13. 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 products, some of which are designated as CIVs.

Updated Consolidation Accounting Guidance

Effective April 1, 2016, Legg Mason adopted updated consolidation guidance on a modified retrospective basis. See Note 2 for additional information regarding the adoption of this updated guidance. The adoption of the updated guidance resulted in certain sponsored investment products that reside in foreign mutual fund trusts that were previously accounted for as VREs to be evaluated as VIEs, and the consolidation of nine funds as of June 30, 2016, which were designated as CIVs. Under the updated accounting guidance, Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE managed by EnTrust, which was also consolidated and designated a CIV. The adoption also resulted in the deconsolidation of 13 employee-owned funds, as Legg Mason no longer had a variable interest in these VIEs.

As of September 30, 2016, Legg Mason no longer held a significant financial interest in four of these funds, and therefore concluded it was no longer the primary beneficiary. As a result, those four foreign mutual funds were not consolidated as of September 30, 2016. In addition, during the quarter ended September 30, 2016, Legg Mason also concluded that it was the primary beneficiary of one additional foreign mutual fund trust, which was consolidated and designated as a CIV.

Legg Mason also concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated as CIVs) as of September 30, 2016. This sponsored investment fund was also consolidated under prior accounting guidance, as further discussed below.

Prior Consolidation Accounting Guidance

Under prior consolidation guidance, as of March 31, 2016 and September 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 March 31, 2016, and September 30, 2015. Legg Mason also concluded it was the primary beneficiary of 14 employee-owned funds it sponsors, which were consolidated and designated as CIVs as of both March 31, 2016 and September 30, 2015, respectively. As discussed above, effective April 1, 2016, under new accounting guidance, all but one of those employee-owned funds no longer qualified as VIEs, and 13 of those employee-owned funds were therefore deconsolidated.

Legg Mason's investment in CIVs, as of September 30, 2016 and March 31, 2016, was $34,272 and $13,641, 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 September 30, 2016 and March 31, 2016, respectively, and the Consolidated Statements of Income for the three and six months ended September 30, 2016 and 2015, respectively:

Consolidating Balance Sheets



	September 30, 2016									March 31, 2016
	Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Eliminations			Consolidated Totals
Current Assets	$	1,600,512	$	92,595	$	(31,631	)	$	1,661,476	$	2,288,080	$	110,631	$	(13,667	)	$	2,385,044
Non-current assets	6,587,299		8,442		(2,667		)	6,593,074		5,135,318		84		—			5,135,402
Total Assets	$	8,187,811	$	101,037	$	(34,298	)	$	8,254,550	$	7,423,398	$	110,715	$	(13,667	)	$	7,520,446
Current Liabilities	$	674,722	$	6,649	$	(26	)	$	681,345	$	837,031	$	4,548	$	(26	)	$	841,553
Non-current liabilities	2,814,308		—		—			2,814,308		2,267,343		—		—			2,267,343
Total Liabilities	3,489,030		6,649		(26		)	3,495,653		3,104,374		4,548		(26		)	3,108,896
Redeemable Non-controlling interests	615,935		60,508		(279		)	676,164		81,649		94,027		109			175,785
Total Stockholders’ Equity	4,082,846		33,880		(33,993		)	4,082,733		4,237,375		12,140		(13,750		)	4,235,765
Total Liabilities and Equity	$	8,187,811	$	101,037	$	(34,298	)	$	8,254,550	$	7,423,398	$	110,715	$	(13,667	)	$	7,520,446


(1)	Other represents consolidated sponsored investment products that are not designated as CIVs.

Consolidating Statements of Income



	Three Months Ended
	September 30, 2016												September 30, 2015
	Balance Before Consolidation of CIVs and Other⁽¹⁾			CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals			Balance Before Consolidation of CIVs and Other			CIVs and Other			Eliminations			Consolidated Totals
Total Operating Revenues	$	748,384		$	—		$	(14	)	$	748,370		$	673,168		$	—		$	(82	)	$	673,086
Total Operating Expenses	620,613			124			—			620,737			540,023			115			(82		)	540,056
Operating Income	127,771			(124		)	(14		)	127,633			133,145			(115		)	—			133,030
Total Other Non-Operating Expense	(17,023		)	7,103			(1,279		)	(11,199		)	(40,988		)	(2,303		)	827			(42,464		)
Income Before Income Tax Provision	110,748			6,979			(1,293		)	116,434			92,157			(2,418		)	827			90,566
Income tax provision	29,902			—			—			29,902			27,647			—			—			27,647
Net Income	80,846			6,979			(1,293		)	86,532			64,510			(2,418		)	827			62,919
Less: Net income (loss) attributable to noncontrolling interests	14,405			554			5,132			20,091			191			—			(1,591		)	(1,400		)
Net Income Attributable to Legg Mason, Inc.	$	66,441		$	6,425		$	(6,425	)	$	66,441		$	64,319		$	(2,418	)	$	2,418		$	64,319


(1)	Other represents consolidated sponsored investment products that are not designated as CIVs.



	Six Months Ended
	September 30, 2016												September 30, 2015
	Balance Before Consolidation of CIVs and Other⁽¹⁾			CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals			Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals
Total Operating Revenues	$	1,448,561		$	(12	)	$	(14	)	$	1,448,535		$	1,381,903		$	—		$	(167	)	$	1,381,736
Total Operating Expenses	1,247,124			223			—			1,247,347			1,124,110			220			(167		)	1,124,163
Operating Income	201,437			(235		)	(14		)	201,188			257,793			(220		)	—			257,573
Total Other Non-Operating Expense	(32,518		)	9,651			(1,236		)	(24,103		)	(45,867		)	(1,896		)	785			(46,978		)
Income Before Income Tax Provision	168,919			9,416			(1,250		)	177,085			211,926			(2,116		)	785			210,595
Income tax provision	45,213			—			—			45,213			52,737			—			—			52,737
Net Income	123,706			9,416			(1,250		)	131,872			159,189			(2,116		)	785			157,858
Less: Net income (loss) attributable to noncontrolling interests	23,813			556			7,610			31,979			322			—			(1,331		)	(1,009		)
Net Income Attributable to Legg Mason, Inc.	$	99,893		$	8,860		$	(8,860	)	$	99,893		$	158,867		$	(2,116	)	$	2,116		$	158,867


(1)	Other represents consolidated sponsored investment products that are not designated as CIVs.

Other non-operating expense includes interest income, interest expense, and net gains (losses) on investments.

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

As further discussed in Note 4, effective April 1, 2016, Legg Mason adopted updated accounting guidance on fair value measurement. In accordance with the updated guidance, investments for which fair value is measured using NAV as a practical expedient are disclosed separately in the following tables as a reconciling item between investments included in the fair value hierarchy and investments reported in the Consolidated Balance Sheets.

Legg Mason had no financial liabilities of CIVs carried at fair value as of September 30, 2016 or March 31, 2016. The fair value of the financial assets of CIVs were determined using the following categories of inputs as of September 30, 2016 and March 31, 2016:



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV⁽¹⁾		Balance as of September 30, 2016
Assets:
Trading investments:
Hedge funds	$	—	$	—	$	—	$	16,126	$	16,126
Other proprietary fund products	50,438		—		—		—		50,438
Total trading investments	50,438		—		—		16,126		66,564
Investments:
Hedge funds	—		—		—		7,918		7,918
Total investments	$	50,438	$	—	$	—	$	24,044	$	74,482



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Investments measured at NAV⁽¹⁾		Balance as of March 31, 2016
Assets:
Trading investments:
Hedge funds	$	—	$	—	$	—	$	18,144	$	18,144
Other proprietary fund products	22,327		8,244		—		—		30,571
Total trading investments	$	22,327	$	8,244	$	—	$	18,144	$	48,715


(1)	Reflects certain investments measured at fair value using NAV (or its equivalent) as a practical expedient. These investments have not been classified in the fair value hierarchy.

There were no transfers between Level 1 and Level 2 during either of the three ended September 30, 2016 and 2015.

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 September 30, 2016 and March 31, 2016, 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 September 30, 2016

Category of Investment

Investment Strategy

September 30, 2016

March 31, 2016

Unfunded Commitments

Remaining Term

Hedge funds

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

24,044

⁽¹⁾

18,144

n/a

n/a - not applicable


(1)	Redemption restrictions: 4% daily redemption; 10% monthly redemption; 41% quarterly redemption; and 45% are subject to three to five year lock-up or side pocket provisions.

As of September 30, 2016 and March 31, 2016, 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 September 30, 2016				As of March 31, 2016
	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	$	—	$	—	$	—	$	288
Real Estate Investment Trust	11,328		13,131		9,540		14,595
Other sponsored investment funds	25,320		41,191		22,551		27,852
Total	$	36,648	$	54,322	$	32,091	$	42,735


(1)	Amounts are related to investments in proprietary funds products.


(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 $27,709,902 and $17,170,697 as of September 30, 2016 and March 31, 2016, 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. As of March 31, 2016, the assets and liabilities of these VIEs also included CLO loans and CLO debt, respectively. 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.