Notes to Condensed Financial Statements
June 30, 2020
(unaudited)
The words “we” and “our” refer collectively to AllianceBernstein Holding L.P. (“AB Holding”) and AllianceBernstein L.P. and its subsidiaries (“AB”), or to their officers and employees. Similarly, the word “company” refers to both AB Holding and AB. Where the context requires distinguishing between AB Holding and AB, we identify which of them is being discussed.
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1.
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Business Description, Organization and Basis of Presentation
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Business Description
AB Holding’s principal source of income and cash flow is attributable to its investment in AB limited partnership interests. The condensed financial statements and notes of AB Holding should be read in conjunction with the condensed consolidated financial statements and notes of AB included as an exhibit to this quarterly report on Form 10-Q and with AB Holding’s and AB’s audited financial statements included in AB Holding’s Form 10-K for the year ended December 31, 2019.
AB provides diversified investment management, research and related services globally to a broad range of clients. Its principal services include:
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Institutional Services – servicing its institutional clients, including private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and affiliates such as Equitable Holdings, Inc. ("EQH") and its subsidiaries, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.
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Retail Services – servicing its retail clients, primarily by means of retail mutual funds sponsored by AB or an affiliated company, sub-advisory relationships with mutual funds sponsored by third parties, separately-managed account programs sponsored by financial intermediaries worldwide and other investment vehicles.
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Private Wealth Management Services – servicing its private clients, including high-net-worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, by means of separately-managed accounts, hedge funds, mutual funds and other investment vehicles.
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Bernstein Research Services – servicing institutional investors, such as pension fund, hedge fund and mutual fund managers, seeking high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options.
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AB also provides distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds it sponsors.
AB’s high-quality, in-depth research is the foundation of its business. AB’s research disciplines include economic, fundamental equity, fixed income and quantitative research. In addition, AB has experts focused on multi-asset strategies, wealth management and alternative investments.
AB provides a broad range of investment services with expertise in:
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Actively-managed equity strategies, with global and regional portfolios across capitalization ranges, concentration ranges and investment strategies, including value, growth and core equities;
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Actively-managed traditional and unconstrained fixed income strategies, including taxable and tax-exempt strategies;
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Passive management, including index and enhanced index strategies;
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Alternative investments, including hedge funds, fund of funds, direct lending and private equity; and
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Multi-asset solutions and services, including dynamic asset allocation, customized target-date funds and target-risk funds.
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AB’s services span various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities), and geographic location (e.g., U.S., international, global, emerging markets, regional and local), in major markets around the world.
Organization
During the second quarter of 2018, AXA S.A. ("AXA") completed the sale of a minority stake in EQH through an initial public offering ("IPO"). Since then, AXA has completed additional offerings and taken other steps, most recently during the fourth quarter of 2019. As a result, AXA owned less than 10% of the outstanding common stock of EQH as of June 30, 2020.
As of June 30, 2020, EQH owned approximately 4.2% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AB Holding (“AB Holding Units”). AllianceBernstein Corporation (an indirect wholly-owned subsidiary of EQH, “General Partner”) is the general partner of both AB Holding and AB. AllianceBernstein Corporation owns 100,000 general partnership units in AB Holding and a 1% general partnership interest in AB.
As of June 30, 2020, the ownership structure of AB, expressed as a percentage of general and limited partnership interests, was as follows:
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EQH and its subsidiaries
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63.7
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%
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AB Holding
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35.5
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Unaffiliated holders
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0.8
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100.0
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%
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Including both the general partnership and limited partnership interests in AB Holding and AB, EQH and its subsidiaries had an approximate 65.2% economic interest in AB as of June 30, 2020.
Basis of Presentation
The interim condensed financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim results, have been made. The preparation of the condensed financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The condensed statement of financial condition as of December 31, 2019 was derived from audited financial statements, but it does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
AB Holding records its investment in AB using the equity method of accounting. AB Holding’s investment is increased to reflect its proportionate share of income of AB and decreased to reflect its proportionate share of losses of AB and cash distributions made by AB to its Unitholders. In addition, AB Holding's investment is adjusted to reflect its proportionate share of certain capital transactions of AB.
AB Holding is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AB Holding (“AB Holding Partnership Agreement”), to its Unitholders pro rata in accordance with their percentage interests in AB Holding. Available Cash Flow is defined as the cash distributions AB Holding receives from AB minus such amounts as the General Partner determines, in its sole discretion, should be retained by AB Holding for use in its business (such as the payment of taxes) or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow.
On July 23, 2020, the General Partner declared a distribution of $0.61 per unit, representing a distribution of Available Cash Flow for the three months ended June 30, 2020. Each general partnership unit in AB Holding is entitled to receive distributions equal to those received by each AB Holding Unit. The distribution is payable on August 20, 2020 to holders of record at the close of business on August 3, 2020.
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3.
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Long-term Incentive Compensation Plans
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AB maintains several unfunded, non-qualified long-term incentive compensation plans, under which the company grants awards of restricted AB Holding Units to its employees and members of the Board of Directors, who are not employed by AB or by any of AB’s affiliates (“Eligible Directors”).
AB funds its restricted AB Holding Unit awards either by purchasing AB Holding Units on the open market or purchasing newly-issued AB Holding Units from AB Holding, and then keeping these AB Holding Units in a consolidated rabbi trust until delivering them or retiring them. In accordance with the AB Holding Partnership Agreement, when AB purchases newly-issued AB Holding Units from AB Holding, AB Holding is required to use the proceeds it receives from AB to purchase the equivalent number of newly-issued AB Units, thus increasing its percentage ownership interest in AB. AB Holding Units held in the consolidated rabbi trust are corporate assets in the name of the trust and are available to the general creditors of AB.
Repurchases of AB Holding Units for the three and six months ended June 30, 2020 and 2019 consisted of the following:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2020
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2019
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2020
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2019
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(in millions)
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Total amount of AB Holding Units Purchased (1)
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1.3
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—
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2.2
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2.0
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Total Cash Paid for AB Holding Units Purchased(1)
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$
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27.8
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$
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—
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$
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47.6
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$
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58.6
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Open Market Purchases of AB Holding Units Purchased (2)
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1.3
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—
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2.2
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1.9
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Total Cash Paid for Open Market Purchases of AB Holding Units (2)
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$
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27.8
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$
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—
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$
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45.1
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$
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55.2
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(1) Purchased on a trade date basis.
(2) The remainder related to purchases of AB Holding Units from employees to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards.
Each quarter, AB considers whether to implement a plan to repurchase AB Holding Units pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). A plan of this type allows a company to repurchase its shares at times when it otherwise might be prevented from doing so because of self-imposed trading blackout periods or because it possesses material non-public information. Each broker selected by AB has the authority under the terms and limitations specified in the plan to repurchase AB Holding Units on AB’s behalf in accordance with the terms and limitations specified in the plan. Repurchases are subject to regulations promulgated by the SEC as well as certain price, market volume and timing constraints specified in the plan. The plan adopted during the second quarter of 2020 expired at the close of business on July 22, 2020. AB may adopt additional plans in the future to engage in open-market purchases of AB Holding Units to help fund anticipated obligations under its incentive compensation award program and for other corporate purposes.
During the first six months of 2020 and 2019, AB granted to employees and Eligible Directors 0.2 million and 1.7 million restricted AB Holding Unit awards, respectively. AB used AB Holding Units repurchased during the applicable period and newly-issued AB Holding Units to fund these restricted AB Holding Unit awards.
During the first six months of 2020 and 2019, AB Holding issued 5,182 and 0.4 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $0.1 million and $9.0 million, respectively, received from award recipients as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.
Basic net income per unit is derived by dividing net income by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by adjusting net income for the assumed dilutive effect of compensatory options (“Net income – diluted”) and dividing by the diluted weighted average number of units outstanding for each period.
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Three Months Ended June 30,
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Six Months Ended
June 30,
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2020
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2019
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2020
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2019
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(in thousands, except per unit amounts)
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Net income – basic
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$
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56,926
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$
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52,274
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$
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119,185
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$
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98,713
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Additional allocation of equity in net income attributable to AB resulting from assumed dilutive effect of compensatory options
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3
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19
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18
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45
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Net income – diluted
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$
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56,929
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$
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52,293
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$
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119,203
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$
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98,758
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Weighted average units outstanding – basic
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96,892
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96,283
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96,526
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95,717
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Dilutive effect of compensatory options
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10
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48
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22
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60
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Weighted average units outstanding – diluted
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96,902
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96,331
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96,548
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95,777
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Basic net income per unit
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$
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0.59
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$
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0.54
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$
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1.23
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$
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1.03
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Diluted net income per unit
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$
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0.59
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$
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0.54
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$
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1.23
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$
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1.03
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Three Months Ended June 30,
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Six Months Ended
June 30,
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2020
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2019
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2020
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2019
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(amounts as shown)
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Anti-dilutive options excluded from diluted net income
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44,877
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29,056
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44,877
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29,056
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Changes in AB Holding’s investment in AB during the six-month period ended June 30, 2020 are as follows (in thousands):
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Investment in AB as of December 31, 2019
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$
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1,554,203
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Equity in net income attributable to AB Unitholders
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133,115
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Changes in accumulated other comprehensive (loss) income
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(4,635
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)
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Cash distributions received from AB
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(160,259
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)
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Additional investments with proceeds from exercise of compensatory options to buy AB Holding Units
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147
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Capital contributions (from) to AB
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(971
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AB Holding Units retired
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(46,178
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AB Holding Units issued to fund long-term incentive compensation plans
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9,961
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Change in AB Holding Units held by AB for long-term incentive compensation plans
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1,234
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Investment in AB as of June 30, 2020
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$
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1,486,617
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Changes in AB Holding Units outstanding during the six-month period ended June 30, 2020 are as follows:
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Outstanding as of December 31, 2019
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98,192,098
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Options exercised
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5,182
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Units issued
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408,059
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Units retired
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(2,173,368
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Outstanding as of June 30, 2020
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96,431,971
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AB Holding is a “grandfathered” publicly-traded partnership (“PTP”) for federal tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AB Holding is subject to the 4.0% New York City unincorporated business tax (“UBT”), net of credits for UBT paid by AB, and to a 3.5% federal tax on partnership gross income from the active conduct of a trade or business. AB Holding’s partnership gross income is derived from its interest in AB.
AB Holding’s federal income tax is computed by multiplying certain AB qualifying revenues (primarily U.S. investment advisory fees, research payments and brokerage commissions) by AB Holding’s ownership interest in AB, multiplied by the 3.5% tax rate. AB Holding Units in AB’s consolidated rabbi trust are not considered outstanding for purposes of calculating AB Holding’s ownership interest in AB.
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Three Months Ended June 30,
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Six Months Ended
June 30,
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2020
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2019
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% Change
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2020
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2019
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% Change
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(in thousands)
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Net income attributable to AB Unitholders
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$
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177,321
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$
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166,252
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6.7
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%
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$
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371,641
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$
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315,366
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17.8
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%
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Multiplied by: weighted average equity ownership interest
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35.6
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%
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35.5
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%
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35.8
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%
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35.4
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%
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Equity in net income attributable to AB Unitholders
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$
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63,201
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$
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59,023
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7.1
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$
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133,115
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$
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111,661
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19.2
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AB qualifying revenues
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$
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586,609
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$
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643,019
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(8.8
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$
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1,288,949
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$
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1,229,569
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4.8
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Multiplied by: weighted average equity ownership interest for calculating tax
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29.9
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%
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29.4
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%
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30.4
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%
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29.5
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%
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Multiplied by: federal tax
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3.5
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%
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3.5
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%
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3.5
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%
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3.5
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%
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Federal income taxes
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6,179
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6,619
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13,694
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12,700
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State income taxes
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96
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130
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236
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248
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Total income taxes
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$
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6,275
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$
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6,749
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(7.0
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$
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13,930
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$
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12,948
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7.6
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Effective tax rate
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9.9
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%
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11.4
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%
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10.5
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%
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11.6
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%
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In order to preserve AB Holding’s status as a “grandfathered” PTP for federal income tax purposes, management ensures that AB Holding does not directly or indirectly (through AB) engage in a substantial new line of business. If AB Holding were to lose its status as a “grandfathered” PTP, it would be subject to corporate income tax, which would reduce materially AB Holding’s net income and its quarterly distributions to AB Holding Unitholders.
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8.
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Commitments and Contingencies
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Legal and regulatory matters described below pertain to AB and are included here due to their potential significance to AB Holding's investment in AB.
With respect to all significant litigation matters, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome is probable and the amount of the loss can be reasonably estimated, we record an estimated loss for the expected outcome of the litigation. If the likelihood of a negative outcome is reasonably possible and we can determine an estimate of the possible loss or range of loss in excess of amounts already accrued, if any, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is often difficult to predict the outcome or estimate a possible loss or range of loss because litigation is subject to inherent uncertainties, particularly when plaintiffs allege substantial or indeterminate damages. Such is also the case when the litigation is in its early stages or when the litigation is highly complex or broad in scope. In these cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.
AB may be involved in various matters, including regulatory inquiries, administrative proceedings and litigation, some of which may allege significant damages. It is reasonably possible that AB could incur losses pertaining to these matters, but management cannot currently estimate any such losses.
Management, after consultation with legal counsel, currently believes that the outcome of any individual matter that is pending or threatened, or all of them combined, will not have a material adverse effect on our results of operations, financial condition or liquidity. However, any inquiry, proceeding or litigation has the element of uncertainty; management cannot determine whether further developments relating to any individual matter that is pending or threatened, or all of them combined, will have a material adverse effect on our results of operations, financial condition or liquidity in any future reporting period.