tools.

The findings from this Review informed the FSB’s assessment of the effectiveness of the FSB’s 2017 policy recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds.

• On November 15, 2022, the FSB published its “Climate Scenario Analysis by Jurisdictions:

Initial findings and lessons” in which the FSB synthesizes findings from climate scenario analysis exercises undertaken by financial authorities at the individual firm level, at the financial sector level, and at the overall financial system level, with the goal of drawing lessons for effective scenario analysis and sketching out a global approach.

The publication also attempts to evaluate the implications of climate change-related developments for financial systems with the goal of advancing a common understanding of the impact of climate change on financial stability.

• On November 14, 2022, the IOSCO published a “Statement on Financial Reporting and Disclosure during Economic Uncertainty” in which, among other things, it highlighted the importance of high quality and transparent disclosures that clearly explain significant management judgments, key assumptions, the identification of known risks, and explanations of how changes in these factors can affect the amounts and trends reported in historical financial statements.

• On November 10, 2022, the FSB published a Progress Report on “Enhancing the resilience of Non-Bank Financial Intermediation” in which the FSB reviews prior and planned work by it and other global regulators to enhance the resilience of NBFI under the FSB’s work program, which has involved money market funds, open-end funds, margining practices, bond market liquidity and fragilities in United States Dollar (USD) cross-border funding.

The Progress Report sets out policy proposals to address systemic risk in NBFI that focus on key amplifiers and seeks to:

(1) reduce liquidity demand spikes;

(2) enhance the resilience of liquidity supply in times of stress;

and (3) enhance risk monitoring and the preparedness of regulatory authorities and market participants.

According to the FSB, the main focus of these proposals is to reduce excessive spikes in the demand for liquidity by addressing the vulnerabilities that drove those spikes (e.g., by reducing liquidity mismatch or the build up of leverage) or by mitigating their financial stability impact (e.g., by ensuring that redeeming investors pay the cost of liquidity (e.g., through swing pricing) and by enhancing the liquidity preparedness of market participants to meet market calls).

• On October 20, 2022, the FSB published a “Report on Liquidity in Core Government Bond Markets,” which is part of the FSB’s work program to enhance the resilience of NBFI.

In this Report, the FSB analyzes the liquidity, structure, and resilience of core government bond markets.

Building on relevant analysis by FSB member authorities and other international bodies, the Report:

(1) reviews recent changes in the structure and liquidity of core government bond markets;

(2) analyzes the changes in government bond market liquidity (and related repurchase agreement and futures markets) in March 2020, including the behavior of various market participants (particularly dealers);

(3) examines the drivers of market participants’ behaviors;

and (4) identifies factors that promote the resilience of government bond markets.

• On October 17, 2022, the FSB published a Consultative Document on “Achieving Greater Convergence in Cyber Incident Reporting,” in which the FSB sets out recommendations to address impediments to achieving convergence among regulators and jurisdictions, advances work on establishing common terminologies related to cyber incidents and proposes the development of a common format for incident reporting exchange.

The comment period ended on December 31, 2022.

• On October 13, 2022, the FSB’s Task Force on Climate-Related Financial Disclosures issued its “2022 Status Report” in which it provided an overview of current disclosure practices in terms of their alignment with the TCFD’s prior recommendations and highlights progress firms are making toward disclosures aligned with the TCFD over the past five years.

Based on a prior April 2022 consultation, on October 13, 2022, the FSB also published a Final Report on “Supervisory and Regulatory Approaches to Client-related Risks” in which the FSB seeks to assist global supervisory and regulatory authorities in developing approaches to monitor, manage and mitigate risks arising from climate change and promote consistent approaches across sectors and jurisdictions.

In this Final Report, among other things, the FSB acknowledges that supervisory goals and approaches differ and that “climate change is likely to represent a systemic risk for the financial sector.”

• On October 13, 2022, the FSB published a “Progress Report on Climate-Related Disclosures” and a “Final Report on supervisory and regulator approaches to client-related risks.” In the Progress Report, the FSB covers, among other

(1) the progress made by the International Sustainability Standards Board (ISSB) in developing its global baseline climate reporting standard and the work of other international standard-setters on assurance over sustainability-related reporting;

(2) the progress made in the area of assurance, including the work of the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA), and the work by IOSCO to support the work on both disclosure and assurance standards;

(3) the progress made by jurisdictions on climate-related disclosure practices, including implementing FSB recommendations, as well as steps being taken by jurisdictions to prepare for adopting, applying or otherwise making use of the ISSB climate-related disclosure reporting standard;

and (4) the progress made by firms on disclosure and reporting.

In the Final Report, the FSB provides recommendations regarding, among other topics:

(1) the collection of climate-related data from financial institutions;

(2) system-wide supervisory and regulatory approaches and the extent to which supervisory and regulatory tools and policies address climate-related risk;

and (3) early considerations of other potential macroprudential policies and tools relating to client risk and disclosure.

• On October 12, 2022, the IOSCO published a Final Report entitled “Report on Retail Distribution and Digitalisation” in which IOSCO considered recent developments in online marketing and distribution to retail investors by financial firms, sets out examples of how some jurisdictions have addressed these issues, and, among other proposals, considers proposals for firm level rules for online marketing and distribution.

In the Final Report, IOSCO also recommends that IOSCO-member regulatory authorities should continue to monitor developments in online marketing, including social media, and consider changes in their respective requirements.

• On October 11, 2022, the ESMA published a Call for Evidence regarding the “Implementation of [Shareholder Rights Directive 2 (SRD2)] provisions on proxy advisors and the investment chain,” in which it seeks to gather information on how market participants perceive the appropriateness of the scope and the effectiveness of the SRD2 provisions on the identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights, as well as on transparency of proxy advisors.

The comment period ended on November 28, 2022.

• On October 11, 2022, the FSB published a Consultative Document regarding “Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets,” a Consultation Report regarding “Review of the FSB High-level recommendations of the Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements,” and a related request for comment regarding “International Regulation of Crypto-asset activities:

A proposed framework – questions for consultation,” in which the FSB:

(1) analyzes the interconnectedness of crypto-asset markets;

(2) provides an overview of applicable international standards and regulatory and supervisory approaches;

(3) identifies issues, challenges and gaps, and provides high-level recommendations, relating to supervisory and oversight approaches to crypto-asset activities;

and (4) proposes revisions to the FSB’s high-level recommendations regarding stablecoin arrangements to address financial stability risks more effectively.

The FSB also invited comments on:

(1) proposed recommendations to promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto-asset activities and markets and to strengthen international cooperation, coordination, and information sharing;

and (2) a review of the previous 10 FSB high-level recommendations from 2020 for the regulation, supervision, and oversight of “global stablecoin” arrangements.

The comment period ended on December 15, 2022.

• On October 3, 2022, the FCA issued a Consultation Paper regarding “Creation of baseline financial resilience regulatory return,” in which it seeks to rationalize and standardize baseline financial resilience data collection with a view to increasing the quality and consistency of financial resilience data.

The FCA seeks to reduce the burden of the existing survey by changing the collection of financial resilience data from an ad-hoc survey to a specific (and shortened) quarterly return within the FCA’s data collection system.

The consultation period ended on December 2, 2022.

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

(1) the EU PRIIPs Regulation under the UCITs directive, which came into effect on January 1, 2023;

and (2) the UK climate-related disclosure regime based on TCFD recommendations, which came into effect for firms with assets greater than £5 billion on January 1, 2023.

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

In addition to the above Regulatory Developments, the FCA, CBI and other global regulators continue to monitor investment management industry participants by examining various reports, financial statements and annual reports and conducting regular review meetings and inspections.

They also continue to take enforcement action when determined

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.

However, following various consultations, reports, and speeches by representatives of the IOSCO and the FSB in 2020, 2021, 2022, and 2023 similar to the SEC in the U.S., ESMA, the BoE, the European Systemic Risk Board, the European Banking Authority, 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.

In September 2023, ESMA published Working Paper No.

2, 2023 titled” “Bang for (breaking) the buck:

Regulatory constraints and money market funds reforms” wherein the authors:

(1) set out a framework to assess money market fund resilience;

(2) demonstrate that the maximum redemptions a money market fund can face depends on regulatory constraints and asset liquidity;

and (3) utilize the framework to assess the impact of regulatory reforms, such as an increase in liquidity requirements, changes to the allowed price deviation for money market funds using amortized cost or requirements to invest in more liquid assets, to, among other things, conclude that removing the use of amortized cost has the largest positive effect in terms of

resilience, while higher liquidity requirements have more limited effects.

In a September 2023 progress report, “Enhancing the Resilience of Non-Bank Financial Intermediation” (FSB Progress Report), the FSB reviewed its 2021 money market reform recommendations, discussed perceived vulnerabilities of money market funds, and recognized that individual jurisdictions need flexibility to tailor measures to their specific circumstances.

In its FSB Progress Report, the FSB also indicated that:

(1) through its “Thematic Peer Review of Money Market Fund Reforms” announced on August 14, 2023, it will take stock of the money market fund policy measures adopted by FSB member jurisdictions by the end of 2023;

(2) it will be working with IOSCO to assess the functioning and resilience of commercial paper and negotiable certificates of deposits markets by the end of 2023;

and (3) it will be working with IOSCO to complete an assessment of the effectiveness of money market fund reforms in addressing risks to financial stability by the end of 2026.

In December 2023, the FCA published a consultation paper in which it sets out proposals to enhance the resilience of Money Market Funds domiciled in the UK, and addressing vulnerabilities identified in March 2020 and other times of market stress.

The proposals are intended to mitigate risks to wider financial stability and reduce the need for central bank support in the future, while maintaining cash management services that meet the needs of investors.

HMT expects to lay a Statutory Instrument (SI) before UK Parliament which will replace the UK Money Market Fund Regulation with provisions in new legislation which will purportedly set an overall framework for money market fund regulation more suited to the needs of the UK market.

HMT published the draft SI and policy note at the same time as the FCA’s consultation paper.

The proposals in the FCA’s consultation paper prioritize strengthening the existing regulatory regime for money market funds while maintaining the broad current money market fund operating model.

The proposals increase money market fund resilience principally by seeking to ensure money market funds have usable liquidity sufficient to endure severe but plausible redemption stresses.

The proposals include:

(1) increasing the minimum liquid asset requirement for all money market funds, raising daily liquid assets and weekly liquid assets (WLA) levels to 15% and 50% of their assets respectively;

(2) modifying the assets eligible for WLA for Variable NAV (VNAV) money market funds;

(3) removing the regulatory link between liquidity levels in money market funds that have the ability to offer subscriptions and redemptions at a constant NAV (so-called ‘stable NAV money market funds’) and the need for the manager to consider or impose tools such as liquidity fees or redemption gates;

(4) enhancing ‘know your customer’ requirements;

(5) enhancing stress testing for stable NAV money market funds;

and (6) enhancing operational resilience for stable NAV money market funds.

Measures not proposed include:

(1) changing or removing stable NAV operation for the current stable NAV money market funds, so these money market funds would be no longer permitted to deal at a constant NAV;

and (2) making changes to how money market funds currently operate in order to impose on redeeming investors the true cost of their redemptions in the absence of money market funds selling assets and crystallizing losses (however, the FCA is consulting on a requirement for all money market funds to have at least one Liquidity Management Tool available for use when the fund is still trading if needed, and for all managers to have the ability to suspend their money market funds, with such tools to be deployed at the manager’s discretion.

In December 2023, ESMA also published a “Final Report:

Guidelines on stress test scenarios under the MMF Regulation” that included:

(1) updated guidelines on the methodology to implement scenarios related to hypothetical changes in the level of liquidity of the assets held in the portfolio of a money market fund;

and (2) updated guidelines on specifications on the type of stress tests and their calibration for reporting purposes.

As noted above, Federated Hermes believes money market funds provide, and will continue to provide, a more attractive investment opportunity compared to other competing products, such as insured and uninsured deposit account alternatives.

Federated Hermes also believes that money market funds are investment products that have proven their resiliency.

Liquidity Risk Management in Open-End Funds.

In July 2023, the FSB issued a consultation report on addressing structural vulnerabilities from the liquidity mismatch in open-end funds.

On the same day, the IOSCO also proposed detailed guidance for open-end funds’ use of anti-dilution liquidity management tools.

In December 2023, the FSB published its final report, which entailed noticeable changes from the consultation report.

On the same day, the IOSCO published its final report.

The revised FSB recommendations set out the key objectives for an effective regulatory and supervisory framework to address vulnerabilities arising from liquidity mismatch in open-end funds.

Combined with the liquidity risk management tools, these recommendations aim to achieve a significant strengthening of liquidity management by open-end fund managers compared to current practices.

To address structural liquidity mismatch in open-end funds, the revised FSB recommendations provide greater clarity on the redemption terms that open-end funds can offer to investors, based on the liquidity of the open-end fund asset holdings.

This would be achieved through a categorization approach, where open-end funds would be grouped depending on the liquidity of their assets (e.g., liquid, less liquid, illiquid).

Open-end funds in each category would then be subject to specific expectations in terms of their redemption terms and conditions.

Authorities should set expectations for open-end fund managers to use a

mixture of quantitative and qualitative factors when determining the liquidity of open-end fund assets in normal and stressed market conditions within the context of the domestic liquidity framework set out by authorities.

The revised FSB recommendations seek to achieve:

(1) greater inclusion of anti-dilution liquidity management tools in open-end fund constitutional documents;

and (2) greater use of, and greater consistency in the use of, anti-dilution liquidity management tools in both normal and stressed market conditions.

To support these objectives and ensure more effective liquidity risk management practices, IOSCO’s liquidity management tool guidance provides detailed guidance on the design and use of anti-dilution liquidity management tools by open-end fund managers.

The liquidity management tool guidance aims to support the greater use of anti-dilution liquidity management tools by open-end funds to mitigate investor dilution and potential first-mover advantage arising from structural liquidity mismatch in open-end funds.

The liquidity management tool guidance sets out key operational, design, oversight, disclosure and other factors and parameters that responsible entities should consider when anti-dilution liquidity management tools are used, to promote greater, more consistent, and more effective use of these tools.

For example, under the IOSCO guidance, responsible entities should have appropriate internal systems, procedures, and controls in place at all times in compliance with applicable regulatory requirements for the design and use of anti-dilution liquidity management tools as part of the everyday liquidity risk management of their open-end funds.

Furthermore, under the IOSCO guidance, anti-dilution liquidity management tools used by responsible entities should impose on subscribing and redeeming investors the estimated cost of liquidity.

This encompasses the explicit and implicit transaction costs of subscriptions and redemptions, including any significant market impact of asset purchases or sales to meet those subscriptions and redemptions.

In July 2023, the FCA published detailed findings from its review of the liquidity management frameworks of a sample of firms, alongside an industry-wide Dear CEO letter to FCA regulated firms.

The FCA emphasized, among other matters, the need to focus on liquidity management from the top of the organization;

creating a liquidity ‘playbook’ outlining governance actions and escalations to be followed when liquidity stress testing triggers are activated;

and a framework for detailed liquidity reporting to be presented to the board.

The FCA set out, among others, the following examples of good practice:

(1) full application of ESMA’s 2019 stress testing guidelines in UCITS and AIFs (where relevant) to the firm’s liquidity stress testing;

(2) using a ‘pro-rata’ methodology as opposed to a ‘most liquid first’ methodology when calculating liquidity bucketing and stress testing;

(3) regularly challenging and reviewing the firm’s models;

and (4) undertaking testing of multiple scenarios for redemptions.

The FCA’s good practice recommendations include encouraging pre and post redemption liquidity stress testing, and implementing internal triggers to generate enhanced governance processes capturing both large and smaller redemptions.

The FCA also provided additional commentary on liquidity management tools (particularly swing pricing policies) and valuation processes.

Sustainability Finance Initiatives (SDR, SFDR, Greenwashing and Fund Names).

In November 2023, the FCA published its policy statement and final rules on the Sustainability Disclosure Requirements (SDR) regime.

The SDR regime is the approach taken by the FCA to (1) establish an environmental and social labeling regime for the UK financial services industry that contracts with and incorporates concepts from the EU, (2) combat greenwashing through greater guidance and accountability requirements and (3) provide greater clarity on the use of sustainability and ESG related terminology in fund names.

The EU’s Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory ESG disclosure obligations on asset managers and other financial markets participants.

SFDR requires all covered firms to disclose how financial products integrate sustainability risks in the investment process, including whether they consider adverse sustainability impacts, and, for those products promoting sustainable objectives, the provision of sustainability-related information.

ESMA has made further recommendations for the Commission to consider changes related to SFDR disclosures.

Related amendments to applicable legislation require that all covered investment managers must consider in their investment process any ESG risks which are likely to have a material impact on the value of the investment and require investment advisors to inquire as to the investor’s desire for ESG-focused products in their portfolio when assessing suitability.

Preventing greenwashing has been a top priority for European policymakers.

In November 2023, building off of its anti-greenwashing rule to be introduced through the SDR and investment labels regime, the FCA issued a consultation paper that provided general guidance on the anti-greenwashing rule.

That guidance sets out the FCA’s expectations for any FCA-authorized firm that makes claims about the sustainability of an offering.

Under the draft guidance, sustainability disclosures must be fair, clear and not misleading, and consistent with the sustainability characteristics of an offering.

The European Commission has also requested input from the European Supervisory Authorities (ESAs) relating to greenwashing risks and supervision of sustainable finance policies.

The ESAs have been studying the market and put forward a common understanding of greenwashing and warning of risks in June 2023.

The ESAs are expected to publish a final greenwashing report in May 2024, which is expected to include recommendations for possible changes to the EU regulatory framework to ensure sustainability-related statements, declarations, actions, or communications reflect the underlying sustainability profile of an entity, financial product, or financial service.

In November 2022, ESMA also published a consultation on its draft guidelines on

the use in funds’ names of ESG or sustainability-related terms.

The guidelines propose quantitative thresholds with minimum investment holding requirements where EU funds use ESG or sustainability-related words in their names.

In December 2023, in a public statement, ESMA provided an update on the guidelines and set out relevant amendments based on feedback received during the consultation period.

ESMA has, however, decided to postpone the adoption of the guidelines until the AIFMD and UCITS directive reviews have further progressed.

Corporate Sustainability Due Diligence.

In December 2023, the Council and the European Parliament announced that they had reached a provisional political agreement on the Corporate Sustainability Due Diligence Directive (CSDDD).

The CSDDD imposes due diligence obligations requiring companies to identify, and to prevent or at least mitigate, adverse impacts on human rights and the environment, including by their subsidiaries and supply chain partners.

Obligations would be enforced through administrative sanctions and civil liability, with a defense of having exercised reasonable due diligence.

The press releases issued by the Council and EU Parliament explain that the financial sector is to be temporarily excluded from part of the scope of the CSDDD, but there will be a review clause that could lead to their possible future inclusion.

The CSDDD proposal remains subject to ongoing review and negotiation in the EU.

Formal adoption is expected to take place in the first half of 2024, which would give businesses until early 2026 to prepare.

Corporate Sustainability Reporting.

In the EU, the Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023.

The CSRD mandates sustainability reporting by corporate issuers in accordance with certain European Sustainability Reporting Standards in December 2023.

The regulation applies from January 1, 2024 for financial years beginning on or after such date.

CSRD will apply to EU companies, and corporate groups that include EU companies, that meet certain criteria.

In the UK, in August 2023, the UK Government Department for Business and Trade published guidance on UK sustainability disclosure standards (SDS).

The SDS are based on the International Financial Reporting Standards Board’s SDS issued by the International Sustainability Standards Board (ISSB).

The UK SDS will set out corporate disclosures on the sustainability-related risks and opportunities that companies face.

They will form the basis of any future requirements in UK legislation or regulation for companies to report on risks and opportunities relating to sustainability matters, including risks and opportunities arising from climate change.

In July 2023, IOSCO issued a report endorsing the ISSB standards concluding that they serve as an effective and proportionate global framework of investor-focused disclosures in relation to climate-related matters.

Financial Transactions Tax (FTT).

An EU FTT also continues to be discussed, although it remains unclear if or when an agreement will be reached regarding its adoption.

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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 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.

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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

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.

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.

The debate regarding the use of a FTT as a funding source for governments continues.

For example, in June 2023, a European Commission Working Document regarding own resources of the EU was published in which an EU FTT was considered as a potential resource to assist in funding the EU budget.

This Working Document concluded that “the prospects of reaching an agreement in the future are limited given that the last substantive discussions took place under the Portuguese Council Presidency in 2021” and “[t]here is little expectations that any proposal would be agreed in the short term.” Also, in June 2023, a policy brief was submitted to the G20 proposing that an international FTT be adopted by G20 nations to assist with funding net zero climate actions.

Current Regulatory Environment – Potential Impacts

Applicable regulatory requirements, regulatory developments and regulatory supervision impact the domestic and international investment management industry generally by imposing substantial legal and compliance burdens, and significant restrictions and requirements, on its participants, and their offerings, and, therefore, will continue to impact, to various degrees, Federated Hermes’ Financial Condition.

Federated Hermes has monitored, reviewed, and assessed, or will continue to monitor, review, and assess, regulatory developments and regulatory requirements, as applicable, and their impact on its business and offerings.

Federated Hermes actively participates, either individually or with industry-trade groups (such as the ICI), in the public comment process regarding regulatory developments that can significantly impact Federated Hermes’ business and offerings.

Regulatory developments and regulatory requirements also are subject to legal challenge in court, and Federated Hermes’ considers initiating, participating in or supporting such legal challenges when management deems it necessary or appropriate.

Federated Hermes also continues to monitor and assess the impact of the interest rate environment (whether increasing or decreasing), and any instability in the banking sector and financial markets, 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.

The difficulty in, and cost of, analyzing and complying with applicable regulatory developments and regulatory requirements increases with the number, complexity, and differing (and potentially conflicting) requirements of new or amended regulatory requirements, among other factors.

In addition to the impact on Federated Hermes' AUM, revenues, operating income and other aspects of Federated Hermes' business, Federated Hermes' regulatory, product development and restructuring, and other efforts in response to regulatory developments and regulatory requirements, 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 Condition.

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 and regulatory requirements ultimately will be successful.

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

As of December 31, 2023, given the regulatory environment, and the possibility of future additional regulatory developments and regulatory requirements, and regulatory oversight, Federated Hermes is unable to fully assess the impact of regulatory developments and regulatory requirements, and Federated Hermes' efforts related thereto, on its Financial Condition.

Regulatory developments and regulatory requirements in the current regulatory environment, and Federated Hermes' efforts in responding to them, could have further material and adverse effects on Federated Hermes' Financial Condition.

Human Capital Resource Management

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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

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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.

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 and shareholders, while affording the business the opportunity to grow.

Generally, for employees working in the U.S., Federated Hermes’ compensation programs are comprised of competitive levels of cash compensation together with equity, a profit sharing/401(k) plan, and other corporate benefits/components for certain positions.

Compensation is structured in the form of:

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and, where appropriate, long-term incentives.

Generally, for employees directly managed from the UK, compensation is based on fixed and variable compensation.

Generally, for employees working in the UK, and other non-U.S.

locations, 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.

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• The pay mix for Investment Management employees is more heavily weighted in variable compensation in the form of discretionary bonuses and, among other factors deemed relevant, takes into account investment product performance from one- through five-year periods.

For employees managed 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.

For employees working in 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.

Management employees are eligible for periodic restricted stock awards and U.S.

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.

Financial factors include, for example, Federated Hermes’ operating profits (as defined in Federated Hermes Stock Incentive Plan), AUM, gross product sales, net product sales, total revenue (including net revenues after taking into account the net pre-tax impact of waivers to maintain the yields of certain money market funds at or above zero (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.

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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).

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.

For all employees working in the UK, and other non-U.S.

locations, 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.

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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.

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, volunteer paid time off, 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.

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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:

Our development framework consists of both on the job development opportunities as well as a robust offering of both classroom and online learning courses facilitated by a network of internal and external experts.

Federated Hermes’ extensive training curriculums focus on technical, professional, leadership and management skills, and include, among others, courses on:

the securities markets and Federated Hermes’ products;

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technical (systems) topics;

and general professional

The attraction, training, and retention of qualified employees across the company supports Federated Hermes’ succession planning at all levels.

and general professional development.

The attraction, development, and retention of qualified employees across the company supports Federated Hermes’ succession planning at all levels.

Diversity and Inclusion

As of December 31, 2023, 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.

Female representation on Federated Hermes’ board of directors is approximately 17%, and approximately 14% of Federated Hermes’ executive officers are women.

In the U.S., approximately 7% of Federated Hermes’ employees are minorities, 32% 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.

As of December 31, 2023, approximately 91% of U.S.

investment teams’ AUM are managed by a team with at least one woman or racially/ethnically diverse individual.

Federated Hermes recognizes the dignity and respect of each person and 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’ unique perspectives and experiences are recognized and appreciated for the contributions they bring to the company.

Federated Hermes has made a long-term commitment to enhancing the diversity of the company’s workforce and providing an inclusive environment.

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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.

and sustainability with ongoing program development.

Federated Hermes cultivates the benefits of workplace diversity throughout the company through its recruitment process, onboarding of new employees, and employees’ ongoing education and development.

In the U.S., the company implemented and/or enhanced several programs and initiatives to advance diversity and inclusion, which include (in addition to other previously established programs and initiatives):

(1) expanding the list of diversity-focused job advertisements;

(2) expanding the diverse colleges and affinity groups with whom we share job postings;

(3) expanding the company’s internship program

with a local high school for underrepresented students;

(4) enhancing our partnership with a Pittsburgh-based high school, whose mission is to break the cycle of generational poverty, by providing educational sessions and student support;

(5) providing paid internships for students affiliated 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;

(6) establishing a relationship with the Financial Alliance for Racial Equity, including providing paid internship opportunities;

(7) expanding the company’s relationship with the Hispanic Heritage Foundation to offer internship and entry level employment opportunities;

and (8) providing Juneteenth as a paid company holiday.

In London, several diversity and inclusion initiatives have been launched, including (in addition to other previously established programs and initiatives):

(1) menopause essential training for all line managers;

(2) inclusive recruitment training;

(3) neurodiversity training open to all colleagues;

(4) cultural competency workshops with several teams across the business;

(5) building strategic relationships inclusion workshops;

(6) launching the MYSTORY campaign;

(7) LGBTQ+ awareness training with the Senior Management Team in London and a workshop for all employees;

(8) coping with change workshop;

(9) mental health first aide training and refresher training;

and (10) several men’s health workshops on topics such as:

(a) tips to beat stress and anger;

(b) how to spot symptoms;

and (d) men’s mental health .

The company’s diversity and inclusion initiatives are sponsored and endorsed by Federated Hermes’ board of directors and executive management, and support dignity and respect commitments.

The Compensation Committee of Federated Hermes’ board of directors 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.

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Ceresino has served as Vice Chairman of Federated Hermes since 2007.

He is President of Federated International Management Limited and Federated International Securities Corp.

He is President of Federated International Securities Corp.

and Vice Chairman of Federated MDTA LLC, each of which are wholly-owned subsidiaries of Federated Hermes.

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.

Ceresino began to transition his day-to-day responsibilities on January 12, 2024, and will retire on May 9, 2024, after the transition period.

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 previously served as a member of Federated Hermes’ board of directors from May 1998 to April 2004 and was re-elected to Federated Hermes’ board of directors 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.

9 unchanged sentences

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 previously served as a member of Federated Hermes’ board of directors from May 1998 to April 2004 and was re-elected to Federated Hermes’ board of directors 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.

15 unchanged sentences

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.

He also serves as a Chairman of Private Markets and as a director or officer of certain FHL subsidiaries.

Uhlman has served as Vice President of Federated Hermes, and President and a director of Federated Securities Corp., a wholly-owned subsidiary of Federated Hermes, since June 2016.

9 unchanged sentences

Between September 2003 and October 2007, Mr.

Van Meter served as Senior Counsel in the SEC’s DOE.

Van Meter served as Senior Counsel in the SEC’s Division of Examinations.

Available Information

5 unchanged sentences

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

What changed 10-K

Item 1. Business