Federated Hermes, Inc. (FHI) Q4 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Federated Investors Fourth Quarter 2011 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond J. Hanley, President of Federated Investors. Thank you. Mr. Hanley, you may begin.

Good morning, and welcome. Leading today's call will be Chris Donahue, CEO and President of Federated; and Tom Donahue, Chief Financial Officer; and participating in today's call will also be Debbie Cunningham, who is our Chief Investment Officer for the money markets. And let me say that during today's call, we may make forward-looking statements. And we want to note that Federated's actual results may be materially different from the results implied by such statements. We invite you to review our risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated assumes no duty to update any of these forward-looking statements. And with that, I'll turn it over to Chris.

Thank you, Ray, and good morning. I will start with a brief review of Federated's recent business performance before turning the call over to Tom to discuss our financials. Looking first at cash management. Total money market assets increased by $13 billion in the fourth quarter and average money market assets were $8.5 billion higher than the third quarter levels. The growth was concentrated in our wealth management bank trust channel. Money market mutual fund average assets were $249 billion, up about $10 billion compared to the prior couple of quarters. Our market share increased to over 9%. Growth occurred in government money fund assets as prime, and Munis were about flat. While yields remained low, our business continues to grow. Tom will comment on money market fee waivers, and Debbie will discuss market conditions and our commentaries going forward. Looking at the regulatory front, money fund discussions continue. The Chairman of the SEC has indicated that further regulations will likely be proposed and may include fluctuating NAV; capital from sources that could include sponsors; fund shareholders and with the capital markets along with potential redemption barriers. At Federated, we are firm in our belief that money funds were meaningfully and sufficiently strengthened by the 2010 extensive regulation revisions in 2a-7. We saw those changes work successfully through a series of events in the United States, the debt ceiling crisis, and the downgrade and the Europe with Greece and European banks, among the challenges that were faced in 2011. Investors continue to use money funds as an efficient and effective way to manage cash. The funds have ample liquidity and compliance with the revised regulations. Investors have ready access to recent portfolio data, and the SEC has a view into the holdings of all money funds. Those features were also enhanced in the 2010 improvements to rule 2a-7. In our view, these improvements made by the SEC are working quite well in the midst of challenging market conditions. We are encouraged to see support for allowing these changes to be more thoroughly evaluated before imposing additional and potentially damaging additional regulations as expressed in a speech last month by an SEC commissioner. In another favorable development, the Commodity Futures Trading Association recently confirmed their are positive view of the liquidity and stability of money market funds for investment of customer funds. This followed an exhaustive multiyear review, taking into account a variety of factors, including the SEC's 2010 regulatory revisions. As I said before, we are favorably disposed to measures that would enhance the resiliency of money funds, while maintaining the critical features that make money funds vital to 30 million investors and to our capital markets. These 30 million investors who currently maintain $2.7 trillion in money funds, do so in large measure because they desire daily liquidity at par for their cash investments from high-quality funds and managers. We believe the changes that fundamentally alter money funds like floating NAVs, or imposing redemption fees or 30 day holdbacks on a portion of redemptions will cause many investors to abandon money funds. This change has potentially enormous negative systemic consequences. Moving money out of money funds could be expected to move to banks, where it is ill-suited for lending and will require additional capital and FDIC insurance, while making the top banks even too bigger to fail. Perhaps money would also move to less visible, less regulated alternatives, which raises the question of adding to systemic risk. Imposing capital requirements on a product that already has basically 100% equity capital is not necessary, nor in our view, advisable. Capital held against money funds may gave the illusion of protection to investors who are informed clearly that money funds are investment products that are not guaranteed. This concept was, of course, illustrated by the reserve fund. Imposing sponsored capital is another way to set in motion the device of money funds. In our view, it is very unlikely that sponsors of money funds holding capital against these funds could avoid consolidating the funds under their balance sheets. The implications to banks and other fund sponsors are likely to be enormous and detrimental, while the benefits are uncertain at best. In our view, this will lead to sponsors moving away from offering money funds. In the event the changes are made to fundamentally order money funds and cause investors to exit, short-term debt issues will be hurt by the destruction of an efficient and effective funding mechanism that has worked well for over 4 decades with very few exceptions. Recently, 23 corporations and large business organizations, including some of the biggest companies in America -- Alcoa, Boeing, Johnson & Johnson, Kraft, CBS, Safeway and the U.S. Chamber -- sent a letter to the SEC that stated that in their view, no further money market regulatory changes are necessary and that the options under consideration will have a dramatic negative consequence in American businesses ability to raise the capital necessary to restore economic stability and job creation. To us and many others who use and depend on money funds, the best course of action is to recognize that the changes made to date, combined with a multi-decade record of regulatory and market success have resulted in a product that works well. This was illustrated, as I've mentioned, by the challenging and successful road test during many of the challenges of 2011. Turning to longer-term assets, Federated continued to benefit in the fourth quarter from investors increased demand for high-quality income-producing strategies in both equities and fixed income. Looking first to our equities business, we had another strong quarter of sales. We're especially proud of producing positive equity fund and separate account flows in the fourth quarter, which differentiated us from much of the industry during this period. We continue to see strong results from the strategic value dividend strategy. The mutual fund product had a second consecutive quarter of net flows in excess of $1 billion. During 2011, the overall strategy more than doubled to reach $10 billion in assets under management and is the biggest part of our equity franchise. Our sales and marketing teams continue to have success at expanding distribution and promoting this strategy during a period where income-oriented equity investments are top-of-mind with investors and the financial media. Far from a fad, we believe that this is a return to basic investing, and we expect investors to continue to move to successful income-oriented strategies like ours. We have a variety of equity products in this area and believe that the others have good growth potential as well. As we mentioned last quarter, we are seeing some lift in the flows for the International Strategic Value Fund as well. The fund recently passed $100 million in assets, and both gross and net fund sales were up substantially from the prior quarter. While the numbers are small relative to the domestic strategy, we see considerable and complementary growth opportunities. We are advertising and promoting these strategies together. The Clover Small Value Fund also produced positive net sales in the fourth quarter, while the Pru Bear flows turn negative and the Kaufmann products had negative flows, though at a slightly lower level than the prior quarter. At the end of the fourth quarter, we had 6 equity strategies and a variety of styles that have top quartile 3-year records and are well-positioned for growth. Capital income, Pru Bear, InterContinental, our International Leaders Fund, our International Strategic value and the Kaufmann Large Cap Fund. Equity fund flows are positive for the first 3 weeks of January, though we've seen a slight pickup in redemptions in the Pru Bear fund as the equity market has been generally strong. Fourth quarter flows in equity separate accounts were positive and higher than the prior quarter, driven by the aforementioned strategic value strategy. Equity RFP activity grew about 28% in 2011 compared to 2010. We won 2 new accounts in the fourth quarter, with about $270 million of assets expected in the next couple of months. We are seeing particular interest in equity income, the Clover Small Cap Value and our international equity strategies. Now looking at fixed income. Net positive fund flows increased substantially in the fourth quarter versus the prior quarter led by our Total Return Bond Fund, Ultrashort funds, our GIP [ph] product, which is known as the Capital Preservation Fund. We also saw good results in high yield which moved from negative flows in Q3 to positive in Q4 on very, very strong records. At the end of the year, we had 9 fixed income strategies, with top quartile 3-year records. Fixed income flows are running solidly positive for the first 3 weeks of January. Fixed income separate accounts also had net positive flows with inflows in the high yield. RFP activity for fixed income was up approximately 11% in 2011 compared with 2010. We won 3 new accounts in the fourth quarter and have about $500 million of related funding expected in the next couple of months. We continue to see interest in a variety of areas, including active cash, short duration, high yield and other corporates and emerging market debt strategies. Now turning to fund investment performance and looking at quarter end Lipper rankings for Federated's equity funds. 45% of rated assets are in the first or second quartile over the last year; 16%, 3 years; 17%, 5 years; and 75%, 10 years. For Bond Fund assets, the comparable first and second quartile percentages are 46%, 1 year; 35%, 3 years; 68%, 5 years; and 73% for 10 years. Looking at Morningstar rated funds, 34% of rated equity fund assets are in 4- and 5-star products as of year end, and 55% are in 3-, 4- and 5-star product. For Bond Fund, the comparable percentages are 39% are 4- and 5-star, and 79%, 3-, 4-, and 5-star. As of January 25, managed assets were approximately $373 billion, including $287 billion in money markets, $32 billion in equities, $54 billion in fixed income which includes our liquidation portfolios. Money market mutual fund assets stand at about $255 billion. So far in January, money fund assets have ranged between $254 billion and $259 billion and have average right above $256 billion. Now looking at some distribution highlights for the full year 2011, growth sales of equity funds increased 21%, with sales growth strongest in our wealth management bank trust channel. Gross SMA sales increased 69%; fixed income fund sales increased 15%, with the best growth coming from our broker/dealer channel. As you may recall in 2011, we added 12 sales and sales support resources in the broker/dealer channel and 3 consultant relations managers in the institutional channel. We will continue looking at this in 2012, and on the broker/dealer side, we have more than doubled our sales since 2008. Several acquisitions and -- looking at acquisitions and our offshore business, we recently announced the acquisition that will broaden our international business. We're in the process of acquiring the London-based Prime Rate Capital Management. In addition to approximately GBP 1.5 billion sterling of assets, we will incorporate their experienced team in our money market business and gain sterling, euro and dollar-denominated usage products to boost our growth prospects abroad. We expect this deal to close in the first quarter. We continue to seek additional alliances to further advance our business outside the U.S., and we continue to work to grow our current offshore businesses organically. In the U.S., we are seeking consolidation opportunities as they come available. Tom?

Thank you, Chris. Taking off first at the money market fee waivers. The impact to pretax income in Q4 was $26.1 million. The increase from last quarter can be attributed to Treasury money fund products as changes in other fund categories roughly netted out. Interest rates, we had higher assets, higher revenue, higher distribution expense and higher waivers. Gross yields were in the mid to upper single-digit. In certain funds, we exhausted further sharing of waivers with intermediaries, and as a result, distribution expense waivers as a percentage of revenue waivers, decreased from 74% in the third quarter to 71% in Q4. Based on current assets and yield levels, we think these waivers could impact Q1 2012 by around $27 million in pretax earnings. Revenue in Q4 increased from the prior quarter, the first sequential quarterly revenue increased since Q4 2010. Revenue gains from money market and fixed income assets were partially offset by lower equity revenue, while average equity assets were up slightly from the prior quarter, the blended fee rate decreased due to changes in the asset mix. Contributing to the lower blended fee rate where redemptions, as Chris mentioned, in the Kaufmann products and Pru Bear and overall growth in equity separate account assets. Compared to the prior quarter, revenue from money market assets increased by $5.5 million to $99 million due to higher yields and higher assets. Operating expenses increase primarily due to higher money market-related distribution expense, also from higher yields and higher assets. In particular, in our prime funds, higher yields during Q4 led to an increase in revenue and an increase in related distribution expense. The rest of the distribution expense increase was due mainly to higher yields and higher assets and the other money fund categories, again with related revenue increases. Looking forward and holding all of our other variables constant, we estimate that gaining 10 basis points in gross yields will likely reduce the impact of minimum yield waivers by about 36% from these levels. And the 25-basis-point increase would reduce the impact by about 2/3. Looking at expenses, comp and related expense was higher compared to Q3, which included a change in the accruals that had been made up to that point. And also, we had higher incentive comp because of increased sales in Q4. As I've already said, distribution expense increased due mainly to the impact of higher yields and prime money funds, which resulted in higher distribution-related payments to intermediaries. In nonoperating expense, Q4 included $900,000 in investment gains compared to $2.3 million in investment losses in the prior quarter, primarily related to consolidated fees investment products. Looking at our balance sheet, cash and marketable securities totaled $322 million at quarter end, and our net debt was about $41 million. Cash and investments combined with expected additional cash flow from operations and availability under present debt facilities provides us with significant liquidity to be able to take advantage of acquisition opportunities, as well as the ability to fund related contingent payments, share repurchases, dividends, new product fees and other investments and capital expenditures and debt repayments. I'd like to turn the call over to Debbie now to talk about money market conditions briefly.

Thanks, Tom. I thought I'd just give a quick update on the European debt situation, as that continues to be an ever-evolving issue within money market funds, that the good part about today's environment is that presumably, ratings downgrades were actually a good thing and were welcomed by the overall money market community. Various of the 17 European countries that were under review by S&P were downgraded several weeks ago, followed by just last week, several of the various banks within those countries also under review being downgraded. Many were affirmed, but a few were actually downgraded. And as I said, that was actually received from a market perspective with open arms and spread tightening. I guess France at AA+, with no uncertainty, is better than France at AAA with the uncertainty of a downgrade, not unlike what we saw with the United States back in the third quarter of 2011. Spreads are in at this point. There's a lot more liquidity available. Liquidity, both from external sources such as the ECB and other central banks, opening up longer-term facilities from a liquidity perspective to various European banks. But in addition, increased liquidity has come from the marketplace. Certainly, I do believe we're going to continue to hear debates and discussions about Europe going forward. The Greek write-downs are still uncertain, but at this point, I think what the market realizes and what the media has begun to focus on is that it doesn't much matter whether Greece is written down within these banks by 20%, 50%, 75% or 100%. These banks are very large, very strong, very profitable and will continue to survive. It remains to be seen how long the situation continues to evolve. And certainly, it is something that we expect will be with us over the next several years, not just several months. But we do see the tide having turned. Italy 10-year transactions at this point are under 6%. Spanish 10 years are under 5%. These are very firm in our levels that haven't been seen for quite some time, and it's a result of the excess liquidity and the additional funding that these banks are getting in the short term markets from the money markets. The other items that I just touched upon is the most recent FOMC meeting, and what was initially an announcement that was very disheartening that talked about short-term rates remaining unchanged or at extremely low levels into the end of 2014. Previously, in the summer of 2011, the Fed had mentioned that this might go on to mid-2013. And again, their announcement this week initially affirmed the expectation that low rates would be with us for even longer into the end of 2014. What then became a little bit more comforting in the context of the release several hours later when the text of the FOMC meeting was released was in 2 parts. Number one, the Fed is now providing additional information as to what members individually think, not necessarily by name basis but on a dot system basis. And when you look at the dots and how they are arrayed by expectation for interest rates to actually start moving up from a policymaking perspective, they're with -- there are actually 3 of the 17 members of the FOMC committee that think it will be in 2012. Another 6 that think it will be in 2013. Now, there's a larger amount that are in 2014, but it actually showed that there is enough dissension and enough discussion and debate within the FOMC itself that certainly we're not too disheartened after seeing this with the original announcement that takes low rates into 2014. The other thing that became apparent in the second part of their announcement was that low rates doesn't necessarily mean 0 to 25 basis points on a Fed funds target rate. 50 basis points, 75 basis points even 100 basis points with the 1 hand, 1% on a Fed funds target basis is still overall very low from an accommodation perspective from the Fed. So we don't necessarily think that 2014 proclamation means that funds stays at that 0 to 25 basis points. So it was one of those announcements where we were glad there was more to come.

Okay, thank you, Debbie. And we'd like to open the call up for questions now.

[Operator Instructions] Our first question comes from the line of Roger Freeman with Barclays Capital.

I may have missed this earlier. Did you say when you expect the or what are you hearing with respect to when the SEC may actually make its proposal?

Mary Schapiro had said that she expected or wanted to release a proposal before the end of the first quarter.

Okay. If you -- I guess, my question is if you ultimately -- if the proposal was something that required 40 basis points or so, 30, 40 basis points of capital to be held but there was 7 years to get there, 5 to 7 years, is that a model that you can manage to it as a non-bank money market sponsor?

Probably. It would be an unnecessary and unwise move. And as I have said before, the concept of that fidelity put out, which was obviously known as the fidelity buffer, is something that could work because that comes out of the fund and is simply taking yield from today or number of years. There isn't that much yield today. But taking yield from certain times and then putting it into the fund, up to some number, 35 or 40 basis points, that does not cause the fund to trigger a 105 and there by jump $0.01. So stuck within that context is workable, but unnecessary.

Okay, agreed. My only other question right now is just, can you just remind us from an investor perspective, and look at your -- whether it's high net worth, whether it's corporate customers that use money market funds, clearly, there's still a lot of money sitting in money markets or earning basically nothing, so clearly not yield-sensitive. What are the advantages, really particularly corporate of keeping money day to day in money markets versus moving those into a demand deposit? How much of it is just structural in terms the way they're set up today and there's really no incentive to move because the yield differential is not there. But assuming equal yields, like, what are the other benefits from investor perspective being in this?

Roger, it all depends on what kind of client. Most of the clients that we have are looking at it as a cash management system. And therefore, broker/dealer types are basically looking at it to maintain market share in order to write tickets to enhance the client relationships that they have. On the bank trust side, you have an enormous array of systems that are geared around the $1 net asset value, taking care of fiduciary duties and maintaining cash as a cash management system. And there's a lot of intricacies to that and 40 years worth of buildup of systems and activities in that world. In the corporate world, when a corporation like the ones I've listed wants to use money funds, some of them are looking at it from both sides, i.e. as an issuer and on the Treasury side as a user. The advantage they get out of using a money fund even at no yield is that they get what they really want and what is really important to them, which is daily liquidity at par. So a lot of them will diversify their holdings among various money funds and use it as their cash management tool. So to summarize, it really depends on what type of client. But the theme throughout is as you have detected, that it is a cash management system overlay as compared to some yield or investment-oriented overlay.

Okay, so it sounds like the infrastructure around money markets makes -- offers better ability to manage cash, move money around then, say, the banking industry does out of just traditional bank deposits.

Yes, that is very true. It's not only easier, but you have a lot more variety of the type of fund that you would go into. You can go into a government fund, an all government fund, an agency fund, a Muni fund. You can go into a prime fund, different types of prime funds. So you get a broad array of how you might want to play the game.

Our next question comes from the line of Michael Carrier with Deutsche Bank.

Just on the long-term side, so particularly in the equities, but also in fixed income. You've seen a lot of traction. Any color on kind of the concentration? I know you guys may have mentioned this strategic value dividend, but any other products where you're seeing traction on the income side? And then alternatively, any other products that maybe you don't have out there in this distribution channels, but you're looking to launch that could diversify those flows, but even increase them just given that there's -- it continues to be demand for those types of products.

Well, on the equity side that's oriented around income, we have a full family of funds that we had advertised historically as the power of income, which include the capital income fund with an excellent record, the equity income fund, with an excellent record, and then the 2 I commented on in my remarks, the strategic value dividend fund and its companion, the International Strategic Value Dividend Fund. So that's a pretty good array of equity-oriented income products. And if you allow income to mean income, then I don't think you really mean for me to catalog all of our fixed income product, but I could certainly do so if that's where you wanted us to go.

Okay. That's helpful. And then just on the expenses, I think I understand what you guys were discussing in terms of some of the pressures, given where the waivers were, but I guess going forward, when you see flows coming in, into the money fund products, obviously, this quarter very strong, when you think about the pros and cons of all that money coming in, one is still attractive, and then meaning is it still attractive? And then two, is just when the Treasury yields continue to compress, it sounds like you couldn't share anymore of that compression with the distributors. Like what is that level where Treasury has get to where that pressure is a bit more than what we're used to? Meaning, you can't pass on the additional pressure from the waivers.

Mike, it's Ray. The answer to the first part is yes. It still attractive. The yields vary across the different asset categories, but with the exception of the Munis, the yields picked up in all of the categories, at least point-to-point, looking at Q4. And that's why we go through how much of our revenue comes out of the money market. Now to the second part of your question, you really have to drill even into the Treasury funds because we have a subset which would be the minority of the Treasury assets but around $20 billion out of, say, $50 billion that are in primarily a product, 1 product that doesn't use repo. And as a result, those yields where the other ones are today, gross yielding around 10, 11, 12 basis points. That product is more around 4 and the difference being the repo yields are higher than the build yields. And so in that particular product, that's where -- that's behind the comment about we've exhausted the intermediary sharing portion of the waivers, and we still have positive revenue coming from that product, but not as much and there's not an offset to the waivers. We would continue to offer that product. We would expect to continue to offer it, because there are clients who either want or need a product that is strictly T-bills without repo.

Our next question is from the line of Michael Kim with Sandler O'Neill.

This is actually James Howley filling in for Michael. Just a couple of quick questions here. It seems like you guys got some way to take advantage of the environment where a number of your products were in demand, whether it be the strategic value which you touched on in the equity side and some of the fixed income and money market funds. Is that type kind of generally remain pretty soft here, so kind of curious to get your view on how you see rerisking and whole process playing out assuming that markets remain constructive here. Do you guys think it will be a fairly quick rerisking or you think it will be a little bit more of a drawn out process and just based on what you guys have seen over the last few years.

Well, it's hard to say when you look at the flows that we've had. There's clearly been a movement toward the income side of equity. And we phrase that in the past as kind of a step out into rerisking. It's driven by yield, but you also have, of course, the underlying opportunities that an equity investment would have. We're seeing increased demand into other spread on the fixed income side and the spread products like high-yield, like emerging market debt. So you see the beginning of movement in regard to rerisking, but as to the eventual pace of it and how that could be affected by -- obviously, by markets and it's just very hard for us to say.

We still are seeing the flows into the dividend oriented equity funds.

And it's probably worth noting too that you look at the month of January, and we have products like, for example, the Kaufmann funds that have moved just isolating the month of January to the top center categories again but with better treatments for international investments in the equity markets and better recognition of the quality of the companies that they've had in those portfolios. We've seen a pretty dramatic reversal there. So we try to be positioned and have products for wherever the demand moves to.

And then just kind of touching back to regulatory changes here. Obviously, you guys spoke about that earlier but how much is that playing to your capital management strategy if at all? The potential for capital buffers come into play when you're thinking about either buybacks, dividends or M&A opportunities?

Yes. We took out a loan a couple of years ago and still have a pretty decent sized loan out. And we basically have kept most of that on the balance sheet. Remember I said, we only have $41 million of net debt and availability of $200 million under our revolver, while we have assets of $322 million on the balance sheet. So we're keeping that here at the home team, and I always refer to it as risk management and potential M&A and contingent payment items. So we put them all together and risk management would cover what you're talking about in terms of capital-type issues.

Our next question comes from the line of Cynthia Mayer with Bank of America Merrill Lynch.

Going back to the fee waivers, and I apologize if you covered this already, but it seems like you -- the sharing of the pain varies according to product and channel. Is it possible to just go over your major buckets of money market assets and discuss how the sharing of waivers varies, so that as we see the assets move around during the quarter, we can try to model that better?

Yes, Cynthia. That's probably a more detailed discussion than we could -- will be appropriate for the call. But that would be something I'd be happy to help you with off-line.

Okay, that's fine. And then you mentioned Kaufmann, which I guess is bounced back. Is the mix shift that affected the fee rate in the fourth quarter, has Kaufmann bounced back enough so that it's back to, say, 3Q level or not quite yet, since I presume Pru Bear is down?

Ray's talking about bounce back in performance for a 3-week period. So the flows, I don't think there's been a change in the...

Slightly less worse.

Yes, slightly less in the flow. Yes, you can't model that in to say that's turned around. But we're looking at it on a longer-term basis and if the performance holds, we would expect the flows to change around. So it's a combination of obviously of the NAV and the flows. I don't think you can change your modeling on it yet, though.

Right. And since you have a few more products working well, I mean, is there going to be any change you think in what you spent on marketing?

We're still committing and you saw Barron's last week. We had some adds in there in the dividend base, and we're still continuing that in the first and second quarter. The jury's still out on the second half of the year. We'll see how things go.

Okay, because it looked like it came down in the fourth quarter. But is that just seasonal, or because it...

We were up for the year in 2010 or 2011, and the way you have to account for that -- I'm just trying to look at the quarterly numbers.

You think of it on a year-over-year?

In Q3, when it shows up there as a $3.9 million, the advertising and promotional, when we basically -- when we commit from accounting perspective to spend the money, even though some of it is in the fourth quarter, we have to account for some of it in the third quarter. So I wouldn't view that the downtick of $300,000, $400,000 from Q3 to Q4 really means anything. I'd look at it on an overall, yearly basis, and that's why I say we're doing stuff in the first and second quarter, and the jury's still out in the second -- in the fourth and third quarter.

Okay. And overall, just looking ahead for some of the smaller expense items, the travel and occupancy and stuff like that, are you expecting any changes that we should know about?

Well, we'll have some more occupancy with our Prime Rate deal over in the U.K. I don't think there's any major items in there. And travel, the fourth quarters always seems to be higher, a lot of stuff happening then. That's why you see a little bit of an uptick there.

Okay. And then maybe if I could, just 1 regulatory question, which is I guess, I've been reading that one of the commission members is in favor of basically studying rather than acting right now. I'm just wondering from your point of view, does it make much of a difference if a single commission member is really an advocate for pausing like that?

It makes a big difference. There are 5 votes as to whether to come up with a proposal and what would be in a proposal. And so we basically meet with all of the commissioners and have over the last many months in order to tell our story and show them that the single biggest success I know of that the SEC has had consistently over the last 40 years has been the regulation of money funds. And they don't blow their own horn enough, and I think they are getting pressure from other places like the Fed, and perhaps even threatened by the Fed to be FSOC if they don't do what they want. So we tell the story and, hopefully, we're able to convince, not just one but us and others or be able to convince 3 of the commissioners that they've done enough. And with the legal thing that's behind the curtain there, it's basically the fact that the Administrative Procedures Act has been a little bit of a stumbling block for some SEC rules like the proxy access rules and the independent chair rules, because there's been no study yet of the unintended consequences/cost benefit analysis of what doing something really crazy to the money funds would do. And so they end up losing in the DC District Court and that doesn't help anybody. And that whole spirit adds back to the ability to talk to each commissioner and hopefully have at least 3 of them see the wisdom of hitting pause mode on this whole thing.

Our next question comes from the line of William Katz with Citigroup.

Given that, that commentary, trying to appreciate Debbie's view as well of lower for longer, is there any thoughts of having a more structural reduction in the gross fee rates, and maybe the management fees and the money market business to potentially make them more competitive versus demand deposits?

No.

Okay. Second question is, I may have missed this in your opening remarks, I apologize, I joined a few minutes late, would you give an update and so from an acquisition perspective, I heard the discussion around U.S. consolidation but I didn't hear anything on the non-U.S. story beyond the money market platform in U.K. Is that still an area of interest to you, or is the...

Oh, yes. We are continuing to look there. The Prime Rate thing is a good thing to have happened and came out of that effort. But the main push there is for variable net asset value product, primarily equity product as I've described in these calls before, and that effort continues. And we think that we're going to be seeing more product come on to the market, and we talked about this before on these calls because of the effect of Basel III on some large banking institutions in terms of how they will handle their investment management operations from a capital standpoint.

And just one last one. Just listening to you give out your assets, as of couple of days ago, it seemed a little low relative to your comment, just given the market gain so far this year and your comments around the fund flows, is there an element here that I'm missing, is there an outflow and liquidity portfolio or an assembly manage account that's negating some of the absolute growth in the assets?

No, Bill. I mean, we're up in all the categories. So all of them are higher than they were coming into the quarter.

Our next question comes from the line of Ken Worthington with JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: First, with rates low for longer, can you talk about the appetite for participants to sell businesses and particularly money market fund businesses? I know you've been doing some tuck-ins here and there, but what's the appetite for larger companies to sell like stuff the size of Alliance? And then, is that something that will be interesting to you or would you prefer kind of the smaller deals?

Well, when you use the words sell, you have to be very careful, because sell implies lots of money trading hands. And as you know, the structure of the way we've done a lot of money fund deals is where if there are payments, they are, over time, based on assets staying there if there is money available. As regards to our appetite, we have appetite to do good, solid money fund deals for the long haul. And so we would continue to do that. As to specific firms and their relative size and how they would look at it, I just can't comment on those specific firms. As to any one of them at any one time, there is, as we've talked about before, an oligopolization occurring in this business and this lower for longer theme will influence that more so. Before -- I think it was in the end of 2007, there are 300 people offering money funds. Today, there are less than 100. And so that will continue. So it's really hard to say how some of the other big people will look at it. But we would be happy to receive any big people's calls on that subject. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: You answered the question. And I hear what you're saying in terms of process you see actions that they have addressed the flaws in the money fund business. But should we see floating NAVs or redemption barriers, I guess, specifically redemption barriers? What arrangements have you made or contingency plans have you formulated to better position Federated in the new regulatory world? The reason I ask is I think investors are concerned that you disagree so strongly with this regulation and the potential proposals that you don't have a plan, and I'm sure you do. But what is the plan, particularly for the redemption barriers?

Well, I will reemphasize the second part of that then get to the first. Yes, we think this is the opposite of "let's enhance the resiliency of money funds if they go down either of the lines that you have set". And so what you will see as a contingency plan is first, to fight it initially, then to fight it regulatory-wise and legal-wise as much as can be done. There will be time as if this actually occurs, wherein they don't want disruption in the marketplace as the money funds unwind. And so that will all be planned out and be organized on that way. Then you get to the next level where you start shining up all your other products. You've got usage products, you've got separate accounts and you've got a short and intermediate and Ultrashort Bond Funds that if everything else becomes illegal for inappropriate reasons and inappropriate results, then you have to face that reality. And so that's the area where the plans would go. There are a number of clients who are large enough that they could sustain separate accounts. They don't want to go there, and we don't want to go there. But if forced to, that's certainly an area that could be covered. So with the collection of international accounts, usage type accounts, separate accounts and perhaps even areas where they are not covered like common funds, you can begin to take care of some of the cash management needs in a less efficient way and without nearly as much help to the capital markets as the current environment. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: In terms of legal, so if SEC comes out with a proposal, puts it out for comment, again you disagree. What legal actions can you take against the industry, take against the SEC? Can you sue the SEC?

Well, what happens is when they come up with the rule, that's what I meant by the proxy access rule comment and the independent chair comment, that the SEC proposed rules had not done their homework in terms of studying the potential effects, i.e. the cost benefit. This went to court, and the information that the SEC supplied was deemed inadequate under the Administrative Procedures Act. And therefore, the rule was overturned. And so that is a path that we would go down. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: And how long does that delay the process? Does that buy you a year, 2 years?

It depends on whether or not you're able to get the injunction at the moment of impact, and then you fight it out in court. So that would all be a court-type determinations. And it could delay it indefinitely. They have not restored the independent chair rule. They have not restored the proxy access rule. And I think if they did any really thorough analysis of the cost benefit of the kind of ideas they're talking about on money funds, they would discover it's a whopping negative. And so the study would probably end up delaying it forever because these ideas like changing NAV and withholding redemptions are not designed to enhance resiliency of money fund. They're designed to eliminate them or seriously curtail their existence. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: And then lastly for Debbie. I think it was mentioned that money market fund fee waivers are up. With time yields up, LIBOR up, GC repo up a little bit, why are the waivers expected to increase? I know there's like a billion moving parts, but those are just a couple.

I think twofold. Number one, an increase in assets overall which continues into the first quarter of 2012; and number two, as Ray was mentioning, with regards to our Treasury products, Treasury funds can't buy floating rate security. So even our government agency assets would benefit from the LIBOR curve, Treasury assets don't. Treasury assets are priced off of the LIBOR curve. They have their own curve. And Treasury repo products, although they do a little bit better than Treasury singly without the repo involved, still are basically the safest, but the lowest yielding products that we have and those -- the mix of those assets growing on a proportionate basis is also part of a determination of the yield waivers.

Our next question comes from the line of Matthew Kelley with Morgan Stanley.

At the risk of being redundant, I just want to ask again about money fund reform. Just curiously to get your thoughts on the SEC and the Fed and in terms of how well they understand the different dynamics going on in the industry. I know there have been discussions on both side of the equation. So what's your thought on how well they understand all the dynamics, who's impacted and that sort of stuff?

Well, I don't have a lot of evidence that they have done the studies on the effects of taking money funds out or seriously diminishing their participation. So I think that they are rather driven by higher goals that they have in mind, and because the first round of changes in 2a-7 were basically designed around enhancing the resiliency of money funds, and on this next round, it doesn't seem to do that. And therefore, it must be oriented towards some other goal, which has not exactly been articulated. So I try to take them at their word that what we're after is enhancing resiliency and not killing and that should take off the table all the things that tend to kill or severely injure. So I can't say what kinds of internal studies they have done. They haven't shared them with us. And I'm just not aware of them. They are all smart people, though, and are very knowledgeable. And I think they should, therefore, have done the homework first before they come up with these ideas, which don't help the funds, don't help us, don't help our stock and don't appear to have in the public domain anyway, a lot of evidence as to how they could do what they want to do and not end up breaking a lot of things with a lot of unintended consequence.

Okay, that's helpful color. I appreciate that. Just one follow-up from me on your Prime money funds. Just from a client mindset, how willing are they now, given recent macro news essentially improving picture in Europe to have you guys take incrementally more credit risk in Europe and beyond? And when does that come back do you think? What are the key steps to get there?

I speak to our institutional clients on, if not daily, maybe an hourly basis. So I think I have a pretty good feel for their tolerance from a risk perspective at this point. They are clearly wanting to understand and have better knowledge about what happens from a credit markets perspective, in particular, that focus has been on the euro sector over the course of the last 18 to 24 months. I think at this point, and I said this earlier on the call, Greece doesn't matter much to them anymore. They can see fires burning. They can see negotiations going from 50% to 75% to 100% write off. And they understand at this point because of disclosure and increased communication that it doesn't much matter with those institutions, that Federated Prime funds, as well as the industry, for the most part, are using at this point. Certainly, it takes on some negative media attention when you have that sort of an outcome. But the underlying fundamentals of the large banks that we're using at this point in time are still strong, even when you end up with somebody like a Greece or a Portugal having problems in the marketplace. So I think at this point, there's enough better knowledge and understanding in the marketplace that it's not a just say no attitude, it's an attitude of looking at and understanding why it makes more sense from a diversification perspective, from a yield perspective, from a liquidity perspective where these banks are supported heavily in the marketplace, not only by individual participants, but by the various regulators too to have these banks within the portfolios.

Our next question comes from the line of Ed Groshans with Height Analytics.

I know we've done a lot on SEC regulation of money market fund rules, and I appreciate your time on all these topics. I guess, my last conversations with people looking into it, it seems that the 3% hold back for 30 days was gaining some traction, and it seems like that -- I guess, what I don't understand between the 3% hold back versus floating NAV is like they both seem somewhat similar in that when you have a withdrawal, the clients not getting all their money back and there's potential for risk at that point. So can you just tell me your thoughts on the difference between the 2, I guess, if those are some of the lead causes that the SEC is looking at?

It's like the choice between you want to die by hanging or by bullet. And so you can go one way or the other. You have got it exactly right, because they each injure the basic concept of daily liquidity at par. And at the next level, they each injure severely the operational things that have been set up for 40 years to use money funds. The variable NAV is obvious because people then have no anticipation of coming in, going out and all of their internal transactions at the dollar. And on the hold back, a fiduciary has a heck of a time figuring out that the fiduciary is going to put himself or herself into an investment where 3% of it doesn't come back out for 30 days and then what happens then. And if you look at those clients as we have many on an omnibus basis, the idea that an omnibus client is going to figure out how to do the 3% hold and who is really holding and who isn't is bizarre. And you can have all the computer wizards in the world and you're going to spend a fortune trying to figure that one out. So in each of those cases, it's just choose your different poison.

Okay. The omnibus account is quite important. I think some people just don't realize that. I guess, the other thing, though, that comes down is the issue of sweep accounts. Like -- it would seem like sweep accounts just couldn't function if we had any type of hold back.

That is correct.

And either for Federated or for the industry, do you have a sense of what percent or what dollar amount of assets tend to be in sweep? I don't know if you want to do it on quarterly average...

No, I don't know that. I do know this that I know of no industry participants that like either the variable NAV or the 30-day 3% hold. So whatever sweep size is nobody likes it.

Okay. I mean, I know floating NAV, I mean, people have been outspoken against that for well over a year now. And as redemption feature, I guess, start percolating in the fall a little bit, now the discussion went from having a redemption feature in a stress environment to having a permanent redemption feature. If the industry itself, both the users and providers of the product are resistant to floating NAV or to hold backs and the SEC says it's moving forward, doesn't that kind of push us back into the box of capital buffers?

Well, I don't know about that. If it is, as I said earlier in the call, if the deal is closed around the fidelity buffer idea, that's probably something people could agree to. But if it goes beyond that, then it's going to have a lot of the same problems that the other one has. One of the other comments on capital that the SEC could, that the other SEC Commissioner made was that a lot of the discussion on capital, and I know you've done some work on it, is that either the numbers are so big that it makes the industry uneconomic, or it isn't big enough to take care of a problem it allegedly is going to take care of. And so in either case, it doesn't work. And the other arguments I would make here are that remember, we're dealing here with an investment company under the Investment Company Act of 1940, which was passed in order to enhance disclosure. This is not a capital regime like the banking industry. This is a disclosure regime where you're supposed to tell people what is going on in these funds. And then toying with the fundamental rights like the right to redeem, it's just antithetical as is adding capital into a fund where basically it's all capital already, which is what we mentioned earlier on the call.

And I appreciate all your time on this. Just one other question because you did bring it up. And I've been hearing very similar to what you said is this concerned that the Financial Stability Oversight Council is really staring over the shoulder of the SEC on this whole topic. And, I guess, I've gotten some feedback that there's a real concern, specifically from industry participants, that if the SEC comes out with something that appears to be insufficient in the eyes of the Stability Oversight Council, that FSOC would then or can, not definitely would, but can call the entire industry systemically risky and therefore, the regulatory oversight moves from the SEC up to the FSOC council. I think that's where I struggle, Chris, is because it seems like the SEC has to do something, otherwise, they risk losing their authority over the entire industry.

And perhaps we filed a rather lengthy commentary on the FSOC and this whole subject of the authority of the FSOC and the legitimacy of either doing an industry which is a big question or doing companies that are less than $50 billion. It's almost like you have to then do a backflip in order to conglomerate asset managers, and we wrote very, very lengthy commentary on this, which is publicly available and would be very, very well worth looking at. Because it takes a long, long time to get through this whole process of FSOC-ing and yet it is being used as you pointed out as a lever or a threat as against the SEC. And this is part of the deals that we're dealing with that came out of Dodd-Frank. And I don't think that there is a legitimate way for them to actually do the FSOC thing. I could be wrong of course, and there are others who disagree, but that's been our position. And I think it is very well-articulated. So in the end, it is as it has been for 40 years, where Federated continues to fight for the existence and legitimacy and efficacy of money funds, consistent with the desire of 30 million clients, 5,000 of our intermediary clients and 2.7 trillion. And with that, I would say that we are at 10 after 10, which is past the post usually...

Mr. Hanley, we have come to the end of our allotted question time. I'd like to turn the call back over to you for any closing comments.

Okay. Well, thank you. That will conclude our call for today, and we appreciate your time.

Thank you. This concludes today's teleconference. You may disconnect your lines, and log off at this time. Thank you for your participation.