12. Variable Interest Entities and Consolidated Investment Vehicles

As further discussed in Notes 2 and 4, in accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment vehicles, some of which are designated as CIVs. As of June 30, 2015, Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated a CIV) as of June 30, 2015, March 31, 2015, and June 30, 2014, despite significant third party investments in this product. As of June 30, 2015, March 31, 2015, and June 30, 2014, Legg Mason also concluded it was the primary beneficiary of 18, 17, and 16, respectively, employee-owned funds it sponsors, which were consolidated and reported as CIVs.

Legg Mason also held a longer-term controlling financial interest in one sponsored investment fund VRE, which has third-party investors and was consolidated and included as a CIV prior to the quarter ended March 31, 2015. Prior to March 31, 2015, Legg Mason redeemed a significant portion of its investment in this fund and as a result no longer had a controlling financial interest in the fund; therefore, the fund was not consolidated, or included as a CIV as of March 31, 2015 or June 30, 2015.

Prior to June 30, 2014, Legg Mason concluded it was the primary beneficiary of one of three CLOs in which it had a variable interest and the balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. During the three months ended June 30, 2014, this CLO substantially liquidated and therefore was not consolidated by Legg Mason as of, or subsequent to, June 30, 2014.

Legg Mason's investment in CIVs, as of June 30, 2015 and March 31, 2015, was $15,596 and $15,553, respectively, which represents its maximum risk of loss, excluding uncollected advisory fees. The assets of these CIVs are primarily comprised of investment securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its investment in these funds.

The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of June 30, 2015 and March 31, 2015, respectively, and the Consolidated Statements of Income for the three months ended June 30, 2015 and 2014, respectively:

Consolidating Balance Sheets



	June 30, 2015									March 31, 2015
	Balance Before Consolidation of CIVs		CIVs		Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs		CIVs		Eliminations			Consolidated Totals
Current Assets	$	1,627,089	$	64,019	$	(15,628	)	$	1,675,480	$	1,880,689	$	56,929	$	(15,583	)	$	1,922,035
Non-current assets	5,153,908		—		—			5,153,908		5,151,942		—		—			5,151,942
Total Assets	$	6,780,997	$	64,019	$	(15,628	)	$	6,829,388	$	7,032,631	$	56,929	$	(15,583	)	$	7,073,977
Current Liabilities	$	510,785	$	3,795	$	(32	)	$	514,548	$	808,640	$	6,436	$	(30	)	$	815,046
Non-current liabilities	1,737,121		—		—			1,737,121		1,728,510		—		—			1,728,510
Total Liabilities	2,247,906		3,795		(32		)	2,251,669		2,537,150		6,436		(30		)	2,543,556
Redeemable Non-controlling interests	11,092		37,570		6,851			55,513		10,787		27,581		7,152			45,520
Total Stockholders’ Equity	4,521,999		22,654		(22,447		)	4,522,206		4,484,694		22,912		(22,705		)	4,484,901
Total Liabilities and Equity	$	6,780,997	$	64,019	$	(15,628	)	$	6,829,388	$	7,032,631	$	56,929	$	(15,583	)	$	7,073,977

Consolidating Statements of Income



	Three Months Ended
	June 30, 2015												June 30, 2014
	Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals			Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals
Total Operating Revenues	$	708,735		$	—		$	(85	)	$	708,650		$	694,064		$	—		$	(183	)	$	693,881
Total Operating Expenses	584,087			105			(85		)	584,107			574,315			203			(183		)	574,335
Operating Income (Loss)	124,648			(105		)	—			124,543			119,749			(203		)	—			119,546
Total Other Non-Operating Income (Expense)	(4,879		)	407			(42		)	(4,514		)	(6,816		)	3,007			(1,469		)	(5,278		)
Income Before Income Tax Provision	119,769			302			(42		)	120,029			112,933			2,804			(1,469		)	114,268
Income tax provision	25,090			—			—			25,090			40,656			—			—			40,656
Net Income	94,679			302			(42		)	94,939			72,277			2,804			(1,469		)	73,612
Less: Net income attributable to noncontrolling interests	131			—			260			391			89			1,068			267			1,424
Net Income Attributable to Legg Mason, Inc.	$	94,548		$	302		$	(302	)	$	94,548		$	72,188		$	1,736		$	(1,736	)	$	72,188

Other non-operating income (expense) includes interest income, interest expense and net gains (losses) on investments and long-term debt of CIVs determined on an accrual basis.

The consolidation of CIVs has no impact on Net Income Attributable to Legg Mason, Inc.

Legg Mason had no financial liabilities of CIVs carried at fair value as of June 30, 2015 or March 31, 2015. The fair value of the financial assets of CIVs were determined using the following categories of inputs as of June 30, 2015 and March 31, 2015:



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Value as of June 30, 2015
Assets:
Trading investments:
Hedge funds	$	1,133	$	5,950	$	13,482	$	20,565
Proprietary funds	32,805		—		—		32,805
Total trading investments	$	33,938	$	5,950	$	13,482	$	53,370



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Value as of March 31, 2015
Assets:
Trading investments:
Hedge funds	$	1,108	$	4,412	$	14,093	$	19,613
Proprietary funds	28,387		—		—		28,387
Total trading investments	$	29,495	$	4,412	$	14,093	$	48,000

Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the NAV practical expedient, such that measurement uncertainty has little relevance.

The changes in assets and (liabilities) of CIVs measured at fair value using significant unobservable inputs (Level 3) for the three months ended June 30, 2015 and 2014, are presented in the tables below:



	Value as of March 31, 2015		Purchases		Sales			Settlements / Other		Transfers			Realized and unrealized gains/(losses), net		Value as of June 30, 2015
Assets:
Hedge funds	$	14,093	$	137	$	(310	)	$	—	$	(526	)	$	88	$	13,482



	Value as of March 31, 2014			Purchases		Sales			Settlements / Other		Transfers		Realized and unrealized gains/(losses), net			Value as of June 30, 2014
Assets:
Hedge funds	$	17,888		$	160	$	(682	)	$	—	$	—	$	(314	)	$	17,052
Private equity funds	31,810			1,013		—			—		—		2,294			35,117
	$	49,698		$	1,173	$	(682	)	$	—	$	—	$	1,980		$	52,169
Liabilities:
CLO debt	$	(79,179	)	$	—	$	—		$	79,179	$	—	$	—		$	—
Total realized and unrealized gains (losses), net													$	1,980

Realized and unrealized gains and losses recorded for Level 3 assets and liabilities of CIVs are included in Other non-operating income (expense) of CIVs in the Consolidated Statements of Income. Total unrealized gains (losses) for Level 3 investments and liabilities of CIVs relating only to those assets and liabilities still held at the reporting date were $(45) and $1,850 for the three months ended June 30, 2015 and 2014, respectively.

There were no transfers between Level 1 and Level 2 during either of the three months ended June 30, 2015 and 2014.

The NAVs used as a practical expedient by CIVs have been provided by the investees and have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of June 30, 2015 and March 31, 2015, the nature of these investments and any related liquidation restrictions or other factors, which may impact the ultimate value realized:

Fair Value Determined

Using NAV

As of June 30, 2015

Category of Investment

Investment Strategy

June 30, 2015

March 31, 2015

Unfunded Commitments

Remaining Term

Hedge funds

Global macro, fixed income, long/short equity, systematic, emerging market, U.S. and European hedge

20,565

⁽¹⁾

19,613

n/a

n/a – not applicable


(1)	Redemption restrictions: 9% daily redemption; 5% monthly redemption; 2% quarterly redemption; and 84% are subject to three to five year lock-up or side pocket provisions.

As of June 30, 2015 and March 31, 2015, for VIEs in which Legg Mason holds a variable interest or is the sponsor and holds a variable interest, but for which it was not the primary beneficiary, Legg Mason's carrying value and maximum risk of loss were as follows:



	As of June 30, 2015				As of March 31, 2015
	Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾		Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾
CLOs	$	—	$	1,140	$	—	$	1,146
Real Estate Investment Trust	12,758		16,136		13,026		18,096
Other sponsored investment funds	15,175		21,768		21,983		34,463
Total	$	27,933	$	39,044	$	35,009	$	53,705


(1)	Includes $27,933 and $27,463 related to investments in proprietary funds products as of June 30, 2015 and March 31, 2015, respectively.


(2)	Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.

The Company's total AUM of unconsolidated VIEs was $19,471,116 and $19,527,670 as of June 30, 2015 and March 31, 2015, respectively.

The assets of these VIEs are primarily comprised of cash and cash equivalents and investment securities, and the liabilities are primarily comprised of various expense accruals. These VIEs are not consolidated because either (1) Legg Mason does not have the power to direct significant economic activities of the entity and rights/obligations associated with benefits/losses that could be significant to the entity, or (2) Legg Mason does not absorb a majority of each VIE's expected losses or does not receive a majority of each VIE's expected residual gains.