4. Investments and Fair Values of Assets and Liabilities

The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair value, excluding the financial assets and financial liabilities of CIVs. See Note 13, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.

Effective April 1, 2016, Legg Mason adopted updated accounting guidance on fair value measurement which removed both the requirement to categorize within the fair value hierarchy and the requirement to provide related sensitivity disclosures for all investments for which fair value is measured using net asset value ("NAV") as a practical expedient. The amount of these investments is 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. The updated guidance was adopted on a retrospective basis, therefore, the investment amounts for which fair value is measured using NAV as a practical expedient have been removed from the fair value hierarchy for all periods presented.

The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:



	As of December 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⁾		Total
Assets:
Cash equivalents:⁽²⁾
Money market funds	$	350,494		$	—	$	—		$	—	$	350,494
Time deposits and other	—			29,037		—			—		29,037
Total cash equivalents	350,494			29,037		—			—		379,531
Trading investments of proprietary fund products and other trading investments:⁽³⁾
Seed capital investments	147,897			87,988		—			4,486		240,371
Other⁽⁴⁾	34,978			2,556		—			10		37,544
Trading investments relating to long-term incentive compensation plans⁽⁵⁾	146,235			—		—			792		147,027
Equity method investments relating to proprietary fund products and long-term incentive compensation plans:⁽⁶⁾
Seed capital investments	—			3,334		—			—		3,334
Investments related to long-term incentive compensation plans	—			6,038		2,701			—		8,739
Total current investments⁽⁷⁾	329,110			99,916		2,701			5,288		437,015
Equity method investments in partnerships and LLCs:⁽⁶⁾⁽⁸⁾
Seed capital investments⁽⁷⁾	—			—		591			38,709		39,300
Seed capital investments in real estate funds	—			—		26,679			—		26,679
Investments in partnerships and LLCs:⁽⁸⁾
Seed capital investments	—			—		—			3,526		3,526
Investments related to long-term incentive compensation plans	—			—		7,815			—		7,815
Other proprietary fund products	—			93		2,368			—		2,461
Derivative assets⁽⁸⁾⁽⁹⁾	836			—		—			—		836
Other investments⁽⁸⁾	—			—		162			141		303
Total	$	680,440		$	129,046	$	40,316		$	47,664	$	897,466
Liabilities:
Contingent consideration liabilities⁽¹⁰⁾	$	—		$	—	$	(35,484	)	$	—	$	(35,484	)
Derivative liabilities⁽⁸⁾	(7,047		)	—		—			—		(7,047		)
Total	$	(7,047	)	$	—	$	(35,484	)	$	—	$	(42,531	)



	As of 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⁾		Total
Assets:
Cash equivalents:⁽²⁾
Money market funds	$	1,057,916		$	—	$	—		$	—	$	1,057,916
Time deposits and other	—			35,265		—			—		35,265
Total cash equivalents	1,057,916			35,265		—			—		1,093,181
Trading investments of proprietary fund products and other trading investments:⁽³⁾
Seed capital investments	205,608			102,021		3			18,304		325,936
Other⁽⁴⁾	65,112			2,331		—			21		67,464
Trading investments relating to long-term incentive compensation plans⁽⁵⁾	105,568			—		—			996		106,564
Equity method investments relating to proprietary fund products and long-term incentive compensation plans:⁽⁶⁾
Seed capital investments	1,329			7,575		—			—		8,904
Investments related to long-term incentive compensation plans	—			6,467		—			—		6,467
Total current investments⁽⁷⁾	377,617			118,394		3			19,321		515,335
Equity method investments in partnerships and LLCs:⁽⁶⁾⁽⁸⁾
Seed capital investments	—			—		627			19,812		20,439
Other proprietary fund products	—			—		—			9,434		9,434
Investments in partnerships and LLCs:⁽⁸⁾
Investments related to long-term incentive compensation plans	—			—		7,501			—		7,501
Other proprietary fund products	—			—		4,807			3,124		7,931
Derivative assets⁽⁸⁾⁽⁹⁾	1,051			7,599		—			—		8,650
Other investments⁽⁸⁾	—			—		83			—		83
Total	$	1,436,584		$	161,258	$	13,021		$	51,691	$	1,662,554
Liabilities:
Contingent consideration liabilities⁽¹⁰⁾	$	—		$	—	$	(84,585	)	$	—	$	(84,585	)
Derivative liabilities⁽⁹⁾	(18,079		)	—		—			—		(18,079		)
Total	$	(18,079	)	$	—	$	(84,585	)	$	—	$	(102,664	)


(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.

(2)

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are classified as Level 1. Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization, and are classified as Level 2.


(3)	Trading investments of proprietary fund products and other trading investments consist of approximately 76% and 24% equity and debt securities, respectively, as of December 31, 2016, and approximately 68% and 32% equity and debt securities, respectively, as of March 31, 2016.


(4)	Includes $24,016 and $54,392 in noncontrolling interests associated with consolidated seed investment products as of December 31, 2016 and March 31, 2016, respectively.


(5)	Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability.


(6)	Legg Mason's equity method investments that are investment companies record underlying investments at fair value. Therefore, fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee.


(7)	Excludes $31,779 and $13,641 of seed capital as of December 31, 2016, and March 31, 2016, respectively, which is related to Legg Mason's investments in CIVs. See Note 13.


(8)	Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented.


(9)	See Note 12.


(10)	See Note 3 and Note 9.

Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and products. Legg Mason had seed capital investments in proprietary fund products, which totaled $344,989 and $368,920, as of December 31, 2016 and March 31, 2016, respectively, which are substantially comprised of investments in 65 funds and 63 funds, respectively, that are individually greater than $1,000, and together comprise over 90% of the total seed capital investments at each period end.

See Notes 2 and 13 for information regarding the determination of whether investments in proprietary fund products represent VIEs and consolidation.

The net realized and unrealized gain (loss) for investment securities classified as trading was $1,617 and $2,148 for the three months ended December 31, 2016 and 2015, respectively, and $26,969 and $(25,283) for the nine months ended December 31, 2016 and 2015, respectively.

The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $(165) and $7,028 for the three months ended December 31, 2016 and 2015, respectively, and $16,991 and $(36,137) for the nine months ended December 31, 2016 and 2015, respectively.

The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2016 and 2015, are presented in the tables below:



	Balance as of September 30, 2016			Purchases		Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2016
Assets:
Trading investments of seed capital investments in proprietary fund products	$	—		$	—	$	—	$	—		$	—	$	—		$	—
Equity method investments relating to long-term incentive compensation plans	2,653			20		—		(20		)	—		48			2,701
Equity method investments in partnerships and LLCs:
Seed capital investments	552			—		—		—			—		39			591
Seed capital investments in real estate funds	25,722			667		—		(197		)	—		487			26,679
Investments in partnerships and LLCs:
Investments related to long-term incentive compensation plans	7,501			314		—		—			—		—			7,815
Other proprietary fund products	3,827			—		—		(2,000		)	—		541			2,368
Other investments	245			—		—		—			—		(83		)	162
	$	40,500		$	1,001	$	—	$	(2,217	)	$	—	$	1,032		$	40,316
Liabilities:
Contingent consideration liabilities	$	(52,053	)	$	—	n/a		$	—		n/a		$	16,569		$	(35,484	)

n/a - not applicable



	Balance as of September 30, 2015			Purchases			Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2015
Assets:
Trading investments of seed capital investments in proprietary fund products	$	2		$	1		$	—	$	—		$	—	$	—		$	3
Equity method investments in partnerships and LLCs:
Seed capital investments	634			—			—		(19		)	—		71			686
Other	87			—			—		—			—		1			88
Investments in partnerships and LLCs:
Investments related to long-term incentive compensation plans	7,040			220			—		—			—		—			7,260
Other proprietary fund products	8,071			—			—		(2,875		)	—		(2		)	5,194
Other investments	77			—			—		—			—		—			77
	$	15,911		$	221		$	—	$	(2,894	)	$	—	$	70		$	13,308
Liabilities:
Contingent consideration liabilities	$	(90,219	)	$	(27,457	)	n/a		$	—		n/a		$	27,212		$	(90,464	)

n/a - not applicable



	Balance as of March 31, 2016			Purchases			Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2016
Assets:
Trading investments of seed capital investments in proprietary fund products	$	3		$	—		$	—	$	(3	)	$	—	$	—		$	—
Equity method investments relating to long-term incentive compensation plans	—			2,979			—		(448		)	—		170			2,701
Equity method investments in partnerships and LLCs:
Seed capital investments	627			—			—		—			—		(36		)	591
Seed capital investments in real estate funds	—			25,966			—		(636		)	—		1,349			26,679
Investments in partnerships and LLCs:
Investments related to long-term incentive compensation plans	7,501			314			—		—			—		—			7,815
Other proprietary fund products	4,807			—			—		(3,000		)	—		561			2,368
Other investments	83			—			—		—			—		79			162
	$	13,021		$	29,259		$	—	$	(4,087	)	$	—	$	2,123		$	40,316
Liabilities:
Contingent consideration liabilities	$	(84,585	)	$	(2,000	)	n/a		$	6,587		n/a		$	44,514		$	(35,484	)



	Balance as of March 31, 2015			Purchases			Sales			Redemptions/Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2015
Assets:
Trading investments of seed capital investments in proprietary fund products	$	2		$	1		$	—		$	—		$	—	$	—		$	3
Equity method investments in partnerships and LLCs:
Seed capital investments	734			—			—			(19		)	—		(29		)	686
Other	7,526			—			(5,352		)	(1,821		)	—		(265		)	88
Investments in partnerships and LLCs:
Investments related to long-term incentive compensation plans	5,595			1,665			—			—			—		—			7,260
Other proprietary fund products	10,027			—			—			(5,448		)	—		615			5,194
Other investments	77			—			—			—			—		—			77
	$	23,961		$	1,666		$	(5,352	)	$	(7,288	)	$	—	$	321		$	13,308
Liabilities:
Contingent consideration liabilities	$	(110,784	)	$	(27,457	)	n/a			$	22,765		n/a		$	25,012		$	(90,464	)

Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other non-operating income (expense), net, in the Consolidated Statements of Income (Loss). The change in unrealized gains (losses) for Level 3 investments and liabilities still held at the reporting date was $15,448 and $22,911 for the three months ended December 31, 2016 and 2015, respectively, and $44,636 and $21,269 for the nine months ended December 31, 2016 and 2015, respectively.

There were no significant transfers between Level 1 and Level 2 during the periods ended December 31, 2016 and 2015.

As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of December 31, 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 December 31, 2016
Category of Investment	Investment Strategy	December 31, 2016			March 31, 2016		Unfunded Commitments		Remaining Term
Funds-of-hedge funds	Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge	$	18,707	(1)	$	19,139	n/a		n/a
Hedge funds	Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge	10,300			11,403		$	20,000	n/a
Private equity funds	Long/short equity	18,433		(2)	20,471		7,436		Up to 12 years
Other	Various	224			678		n/a		Various ⁽³⁾
Total		$	47,664		$	51,691	$	27,436

n/a - not applicable


(1)	Liquidation restrictions: 1% daily redemption, 11% monthly redemption, 14% quarterly redemption, and 74% are not subject to redemption or are not currently redeemable.


(2)	Liquidations are expected over the remaining term.


(3)	Of this balance, 28% has a remaining term of less than one year and 72% has a remaining term of 15 years.

There are no current plans to sell any of these investments held as of December 31, 2016.