13. Variable Interest Entities and Consolidated Investment Vehicles

In accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment products, some of which are designated as CIVs. As further discussed in Note 2, Legg Mason concluded it was the primary beneficiary of three foreign mutual fund VIEs as of each June 30, 2017 and March 31, 2017, and of nine foreign mutual fund VIEs as of June 30, 2016, which were consolidated and designated as CIVs, because it held significant financial interests in these funds. Legg Mason also concluded it was the primary beneficiary of two sponsored investment fund VIEs, and one employee-owned fund that it sponsors, as of each June 30, 2017, March 31, 2017, and June 30, 2016, which were also consolidated and designated as CIVs. In addition, Legg Mason determined it was the primary beneficiary of a sponsored ETF as a result of total return swap arrangements it executed on June 6, 2017 with four separate financial intermediaries. As such, the underlying sponsored investment fund was consolidated and designated a CIV during the three months ended June 30, 2017.

As of June 30, 2017 and March 31, 2017, Legg Mason's investment in CIVs was $36,026 and $28,300, respectively, which represent its maximum risk of investment loss, excluding uncollected advisory fees. In addition, as of June 30, 2017, under the above referenced total return swap arrangements, Legg Mason receives the related investment gains and losses on notional amounts totaling $20,253. 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.

See Notes 2 and 4 for additional information regarding VIEs, VREs, and the consolidation of investment products.

The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of June 30, 2017 and March 31, 2017, respectively, and the Consolidated Statements of Income for the three months ended June 30, 2017 and 2016, respectively:

Consolidating Balance Sheets



	June 30, 2017									March 31, 2017
	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	$	1,541,578	$	97,091	$	(33,068	)	$	1,605,601	$	1,749,959	$	77,406	$	(25,618	)	$	1,801,747
Non-current assets	6,441,831		9,968		(2,971		)	6,448,828		6,481,376		9,987		(2,695		)	6,488,668
Total Assets	$	7,983,409	$	107,059	$	(36,039	)	$	8,054,429	$	8,231,335	$	87,393	$	(28,313	)	$	8,290,415
Current Liabilities	$	584,635	$	1,762	$	(13	)	$	586,384	$	808,664	$	736	$	(13	)	$	809,387
Non-current liabilities	2,789,069		—		—			2,789,069		2,792,084		—		—			2,792,084
Total Liabilities	3,373,704		1,762		(13		)	3,375,453		3,600,748		736		(13		)	3,601,471
Redeemable Non-controlling interests	614,819		12,691		56,693			684,203		619,302		26,853		31,617			677,772
Total Stockholders’ Equity	3,994,886		92,606		(92,719		)	3,994,773		4,011,285		59,804		(59,917		)	4,011,172
Total Liabilities and Equity	$	7,983,409	$	107,059	$	(36,039	)	$	8,054,429	$	8,231,335	$	87,393	$	(28,313	)	$	8,290,415


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

Consolidating Statements of Income



	Three Months Ended
	June 30, 2017												June 30, 2016
	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⁽¹⁾			Eliminations			Consolidated Totals
Total Operating Revenues	$	793,886		$	—		$	(44	)	$	793,842		$	700,177		$	(12	)	$	—		$	700,165
Total Operating Expenses	686,614			68			(45		)	686,637			626,511			99			—			626,610
Operating Income (Loss)	107,272			(68		)	1			107,205			73,666			(111		)	—			73,555
Total Non-Operating Income (Expense)	(16,127		)	1,239			(525		)	(15,413		)	(15,495		)	2,548			43			(12,904		)
Income Before Income Tax Provision	91,145			1,171			(524		)	91,792			58,171			2,437			43			60,651
Income tax provision	28,255			—			—			28,255			15,311			—			—			15,311
Net Income	62,890			1,171			(524		)	63,537			42,860			2,437			43			45,340
Less: Net income attributable to noncontrolling interests	11,970			243			404			12,617			9,408			2			2,478			11,888
Net Income Attributable to Legg Mason, Inc.	$	50,920		$	928		$	(928	)	$	50,920		$	33,452		$	2,435		$	(2,435	)	$	33,452


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

Non-Operating Income (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 of June 30, 2017 and March 31, 2017, financial assets of CIVs carried at fair value totaling $67,241 and $33,991, respectively, were valued using Level 1 inputs and totaling $23,054 and $24,734, respectively, were valued using NAV as a practical expedient. Legg Mason had no financial liabilities of CIVs carried at fair value as of June 30, 2017 or March 31, 2017.

There were no transfers between Level 1 and Level 2 during either of the three months ended June 30, 2017 and 2016.

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, 2017 and March 31, 2017, 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, 2017

Category of Investment

Investment Strategy

June 30, 2017

March 31, 2017

Unfunded Commitments

Remaining Term

Hedge funds

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

23,054

⁽¹⁾

24,734

n/a

n/a - not applicable


(1)	Redemption restrictions: 4% daily redemption; 7% monthly redemption; 47% quarterly redemption; and 42% are subject to three to five-year lock-up or side pocket provisions.

As of June 30, 2017 and March 31, 2017, for VIEs in which Legg Mason 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, 2017				As of March 31, 2017
	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⁾
Real Estate Investment Trusts	$	12,257	$	14,760	$	11,660	$	15,763
Other investment funds	47,149		63,648		47,063		73,710
Total	$	59,406	$	78,408	$	58,723	$	89,473


(1)	Amounts are related to investments in proprietary and other fund 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 $27,013,127 and $26,735,285 as of June 30, 2017 and March 31, 2017, 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 were not consolidated because Legg Mason does not have both the power to direct significant economic activities of the entity and rights/obligations associated with benefits/losses that could be significant to the entity.