AllianceBernstein Holding L.P. 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal Year Ended December 31, 2007
For the transition period from to
Commission file number 001-09818
AllianceBernstein Holding l.p.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (212) 969-1000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the units representing assignments of beneficial ownership of limited partnership interests held by non-affiliates computed by reference to the price at which such units were last sold on the New York Stock Exchange as of June 30, 2007 was approximately $7,249,000,000.
The number of units representing assignments of beneficial ownership of limited partnership interests outstanding as of January 31, 2008 was 87,251,925. (This figure includes 100,000 units of general partnership interest having economic interests equivalent to the economic interests of the units representing assignments of beneficial ownership of limited partnership interests.)
DOCUMENTS INCORPORATED BY REFERENCE
This Form 10-K does not incorporate any document by reference.
TABLE OF CONTENTS
GLOSSARY OF CERTAIN DEFINED TERMS
“AllianceBernstein>” — AllianceBernstein L.P. (Delaware limited partnership formerly known as Alliance Capital Management L.P., “Alliance Capital>”), the operating partnership, and its subsidiaries and, where appropriate, its predecessors, Holding and ACMC, Inc. and their respective subsidiaries.
“AllianceBernstein Investments>”— AllianceBernstein Investments, Inc. (Delaware corporation), a wholly-owned subsidiary of AllianceBernstein that services retail clients and distributes company-sponsored mutual funds.
“AllianceBernstein Partnership Agreement>”— the Amended and Restated Agreement of Limited Partnership of AllianceBernstein.
“AllianceBernstein Units>”— units of limited partnership interest in AllianceBernstein.
“AUM” — assets under management for clients.
“AXA>”— AXA (société anonyme organized under the laws of France), the holding company for an international group of insurance and related financial services companies engaged in the financial protection and wealth management businesses.
“AXA Equitable>”— AXA Equitable Life Insurance Company (New York stock life insurance company), an indirect wholly-owned subsidiary of AXA Financial, and its subsidiaries other than AllianceBernstein and its subsidiaries.
“AXA Financial>”— AXA Financial, Inc. (Delaware corporation), a wholly-owned subsidiary of AXA.
“Bernstein GWM>” — Bernstein Global Wealth Management, a unit of AllianceBernstein that services private clients.
“Bernstein Transaction>”— on October 2, 2000, AllianceBernstein’s acquisition of the business and assets of SCB Inc., formerly known as Sanford C. Bernstein Inc. (“Bernstein”), and assumption of the liabilities of the Bernstein business.
“Exchange Act”— the Securities Exchange Act of 1934, as amended.
“ERISA>” — the Employee Retirement Income Security Act of 1974, as amended.
“General Partner>”— AllianceBernstein Corporation (Delaware corporation), the general partner of AllianceBernstein and Holding and a wholly-owned subsidiary of AXA Equitable, and, where appropriate, ACMC, Inc., its predecessor.
“Holding>” — AllianceBernstein Holding L.P. (Delaware limited partnership).
“Holding Partnership Agreement>”— the Amended and Restated Agreement of Limited Partnership of Holding.
“Holding Units>”— units representing assignments of beneficial ownership of limited partnership interests in Holding.
“Investment Advisers Act”— the Investment Advisers Act of 1940, as amended.
“Investment Company Act”— the Investment Company Act of 1940, as amended.
“NYSE” — the New York Stock Exchange, Inc.
“Partnerships”— AllianceBernstein and Holding together.
“SCB LLC>”— Sanford C. Bernstein & Co., LLC (Delaware limited liability company), a wholly-owned subsidiary of AllianceBernstein that provides institutional research services in the United States.
“SCBL>”— Sanford C. Bernstein Limited (U.K. company), a wholly-owned subsidiary of AllianceBernstein that provides institutional research services primarily in Europe.
“SEC”— the United States Securities and Exchange Commission.
“Securities Act>”— the Securities Act of 1933, as amended.
The words “we” and “our” in this Form 10-K refer collectively to Holding and AllianceBernstein, or to their officers and employees. Similarly, the word “company” refers to both Holding and AllianceBernstein. Where the context requires distinguishing between Holding and AllianceBernstein, we identify which of them is being discussed. Cross-references are in italics.
We use “global” in this Form 10-K to refer to all nations, including the United States; we use “international” or “non-U.S.” to refer to nations other than the United States.
We use “emerging markets” in this Form 10-K to refer to countries considered to be developing countries by the international financial community and countries included in the MSCI emerging markets index. As of January 31, 2008, examples of such countries are Argentina, Brazil, Chile, Egypt, India, Indonesia, Israel, Malaysia, Mexico, the People’s Republic of China, Peru, the Philippines, Poland, South Africa, South Korea, Taiwan, Thailand, and Turkey.
We use the term “hedge funds” in this Form 10-K to refer to private investment partnerships we sponsor that invest in various alternative strategies such as leverage, short selling of securities and utilizing forward contracts, currency options and other derivatives.
AllianceBernstein provides research, diversified investment management and related services globally to a broad range of clients, including:
We also provide distribution, shareholder servicing, and administrative services to our sponsored mutual funds.
Our primary objective is to have more investment knowledge and to use it better than our competitors to help our clients achieve their investment goals and financial peace of mind.
Our high-quality, in-depth, fundamental research is the foundation of our business. We believe that our global team of research professionals gives us a competitive advantage in achieving investment success for our clients.
Our research disciplines include fundamental research, quantitative research, economic research, and currency forecasting capabilities. In addition, we have created several specialized research units, including one unit that examines global strategic changes that can affect multiple industries and geographies, and another dedicated to identifying potentially successful innovations within early-stage companies.
Products and Services
We offer a broad range of investment products and services to our clients:
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These services are provided by a group of investment professionals with significant expertise in their respective disciplines. As of December 31, 2007, our 304 buy-side research analysts, located around the world, supported our 180 portfolio managers. Our portfolio managers have an average of 20 years of experience in the industry and 10 years of experience with AllianceBernstein. Together, they oversee a number of different types of investment services within various vehicles and strategies discussed above. As of December 31, 2007, our 60 sell-side research analysts provided the foundation for our Institutional Research Services.
Our services include:
We manage these services using various investment disciplines, including market capitalization (e.g., large-, mid-, and small-cap equities), term (e.g., long-, intermediate-, and short-duration debt securities), and geographic location (e.g., U.S., international, global, and emerging markets), as well as local and regional disciplines in major markets around the world.
Blend strategies are an increasingly important component of our product line. As of December 31, 2007, blend AUM was $175 billion (representing 22% of our company-wide AUM), an increase of 30% from $134 billion as of December 31, 2006 and 99% from $88 billion as of December 31, 2005.
We market and distribute our hedge funds globally to high-net-worth clients and, more recently, to institutional investors. Hedge fund AUM totaled $9.5 billion as of December 31, 2007, $7.5 billion of which was private client AUM and $2.0 billion of which was institutional AUM. Our hedge fund AUM constitutes only a small portion of our company-wide AUM, but can have a disproportionately large effect on our revenues because of the performance-based fees we are eligible to earn. For additional information about these fees, see “Revenues” in this Item 1, “Risk Factors” in Item 1A, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
Sub-advisory client mandates span our investment strategies, including growth, value, fixed income, and blend. We serve as sub-adviser for retail mutual funds, insurance products, retirement platforms, and institutional investment products.
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We serve clients in major global markets through operations in 48 cities in 25 countries. Our client base includes investors throughout the Americas, Europe, Asia, Africa, and Australia. We utilize an integrated global investment platform that provides our clients with access to local (country-specific), international, and global research and investment strategies.
Assets under management by client domicile and investment service as of December 31, 2007, 2006, and 2005 were as follows:
As the above charts indicate, our business continues to become increasingly global. Our international client base increased by 23% during 2007 and 44% during 2006 and, likewise, our global and international AUM increased by 27% during 2007 and 50% during 2006. In addition, approximately 80%, 76%, and 69% of our gross asset inflows (sales / new accounts) during 2007, 2006, and 2005, respectively, were invested in global and international investment services.
We earn revenues primarily by charging fees for managing the investment assets of, and providing research to, our clients.
We generally calculate investment advisory fees as a percentage of the value of AUM at a specific point in time or as a percentage of the value of average AUM for the applicable billing period, with these fees varying by type of investment service, size of account, and total amount of assets we manage for a particular client. Accordingly, fee income generally increases or decreases as AUM increases or decreases. Increases in AUM generally result from market appreciation, positive investment performance for clients, or net asset inflows from new and existing clients. Similarly, decreases in AUM generally result from market depreciation, negative investment performance for clients, or net asset outflows due to client redemptions, account terminations, or asset withdrawals.
We are eligible to earn performance-based fees on hedge fund services, as well as some Institutional Investment Services. In these situations, we charge a base advisory fee and are eligible to earn an additional performance-based fee or incentive allocation that is calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. In addition, many performance-based fees include a high-watermark provision, which generally provides that if a client account underperforms relative to its performance target (whether absolute or relative to a specified benchmark), it must gain back such underperformance before we can collect future performance-based fees. Therefore, if we do not exceed our performance target for a particular period, we will not earn a performance-based fee for that period and, for accounts with a high-watermark provision, we will impair our ability to earn future performance-based fees. Because the portion of our AUM on which we are eligible to earn performance-based fees has increased, the seasonality and volatility of our revenues and earnings have become more significant. Our performance-based fees in 2007 were $81.2 million, in 2006 were $235.7 million, and in 2005 were $131.9 million. For additional information about performance-based fees, see “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
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We sometimes experience periods when the number of new accounts or the amount of AUM increases or decreases significantly. These shifts result from wide-ranging factors, including conditions of financial markets, our investment performance for clients, and changes in our clients’ investment preferences.
We earn revenues from clients to whom we provide fundamental research and brokerage-related services generally in the form of transaction fees calculated as either “cents per share” or a percentage of the value of the securities traded for these clients.
Our revenues may fluctuate for a number of reasons; see “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
As of December 31, 2007, we had 5,580 full-time employees located in 25 countries, including 364 research analysts, 180 portfolio managers, 42 traders, and 31 professionals with other investment-related responsibilities. We have employed these professionals for an average period of approximately seven years, and their average investment experience is approximately 16 years. We consider our employee relations to be good.
Institutional Investment Services
We serve our institutional clients primarily through AllianceBernstein Institutional Investments, a unit of AllianceBernstein, and through other units in our international subsidiaries and one of our joint ventures (institutional relationships of less than $25 million are generally serviced by Bernstein GWM, our Private Client channel). Institutional Investment Services include actively managed equity accounts (including growth, value, and blend accounts), fixed income accounts, and balanced accounts (which combine equity and fixed income), as well as passive management of index and enhanced index accounts. These services are provided through separately managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, and other investment vehicles. As of December 31, 2007, institutional AUM was $508 billion, or 63% of our company-wide AUM. For more information concerning institutional AUM, revenues, and fees, see “Assets Under Management, Revenues, and Fees” in this Item 1.
Our institutional client base includes unaffiliated corporate and public employee pension funds, endowment funds, domestic and foreign institutions and governments, and certain of our affiliates (AXA and its subsidiaries), as well as certain sub-advisory relationships with unaffiliated sponsors of various other investment products. We manage approximately 2,448 mandates for these clients, which are located in 45 countries. As of December 31, 2007, we managed employee benefit plan assets for 57 of the Fortune 100 companies, and we managed public pension fund assets for 37 states and/or municipalities in those states.
Like our business generally, our Institutional Investment Services are becoming increasingly global. As of December 31, 2007, our institutional AUM invested in global and international investment services was $341 billion, or 67% of institutional AUM, as compared to $270 billion, or 59% of institutional AUM, as of December 31, 2006, and $172 billion, or 48% of institutional AUM, as of December 31, 2005. Similarly, as of December 31, 2007, the AUM we invested for clients domiciled outside the United States was $269 billion, or 53% of institutional AUM, as compared to $214 billion, or 47% of institutional AUM, as of December 31, 2006, and $138 billion, or 38% of institutional AUM, as of December 31, 2005.
We provide investment management and related services to a wide variety of individual retail investors, both in the U.S. and internationally, through retail mutual funds sponsored by our company, our subsidiaries and affiliated joint venture companies; mutual fund sub-advisory relationships; Separately Managed Account Programs; and other investment vehicles (“Retail Products and Services”). As of December 31, 2007, retail AUM, which is determined by subtracting applicable liabilities from AUM, was $183 billion, or 23% of our company-wide AUM. For more information concerning retail AUM, revenues, and fees, see “Assets Under Management, Revenues, and Fees” in this Item 1.
Our Retail Products and Services are designed to provide disciplined, research-based investments that contribute to a well-diversified investment portfolio. We distribute these products and services through financial intermediaries, including broker-dealers, insurance sales representatives, banks, registered investment advisers, and financial planners.
Our Retail Products and Services are becoming increasingly global. As of December 31, 2007, our retail AUM invested in global and international investment services was $110 billion, or 60% of retail AUM, as compared to $86 billion, or 52% of retail AUM, as of December 31, 2006, and $65 billion, or 45% of retail AUM, as of December 31, 2005. As of December 31, 2007, the AUM we invested for clients domiciled outside the U.S. was $44 billion, or 24% of retail AUM, as compared to $40 billion, or 24% of retail AUM, as of December 31, 2006, and $39 billion, or 27% of retail AUM, as of December 31, 2005.
Our Retail Products and Services include open-end and closed-end funds that are either (i) registered as investment companies under the Investment Company Act (“U.S. Funds”), or (ii) not registered under the Investment Company Act and generally not offered to United States persons (“Non-U.S. Funds” and collectively with the U.S. Funds, “AllianceBernstein Funds”). They provide a broad range of investment options, including local and global growth equities, value equities, blend strategies, and fixed income securities. They also include Separately Managed Account Programs, which are sponsored by financial intermediaries and generally charge an all-inclusive fee covering investment management, trade execution, asset allocation, and custodial and administrative services. We also provide distribution, shareholder servicing, and administrative services for our Retail Products and Services.
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Our U.S. Funds, which include retail funds, our variable products series fund (a component of an insurance product), and the Sanford C. Bernstein Funds (principally Private Client Services products), currently offer 120 different portfolios to U.S. investors. As of December 31, 2007, retail U.S. Funds AUM was approximately $66 billion, or 36% of total retail AUM. Because of the way they are marketed and serviced, we report substantially all of the AUM in the Sanford C. Bernstein Funds (“SCB Funds”), which totaled $32 billion as of December 31, 2007, as private client AUM.
We offer the following Retail Products and Services to clients domiciled outside the United States:
AllianceBernstein Investments serves as the principal underwriter and distributor of the U.S. Funds. AllianceBernstein Investments employs approximately 160 sales representatives who devote their time exclusively to promoting the sale of U.S. Funds and certain other Retail Products and Services by financial intermediaries.
AllianceBernstein (Luxembourg) S.A. (“AllianceBernstein Luxembourg”), a Luxembourg management company and one of our wholly-owned subsidiaries, generally serves as the placing or distribution agent for the Non-U.S. Funds. AllianceBernstein Luxembourg employs approximately 21 sales representatives who devote their time exclusively to promoting the sale of Non-U.S. Funds and other Retail Products and Services by financial intermediaries.
Cash Management Services
During June 2005, Federated Investors, Inc. (“Federated”) acquired our retail cash management services. For additional information, see Note 22 to AllianceBernstein’s consolidated financial statements in Item 8.
Private Client Services
Bernstein GWM combines the former private client services group of Bernstein, which has served private clients for approximately 40 years, and the former private client group of Alliance Capital. As of December 31, 2007, private client AUM was $109 billion, or 14% of our company-wide AUM. For more information concerning private client AUM, revenues, and fees, see “Assets Under Management, Revenues, and Fees” in this Item 1.
Through Bernstein GWM, we provide Private Client Services to high-net-worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities by means of separately managed accounts, hedge funds, mutual funds, and other investment vehicles. We target investors with financial assets of $1 million or more, although we have a minimum opening account size of $500,000.
Our Private Client Services are built on a sales effort that involves 338 financial advisors. These advisors do not manage money, but work with private clients and their tax, legal, and other advisors to assist clients in determining a suitable mix of U.S. and non-U.S. equity securities and fixed income investments. The diversified portfolio created for each client is intended to maximize after-tax investment returns, in light of the client’s individual investment goals, income requirements, risk tolerance, tax situation, and other relevant factors. In creating these portfolios, we utilize all of our resources, including research reports, investment planning services, and our Wealth Management Group, which has in-depth knowledge of trust, estate, and tax planning strategies.
Our financial advisors are based in 18 cities in the U.S.: New York City, Atlanta, Boston, Chicago, Cleveland, Dallas, Denver, Houston, Los Angeles, Miami, Minneapolis, Philadelphia, San Diego, San Francisco, Seattle, Tampa, Washington, D.C., and West Palm Beach. We also have financial advisors based in London, England. We added 40 financial advisors in 2007, a 13% increase from 2006; however, we anticipate that growth in the number of financial advisors will slow in 2008.
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Non-U.S. investment services have become increasingly important in the private client channel. As of December 31, 2007, our private client AUM invested in global and international investment services was $38 billion, or 35% of private client AUM, as compared to $29 billion, or 30% of private client AUM, as of December 31, 2006, and $20 billion, or 26% of private client AUM, as of December 31, 2005.
Institutional Research Services
Institutional Research Services (“IRS”) consist of independent research, portfolio strategy, and brokerage-related services provided to institutional investors such as pension fund, hedge fund, and mutual fund managers, and other institutional investors. Brokerage-related services are provided by SCB LLC in the United States and SCBL primarily in Europe. As of December 31, 2007, SCB LLC and SCBL (together, “SCB”) served approximately 1,350 clients in the U.S. and approximately 460 clients outside the U.S. For more information concerning the revenues we derive from IRS, see “Assets Under Management, Revenues, and Fees” in this Item 1.
SCB provides fundamental company and industry research along with disciplined research into securities valuation and factors affecting stock-price movements. Our analysts are consistently among the highest ranked research analysts in industry surveys conducted by third-party organizations. Along with quantitative analysts and portfolio strategists, our IRS research team totals approximately 175 people, including 55 senior analysts.
In 2007, SCBL launched its European equity program and algorithmic trading capabilities in London, where SCBL employs 16 published analysts covering industries and companies in Europe. These product additions complement similar programs rolled out in the U.S. in 2005 and 2006.
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Assets Under Management, Revenues, and Fees
The following tables summarize our AUM and revenues by distribution channel:
Assets Under Management(1)
AXA Financial, AXA Equitable, and our other affiliates, whose AUM consists primarily of fixed income investments, together constitute our largest client. Our affiliates represented approximately 15%, 17%, and 19% of our company-wide AUM as of December 31, 2007, 2006, and 2005, respectively. We also earned approximately 5% of our company-wide net revenues from our affiliates for each of 2007, 2006, and 2005. We manage this AUM as part of our Institutional Investment Services and our Retail Services.
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Institutional Investment Services
The following tables summarize our Institutional Investment Services AUM and revenues:
Institutional Investment Services Assets Under Management(1)
(by Investment Service)
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Revenues From Institutional Investment Services
(by Investment Service)
As of December 31, 2007, 2006, and 2005, Institutional Investment Services represented approximately 63%, 63%, and 62%, respectively, of our company-wide AUM. The fees we earned from these services represented approximately 33%, 31%, and 28% of our company-wide net revenues for 2007, 2006, and 2005, respectively.
We manage assets for AXA and its subsidiaries, which together constitute our largest institutional client. These assets accounted for approximately 16%, 17%, and 18% of our total institutional AUM as of December 31, 2007, 2006, and 2005, respectively, and approximately 7%, 7%, and 8% of our total institutional revenues for 2007, 2006, and 2005, respectively.
The institutional AUM we manage for our affiliates, along with our nine other largest institutional accounts, accounts for approximately 28% of our total institutional AUM as of December 31, 2007 and approximately 17% of our total institutional revenues for the year ended December 31, 2007. No single institutional client other than AXA and its subsidiaries accounted for more than approximately 1% of our company-wide net revenues for the year ended December 31, 2007.
We manage the assets of our institutional clients through written investment management agreements or other arrangements, all of which are generally terminable at any time or upon relatively short notice by either party. In general, our written investment management agreements may not be assigned without client consent.
We are compensated principally on the basis of investment advisory fees calculated as a percentage of assets under management. The percentage we charge varies with the type of investment service, the size of the account, and the total amount of assets we manage for a particular client.
We are eligible to earn performance-based fees on approximately 16% of institutional assets under management, which are primarily invested in equity and fixed income services rather than hedge funds. Performance-based fees provide for a relatively low asset-based fee plus an additional fee based on investment performance. For additional information about performance-based fees, see “General - Revenues” in this Item 1 and “Risk Factors” in Item 1A.
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The following tables summarize our Retail Services AUM and revenues:
Retail Services Assets Under Management
(by Investment Service)
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Revenues From Retail Services
(by Investment Service)
Investment advisory fees and distribution fees for our Retail Products and Services are generally charged as a percentage of average daily AUM. As certain of the U.S. Funds have grown, we have revised our fee schedules to provide lower incremental fees above certain asset levels. Fees paid by the U.S. Funds, EQ Advisors Trust (“EQAT”), AXA Enterprise Multimanager Funds Trust (“AXA Enterprise Trust”), and AXA Premier VIP Trust are reflected in the applicable investment management agreement, which generally must be approved annually by the boards of directors or trustees of those funds, including by a majority of the independent directors or trustees. Increases in these fees must be approved by fund shareholders; decreases need not be, including any decreases implemented by a fund’s directors and trustees. In general, each investment management agreement with the AllianceBernstein Funds, EQAT, AXA Enterprise Trust, and AXA Premier VIP Trust provides for termination by either party at any time upon 60 days’ notice.
Fees paid by Non-U.S. Funds are reflected in investment management agreements that continue until they are terminated. Increases in these fees must generally be approved by the relevant regulatory authority depending on the domicile and structure of the fund, and Non-U.S. Fund shareholders must be given advance notice of any fee increases.
Our Retail Products and Services include variable products, which are open-end mutual funds designed to fund benefits under variable annuity contracts and variable life insurance policies offered by life insurance companies (“Variable Products”). We manage the AllianceBernstein Variable Products Series Fund, Inc., which serves as the investment vehicle for insurance products offered by unaffiliated insurance companies, and we sub-advise variable product mutual funds sponsored by affiliates. As of December 31, 2007, we managed or sub-advised approximately $59 billion of Variable Product AUM.
The mutual funds we sub-advise for various affiliates together constitute our largest retail client. They accounted for approximately 22%, 24%, and 29% of our total retail AUM as of December 31, 2007, 2006, and 2005, respectively, and approximately 7%, 7%, and 8% of our total retail revenues for 2007, 2006 and 2005, respectively.
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Our mutual fund distribution system (the “System”) includes a multi-class share structure that permits open-end AllianceBernstein Funds to offer investors various options for the purchase of mutual fund shares, including both front-end load shares and back-end load shares. For front-end load shares, AllianceBernstein Investments pays sales commissions to financial intermediaries distributing the funds from the front-end sales charge it receives from investors at the time of the sale. For back-end load shares, AllianceBernstein Investments pays sales commissions to financial intermediaries at the time of sale and also receives higher ongoing distribution services fees from the mutual funds. In addition, investors who redeem back-end load shares before the expiration of the minimum holding period (which ranges from one year to four years) pay a contingent deferred sales charge (“CDSC”) to AllianceBernstein Investments. We expect to recover deferred sales commissions over periods not exceeding five and one-half years through receipt of a CDSC and/or the higher ongoing distribution services fees we receive from holders of back-end load shares. Payments of sales commissions made to financial intermediaries in connection with the sale of back-end load shares under the System, net of CDSC received of $31.1 million, $23.7 million, and $21.4 million, totaled approximately $84.1 million, $98.7 million, and $74.2 million during 2007, 2006, and 2005, respectively.
The rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”), the successor to the National Association of Securities Dealers, Inc., effectively cap the aggregate sales charges that may be received from each U.S. Fund by AllianceBernstein Investments. The cap is 6.25% of cumulative gross sales (plus interest at the prime rate plus 1% per annum) in each share class of the open-end U.S. Funds.
Most open-end U.S. Funds have adopted a plan under Rule 12b-1 of the Investment Company Act that allows the fund to pay, out of assets of the fund, distribution and service fees for the distribution and sale of its shares (“Rule 12b-1 Fees”). The open-end AllianceBernstein Funds have entered into agreements with AllianceBernstein Investments under which they pay a distribution services fee to AllianceBernstein Investments. AllianceBernstein Investments has entered into selling and distribution agreements pursuant to which it pays sales commissions to the financial intermediaries that distribute our open-end U.S. Funds. These agreements are terminable by either party upon notice (generally not more than 60 days) and do not obligate the financial intermediary to sell any specific amount of fund shares. A small amount of mutual fund sales is made directly by AllianceBernstein Investments, in which case AllianceBernstein Investments retains the entire sales charge.
In addition to Rule 12b-1 Fees, AllianceBernstein Investments, at its own expense, currently provides additional payments under distribution services and educational support agreements to firms that sell shares of our funds, a practice sometimes referred to as revenue sharing. Although the amount of payments made to each qualifying firm in any given year may vary, the total amount paid to a financial intermediary in connection with the sale of shares of U.S. Funds will generally not exceed the sum of (i) 0.25% of the current year’s fund sales by that firm, and (ii) 0.10% of average daily net assets attributable to that firm over the course of the year. These sums may be associated with our funds’ status on a financial intermediary’s preferred list of funds or may be otherwise associated with the financial intermediary’s marketing and other support activities, such as client education meetings and training efforts relating to our funds.
Financial intermediaries and record keepers that provide sub-transfer agency or accounting services with respect to their customers’ investments in AllianceBernstein Funds may receive specified payments from these funds or from affiliates of AllianceBernstein, including AllianceBernstein Investor Services, Inc. (one of our wholly-owned subsidiaries, “AllianceBernstein Investor Services”) and AllianceBernstein Investments.
During 2007, the 10 financial intermediaries responsible for the largest volume of sales of open-end AllianceBernstein Funds were responsible for 38% of such sales. AXA Advisors, LLC (“AXA Advisors”), a wholly-owned subsidiary of AXA Financial that utilizes members of AXA Equitable’s insurance sales force as its registered representatives, was responsible for approximately 2%, 2%, and 3% of total sales of shares of open-end AllianceBernstein Funds in 2007, 2006, and 2005, respectively. AXA Advisors is under no obligation to sell a specific amount of AllianceBernstein Fund shares and also sells shares of mutual funds sponsored by other affiliates and unaffiliated organizations.
Merrill Lynch & Co., Inc. (and its subsidiaries, “Merrill Lynch”) was responsible for approximately 7%, 6%, and 5% of open-end AllianceBernstein Fund sales in 2007, 2006, and 2005, respectively. Citigroup Inc. (and its subsidiaries, “Citigroup”) was responsible for approximately 7% of open-end AllianceBernstein Fund sales in 2007 and 5% in each of 2006 and 2005. Neither Merrill Lynch nor Citigroup is under any obligation to sell a specific amount of AllianceBernstein Fund shares and each also sells shares of mutual funds that it sponsors and that are sponsored by unaffiliated organizations.
No dealer or agent has in any of the last three years accounted for more than 10% of total sales of shares of our open-end AllianceBernstein Funds.
Based on industry sales data reported by the Investment Company Institute, our market share in the U.S. mutual fund industry is 1.2% of total industry assets and we accounted for 1.0% of total open-end industry sales (and 3.4% of non-proprietary manager sales) in the U.S. during 2007. The investment performance of the U.S. Funds is an important factor in the sale of their shares, but there are also other factors, including the level and quality of shareholder services (see below) and the amounts and types of distribution assistance and administrative services payments made to financial intermediaries. We believe that our compensation programs with financial intermediaries are competitive with others in the industry.
Each of the U.S. Funds appointed an independent compliance officer reporting to the board of directors of each U.S. Fund. The expense of this officer and his staff is borne by AllianceBernstein.
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AllianceBernstein Investor Services provides transfer agency and related services for each open-end U.S. Fund and provides shareholder servicing for each open-end U.S. Fund’s shareholder accounts (approximately 4.1 million accounts in total). (Transfer agency and related services are provided to the SCB Funds primarily by Boston Financial Data Services.) As of December 31, 2007, AllianceBernstein Investor Services employed 258 people. AllianceBernstein Investor Services operates in San Antonio, Texas, and it receives a monthly fee under each of its servicing agreements with the open-end U.S. Funds based on the number and type of shareholder accounts serviced. Each servicing agreement must be approved annually by the relevant open-end U.S. Fund’s board of directors or trustees, including a majority of the independent directors or trustees, and may be terminated by either party without penalty upon 60 days’ notice.
AllianceBernstein Funds utilize our personnel to perform most legal, clerical, and accounting services. Payments to us by the U.S. Funds and certain Non-U.S. Funds for these services must be specifically approved in advance by each fund’s board of directors or trustees. Currently, AllianceBernstein Investor Services record revenues for providing these services to the AllianceBernstein Funds at the rate of approximately $7.0 million per year.
A unit of AllianceBernstein Luxembourg (“ABIS Lux”) is the transfer agent for substantially all of the Non-U.S. Funds. As of December 31, 2007, ABIS Lux employed 77 people. ABIS Lux operates in Luxembourg (and is supported by operations in Singapore, Hong Kong, and the United States) and receives a monthly fee for its transfer agency services and a transaction-based fee under various services agreements with the Non-U.S. Funds for which it provides these services. Each agreement may be terminated by either party upon 60 days’ notice.
Private Client Services
The following tables summarize Private Client Services AUM and revenues:
Private Client Services Assets Under Management
(by Investment Service)
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Revenues From Private Client Services
(by Investment Service)
Private client accounts are managed pursuant to a written investment advisory agreement generally among the client, AllianceBernstein and SCB LLC (sometimes between the client and AllianceBernstein Limited, a wholly-owned subsidiary of ours organized in the U.K.), which usually is terminable at any time or upon relatively short notice by any party. In general, these contracts may not be assigned without the consent of the client. We are compensated under these contracts by fees calculated as a percentage of AUM at a specific point in time or as a percentage of the value of average assets under management for the applicable billing period, with these fees varying based on the type of portfolio and the size of the account. The aggregate fees we charge for managing hedge funds may be higher than the fees we charge for managing other assets in private client accounts because hedge fund fees provide for performance-based fees, incentive allocations, or carried interests in addition to asset-based fees. We are eligible to earn performance-based fees on approximately 8% of private client AUM, substantially all of which is held in hedge funds.
We eliminated transaction charges during 2005 on U.S. equity services for most private clients as part of a management initiative that changed the structure of investment advisory and services fees charged for our services. The restructuring eliminated transaction charges for trade execution performed by SCB LLC for most private clients; the transaction charges were replaced by higher asset-based fees. This fee structure provides greater transparency and predictability of asset management costs for our private clients. (The elimination of transaction charges was not the result of the New York State Attorney General’s Assurance of Discontinuance dated September 1, 2004 (“NYAG AoD”) or an agreement with any other regulator; see “Governance” in this Item 1 for additional information.)
Revenues from Private Client Services represented approximately 21%, 22%, and 21% of our company-wide net revenues for the years ended December 31, 2007, 2006, and 2005, respectively.
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Institutional Research Services
The following table summarizes Institutional Research Services revenues:
Revenues From Institutional Research Services
We earn revenues for providing investment research to, and executing brokerage transactions for, institutional clients. These clients compensate us principally by directing SCB to execute brokerage transactions, for which we earn transaction charges. These services accounted for approximately 9%, 9%, and 11% of our company-wide net revenues for the years ended December 31, 2007, 2006, and 2005, respectively.
Fee rates charged for brokerage transactions have declined significantly in recent years, but increases in transaction volume in both the U.S. and Europe have more than offset these decreases. For additional information, see “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
Custody and Brokerage
SCB LLC acts as custodian for the majority of AllianceBernstein’s private client AUM and some of AllianceBernstein’s institutional AUM. Other custodial arrangements are maintained by client-designated banks, trust companies, brokerage firms or other custodians.
We generally have the discretion to select the broker-dealers that execute securities transactions for client accounts. When selecting brokers, we are required to obtain “best execution”. Although there is no single statutory definition, SEC releases and other legal guidelines make clear that the duty to obtain best execution requires us to seek “the most advantageous terms reasonably available under the circumstances for a customer’s account”. In addition to commission rate, we take into account such factors as current market conditions, the broker’s financial strength, and the ability and willingness of the broker to commit capital by taking positions in order to execute transactions.
While we select brokers primarily on the basis of their execution capabilities, we may also take into consideration the quality and amount of research services a broker provides to us for the benefit of our clients. These research services, which are paid for with client commissions and which we purchase to augment our own research capabilities, are governed by Section 28(e) of the Exchange Act. We use broker-dealers that provide these services in consideration for commissions paid for the execution of client trades, subject at all times to our duty to seek best execution, and with respect to which we reasonably conclude, in good faith, that the value of the execution and other services we receive from the broker-dealer is reasonable in relation to the amount of commissions paid. The commissions charged by these full-service brokers are generally higher than those charged by electronic trading networks and other “low-touch” trading venues.
We sometimes execute client transactions through SCB LLC or SCBL, our affiliated broker-dealers. We do so only when our clients have consented to our use of affiliated broker-dealers or we are otherwise permitted to do so, and only when we can execute these transactions in accordance with applicable law (i.e., our obligation to obtain best execution). In 2007, we executed approximately $3.3 million in transactions through SCB. We may use brokers to effect client transactions that sell shares of AllianceBernstein Funds or third party funds we sub-advise; however, we prohibit our investment professionals who place trades from considering these other relationships or the sale of fund shares as a factor when selecting brokers to effect transactions.
Our Brokerage Allocation Committee has principal oversight responsibility for evaluating equity-related brokerage matters, including how to use research services we receive in a manner that is in the best interests of our clients and consistent with current regulatory requirements.
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In connection with our name changes to AllianceBernstein L.P. and AllianceBernstein Holding L.P. in February 2006, we have registered a number of service marks with the U.S. Patent and Trademark Office and various foreign patent offices, including an “AB” design logo and the combination of such logo with the mark “AllianceBernstein”.
In connection with the Bernstein Transaction, we acquired all of the rights and title in, and to, the Bernstein service marks, including the mark “Bernstein”.
We maintain a robust fiduciary culture and, as a fiduciary, we place the interests of our clients first and foremost. We are committed to the fair and equitable treatment of all our clients, and to compliance with all applicable rules and regulations and internal policies to which our business is subject. We pursue these goals through education of our employees to promote awareness of our fiduciary obligations, incentives that align employees’ interests with those of our clients, and a range of measures, including active monitoring, to ensure regulatory compliance. Specific steps we have taken to help us achieve these goals include:
We implemented these measures, in part, pursuant to the Order of the Commission (“SEC Order”) dated December 18, 2003 (amended and restated January 15, 2004) and the NYAG AoD (together with the SEC Order, “Orders”), which related to trading practices in the shares of certain of our sponsored mutual funds. In addition, the Orders required:
We believe that our remedial actions provide reasonable assurance that the deficiencies in our internal controls related to market timing will not occur again.
With the approval of the independent directors of the U.S. Fund Boards and the staff of the SEC, we retained an Independent Distribution Consultant (“IDC”) to develop a plan for the distribution of the Restitution Fund. To the extent it is determined by the IDC and the SEC that the harm to mutual fund shareholders caused by market timing exceeds $200 million, we will be required to contribute additional monies to the Restitution Fund. In September 2005, the IDC submitted to the SEC Staff the portion of his report concerning his methodology for determining damages and a proposed distribution plan, which addresses the mechanics of distribution; in February 2006, the final portion of his report was submitted. The Restitution Fund proceeds will not be distributed until after the SEC has issued an order approving the distribution plan. Until then, it is not possible to predict the exact timing, method, or amount of the distribution.
Virtually all aspects of our business are subject to federal and state laws and regulations, rules of securities regulators and exchanges, and laws in the foreign countries in which our subsidiaries conduct business.
AllianceBernstein, Holding, the General Partner, SCB LLC, AllianceBernstein Global Derivatives Corporation (a wholly-owned subsidiary of AllianceBernstein, “Global Derivatives”), and Alliance Corporate Finance Group Incorporated (a wholly-owned subsidiary of AllianceBernstein) are investment advisers registered under the Investment Advisers Act. SCB LLC and Global Derivatives are also registered with the Commodity Futures Trading Commission as commodity pool operators.
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Each U.S. Fund is registered with the SEC under the Investment Company Act and the shares of most U.S. Funds are qualified for sale in all states in the United States and the District of Columbia, except for U.S. Funds offered only to residents of a particular state. AllianceBernstein Investor Services is registered with the SEC as a transfer agent.
SCB LLC and AllianceBernstein Investments are registered with the SEC as broker-dealers, and both are members of FINRA. SCB LLC is also a member of the NYSE and all other principal U.S. exchanges. SCBL is a broker regulated by the Financial Services Authority of the United Kingdom (“FSA”) and is a member of the London Stock Exchange.
AllianceBernstein Trust Company, LLC (“ABTC”), a wholly-owned subsidiary of AllianceBernstein, is a non-depository trust company chartered under New Hampshire law as a limited liability company. ABTC is authorized to act as trustee, executor, transfer agent, assignee, receiver, custodian, investment adviser, and in any other capacity authorized for a trust company under New Hampshire law. As a state-chartered trust company exercising fiduciary powers, ABTC must comply with New Hampshire laws applicable to trust company operations (such as New Hampshire Revised Statutes Annotated Part 392), certain federal laws (such as ERISA and sections of the Bank Secrecy Act), and the New Hampshire banking laws. The primary fiduciary activities of ABTC consist of serving as trustee to a series of collective investment trusts, the investors of which currently are defined benefit and defined contribution retirement plans.
Many of our subsidiaries around the world are subject to minimum net capital requirements by the local laws and regulations to which they are subject. As of December 31, 2007, each of our subsidiaries subject to a minimum net capital requirement satisfied the applicable requirement.
Holding Units trade publicly on the NYSE under the ticker symbol “AB”. Holding is an NYSE listed company and, therefore, is subject to the applicable regulations promulgated by the NYSE.
Our relationships with AXA and its subsidiaries are subject to applicable provisions of the insurance laws and regulations of New York and other states. Under such laws and regulations, the terms of certain investment advisory and other agreements we enter into with AXA or its subsidiaries are required to be fair and equitable, charges or fees for services performed must be reasonable, and, in some cases, are subject to regulatory approval.
All aspects of our business are subject to various federal and state laws and regulations, rules of various securities regulators and exchanges, and laws in the foreign countries in which our subsidiaries and joint ventures conduct business. These laws and regulations are primarily intended to benefit clients and fund shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser or broker-dealer, censures, and fines.
Some of our subsidiaries are subject to the oversight of regulatory authorities in Europe, including the FSA in the U.K., and in Asia, including the Financial Services Agency in Japan, the Securities and Futures Commission in Hong Kong and the Monetary Authority of Singapore. While the requirements of these foreign regulators are often comparable to the requirements of the SEC and other U.S. regulators, they are sometimes more restrictive and may cause us to incur substantial expenditures of time and money in our efforts to comply.
Holding, having elected under Section 7704(g) of the Internal Revenue Code of 1986, as amended (“Code”), to be subject to a 3.5% federal tax on partnership gross income from the active conduct of a trade or business, is a “grandfathered” publicly-traded partnership for federal income tax purposes. Holding is also subject to the 4.0% New York City unincorporated business tax (“UBT”), net of credits for UBT paid by AllianceBernstein. In order to preserve Holding’s status as a “grandfathered” publicly-traded partnership for federal income tax purposes, management ensures that Holding does not directly or indirectly (through AllianceBernstein) enter into a substantial new line of business. A “new line of business” would be any business that is not closely related to AllianceBernstein’s historical business of providing research and diversified investment management and related services to its clients. A new line of business is “substantial” when a partnership derives more than 15% of its gross income from, or uses more than 15% (by value) of its total assets in, the new line of business.
AllianceBernstein is a private partnership for federal income tax purposes and, accordingly, is not subject to federal and state corporate income taxes. However, AllianceBernstein is subject to the 4.0% UBT. Domestic corporate subsidiaries of AllianceBernstein, which are subject to federal, state and local income taxes, are generally included in the filing of a consolidated federal income tax return with separate state and local income tax returns being filed. Foreign corporate subsidiaries are generally subject to taxes at higher rates in the foreign jurisdiction where they are located so, as our business increasingly operates in countries other than the U.S., our effective tax rate continues to increase.
For additional information, see “Risk Factors” in Item 1A.
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History and Structure
We have been in the investment research and management business for more than 35 years. Alliance Capital was founded in 1971 when the investment management department of Donaldson, Lufkin & Jenrette, Inc. (since November 2000, a part of Credit Suisse Group) merged with the investment advisory business of Moody’s Investor Services, Inc. Bernstein was founded in 1967.
In April 1988, Holding “went public” as a master limited partnership. Holding Units, which trade under the ticker symbol “AB”, have been listed on the NYSE since that time.
In October 1999, Holding reorganized by transferring its business and assets to AllianceBernstein, a newly-formed operating partnership, in exchange for all of the AllianceBernstein Units (“Reorganization”). Since the date of the Reorganization, AllianceBernstein has conducted the business formerly conducted by Holding and Holding’s activities have consisted of owning AllianceBernstein Units and engaging in related activities. As stated above, Holding Units trade publicly; AllianceBernstein Units do not trade publicly and are subject to significant restrictions on transfer. The