Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________________________________________________
FORM 10-Q
 _______________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20212022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-14818
 _______________________________________________________________________________________
Federated Hermes, Inc.
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________________
Pennsylvania 25-1111467
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1001 Liberty Avenue 15222-3779
Pittsburgh,Pennsylvania
(Address of principal executive offices) (Zip Code)
(Registrant'sRegistrant’s telephone number, including area code) 412-288-1900
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class B common stock, no par valueFHINew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company," and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerx  Accelerated filer
Non-accelerated filer  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No  x
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the last practicable date: As of October 22, 2021,21, 2022, the Registrant had outstanding 9,000 shares of Class A Common Stockcommon stock and 96,843,69888,986,067 shares of Class B Common Stock.common stock.

Table of Contents
Table of Contents

Item 1.
Item 2.
Item 3.
Item 4.
Part II. Other Information
Item 1.
Item 1A.
Item 2.
Item 6.


FORWARD-LOOKING STATEMENTS

Certain statements in this report on Form 10-Q constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that could cause the actual results, levels of activity, performance or achievements of Federated Hermes, Inc. and its consolidated subsidiaries (collectively, Federated Hermes), or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "trend," "potential," "opportunity," "believe," "expect," "anticipate," "current," "intention," "estimate," "position," "projection," "assume," "continue," "remain," "maintain," "sustain," "seek," "achieve,"“forecast,” “project,” “predict,” “trend,” “approximate,” “potential,” “opportunity,” “believe,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “projection,” “plan,” “assume,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "can," "may,"“will,” “would,” “should,” “could,” “can,” “may,” and similar expressions.Among other forward-looking statements, such statements include certain statements relating to, or, as applicable, statements concerning management'smanagement’s assessments, beliefs, expectations, assumptions, judgments, projections or estimates regarding: the coronaviruspandemic and pandemic, their impactits impact; Russia’s invasion of Ukraine and status, and plans in response;its impact; asset flows, levels, values and mix orand their impact; the possibility of impairments; business mix; the level, timing, degree and impact of changes in interest rates or gross or net yields; rates of inflation; fee rates and recognition; sources, levels and levelsrecognition of revenues, expenses, gains, losses, income and earnings; the level and impact of reimbursements, rebates or assumptions of fund-related expenses (Consideration Payable to Customers) and fee waivers for competitive reasons such as to maintain positive or zero net yields (Voluntary Yield-related Fee Waivers), to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers); whether, under what circumstances and the degree to which Fee Waivers will be implemented; the impact of market volatility, liquidity, and other market conditions; whether and when revenue or expense is recognized; whether performance fees or carried interest will be earned or repaid or clawed-back; whether and when capital contributions could be made; the components and level of, and prospect for, distribution-related expenses; guarantee and indemnification obligations; the impact of acquisitions on Federated Hermes’ growth; the timing and natureamount of acquisition-related payment obligations; acquisition-related matters, including future contingent consideration payments; payment obligations pursuant to employment or incentive compensation arrangements; vesting rights and requirements; business and market expansion opportunities, including anticipated, or acceleration of global growth; interest and principal payments expenses and repayment obligations;or expenses; taxes, tax rates and the impact of tax law changes; borrowing, debt, future cash needs and principal uses of cash, cash flows and liquidity; the ability to raise additional capital; type, classification and consolidation of investments; uses of treasury stock; Federated Hermes'Hermes’ product and market performance and Federated Hermes'Hermes’ performance indicators; investor preferences; market conditions, product and strategy demand, distribution, development and restructuring initiatives and related planning and timing; the effect, and degree of impact, of changes in customer relationships; legal proceedings; regulatory matters, including the pace, timing, impact, effects and other consequences of the current regulatory environment, regulatory developments and continuing regulatory oversight by United States (U.S.) and foreign regulators and other authorities;environment; the attractiveness and resiliency of money market funds; dedication of resources; the adoption and impact of accounting policies, new accounting pronouncements and accounting treatmentaccounting-related determinations; compliance, and related legal, compliance and other professional services expenses; level and impact of changes in currency exchange rates; interest rate, concentration, market, currency and other risks;risks and varioustheir impact. Any forward-looking statement is inherently subject to significant business, economic, competitive, regulatory and other items set forth under Item 1A - Risk Factors inrisks and uncertainties, many of which are difficult to predict and beyond Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020.Hermes’ control. Among other risks and uncertainties, market conditions can change



significantly and impact Federated Hermes'Hermes’ business and results, including by changing Federated Hermes'Hermes’ asset flows, levels, and mix, and business mix, which could cause a decline in revenues and net



income, result in impairments and increasechange the amount of Fee Waivers incurred by Federated Hermes. The obligation to make purchase price payments in connection with acquisitions is subject to certain adjustments and conditions, and the obligation to make contingent payments is based on net revenue growth levels and will be affected by the achievement of such levels.The obligation to make additional payments pursuant to employment or incentive compensation arrangements can be based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated Hermes'Hermes’ success in developing, structuring and distributing its products and strategies, potential changes in assets under management (AUM) and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated Hermes'Hermes’ products to intermediary customers, and potential increased legal, compliance and other professional services expenses stemming from additional or modified regulation or the dedication of such resources to other initiatives. Federated Hermes'Hermes’ risks and uncertainties also include liquidity and credit risks in Federated Hermes'Hermes’ money market funds and revenue risk, which will be affected by yield levels in money market fund products, Fee Waivers, changes in fair values of AUM, any additional regulatory reforms, investor preferences and confidence, Fee Waivers, and the ability of Federated Hermes to collect fees in connection with the management of such products. Many of these factors could be more likely to occur as a result of continued scrutiny of the mutual fund industry by domestic or foreign regulators, and any disruption in global financial markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated Hermes nor any other person assumes responsibility for the accuracy and completeness, or updating, of such statements in the future. For more information on these items and additional risks that could impact the forward-looking statements, see Item 1A - Risk Factors included in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020.2021 and Part II, Item 1A - Risk Factors.


Table of Contents
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance SheetsConsolidated Balance SheetsConsolidated Balance Sheets
(dollars in thousands)(dollars in thousands)(dollars in thousands)
(unaudited)(unaudited)(unaudited)
September 30,
2021
December 31,
2020
September 30,
2022
December 31,
2021
ASSETSASSETSASSETS
Current AssetsCurrent AssetsCurrent Assets
Cash and Cash EquivalentsCash and Cash Equivalents$201,692 $301,819 Cash and Cash Equivalents$304,520 $233,327 
Investments—Consolidated Investment CompaniesInvestments—Consolidated Investment Companies54,075 91,359 Investments—Consolidated Investment Companies107,277 105,542 
Investments—Affiliates and OtherInvestments—Affiliates and Other89,318 45,593 Investments—Affiliates and Other69,399 87,805 
Receivables, net of reserve of $16 and $16, respectively67,374 64,857 
Receivables, net of reserve of $21 and $21, respectivelyReceivables, net of reserve of $21 and $21, respectively48,586 65,317 
Receivables—AffiliatesReceivables—Affiliates31,381 41,107 Receivables—Affiliates33,000 30,956 
Prepaid ExpensesPrepaid Expenses27,445 22,130 Prepaid Expenses26,112 29,322 
Other Current AssetsOther Current Assets6,757 8,478 Other Current Assets41,389 7,178 
Total Current AssetsTotal Current Assets478,042 575,343 Total Current Assets630,283 559,447 
Long-Term AssetsLong-Term AssetsLong-Term Assets
GoodwillGoodwill798,258 800,267 Goodwill774,570 798,871 
Intangible Assets, net of accumulated amortization of $36,076 and $26,372, respectively472,920 481,753 
Property and Equipment, net of accumulated depreciation of $110,322 and $106,317, respectively49,421 52,610 
Intangible Assets, net of accumulated amortization of $40,949 and $39,618, respectivelyIntangible Assets, net of accumulated amortization of $40,949 and $39,618, respectively406,813 471,209 
Property and Equipment, net of accumulated depreciation of $114,535 and $113,624, respectivelyProperty and Equipment, net of accumulated depreciation of $114,535 and $113,624, respectively37,928 46,965 
Right-of-Use Assets, netRight-of-Use Assets, net111,718 122,078 Right-of-Use Assets, net93,271 108,306 
Other Long-Term AssetsOther Long-Term Assets36,050 28,788 Other Long-Term Assets29,705 33,389 
Total Long-Term AssetsTotal Long-Term Assets1,468,367 1,485,496 Total Long-Term Assets1,342,287 1,458,740 
Total AssetsTotal Assets$1,946,409 $2,060,839 Total Assets$1,972,570 $2,018,187 
LIABILITIESLIABILITIESLIABILITIES
Current LiabilitiesCurrent LiabilitiesCurrent Liabilities
Accounts Payable and Accrued ExpensesAccounts Payable and Accrued Expenses$62,648 $61,736 Accounts Payable and Accrued Expenses$72,037 $64,019 
Accrued Compensation and BenefitsAccrued Compensation and Benefits133,123 170,646 Accrued Compensation and Benefits118,143 162,203 
Lease LiabilitiesLease Liabilities17,181 15,845 Lease Liabilities17,839 17,447 
Other Current LiabilitiesOther Current Liabilities21,760 17,219 Other Current Liabilities30,910 27,038 
Total Current LiabilitiesTotal Current Liabilities234,712 265,446 Total Current Liabilities238,929 270,707 
Long-Term LiabilitiesLong-Term LiabilitiesLong-Term Liabilities
Long-Term DebtLong-Term Debt102,150 75,000 Long-Term Debt397,514 223,350 
Long-Term Deferred Tax Liability, netLong-Term Deferred Tax Liability, net205,317 187,937 Long-Term Deferred Tax Liability, net188,884 205,206 
Long-Term Lease LiabilitiesLong-Term Lease Liabilities109,290 121,922 Long-Term Lease Liabilities88,402 105,270 
Other Long-Term LiabilitiesOther Long-Term Liabilities34,617 36,550 Other Long-Term Liabilities32,826 36,435 
Total Long-Term LiabilitiesTotal Long-Term Liabilities451,374 421,409 Total Long-Term Liabilities707,626 570,261 
Total LiabilitiesTotal Liabilities686,086 686,855 Total Liabilities946,555 840,968 
Commitments and Contingencies (Note (15))00
Commitments and Contingencies (Note (17))Commitments and Contingencies (Note (17))
TEMPORARY EQUITYTEMPORARY EQUITYTEMPORARY EQUITY
Redeemable Noncontrolling Interest in Subsidiaries55,472 236,987 
Redeemable Noncontrolling Interests in SubsidiariesRedeemable Noncontrolling Interests in Subsidiaries54,586 63,202 
PERMANENT EQUITYPERMANENT EQUITYPERMANENT EQUITY
Federated Hermes, Inc. Shareholders' Equity
Federated Hermes, Inc. Shareholders’ EquityFederated Hermes, Inc. Shareholders’ Equity
Common Stock:Common Stock:Common Stock:
Class A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and OutstandingClass A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and Outstanding189 189 Class A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and Outstanding189 189 
Class B, No Par Value, 900,000,000 Shares Authorized, 109,505,456 Shares Issued441,924 418,669 
Additional Paid-In Capital from Treasury Stock Transactions30 
Class B, No Par Value, 900,000,000 Shares Authorized, 99,505,456 and 109,505,456 Shares Issued, respectivelyClass B, No Par Value, 900,000,000 Shares Authorized, 99,505,456 and 109,505,456 Shares Issued, respectively433,842 448,929 
Retained EarningsRetained Earnings1,153,539 1,027,699 Retained Earnings1,002,201 1,187,001 
Treasury Stock, at Cost, 12,531,058 and 10,174,013 Shares Class B Common Stock, respectively(403,807)(324,731)
Treasury Stock, at Cost, 10,519,389 and 16,094,488 Shares Class B Common Stock, respectivelyTreasury Stock, at Cost, 10,519,389 and 16,094,488 Shares Class B Common Stock, respectively(377,387)(538,464)
Accumulated Other Comprehensive Income (Loss), net of taxAccumulated Other Comprehensive Income (Loss), net of tax12,976 15,171 Accumulated Other Comprehensive Income (Loss), net of tax(87,416)16,362 
Total Permanent EquityTotal Permanent Equity1,204,851 1,136,997 Total Permanent Equity971,429 1,114,017 
Total Liabilities, Temporary Equity and Permanent EquityTotal Liabilities, Temporary Equity and Permanent Equity$1,946,409 $2,060,839 Total Liabilities, Temporary Equity and Permanent Equity$1,972,570 $2,018,187 
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
4


Consolidated Statements of IncomeConsolidated Statements of IncomeConsolidated Statements of Income
(dollars in thousands, except per share data)(dollars in thousands, except per share data)(dollars in thousands, except per share data)
(unaudited)(unaudited)(unaudited)
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
2021202020212020 2022202120222021
RevenueRevenueRevenue
Investment Advisory Fees, net—AffiliatesInvestment Advisory Fees, net—Affiliates$163,806 $202,978 $496,747 $573,242 Investment Advisory Fees, net—Affiliates$206,394 $163,806 $574,081 $496,747 
Investment Advisory Fees, net—OtherInvestment Advisory Fees, net—Other66,404 57,111 195,441 172,633 Investment Advisory Fees, net—Other57,250 66,404 180,600 195,441 
Administrative Service Fees, net—AffiliatesAdministrative Service Fees, net—Affiliates76,853 83,028 228,904 238,960 Administrative Service Fees, net—Affiliates75,021 76,853 218,710 228,904 
Other Service Fees, net—AffiliatesOther Service Fees, net—Affiliates15,377 17,952 46,439 87,765 Other Service Fees, net—Affiliates38,265 15,377 85,120 46,439 
Other Service Fees, net—OtherOther Service Fees, net—Other4,149 3,386 11,271 11,750 Other Service Fees, net—Other4,213 4,149 13,404 11,271 
Total RevenueTotal Revenue326,589 364,455 978,802 1,084,350 Total Revenue381,143 326,589 1,071,915 978,802 
Operating ExpensesOperating ExpensesOperating Expenses
Compensation and RelatedCompensation and Related131,996 126,186 408,385 365,104 Compensation and Related126,668 131,996 388,719 408,385 
DistributionDistribution38,486 73,726 120,990 258,925 Distribution91,032 38,486 223,837 120,990 
Systems and CommunicationsSystems and Communications18,537 16,193 56,086 46,179 Systems and Communications19,294 18,537 57,234 56,086 
Professional Service FeesProfessional Service Fees14,294 14,006 44,052 41,162 Professional Service Fees14,203 14,294 41,647 44,052 
Office and OccupancyOffice and Occupancy11,036 10,578 33,358 32,539 Office and Occupancy10,622 11,036 32,457 33,358 
Advertising and PromotionalAdvertising and Promotional4,660 2,921 12,107 10,981 Advertising and Promotional6,496 4,660 13,965 12,107 
Travel and RelatedTravel and Related1,643 542 2,838 4,026 Travel and Related3,421 1,643 8,543 2,838 
OtherOther7,535 6,922 23,297 22,058 Other12,627 7,535 32,466 23,297 
Total Operating ExpensesTotal Operating Expenses228,187 251,074 701,113 780,974 Total Operating Expenses284,363 228,187 798,868 701,113 
Operating IncomeOperating Income98,402 113,381 277,689 303,376 Operating Income96,780 98,402 273,047 277,689 
Nonoperating Income (Expenses)Nonoperating Income (Expenses)Nonoperating Income (Expenses)
Investment Income, netInvestment Income, net686 770 2,466 3,171 Investment Income, net2,599 686 5,270 2,466 
Gain (Loss) on Securities, netGain (Loss) on Securities, net(644)5,852 6,980 3,840 Gain (Loss) on Securities, net(6,825)(644)(39,406)6,980 
Debt ExpenseDebt Expense(476)(494)(1,313)(2,211)Debt Expense(3,302)(476)(7,873)(1,313)
Other, netOther, net(1,319)103 (1,158)8,426 Other, net(38)(1,319)31 (1,158)
Total Nonoperating Income (Expenses), netTotal Nonoperating Income (Expenses), net(1,753)6,231 6,975 13,226 Total Nonoperating Income (Expenses), net(7,566)(1,753)(41,978)6,975 
Income Before Income TaxesIncome Before Income Taxes96,649 119,612 284,664 316,602 Income Before Income Taxes89,214 96,649 231,069 284,664 
Income Tax ProvisionIncome Tax Provision23,163 32,928 83,353 81,852 Income Tax Provision21,640 23,163 58,140 83,353 
Net Income Including the Noncontrolling Interests in SubsidiariesNet Income Including the Noncontrolling Interests in Subsidiaries73,486 86,684 201,311 234,750 Net Income Including the Noncontrolling Interests in Subsidiaries67,574 73,486 172,929 201,311 
Less: Net Income (Loss) Attributable to the Noncontrolling Interests in SubsidiariesLess: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries2,124 862 (419)3,554 Less: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries(1,905)2,124 (10,070)(419)
Net IncomeNet Income$71,362 $85,822 $201,730 $231,196 Net Income$69,479 $71,362 $182,999 $201,730 
Amounts Attributable to Federated Hermes, Inc.Amounts Attributable to Federated Hermes, Inc.Amounts Attributable to Federated Hermes, Inc.
Earnings Per Common Share—BasicEarnings Per Common Share—Basic$0.73 $0.86 $2.05 $2.30 Earnings Per Common Share—Basic$0.78 $0.73 $2.02 $2.05 
Earnings Per Common Share—DilutedEarnings Per Common Share—Diluted$0.73 $0.85 $2.04 $2.29 Earnings Per Common Share—Diluted$0.78 $0.73 $2.02 $2.04 
Cash Dividends Per ShareCash Dividends Per Share$0.27 $0.27 $0.81 $0.81 Cash Dividends Per Share$0.27 $0.27 $0.81 $0.81 
(The accompanying notes are an integral part of these Consolidated Financial Statements.)

5


Consolidated Statements of Comprehensive IncomeConsolidated Statements of Comprehensive IncomeConsolidated Statements of Comprehensive Income
(dollars in thousands)(dollars in thousands)(dollars in thousands)
(unaudited)(unaudited)(unaudited)
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
2021202020212020 2022202120222021
Net Income Including the Noncontrolling Interests in SubsidiariesNet Income Including the Noncontrolling Interests in Subsidiaries$73,486 $86,684 $201,311 $234,750 Net Income Including the Noncontrolling Interests in Subsidiaries$67,574 $73,486 $172,929 $201,311 
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax
Permanent EquityPermanent EquityPermanent Equity
Foreign Currency Translation Gain (Loss)Foreign Currency Translation Gain (Loss)(7,248)16,239 (2,195)(9,333)Foreign Currency Translation Gain (Loss)(43,760)(7,248)(103,778)(2,195)
Temporary EquityTemporary EquityTemporary Equity
Foreign Currency Translation Gain (Loss)Foreign Currency Translation Gain (Loss)(9,953)7,316 (7,655)(4,573)Foreign Currency Translation Gain (Loss)(1,713)(9,953)(3,238)(7,655)
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax(17,201)23,555 (9,850)(13,906)Other Comprehensive Income (Loss), net of tax(45,473)(17,201)(107,016)(9,850)
Comprehensive Income Including the Noncontrolling Interests in SubsidiariesComprehensive Income Including the Noncontrolling Interests in Subsidiaries56,285 110,239 191,461 220,844 Comprehensive Income Including the Noncontrolling Interests in Subsidiaries22,101 56,285 65,913 191,461 
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interest in Subsidiaries(7,829)8,178 (8,074)(1,019)
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests in SubsidiariesLess: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests in Subsidiaries(3,618)(7,829)(13,308)(8,074)
Comprehensive Income Attributable to Federated Hermes, Inc.Comprehensive Income Attributable to Federated Hermes, Inc.$64,114 $102,061 $199,535 $221,863 Comprehensive Income Attributable to Federated Hermes, Inc.$25,719 $64,114 $79,221 $199,535 
(The accompanying notes are an integral part of these Consolidated Financial Statements.)


6


Consolidated Statements of Changes in EquityConsolidated Statements of Changes in EquityConsolidated Statements of Changes in Equity
(dollars in thousands)
(unaudited)(unaudited)(unaudited)
Federated Hermes, Inc. Shareholders' Equity   Federated Hermes, Inc. Shareholders’ Equity  
Common
Stock
Additional
Paid-in
Capital from
Treasury
Stock
Transactions
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive Income (Loss), net of
tax
Total
Permanent
Equity
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
Common
Stock
Additional
Paid-in
Capital from
Treasury
Stock
Transactions
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive Income (Loss), net of
tax
Total
Permanent
Equity
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
Balance at December 31, 2020$418,858 $$1,027,699 $(324,731)$15,171 $1,136,997 $236,987 
Balance at December 31, 2021Balance at December 31, 2021$449,118 $$1,187,001 $(538,464)$16,362 $1,114,017 $63,202 
Net Income (Loss)Net Income (Loss)55,863 55,863 (1,266)
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax(17,134)(17,134)(457)
Subscriptions—Redeemable Noncontrolling Interest HoldersSubscriptions—Redeemable Noncontrolling Interest Holders30,340 
Consolidation (Deconsolidation)Consolidation (Deconsolidation)(16,034)
Stock Award ActivityStock Award Activity9,288 (12,116)12,147 9,319 707 
Dividends DeclaredDividends Declared(24,952)(24,952)
Distributions to Noncontrolling Interests in SubsidiariesDistributions to Noncontrolling Interests in Subsidiaries(4,339)
Change in Estimated Redemption Value of Redeemable Noncontrolling InterestsChange in Estimated Redemption Value of Redeemable Noncontrolling Interests(14,221)(14,221)14,221 
Acquisition of Additional Equity of FHLAcquisition of Additional Equity of FHL3,518 34,048 37,566 (37,805)
Purchase of Treasury StockPurchase of Treasury Stock(102,537)(102,537)
Balance at March 31, 2022Balance at March 31, 2022$458,406 $3,518 $1,191,575 $(594,806)$(772)$1,057,921 $48,569 
Net Income (Loss)Net Income (Loss)57,657 57,657 (6,899)
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax(42,884)(42,884)(1,068)
Subscriptions—Redeemable Noncontrolling Interest HoldersSubscriptions—Redeemable Noncontrolling Interest Holders15,314 
Stock Award ActivityStock Award Activity9,430 (46)62 9,446 
Dividends DeclaredDividends Declared(24,705)(24,705)
Distributions to Noncontrolling Interests in SubsidiariesDistributions to Noncontrolling Interests in Subsidiaries(1,185)
Purchase of Treasury StockPurchase of Treasury Stock(89,542)(89,542)
Balance at June 30, 2022Balance at June 30, 2022$467,836 $3,472 $1,224,527 $(684,286)$(43,656)$967,893 $54,731 
Net Income (Loss)Net Income (Loss)74,484 74,484 (138)Net Income (Loss)69,479 69,479 (1,905)
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax3,558 3,558 1,430 Other Comprehensive Income (Loss), net of tax(43,760)(43,760)(1,713)
Subscriptions—Redeemable Noncontrolling Interest HoldersSubscriptions—Redeemable Noncontrolling Interest Holders25,762 Subscriptions—Redeemable Noncontrolling Interest Holders4,494 
Consolidation (Deconsolidation)Consolidation (Deconsolidation)(16,237)Consolidation (Deconsolidation)15,599 
Stock Award ActivityStock Award Activity9,216 (15,234)15,249 9,231 2,481 Stock Award Activity8,895 8,895 
Dividends DeclaredDividends Declared(26,788)(26,788)Dividends Declared(24,141)(24,141)
Distributions to Noncontrolling Interest in SubsidiariesDistributions to Noncontrolling Interest in Subsidiaries(1,898)Distributions to Noncontrolling Interest in Subsidiaries(16,620)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests02,670 2,670 (2,670)
Purchase of Treasury Stock(45,030)(45,030)
Balance at March 31, 2021$428,074 $$1,062,831 $(354,512)$18,729 $1,155,122 $245,717 
Net Income (Loss)55,884 55,884 (2,405)
Other Comprehensive Income (Loss), net of tax1,495 1,495 868 
Subscriptions—Redeemable Noncontrolling Interest Holders899,962 
Consolidation (Deconsolidation)(894,175)
Stock Award Activity7,760 (189)205 7,776 2,518 
Dividends Declared(26,550)(26,550)
Distributions to Noncontrolling Interest in Subsidiaries(1,016)
Retirement of Treasury StockRetirement of Treasury Stock(42,700)(3,472)(267,664)313,836 
Purchase of Treasury StockPurchase of Treasury Stock(31,797)(31,797)Purchase of Treasury Stock(6,937)(6,937)
Balance at June 30, 2021$435,834 $$1,091,976 $(386,104)$20,224 $1,161,930 $251,469 
Net Income (Loss)71,362 71,362 2,124 
Other Comprehensive Income (Loss), net of tax(7,248)(7,248)(9,953)
Subscriptions—Redeemable Noncontrolling Interest Holders66,903 
Consolidation (Deconsolidation)(74,836)
Stock Award Activity6,279 30 6,309 2,557 
Dividends Declared(26,301)(26,301)
Distributions to Noncontrolling Interest in Subsidiaries(1,178)
Acquisition of Additional Equity of HFML(165,112)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests16,502 16,502 (16,502)
Purchase of Treasury Stock(17,703)(17,703)
Balance at September 30, 2021$442,113 $30 $1,153,539 $(403,807)$12,976 $1,204,851 $55,472 
Balance at September 30, 2022Balance at September 30, 2022$434,031 $$1,002,201 $(377,387)$(87,416)$971,429 $54,586 
Consolidated Statements of Changes in Equity
(dollars in thousands)
(unaudited)
 Federated Hermes, Inc. Shareholders’ Equity  
 Common
Stock
Additional
Paid-in
Capital from
Treasury
Stock
Transactions
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive Income (Loss), net of
tax
Total
Permanent
Equity
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
Balance at December 31, 2020$418,858 $$1,027,699 $(324,731)$15,171 $1,136,997 $236,987 
Net Income (Loss)74,484 74,484 (138)
Other Comprehensive Income (Loss), net of tax3,558 3,558 1,430 
Subscriptions—Redeemable Noncontrolling Interest Holders25,762 
Consolidation (Deconsolidation)(16,237)
Stock Award Activity9,216 (15,234)15,249 9,231 2,481 
Dividends Declared(26,788)(26,788)
Distributions to Noncontrolling Interests in Subsidiaries(1,898)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests2,670 2,670 (2,670)
Purchase of Treasury Stock(45,030)(45,030)
Balance at March 31, 2021$428,074 $$1,062,831 $(354,512)$18,729 $1,155,122 $245,717 
Net Income (Loss)0055,884 0055,884(2,405)
Other Comprehensive Income (Loss), net of tax00001,495 1,495868 
Subscriptions—Redeemable Noncontrolling Interest Holders000000899,962 
Consolidation (Deconsolidation)000000(894,175)
Stock Award Activity7,760 0(189)205 07,7762,518 
Dividends Declared00(26,550)00(26,550)
Distributions to Noncontrolling Interests in Subsidiaries000(1,016)
Purchase of Treasury Stock000(31,797)0(31,797)
Balance at June 30, 2021$435,834 $$1,091,976 $(386,104)$20,224 $1,161,930 $251,469 
Net Income (Loss)71,362 71,362 2,124 
Other Comprehensive Income (Loss), net of tax(7,248)(7,248)(9,953)
Subscriptions—Redeemable Noncontrolling Interest Holders66,903 
Consolidation (Deconsolidation)(74,836)
Stock Award Activity6,279 30 6,309 2,557 
Dividends Declared(26,301)(26,301)
Distributions to Noncontrolling Interests in Subsidiaries(1,178)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests16,502 16,502 (16,502)
Acquisition of Additional Equity of FHL(165,112)
Purchase of Treasury Stock(17,703)(17,703)
Balance at September 30, 2021$442,113 $30 $1,153,539 $(403,807)$12,976 $1,204,851 $55,472 
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Consolidated Statements of Changes in Equity
(dollars in thousands)
(unaudited)
 Federated Hermes, Inc. Shareholders' Equity  
 Common
Stock
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive Income (Loss), net of
tax
Total
Permanent
Equity
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
Balance at December 31, 2019$392,210 $930,351 $(281,032)$(249)$1,041,280 $212,086 
Net Income (Loss)64,178 64,178 (913)
Other Comprehensive Income (Loss), net of tax(24,859)(24,859)(11,454)
Subscriptions—Redeemable Noncontrolling Interest Holders5,577 
Consolidation (Deconsolidation)(4,019)
Stock Award Activity7,467 (16,146)16,146 7,467 2,153 
Dividends Declared(27,304)(27,304)
Distributions to Noncontrolling Interest in Subsidiaries(6,039)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests(1,870)(1,870)1,870 
Purchase of Treasury Stock(15,959)(15,959)
Balance at March 31, 2020$399,677 $949,209 $(280,845)$(25,108)$1,042,933 $199,261 
Net Income (Loss)081,196 0081,1963,605 
Other Comprehensive Income (Loss), net of tax000(713)(713)(435)
Subscriptions—Redeemable Noncontrolling Interest Holders000006,225 
Stock Award Activity6,456 (678)829 06,6072,087 
Dividends Declared0(27,243)00(27,243)
Distributions to Noncontrolling Interest in Subsidiaries000(4,058)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests2,013 2,013(2,013)
Purchase of Treasury Stock00(18,126)0(18,126)
Balance at June 30, 2020$406,133 $1,004,497 $(298,142)$(25,821)$1,086,667 $204,672 
Net Income (Loss)85,822 85,822 862 
Other Comprehensive Income (Loss), net of tax16,239 16,239 7,316 
Subscriptions—Redeemable Noncontrolling Interest Holders3,212 
Stock Award Activity6,281 67 6,348 2,164 
Dividends Declared(27,044)(27,044)
Distributions to Noncontrolling Interest in Subsidiaries(358)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests3,567 3,567 (3,567)
Purchase of Treasury Stock(20,023)(20,023)
Balance at September 30, 2020$412,414 $1,066,842 $(318,098)$(9,582)$1,151,576 $214,301 

7


Consolidated Statements of Cash FlowsConsolidated Statements of Cash FlowsConsolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)(unaudited)(unaudited)
Nine Months EndedNine Months Ended
September 30,September 30,
2021202020222021
Operating ActivitiesOperating ActivitiesOperating Activities
Net Income Including the Noncontrolling Interests in SubsidiariesNet Income Including the Noncontrolling Interests in Subsidiaries$201,311 $234,750 Net Income Including the Noncontrolling Interests in Subsidiaries$172,929 $201,311 
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating ActivitiesAdjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating ActivitiesAdjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities
Depreciation and AmortizationDepreciation and Amortization22,639 22,431 Depreciation and Amortization21,197 22,639 
Share-Based Compensation ExpenseShare-Based Compensation Expense23,283 20,224 Share-Based Compensation Expense27,619 23,283 
Subsidiary Share-Based Compensation ExpenseSubsidiary Share-Based Compensation Expense7,556 6,404 Subsidiary Share-Based Compensation Expense707 7,556 
(Gain) Loss on Disposal of Assets(Gain) Loss on Disposal of Assets(6,975)1,590 (Gain) Loss on Disposal of Assets3,986 (6,975)
Provision (Benefit) for Deferred Income TaxesProvision (Benefit) for Deferred Income Taxes19,495 11,907 Provision (Benefit) for Deferred Income Taxes(6,969)19,495 
Consolidation/(Deconsolidation) of Other EntitiesConsolidation/(Deconsolidation) of Other Entities10,379 (3,051)Consolidation/(Deconsolidation) of Other Entities(20)10,379 
Net Unrealized (Gain) Loss on InvestmentsNet Unrealized (Gain) Loss on Investments27 (5,397)Net Unrealized (Gain) Loss on Investments35,425 27 
Net Sales (Purchases) of Investments—Consolidated Investment CompaniesNet Sales (Purchases) of Investments—Consolidated Investment Companies(129,647)(7,516)Net Sales (Purchases) of Investments—Consolidated Investment Companies(26,216)(129,647)
Other Changes in Assets and Liabilities:Other Changes in Assets and Liabilities:Other Changes in Assets and Liabilities:
(Increase) Decrease in Receivables, net(Increase) Decrease in Receivables, net3,914 5,998 (Increase) Decrease in Receivables, net4,537 3,914 
(Increase) Decrease in Prepaid Expenses and Other Assets(Increase) Decrease in Prepaid Expenses and Other Assets3,887 (9,317)(Increase) Decrease in Prepaid Expenses and Other Assets(23,734)3,887 
Increase (Decrease) in Accounts Payable and Accrued ExpensesIncrease (Decrease) in Accounts Payable and Accrued Expenses(36,769)(27,411)Increase (Decrease) in Accounts Payable and Accrued Expenses(22,984)(36,769)
Increase (Decrease) in Other LiabilitiesIncrease (Decrease) in Other Liabilities(18,144)(7,154)Increase (Decrease) in Other Liabilities5,058 (18,144)
Net Cash Provided (Used) by Operating ActivitiesNet Cash Provided (Used) by Operating Activities100,956 243,458 Net Cash Provided (Used) by Operating Activities191,535 100,956 
Investing ActivitiesInvesting ActivitiesInvesting Activities
Purchases of Investments—Affiliates and OtherPurchases of Investments—Affiliates and Other(7,221)(19,050)Purchases of Investments—Affiliates and Other(18,606)(7,221)
Cash Paid for Business Acquisitions, Net of Cash AcquiredCash Paid for Business Acquisitions, Net of Cash Acquired(5,324)2,697 Cash Paid for Business Acquisitions, Net of Cash Acquired0 (5,324)
Proceeds from Redemptions of Investments—Affiliates and OtherProceeds from Redemptions of Investments—Affiliates and Other33,291 6,415 Proceeds from Redemptions of Investments—Affiliates and Other21,389 33,291 
Cash Paid for Property and EquipmentCash Paid for Property and Equipment(7,753)(8,559)Cash Paid for Property and Equipment(4,094)(7,753)
Net Cash Provided (Used) by Investing ActivitiesNet Cash Provided (Used) by Investing Activities12,993 (18,497)Net Cash Provided (Used) by Investing Activities(1,311)12,993 
Financing ActivitiesFinancing ActivitiesFinancing Activities
Dividends PaidDividends Paid(79,668)(81,612)Dividends Paid(73,804)(79,668)
Purchases of Treasury StockPurchases of Treasury Stock(92,426)(53,145)Purchases of Treasury Stock(211,216)(92,426)
Distributions to Noncontrolling Interest in Subsidiaries(4,092)(10,455)
Contributions from Noncontrolling Interest in Subsidiaries101,297 15,014 
Payments to Acquire Additional Equity in HFML(163,696)
Distributions to Noncontrolling Interests in SubsidiariesDistributions to Noncontrolling Interests in Subsidiaries(22,144)(4,092)
Contributions from Noncontrolling Interests in SubsidiariesContributions from Noncontrolling Interests in Subsidiaries50,148 101,297 
Payments to Acquire Additional Equity in FHLPayments to Acquire Additional Equity in FHL0 (163,696)
Cash paid for Business AcquisitionsCash paid for Business Acquisitions(7,053)(2,008)
Proceeds from New BorrowingsProceeds from New Borrowings488,300 82,150 
Proceeds from New Borrowings82,150 100,000 
Payments on DebtPayments on Debt(55,000)(110,000)Payments on Debt(311,650)(55,000)
Other Financing ActivitiesOther Financing Activities(1,948)(1,616)Other Financing Activities(2,571)60 
Net Cash Provided (Used) by Financing ActivitiesNet Cash Provided (Used) by Financing Activities(213,383)(141,814)Net Cash Provided (Used) by Financing Activities(89,990)(213,383)
Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash EquivalentsEffect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents(2,758)(3,408)Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents(29,980)(2,758)
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash EquivalentsNet Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents(102,192)79,739 Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents70,254 (102,192)
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of PeriodCash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period308,635 249,511 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period238,052 308,635 
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of PeriodCash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period206,443 329,250 Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period308,306 206,443 
Less: Restricted Cash Recorded in Other Current AssetsLess: Restricted Cash Recorded in Other Current Assets4,449 6,091 Less: Restricted Cash Recorded in Other Current Assets3,516 4,449 
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term AssetsLess: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets302 312 Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets270 302 
Cash and Cash EquivalentsCash and Cash Equivalents$201,692 $322,847 Cash and Cash Equivalents$304,520 $201,692 
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
8

Table of Contents
Notes to the Consolidated Financial Statements
(unaudited)

(1) Basis of Presentation
Federated Hermes, Inc. and its consolidated subsidiaries (collectively, Federated Hermes) provide investment advisory, administrative, distribution and other services to various investment products, including sponsored investment companies, collective funds and other funds (Federated Hermes Funds) and Separate Accountsseparate accounts (which include separately managed accounts, institutional accounts, certain sub-advised funds and other managed products)products, collectively Separate Accounts) in both domestic and international markets. In addition, Federated Hermes markets and provides stewardship and real estate development services to various domestic and international companies. The interim Consolidated Financial Statementsconsolidated financial statements of Federated Hermes included herein (Consolidated Financial Statements) have been prepared in accordance with U.S.United States (U.S.) generally accepted accounting principles (GAAP). In the opinion of management, the financial statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.
In preparing the financial statements,Consolidated Financial Statements, management is required to make estimates and assumptions that affect the amounts reported therein and in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the Consolidated Financial Statements.
These financial statementsThe Consolidated Financial Statements should be read in conjunction with Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020.2021. Certain items reported in previous periods have been reclassified to conform to the current period'speriod’s presentation.
(2) Significant Accounting Policies
For a listing of Federated Hermes'Hermes’ significant accounting policies, please refer to Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020. The following accounting policy has been updated as a result of newly consolidated variable interest entities (VIEs).
Consolidation of Variable Interest Entities
Federated Hermes has a controlling financial interest in a VIE and is, therefore, deemed to be the primary beneficiary of a VIE if it has (1) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Financial information for certain entities, whose primary purpose is to collect and distribute carried interest paid by foreign private equity and infrastructure funds, is not available timely and is therefore consolidated on a one quarter lag, adjusted for any known material carried interest revenue and compensation transactions occurring through the balance sheet date.2021.
(3) Business Combination and Equity Acquisition and Business Combination
2021 Acquisition of HFML Noncontrolling Interest
On August 31, 2021 (Closing Date),Effective October 1, 2022, Federated Hermes completed the acquisition of substantially all of the assets of C.W. Henderson and Associates, Inc. (CWH), a 29.5%Chicago-based registered investment advisor specializing in the management of tax-exempt municipal securities (CWH Acquisition). This acquisition will enhance Federated Hermes’ existing separately managed accounts business. An initial closing purchase price of $28.0 million was paid on September 30, 2022 and was recorded in Other Current Assets on the Consolidated Balance Sheets. The purchase agreement provides for a series of contingent purchase price payments, which can total as much as $17.6 million in the aggregate and can become payable annually over the next five years based on certain levels of net revenue growth. Due to the timing of the CWH Acquisition, the information necessary to complete the preliminary purchase price allocation is not yet available. Federated Hermes expects to disclose the preliminary purchase price allocation in its Annual Report on Form 10-K for the year ended December 31, 2022.
On March 14, 2022, Federated Hermes completed a tender offer resulting in the acquisition of the remaining approximate 10% noncontrolling interestinterests in Federated Hermes Limited (FHL, formerly known as Hermes Fund Managers Limited (HFML)Limited) from BT Pension Scheme (BTPS) for £116.5 million ($160.2 million) pursuant to the termsa trustee of a certain Put and Call Option Deed, dated July 2, 2018 (the Option Deed), between BTPS and Federated Hermes (2021 Acquisition of HFML Noncontrolling Interest). Because Federated Hermes had previously acquired a 60% controlling interest in HFML from BTPS as of July 1, 2018 (2018 HFML Acquisition), the 2021 Acquisition of HFML Noncontrolling Interest was accounted for as an acquisition of additional equity. The difference between the carrying value of the BTPS noncontrolling interest and the purchase price was reclassified from temporary equity to permanent equity. The remaining approximate 10% of the equity interests of HFML is held in annon-U.S. domiciled employee benefit trust established for the benefit of certain members of HFML'sFHL’s management, a non-U.S. resident former FHL employee and other non-U.S. resident key FHL employees under a long-term incentive plan established in connection with the 2018 HFML Acquisition.
acquisition of FHL (2022 Acquisition of FHL Noncontrolling Interests). Pursuant to the Option Deed,2022 Acquisition of FHL Noncontrolling Interests, FHL became a 100% indirect, wholly-owned subsidiary of Federated Hermes.
The 2022 Acquisition of FHL Noncontrolling Interests was transacted in shares whereby Federated Hermes issued awards of restricted Class B common stock under Federated Hermes Stock Incentive Plan and BTPS agreed uponFederated Hermes UK Sub-Plan, as amended, and treasury Class B common stock, in exchange for the beneficial interests in shares of FHL. The FHL shares were exchanged at fair value for Federated Hermes shares valued at £36.4 million or $47.5 million, which was based on a third-party valuation company, which determinedof FHL. See Note (12) for additional information regarding the fair value of HFML for purposes of the Option Deed. The Option Deed provided that the consideration to be paid for BTPS' remaining interest in HFML would be based on BTPS' equity proportion of the fair value of HFML as determined in accordance with the terms of the Option Deed. Federated Hermes paid the purchase price by using a combination of cash on hand and borrowings under its corporate credit facility. Upon completion of the acquisition on the Closing Date, BTPS no longer has any ownership interest in HFML nor any representation on HFML's board of directors.share exchange.
9

Table of Contents
Notes to the Consolidated Financial Statements
(unaudited)
HCL Acquisition
On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of HGPE Capital Limited (HCL Acquisition) for £15.9 million ($20.4 million). The principal activity of HGPE Capital Limited is that of a holding company for an infrastructure and private equity investment management business. As a result of the HCL Acquisition, Federated Hermes gained control of Hermes GPE LLP (HGPE) (collectively with HGPE Capital Limited, HCL). The addition of London-based HCL provides the opportunity to further accelerate and broaden Federated Hermes' global growth.
The HCL Acquisition included upfront cash payments that totaled £11.2 million ($14.3 million). The transaction also includes contingent purchase price payments payable through December 2024 that were deposited into escrow. The maximum contingent purchase price payments, recorded in Other Long-Term Liabilities, totaled £3.5 million ($4.5 million as of March 1, 2020), which represents the payment of certain future carried interest.
Prior to March 1, 2020, Federated Hermes accounted for its partial ownership interest in HGPE (through its ownership of HFML) as an equity-method investment recorded in Other Long-Term Assets on the Consolidated Balance Sheets. Management used an independent valuation expert to assist in estimating the fair value of this equity interest in HGPE using primarily the discounted cash flow methodology under the income approach. The acquisition-date fair value of this previous equity interest was $34.5 million. In the first quarter 2020, Federated Hermes recognized a gain of $7.5 million as a result of remeasuring the prior equity interest in HGPE held before the business combination and the consolidation of HGPE. This gain is included in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income.
Federated Hermes performed a valuation of the fair market value of acquired assets and assumed liabilities of the HCL Acquisition. The accounting for this acquisition was finalized in the first quarter 2021. During the first quarter 2021, Federated Hermes recorded adjustments that primarily resulted from the consolidation of certain foreign subsidiaries not previously consolidated. The provisional amounts recognized for certain acquired assets and incurred liabilities were adjusted by $25.8 million and $17.2 million, respectively, with the net offset of $8.6 million recorded to the related redeemable noncontrolling interest in subsidiary. This adjustment reflected facts and circumstances that existed as of the acquisition date. As a result of the consolidation of these subsidiaries, Federated Hermes recorded revenue of $6.9 million offset by $6.9 million of Compensation and Related expense, which represented the income and expense that would have been recorded had these entities been consolidated on March 1, 2020. There was no change to net income or earnings per share for the three-month period ended March 31, 2021 as a result of these adjustments.
The following table summarizes the final purchase price allocation determined as of the purchase date:
(in millions)
Cash and Cash Equivalents$32.7 
Other Current Assets1
11.8 
Goodwill2
19.1 
Intangible Assets3
27.6 
Other Long-Term Assets16.4 
Less: Liabilities Acquired(44.1)
Less: Fair Value of Redeemable Noncontrolling Interest in Subsidiary4
(43.1)
Total Purchase Price Consideration$20.4 
1    Includes $5.0 million of accounts receivable.
2    The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled workforce of HGPE. In this instance, goodwill is not deductible for tax purposes.
3    Includes $20.3 million for rights to manage fund assets for private equity funds with a weighted-average useful life of 9.0 years and $6.9 million for rights to manage fund assets for infrastructure funds with a weighted-average useful life of 11.0 years, all of which are recorded in Intangible Assets, net on the Consolidated Balance Sheets.
4    The fair value of the noncontrolling interest was determined utilizing primarily the discounted cash flow methodology under the income approach.
10

Table of Contents
Notes to the Consolidated Financial Statements
(unaudited)
(4) Revenue from Contracts with Customers
The following table presents Federated Hermes'Hermes’ revenue disaggregated by asset class:
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in thousands)(in thousands)2021202020212020(in thousands)2022202120222021
EquityEquity$172,349 $138,590 $510,302 $399,208 Equity$127,183 $172,349 $406,642 $510,302 
Money marketMoney market170,542 55,726 402,639 185,704 
Fixed-incomeFixed-income60,622 49,407 175,115 139,705 Fixed-income49,197 60,622 159,025 175,115 
Money market55,726 143,391 185,704 452,240 
Other1
Other1
37,892 33,067 107,681 93,197 
Other1
34,221 37,892 103,609 107,681 
Total RevenueTotal Revenue$326,589 $364,455 $978,802 $1,084,350 Total Revenue$381,143 $326,589 $1,071,915 $978,802 
1    Primarily includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), multi-asset and stewardship services revenue.
The following table presents Federated Hermes'Hermes’ revenue disaggregated by performance obligation:
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in thousands)(in thousands)2021202020212020(in thousands)2022202120222021
Asset Management1
Asset Management1
$230,210 $260,089 $692,188 $745,875 
Asset Management1
$263,644 $230,210 $754,681 $692,188 
Administrative ServicesAdministrative Services76,853 83,028 228,904 238,960 Administrative Services75,021 76,853 218,710 228,904 
Distribution2
Distribution2
12,460 15,273 37,679 79,786 
Distribution2
36,026 12,460 78,285 37,679 
Other3
Other3
7,066 6,065 20,031 19,729 
Other3
6,452 7,066 20,239 20,031 
Total RevenueTotal Revenue$326,589 $364,455 $978,802 $1,084,350 Total Revenue$381,143 $326,589 $1,071,915 $978,802 
1    The performance obligation may include administrative, distribution and other services recorded as a single asset management fee under Topic 606, as it is part of a unitary fee arrangement with a single performance obligation.
2    The performance obligation is satisfied at a point in time. A portion of this revenue relates to a performance obligation that has been satisfied in a prior period.
3    Primarily includes shareholder service fees and stewardship services revenue.
The following table presents Federated Hermes'Hermes’ revenue disaggregated by geographical market:
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in thousands)(in thousands)2021202020212020(in thousands)2022202120222021
DomesticDomestic$237,543 $295,422 $718,316 $884,569 Domestic$311,254 $237,543 $849,570 $718,316 
Foreign1
Foreign1
89,046 69,033 260,486 199,781 
Foreign1
69,889 89,046 222,345 260,486 
Total RevenueTotal Revenue$326,589 $364,455 $978,802 $1,084,350 Total Revenue$381,143 $326,589 $1,071,915 $978,802 
1    This represents revenue earned by non-U.S. domiciled subsidiaries.
The following table presents Federated Hermes'Hermes’ revenue disaggregated by product type:
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in thousands)(in thousands)2021202020212020(in thousands)2022202120222021
Federated Hermes FundsFederated Hermes Funds$256,036 $303,958 $772,090 $899,967 Federated Hermes Funds$319,680 $256,036 $877,910 $772,090 
Separate AccountsSeparate Accounts66,404 57,111 195,441 172,633 Separate Accounts57,250 66,404 180,600 195,441 
Other1
Other1
4,149 3,386 11,271 11,750 
Other1
4,213 4,149 13,405 11,271 
Total RevenueTotal Revenue$326,589 $364,455 $978,802 $1,084,350 Total Revenue$381,143 $326,589 $1,071,915 $978,802 
1    Primarily includes stewardship services revenue.
For nearly all revenue, Federated Hermes is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of applying the following exemptions: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.
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(unaudited)
duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.
Federated Hermes expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services and real estate development performance obligations at September 30, 2021.2022. Generally, contracts are billed in arrears on a quarterly basis and have a three yearthree-year duration, after which the customer can terminate the agreement with notice, generally from three to 12 months. Based on existing contracts and the applicable foreign exchange rates as of September 30, 2021,2022, Federated Hermes may recognize future fixed revenue from these services as presented in the following table:
(in thousands)(in thousands)(in thousands)
Remainder of 2021$4,418 
20229,057 
Remainder of 2022Remainder of 2022$3,176 
202320234,486 20236,778 
2024 and Thereafter2,687 
202420242,878 
2025 and Thereafter2025 and Thereafter1,086 
Total Remaining Unsatisfied Performance ObligationsTotal Remaining Unsatisfied Performance Obligations$20,648 Total Remaining Unsatisfied Performance Obligations$13,918 
(5) Concentration Risk
(a) Revenue Concentration by Asset Class
The following table presents Federated Hermes'Hermes’ significant revenue concentration by asset class:
Nine Months EndedNine Months Ended
September 30,September 30,
2021202020222021
Equity AssetsEquity Assets52 %37 %Equity Assets38 %52 %
Money Market AssetsMoney Market Assets19 %42 %Money Market Assets37 %19 %
Fixed-Income AssetsFixed-Income Assets18 %13 %Fixed-Income Assets15 %18 %
The change in the relative proportion of Federated Hermes'Hermes’ revenue attributable to money market assets for the nine months ended September 30, 2021,2022 as compared to the same period in 2020,2021, was primarily the result of an increase in money market revenue due to a decrease in fee waivers.waivers in order for certain money market funds to maintain positive or zero net yields (Voluntary Yield-related Fee Waivers). See section below entitled Low Short-Term Interest Rates.
The change in the relative proportion of Federated Hermes'Hermes’ revenue attributable to equity and fixed-income assets for the nine months ended September 30, 2021,2022 as compared to the same period in 2020,2021, was primarily the result of decreasedincreased money market revenue due to the decrease in Voluntary Yield-related Fee Waivers and higher averagedecreased equity and fixed-income revenue from lower average equity assets and fixed-income asset mix in 2021.2022.
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the outbreak of a novel coronavirus (Covid-19, or the(the Pandemic), the Federal Open Market Committee of the Federal Reserve Board (FOMC) decreased the federal funds target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds iswas not sufficient to cover all of the fund'sfund’s operating expenses. Beginning in the first quarter 2020, Federated Hermes began to waive fees in order for certain money market funds to maintain positive or zero net yields (Voluntaryimplement Voluntary Yield-related Fee Waivers).Waivers. These Voluntary Yield-related Fee Waivers have been partially offset by related reductions in distribution expense as a result of Federated Hermes'Hermes’ mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers. In response to global economic activity and elevated inflation levels, the FOMC has raised the federal funds target rate multiple times in 2022. The range is currently 3.00% - 3.25% as of the September 2022 FOMC meeting. These rate increases have eliminated the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers.
There were no material Voluntary Yield-related Fee Waivers during the quarter ended September 30, 2022. During the nine months ended September 30, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million. These fee waivers were partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to Federated Hermes was $18.8 million for the nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, Voluntary Yield-related Fee Waivers totaled $109.2 million and $310.2 million, respectively. These fee waivers were partially offset by related reductions in distribution expenses of $72.3 million and $204.9 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $36.9 million and $105.3 million for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, Voluntary Yield-related Fee Waivers totaled $36.8 million and $56.9 million, respectively. These fee waivers were partially offset by related reductions in distribution expenses of $33.0 million and $51.0 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $3.8 million and $5.9 million for the three and nine months
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Notes to the Consolidated Financial Statements
(unaudited)
ended September 30, 2020, respectively. See Management's Discussion and Analysis under the caption Business Developments - Low Short-Term Interest Rates for additional information on management's expectations regarding Voluntary Yield-related Fee Waivers.
(b) Revenue Concentration by Investment Fund Strategy
The following table presents Federated Hermes'Hermes’ revenue concentration by investment fund strategy:
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
20212020202120202022202120222021
Federated Hermes Government Obligations FundFederated Hermes Government Obligations Fund14 %%11 %%
Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund IIFederated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II12 %%11 %%Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II6 %12 %7 %11 %
Federated Hermes Government Obligations Fund5 %14 %5 %13 %
A significant and prolonged decline in the AUM in these funds could have a material adverse effect on Federated Hermes'Hermes’ future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with these funds.
(c) Revenue Concentration by Intermediary
Approximately 14% and 11% of Federated Hermes’ total revenue for the three- and nine-month periods ended September 30, 2022, respectively, and 3% for both the three- and nine-month periods ended September 30, 2021 was derived from services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary. The increase in 2022 was primarily due to the decrease in Voluntary Yield-related Fee Waivers. An increase in Voluntary Yield-related Fee Waivers or a negative change in Federated Hermes’ relationship with this intermediary may have a material adverse effect on Federated Hermes’ future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses associated with this intermediary.
(6) Consolidation
The Consolidated Financial Statements include the accounts of Federated Hermes, certain Federated Hermes Funds and other entities in which Federated Hermes holds a controlling financial interest. Federated Hermes is involved with various entities in the normal course of business that may be deemed to be voting rights entities (VREs) or VIEs.variable interest entities (VIEs). From time to time, Federated Hermes invests in Federated Hermes Funds for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history. Federated Hermes'Hermes’ investment in, and/or receivables from, these Federated Hermes Funds represents its maximum exposure to loss. The assets of each consolidated Federated Hermes Fund are restricted for use by that Federated Hermes Fund. Generally, neither creditors of, nor equity investors in, the Federated Hermes Funds have any recourse to Federated Hermes'Hermes’ general credit. Given that the entities consolidated by Federated Hermes generally follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in the recognition of gains or losses for Federated Hermes.
In the ordinary course of business, Federated Hermes may implement fee waivers, rebates or expense reimbursements for various Federated Hermes Funds for competitive reasons (such as Voluntary Yield-related Fee Waivers or to maintain certain fund expense ratios/yields), to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers). For the three and nine months ended September 30, 2022, Fee Waivers totaled $118.2 million and $444.7 million, respectively, of which $89.1 million and $351.0 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance. For the three and nine months ended September 30, 2021, Fee Waivers totaled $233.9 million and $680.0 million, respectively, of which $197.2 million and $573.5 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance. For the three and nine months ended September 30, 2020, Fee Waivers totaled $174.6 million and $490.0 million, respectively, of which $145.1 million and $386.8 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance.
Like other sponsors of investment companies, Federated Hermes in the ordinary course of business may make capital contributions to certain affiliated money market Federated Hermes Funds in connection with the reorganization of such funds into certain other affiliated money market Federated Hermes Funds or in connection with the liquidation of a money market Federated Hermes Fund.Funds. In these instances, such capital contributions typically are intended to either offset realized losses or other permanent impairments to a fund'sfund’s net asset value (NAV), increase the market-based NAV per share of the fund'sfund’s portfolio that is being reorganized to equal the market-based NAV per share of the acquiring fund or to bear a portion of expenses relating to a fund liquidation. Under current money market fund regulations and Securities and Exchange Commission (SEC) guidance, Federated Hermes is required to report these types of capital contributions to U.S. money market mutual funds to the SEC as financial support to the investment company that is being reorganized or liquidated. There were no contributions for the threenine months ended September 30, 20212022 and no material contributions for the nine months ended September 30, 2021. There were no contributions for the three and nine months ended September 30, 2020.
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Notes to the Consolidated Financial Statements
(unaudited)
In accordance with Federated Hermes'Hermes’ consolidation accounting policy, Federated Hermes first determines whether the entity being evaluated is a VRE or a VIE. Once this determination is made, Federated Hermes proceeds with its evaluation of whether to consolidate the entity. The disclosures below represent the results of such evaluations as of September 30, 20212022 and December 31, 2020.
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Notes to the Consolidated Financial Statements
(unaudited)
2021.
(a) Consolidated Voting Rights Entities
Although most of the Federated Hermes Funds meet the definition of a VRE, Federated Hermes consolidates VREs only when it is deemed to have control. Consolidated VREs are reported on Federated Hermes'Hermes’ Consolidated Balance Sheets primarily in Investments—Consolidated Investment Companies and Redeemable Noncontrolling InterestInterests in Subsidiaries.
(b) Consolidated Variable Interest Entities
As of the periods ended September 30, 20212022 and December 31, 2020,2021, Federated Hermes was deemed to be the primary beneficiary of, and therefore consolidated, certain entities as a result of its controlling financial interest. The following table presents the balances related to the consolidated VIEs that were included on the Consolidated Balance Sheets as well as Federated Hermes'Hermes’ net interest in the consolidated VIEs for each period presented.presented:
(in millions)September 30, 2021December 31, 2020
Cash and Cash Equivalents$3.3 $0.2 
Investments—Consolidated Investment Companies35.3 12.1 
Other Assets0.5 0.1 
Long-Term Investments12.0 0.0 
Less: Liabilities1.7 0.1 
Less: Redeemable Noncontrolling Interest in Subsidiaries27.2 0.0 
Federated Hermes' Net Interest in VIEs$22.2 $12.3 
(in millions)September 30, 2022December 31, 2021
Cash and Cash Equivalents$7.1 $3.0 
Investments—Consolidated Investment Companies45.9 35.9 
Other Current Assets0.5 0.1 
Other Long-Term Assets12.5 13.8 
Less: Other Current Liabilities4.8 1.4 
Less: Redeemable Noncontrolling Interests in Subsidiaries46.0 33.3 
Federated Hermes’ Net Interest in VIEs$15.2 $18.1 
Federated Hermes'Hermes’ net interest in the consolidated VIEs represents the value of Federated Hermes'Hermes’ economic ownership interest in that VIE.
During the first quarternine months ended September 30, 2022, there was one new consolidation of 2021, as a result of the HCL Acquisition,VIE when Federated Hermes consolidated certain VIEs not previously consolidated. See Note (3) for additional information. During the second quarter of 2021, Federated Hermes consolidated a Federated Hermes Fund VIE in which it was the primary beneficiary.Hermes’ ownership increased due to redemptions from third-party investors. There was no material impact to the Consolidated Statements of Income as a result of these consolidations.this consolidation. There were no other consolidations ornew deconsolidations of VIEs during the nine months ended September 30, 2021.2022.
(c) Non-Consolidated Variable Interest Entities
Federated Hermes'Hermes’ involvement with certain Federated Hermes Funds that are deemed to be VIEs includes serving as investment manager, or at times, holding a minority interest or both. Federated Hermes'Hermes’ variable interest is not deemed to absorb losses or receive benefits that could potentially be significant to the VIE. Therefore, Federated Hermes is not the primary beneficiary of these VIEs and has not consolidated these entities.
At September 30, 20212022 and December 31, 2020,2021, Federated Hermes'Hermes’ maximum risk of loss related to investments in variable interestinterests in non-consolidated VIEs was $150.7$82.4 million and $106.0$170.6 million, respectively, (primarily recorded in Cash and Cash Equivalents on the Consolidated Balance Sheets) and was entirely related to Federated Hermes Funds. AUM for these non-consolidated Federated Hermes Funds totaled $9.3$6.9 billion and $9.1$8.0 billion at September 30, 20212022 and December 31, 2020,2021, respectively. Of the Receivables—Affiliates at September 30, 20212022 and December 31, 2020, $0.62021, $1.0 million and $0.4$0.7 million, respectively, related to non-consolidated VIEs and represented Federated Hermes'Hermes’ maximum risk of loss from non-consolidated VIE receivables.
(7) Investments
At September 30, 20212022 and December 31, 2020,2021, Federated Hermes held investments in non-consolidated fluctuating-value Federated Hermes Funds of $78.8$60.6 million and $36.0$77.6 million, respectively, primarily in mutual funds which predominantly invest in equity securities, and held investments in Separate Accounts of $10.5$8.8 million and $9.6$10.2 million at September 30, 20212022 and December 31, 2020,2021, respectively, that were included in Investments—Affiliates and Other on the Consolidated Balance Sheets. Federated Hermes'Hermes’ investments held in Separate Accounts as of September 30, 20212022 and December 31, 2020,2021 were primarily composed of domestic debt securities ($5.34.5 million and $5.2 million, respectively) and stocks of large domestic and foreign companies ($3.53.1 million and $3.1$3.4 million, respectively).
Federated Hermes consolidates certain Federated Hermes Funds into its Consolidated Financial Statements as a result of its controlling financial interest in these Federated Hermes Funds (see Note (6)). All investments held by these consolidated
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Notes to the Consolidated Financial Statements
(unaudited)
Federated Hermes consolidates certain Federated Hermes Funds into its Consolidated Financial Statements as a result of its controlling financial interest in these Federated Hermes Funds (see Note (6)). All investments held by these consolidated Federated Hermes Funds were included in Investments—Consolidated Investment Companies on Federated Hermes'Hermes’ Consolidated Balance Sheets.
The investments held by consolidated Federated Hermes Funds as of September 30, 20212022 and December 31, 20202021 were primarily composed of domestic and foreign debt securities ($23.655.8 million and $48.6$65.2 million, respectively), stocks of large domestic and foreign companies ($22.847.2 million and $35.2$28.5 million, respectively) and stocks of small and mid-sized domestic and foreign companies ($7.13.0 million and $6.4$7.4 million, respectively).
The following table presents gains and losses recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income in connection with Federated Hermes'Hermes’ investments:
Three Months EndedNine Months Ended Three Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in thousands)(in thousands)2021202020212020(in thousands)2022202120222021
Investments—Consolidated Investment CompaniesInvestments—Consolidated Investment CompaniesInvestments—Consolidated Investment Companies
Net Unrealized Gains (Losses)Net Unrealized Gains (Losses)$(391)$4,451 $(1,197)$3,987 Net Unrealized Gains (Losses)$1,137 $(391)$(16,446)$(1,197)
Net Realized Gains (Losses)1
Net Realized Gains (Losses)1
184 (47)1,786 (1,151)
Net Realized Gains (Losses)1
(4,568)184 (6,047)1,786 
Net Gains (Losses) on Investments—Consolidated Investment CompaniesNet Gains (Losses) on Investments—Consolidated Investment Companies(207)4,404 589 2,836 Net Gains (Losses) on Investments—Consolidated Investment Companies(3,431)(207)(22,493)589 
Investments—Affiliates and OtherInvestments—Affiliates and OtherInvestments—Affiliates and Other
Net Unrealized Gains (Losses)Net Unrealized Gains (Losses)(2,077)1,816 1,170 1,410 Net Unrealized Gains (Losses)(3,248)(2,077)(18,979)1,170 
Net Realized Gains (Losses)1
Net Realized Gains (Losses)1
1,640 (368)5,221 (406)
Net Realized Gains (Losses)1
(146)1,640 2,066 5,221 
Net Gains (Losses) on Investments—Affiliates and OtherNet Gains (Losses) on Investments—Affiliates and Other(437)1,448 6,391 1,004 Net Gains (Losses) on Investments—Affiliates and Other(3,394)(437)(16,913)6,391 
Gain (Loss) on Securities, netGain (Loss) on Securities, net$(644)$5,852 $6,980 $3,840 Gain (Loss) on Securities, net$(6,825)$(644)$(39,406)$6,980 
1    Realized gains and losses are computed on a specific-identification basis.
(8) Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability as of the measurement date. A fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The levels are:
Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that are traded in an active exchange market, including shares of mutual funds.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets.
NAV Practical Expedient – Investments that calculate NAV per share (or its equivalent) as a practical expedient. These investments have been excluded from the fair value hierarchy.
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Notes to the Consolidated Financial Statements
(unaudited)
(a) Fair Value Measurements on a Recurring Basis
The following table presents fair value measurements for classes of Federated Hermes'Hermes’ financial assets and liabilities measured at fair value on a recurring basis:
(in thousands)(in thousands)Level 1Level 2Level 3Total(in thousands)Level 1Level 2Level 3Total
September 30, 2021
September 30, 2022September 30, 2022
Financial AssetsFinancial AssetsFinancial Assets
Cash and Cash EquivalentsCash and Cash Equivalents$201,692 $0 $0 $201,692 Cash and Cash Equivalents$304,520 $0 $0 $304,520 
Investments—Consolidated Investment CompaniesInvestments—Consolidated Investment Companies28,955 25,120 0 54,075 Investments—Consolidated Investment Companies44,061 62,965 251 107,277 
Investments—Affiliates and OtherInvestments—Affiliates and Other83,656 5,343 319 89,318 Investments—Affiliates and Other64,426 4,948 25 69,399 
Other1
Other1
7,095 2 0 7,097 
Other1
6,130 0 0 6,130 
Total Financial AssetsTotal Financial Assets$321,398 $30,465 $319 $352,182 Total Financial Assets$419,137 $67,913 $276 $487,326 
Total Financial Liabilities2
Total Financial Liabilities2
$71 $2,099 $11,856 $14,026 
Total Financial Liabilities2
$141 $11,291 $4,381 $15,813 
December 31, 2020
December 31, 2021December 31, 2021
Financial AssetsFinancial AssetsFinancial Assets
Cash and Cash EquivalentsCash and Cash Equivalents$301,819 $$$301,819 Cash and Cash Equivalents$233,327 $$$233,327 
Investments—Consolidated Investment CompaniesInvestments—Consolidated Investment Companies13,622 77,737 91,359 Investments—Consolidated Investment Companies38,799 66,743 105,542 
Investments—Affiliates and OtherInvestments—Affiliates and Other40,010 5,247 336 45,593 Investments—Affiliates and Other82,594 5,165 46 87,805 
Other1
Other1
9,188 5,143 14,331 
Other1
7,105 7,105 
Total Financial AssetsTotal Financial Assets$364,639 $88,127 $336 $453,102 Total Financial Assets$361,825 $71,908 $46 $433,779 
Total Financial Liabilities2
Total Financial Liabilities2
$$89 $12,896 $12,985 
Total Financial Liabilities2
$$1,644 $11,652 $13,296 
1    Amounts primarily consist ofof restricted cash and security deposits as of September 30, 20212022 and restricted cash, security deposits and derivative assets as of December 31, 2020.2021.
2    Amounts primarily consist of acquisition-related future contingent consideration liabilities and derivative liabilities as of September 30, 2021 and acquisition-related future contingent consideration liabilities as of September 30, 2022 and December 31, 20202021.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis. Federated Hermes did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at September 30, 20212022 or December 31, 2020.2021.
Cash and Cash Equivalents
Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market funds totaled $161.9$258.4 million and $244.3$183.4 million at September 30, 20212022 and December 31, 2020,2021, respectively. Cash investments in publicly available money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.
Investments—Consolidated Investment Companies
Investments—Consolidated Investment Companies represent securities held by consolidated Federated Hermes Funds. For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair valuevalues of certain securities held by consolidated Federated Hermes Funds are determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2).
Investments—Affiliates and Other
Investments—Affiliates and Other primarily represent investments in fluctuating-value Federated Hermes Funds, as well as investments held in Separate Accounts. For investments in fluctuating-value Federated Hermes Funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair valuevalues of certain securities are determined by third-party pricing services which utilize observable market inputs of comparable investments (Level 2).
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Notes to the Consolidated Financial Statements
(unaudited)
Acquisition-related future contingent consideration liabilities
From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes may be required to make future consideration payments if certain contingencies are met. In connection with certain business combinations, Federated Hermes records a liability representing the estimated fair value of future consideration payments as of the acquisition date. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings. As of September 30, 2021,2022, acquisition-related future consideration liabilities of $11.9$4.4 million were primarily related to business combinations made in the first quarter of 2020 and were recorded in Other Current Liabilities ($7.50.9 million) and Other Long-Term Liabilities ($4.43.5 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3).
The following table presents a reconciliation of the beginning and ending balances for Federated Hermes'Hermes’ liability for future consideration payments related to these business combinations/asset acquisitions:
(in thousands)
Balance at December 31, 20202021$12,89611,652 
Changes in Fair Value1,206 (218)
Contingent Consideration Payments(2,246)(7,053)
Balance at September 30, 20212022$11,8564,381 
Investments using Practical Expedients
For investments in mutual funds that are not publicly available but for which the NAV is calculated monthly and for which there are redemption restrictions, the investments are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. As of September 30, 20212022 and December 31, 2020,2021, these investments totaled $17.2$16.5 million and $6.9$17.5 million, respectively, and were recorded in Other Long-Term Assets.
(b) Fair Value Measurements on a Nonrecurring Basis
Federated Hermes did not hold any assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2021.2022.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated Hermes'Hermes’ debt is estimated by management using observable market data (Level 2). Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.
(9) Derivatives
During the third quarter of 2021, Federated Hermes entered into a foreign currency forward transaction in order to hedge against foreign exchange rate fluctuations associated with the payment for the 2021 Acquisition of HFML Noncontrolling Interest. The forward was not designated as a hedging instrument for accounting purposes. The forward transaction settled in the third quarter of 2021 and Federated Hermes recorded $1.3 million of expense in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income as a result of the change in fair value of this derivative.
HFML,FHL, a British Pound Sterling-denominated majority-owned subsidiary of Federated Hermes, enters into foreign currency forward transactions in order to hedge against foreign exchange rate fluctuations in the U.S. Dollar. None of the forwards have been designated as hedging instruments for accounting purposes. As of September 30, 2021,2022, this subsidiary held foreign currency forward derivative instrumentsforwards with a combined notional amount of £67.6£64.4 million and expiration dates ranging from December 20212022 through June 2022.2023. Federated Hermes recorded $2.1$11.3 million in Other Current Liabilities on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of September 30, 2021.2022.
As of December 31, 2020, HFML2021, FHL held foreign currency forward derivative instrumentsforwards with a combined notional amount of £47.3£69.6 million and expiration dates ranging from March 20212022 through September 2021.2022. Federated Hermes recorded $5.1$1.6 million in ReceivablesOther Current Liabilities on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of December 31, 2020.2021.
For the three and nine months ended September 30, 2022, Federated Hermes recorded $6.1 million and $11.5 million, respectively, to Operating Expenses - Other on the Consolidated Statements of Income for realized losses on foreign currency forward transactions. For the three and nine months ended September 30, 2021, Federated Hermes recorded $1.0 million and $5.2 million, respectively, to Operating Expenses - Other on the Consolidated Statements of Income for realized gains on foreign currency forward transactions.
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Notes to the Consolidated Financial Statements
(unaudited)
(10)Intangible Assets, including Goodwill
Intangible Assets, net at September 30, 20212022 decreased $8.8$64.4 million from December 31, 20202021 primarily due to $10.4 million of amortization expense and a $4.7$55.8 million decrease in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate fluctuations. These decreases were partially offset by $5.3fluctuations and $9.3 million of intangible assets recorded in connection with an asset purchase during 2021.amortization expense.
Goodwill at September 30, 20212022 decreased $2.0$24.3 million from December 31, 20202021 primarily as a result of foreign exchange rate fluctuations on goodwill denominated in a foreign currency.
(11) Debt
Unsecured Senior Notes
On March 17, 2022, Federated Hermes entered into a Note Purchase Agreement (Note Purchase Agreement) by and among Federated Hermes and the purchasers of certain unsecured senior notes in the aggregate amount of $350.0 million (Notes), at a fixed interest rate of 3.29% per annum, payable semiannually in arrears on the 17th day of March and September in each year of the agreement. Citigroup Global Markets Inc. and PNC Capital Markets LLC acted as lead placement agents in relation to the Notes and certain subsidiaries of Federated Hermes are guarantors of the obligations owed under the Note Purchase Agreement. As of September 30, 2022, $347.5 million, net of unamortized issuance costs in the amount of $2.5 million, was recorded in Long-Term Debt on the Consolidated Balance Sheets.
The entire principal amount of the Notes will become due March 17, 2032, subject to certain prepayment requirements under limited conditions. Federated Hermes may elect to prepay the Notes under certain limited circumstances including with a make-whole amount if mandatorily prepaid without the consent of the holders of the Notes. The Note Purchase Agreement does not feature a facility for the further issuance of additional notes or borrowing of any other amounts and there is no commitment fee payable in connection with the Notes.
The Note Purchase Agreement includes an interest coverage ratio covenant and a leverage ratio covenant as well as other customary terms and conditions. Federated Hermes was in compliance with all of its covenants at and during the period ended September 30, 2022. See the Liquidity and Capital Resources section of Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
The Note Purchase Agreement includes certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of the Notes if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required payments, insolvency, certain material misrepresentations and other proceedings, whether voluntary or involuntary, that would require the repayment of Notes prior to their stated date of maturity. Any such accelerated amounts would accrue interest at a default rate and could include an additional make-whole amount upon repayment. The Notes rank without preference or priority, with other unsecured and senior indebtedness of Federated Hermes.
Revolving Credit Facility
On July 30, 2021, Federated Hermes entered into an unsecured Fourth Amended and Restated Credit Agreement by and among Federated Hermes, certain of its subsidiaries as guarantors party thereto, a syndicate of 11eleven banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A. as syndication agent, and Toronto-Dominion Bank, New York Branch as documentation agent (Credit Agreement). The Credit Agreement amended and restated Federated Hermes' Third Amended and Restated Credit Agreement, which was dated June 5, 2017 and scheduled to mature on June 5, 2022 (Prior Credit Agreement).
The Credit Agreement consists of a $350$350.0 million revolving credit facility with an additional $200$200.0 million available via an optional increase (or accordion) feature. The interest on the borrowings from the revolving credit facility is calculated at the monthly London Interbank Offering Rate (LIBOR) based on the tenor selection plus a spread unless a base rate option is elected. The borrowings under the revolving credit facility may include up to $50 million for which interest is calculated at the daily LIBOR plus a spread unless a base rate option is elected (Swing Line). The Credit Agreement provides for a replacement reference interest rate index upon the eventual discontinuation of LIBOR, each having a benchmark adjustment applied based on its historical relationship to LIBOR, which can be either the term Secured Overnight Financing Rate (SOFR) plus a spread, daily simple SOFR plus a spread, each having a benchmark adjustment applied based on its historical relationship to LIBOR, or another alternative interest rate index (selected by the administrative agent and Federated Hermes) plus a spread.
The Credit Agreement, which expires on July 30, 2026, has no principal payment schedule, but instead requires that any outstanding principal be repaid by the expiration date. Federated Hermes, however, may elect to make discretionary principal
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Notes to the Consolidated Financial Statements
(unaudited)
payments. During the first nine months of 2021,ended September 30, 2022, Federated Hermes borrowed $82.2$138.3 million and repaid $55.0$311.7 million of the revolving credit facility under the Credit Agreement and Prior Credit Agreement.
As of September 30, 2021, the amount outstanding on the revolving credit facility under the Credit Agreement was $102.2Agreement.
As of September 30, 2022 and December 31, 2021, the amounts outstanding under the revolving credit facility were $50.0 million and was$223.4 million, respectively, and were recorded as Long-Term Debt on the Consolidated Balance Sheets. The interest rate was 1.084%1.354% and 1.161% as of September 30, 2021.2022 and December 31, 2021, respectively, which was calculated at LIBOR plus a spread. The commitment fee under the Credit Agreement is 0.10% per annum on the daily unused portion of each Lender'sLender’s commitment. As of September 30, 2021,2022, Federated Hermes has $247.8$300.0 million available for borrowings under the revolving credit facility and an additional $200$200.0 million available via its optional accordion feature.
As of December 31, 2020, the amount outstanding on the revolving credit facility under the Prior Credit Agreement was $75 million and was recorded as Long-Term Debt on the Consolidated Balance Sheets. The interest rate was 1.277% as of December 31, 2020 which was calculated at LIBOR plus a spread.
The Credit Agreement, similar to the Prior Credit Agreement includes representations and warranties, affirmative and negative financial covenants, including an interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants. Federated Hermes was in compliance with all covenants at and during the nine months ended September 30, 2021.2022. See the Liquidity and Capital Resources section of Management'sItem 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed. The Credit Agreement also requires certain subsidiaries to enter into a Third Amended and Restated Continuing Agreement of Guaranty and Suretyship to guarantee payment of all obligations incurred through the Credit Agreement.
(12) Share-Based Compensation Plans
In connection with the 2022 Acquisition of FHL Noncontrolling Interests, Federated Hermes granted 1,183,066 shares of restricted Federated Hermes Class B common stock pursuant to award agreements to certain FHL employees in exchange for their beneficial interests in awards of restricted FHL shares held on March 14, 2022. These shares of Federated Hermes Class B common stock were reserved for issuance under the Federated Hermes Stock Incentive Plan. Federated Hermes also issued a combined 318,807 shares of treasury Federated Hermes Class B common stock to a non-U.S. resident former FHL employee, and to the trustee of a non-U.S. domiciled employee benefit trust, in exchange for beneficial interests in the FHL shares held by them on March 14, 2022. The Federated Hermes shares now held by the employee benefit trust are to be used for future restricted stock awards for FHL management and key employees. See Note (3) for additional information.
During the nine months ended September 30, 2022, Federated Hermes awarded 509,043 shares of restricted Federated Hermes Class B common stock, nearly all of which was granted in connection with a bonus program in which certain key employees received a portion of their bonus in the form of restricted stock under Federated Hermes’ Stock Incentive Plan. This restricted stock, which was granted on the bonus payment date and issued out of treasury, generally vests over a three-year period.
During 2021, Federated Hermes awarded 1,218,613 shares of restricted Federated Hermes Class B common stock under its Stock Incentive Plan. Of this amount, 726,613 shares were awarded in connection with the aforementioned bonus program. The remaining shares were awarded to certain key employees and generally vest over a 10-year period.
(13) Equity
In December 2021, the board of directors authorized a share repurchase program with no stated expiration date that allowed the repurchase of up to 7.5 million shares of Class B common stock. This program was fulfilled in September 2022. In June 2022, the board of directors authorized a share repurchase program with no stated expiration date that allows the repurchase of up to 5.0 million shares of Class B common stock. No other program existed as of September 30, 2022. The program authorizes executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is to be held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities, unless Federated Hermes’ board of directors subsequently determines to retire the repurchased stock and restore the shares to authorized but unissued status (rather than holding the shares in treasury). During the nine months ended September 30, 2022, Federated Hermes repurchased approximately 6.1 million shares of its Class B common stock for $199.0 million, nearly all of which were repurchased in the open market. At September 30, 2022, approximately 5.0 million shares remain available to be repurchased under this share repurchase program.
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Notes to the Consolidated Financial Statements
(unaudited)
(12) Share-Based Compensation Plans
During the nine months ended September 30, 2021,In July 2022, Federated Hermes awarded 727,924 shares of restricted Federated Hermes Class B common stock, nearly all of which was granted in connection with a bonus program in which certain key employees receive a portion of their bonus in the form of restricted stock under Federated Hermes' Stock Incentive Plan. This restricted stock, which was granted on the bonus payment date and issued out of treasury, generally vests over three years.
During 2020, Federated Hermes awarded 1,134,581 shares of restricted Federated Hermes Class B common stock under its Stock Incentive Plan. Of this amount, 649,581 shares were awarded in connection with the aforementioned bonus program. The remaining shares were awarded to certain key employees and generally vest over ten years.
(13) Equity
In April 2021, theHermes’ board of directors authorized a share repurchase program with no stated expiration date that allows the repurchaseretirement of up to 4.010 million treasury shares of Class B common stock. No other program existed as of September 30, 2021. The program authorizes executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is to be held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities, unless Federated Hermes' board of directors subsequently determines to retire the repurchased stock and restore thewhich restored these shares to authorized but unissued status (rather than holding the shares in treasury). During the first nine months of 2021,status. Federated Hermes repurchased approximately 3.1recorded a $313.8 million shares of itsreduction to Treasury Stock, at cost using the specific-identification method and a $42.7 million reduction to Class B common stock, for $94.5 million ($3.2 millionat cost using the average cost method. The difference was recorded as a reduction to Retained Earnings and Additional Paid-In Capital from Treasury Stock Transactions. There was no impact to total equity as a result of which was accrued in Other Current Liabilities as of September 30, 2021), nearly all of which were repurchased in the open market. At September 30, 2021, approximately 2.6 million shares remained available to be repurchased under this share repurchase program.non-cash transaction.
The following table presents the activity for the Class B common stock and Treasury stock for the three and nine months ended September 30, 20212022 and 2020.2021. Class A shares have been excluded as there was no activity during these same periods.
Three Months EndedNine Months Ended Three Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
20212020202120202022202120222021
Class B SharesClass B SharesClass B Shares
Beginning BalanceBeginning Balance97,558,017 100,279,043 99,331,443 101,130,379 Beginning Balance89,197,952 97,558,017 93,410,968 99,331,443 
Stock Award ActivityStock Award Activity10,000 22,500 734,674 728,831 Stock Award Activity0 10,000 1,704,592 734,674 
Purchase of Treasury StockPurchase of Treasury Stock(593,619)(866,900)(3,091,719)(2,424,567)Purchase of Treasury Stock(211,885)(593,619)(6,129,493)(3,091,719)
Ending BalanceEnding Balance96,974,398 99,434,643 96,974,398 99,434,643 Ending Balance88,986,067 96,974,398 88,986,067 96,974,398 
Treasury SharesTreasury SharesTreasury Shares
Beginning BalanceBeginning Balance11,947,439 9,226,413 10,174,013 8,375,077 Beginning Balance20,307,504 11,947,439 16,094,488 10,174,013 
Stock Award ActivityStock Award Activity(10,000)(22,500)(734,674)(728,831)Stock Award Activity0 (10,000)(1,704,592)(734,674)
Purchase of Treasury StockPurchase of Treasury Stock593,619 866,900 3,091,719 2,424,567 Purchase of Treasury Stock211,885 593,619 6,129,493 3,091,719 
Retirement of Treasury StockRetirement of Treasury Stock(10,000,000)(10,000,000)
Ending BalanceEnding Balance12,531,058 10,070,813 12,531,058 10,070,813 Ending Balance10,519,389 12,531,058 10,519,389 12,531,058 
(14) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders
The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated Hermes:
 Three Months EndedNine Months Ended
September 30,September 30,
(in thousands, except per share data)2022202120222021
Numerator
Net Income Attributable to Federated Hermes, Inc.$69,479 $71,362 $182,999 $201,730 
Less: Total Net Income Available to Participating Unvested Restricted Shareholders1
(3,713)(2,989)(9,479)(8,363)
Total Net Income Attributable to Federated Hermes Common Stock - Basic$65,766 $68,373 $173,520 $193,367 
Less: Total Net Income Available to Unvested Restricted Shareholders of a Nonpublic Consolidated Subsidiary0 (443)0 (1,273)
Total Net Income Attributable to Federated Hermes Common Stock - Diluted$65,766 $67,930 $173,520 $192,094 
Denominator
Basic and Diluted Weighted-Average Federated Hermes Common Stock2
84,341 93,320 85,909 94,160 
Earnings Per Share
Net Income Attributable to Federated Hermes Common Stock - Basic2
$0.78 $0.73 $2.02 $2.05 
Net Income Attributable to Federated Hermes Common Stock - Diluted2
$0.78 $0.73 $2.02 $2.04 
1    Includes dividends paid on unvested restricted Federated Hermes Class B common stock and their proportionate share of undistributed earnings attributable to Federated Hermes shareholders.
2Federated Hermes common stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.
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Notes to the Consolidated Financial Statements
(unaudited)
(14) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders
The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated Hermes:
 Three Months EndedNine Months Ended
September 30,September 30,
(in thousands, except per share data)2021202020212020
Numerator
Net Income Attributable to Federated Hermes, Inc.$71,362 $85,822 $201,730 $231,196 
Less: Total Net Income Available to Participating Unvested Restricted Shareholders1
(2,989)(3,378)(8,363)(8,937)
Total Net Income Attributable to Federated Hermes Common Stock - Basic$68,373 $82,444 $193,367 $222,259 
Less: Total Net Income Available to Unvested Restricted Shareholders of a Nonpublic Consolidated Subsidiary(443)(391)(1,273)(786)
Total Net Income Attributable to Federated Hermes Common Stock - Diluted$67,930 $82,053 $192,094 $221,473 
Denominator
Basic and Diluted Weighted-Average Federated Hermes Common Stock2
93,320 96,039 94,160 96,726 
Earnings Per Share
Net Income Attributable to Federated Hermes Common Stock – Basic2
$0.73 $0.86 $2.05 $2.30 
Net Income Attributable to Federated Hermes Common Stock – Diluted2
$0.73 $0.85 $2.04 $2.29 
1    Includes dividends paid on unvested restricted Federated Hermes Class B Common Stock and their proportionate share of undistributed earnings attributable to Federated Hermes shareholders.
2Federated Hermes Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.
(15) Commitments and Contingencies
(a) Contractual
From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes is obligated to make future payments under various agreements to which it is a party. See Note (8) for additional information regarding these payments.
(b)Contingencies
Federated Hermes previously recorded as revenue certain carried interest, subject to clawback provisions, from certain funds (Carried Interest). As of September 30, 2021, approximately $11 million of Carried Interest is subject to clawback. As a result of the impact of the Pandemic on certain markets, management concluded it was reasonably possible that the market value of the assets held by these funds would be reduced at future valuation dates, which could result in a portion or all of this Carried Interest being repaid. As of September 30, 2021, management estimates that clawbacks will not occur based on the current valuation of the assets held by these funds. Future reductions in the valuation of the assets held by these funds may result in a clawback of a portion or all of this Carried Interest.
(c) Guarantees and Indemnifications
On an intercompany basis, various subsidiaries of Federated Hermes guarantee certain financial obligations of Federated Hermes, Inc., and of other consolidated subsidiaries, and Federated Hermes, Inc. guarantees certain financial and performance-related obligations of various wholly owned subsidiaries. In addition, in the normal course of business, Federated Hermes has entered into contracts that provide a variety of indemnifications. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated Hermes, under which Federated Hermes agrees to hold the other party harmless against losses arising out of the contract, provided the other party's actions are not deemed to have breached an agreed-upon standard of care. In each of these circumstances, payment by Federated Hermes is contingent on the other party making a claim for indemnity, subject to Federated Hermes' right to challenge the claim. Further, Federated Hermes' obligations under these
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Notes to the Consolidated Financial Statements
(unaudited)
agreements may be limited in terms of time and/or amount. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of Federated Hermes' obligations and the unique facts and circumstances involved in each particular agreement. As of September 30, 2021, management does not believe that a material loss related to any of these matters is reasonably possible.
(d)Legal Proceedings
Like other companies, Federated Hermes has claims asserted and threatened against it in the ordinary course of business. As of September 30, 2021, Federated Hermes does not believe that a material loss related to these claims is reasonably possible.
(16) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders
Accumulated Other Comprehensive Income (Loss), net of tax, attributable to Federated HermesHermes’ shareholders resulted from foreign currency translation gain (loss):
(in thousands)
Balance at December 31, 2021$16,362
Other Comprehensive Income (Loss)(103,778)
Balance at September 30, 2022$(87,416)
Balance at December 31, 2020$15,171 
Other Comprehensive Income (Loss)(2,195)
Balance at September 30, 2021$12,976
Balance at December 31, 2019$(249)
Other Comprehensive Income (Loss)(9,333)
Balance at September 30, 2020$(9,582)
(16)Redeemable Noncontrolling Interests in Subsidiaries
The following table presents the changes in Redeemable Noncontrolling Interests in Subsidiaries:
(in thousands)Consolidated Investment CompaniesFHL and other entitiesTotal
Balance at December 31, 2021$24,659 $38,543 $63,202 
Net Income (Loss)(1,744)478 (1,266)
Other Comprehensive Income (Loss), net of tax(457)(457)
Subscriptions—Redeemable Noncontrolling Interest Holders29,577 763 30,340 
Consolidation/(Deconsolidation)(16,034)(16,034)
Stock Award Activity707 707 
Distributions to Noncontrolling Interests in Subsidiaries(771)(3,568)(4,339)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHL14,221 14,221 
Acquisition of Additional Equity of FHL(37,805)(37,805)
Balance at March 31, 2022$35,687 $12,882 $48,569 
Net Income (Loss)(7,616)717 (6,899)
Other Comprehensive Income (Loss), net of tax(1,068)(1,068)
Subscriptions—Redeemable Noncontrolling Interest Holders14,977 337 15,314 
Distributions to Noncontrolling Interests in Subsidiaries(1,024)(161)(1,185)
Balance at June 30, 2022$42,024 $12,707 $54,731 
Net Income (Loss)(2,104)199 (1,905)
Other Comprehensive Income (Loss), net of tax(1,713)(1,713)
Subscriptions—Redeemable Noncontrolling Interest Holders3,591 903 4,494 
Consolidation/(Deconsolidation)15,599 15,599 
Distributions to Noncontrolling Interests in Subsidiaries(15,512)(1,108)(16,620)
Balance at September 30, 2022$43,598 $10,988 $54,586 
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Notes to the Consolidated Financial Statements
(unaudited)
(17)Redeemable Noncontrolling Interest in Subsidiaries
The following table presents the changes in Redeemable Noncontrolling Interest in Subsidiaries:
(in thousands)(in thousands)Consolidated Investment CompaniesHFML and other entitiesTotal(in thousands)Consolidated Investment CompaniesFHL and other entitiesTotal
Balance at December 31, 2020Balance at December 31, 2020$24,246 $212,741 $236,987 Balance at December 31, 2020$24,246 $212,741 $236,987 
Net Income (Loss)Net Income (Loss)(1,091)953 (138)Net Income (Loss)(1,091)953 (138)
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax1,430 1,430 Other Comprehensive Income (Loss), net of tax1,430 1,430 
Subscriptions—Redeemable Noncontrolling Interest HoldersSubscriptions—Redeemable Noncontrolling Interest Holders25,762 25,762 Subscriptions—Redeemable Noncontrolling Interest Holders25,762 25,762 
Consolidation/(Deconsolidation)Consolidation/(Deconsolidation)(25,419)9,182 (16,237)Consolidation/(Deconsolidation)(25,419)9,182 (16,237)
Stock Award ActivityStock Award Activity2,481 2,481 Stock Award Activity2,481 2,481 
Distributions to Noncontrolling Interest in Subsidiaries(1,320)(578)(1,898)
Distributions to Noncontrolling Interests in SubsidiariesDistributions to Noncontrolling Interests in Subsidiaries(1,320)(578)(1,898)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests(2,670)(2,670)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHLChange in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHL(2,670)(2,670)
Balance at March 31, 2021Balance at March 31, 2021$22,178 $223,539 $245,717 Balance at March 31, 2021$22,178 $223,539 $245,717 
Net Income (Loss)Net Income (Loss)682 (3,087)(2,405)Net Income (Loss)682 (3,087)(2,405)
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax868 868 Other Comprehensive Income (Loss), net of tax868 868 
Subscriptions—Redeemable Noncontrolling Interest HoldersSubscriptions—Redeemable Noncontrolling Interest Holders899,250 712 899,962 Subscriptions—Redeemable Noncontrolling Interest Holders899,250 712 899,962 
Consolidation/(Deconsolidation)Consolidation/(Deconsolidation)(894,175)(894,175)Consolidation/(Deconsolidation)(894,175)(894,175)
Stock Award ActivityStock Award Activity2,518 2,518 Stock Award Activity2,518 2,518 
Distributions to Noncontrolling Interest in Subsidiaries(622)(394)(1,016)
Distributions to Noncontrolling Interests in SubsidiariesDistributions to Noncontrolling Interests in Subsidiaries(622)(394)(1,016)
Balance at June 30, 2021Balance at June 30, 2021$27,313 $224,156 $251,469 Balance at June 30, 2021$27,313 $224,156 $251,469 
Net Income (Loss)Net Income (Loss)(108)2,232 2,124 Net Income (Loss)(108)2,232 2,124 
Other Comprehensive Income (Loss), net of taxOther Comprehensive Income (Loss), net of tax(9,953)(9,953)Other Comprehensive Income (Loss), net of tax(9,953)(9,953)
Subscriptions—Redeemable Noncontrolling Interest HoldersSubscriptions—Redeemable Noncontrolling Interest Holders66,506 397 66,903 Subscriptions—Redeemable Noncontrolling Interest Holders66,506 397 66,903 
Consolidation/(Deconsolidation)Consolidation/(Deconsolidation)(74,836)(74,836)Consolidation/(Deconsolidation)(74,836)(74,836)
Stock Award ActivityStock Award Activity2,557 2,557 Stock Award Activity2,557 2,557 
Distributions to Noncontrolling Interest in Subsidiaries(575)(603)(1,178)
Acquisition of Additional Equity of HFML(165,112)(165,112)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests(16,502)(16,502)
Distributions to Noncontrolling Interests in SubsidiariesDistributions to Noncontrolling Interests in Subsidiaries(575)(603)(1,178)
Acquisition of Additional Equity of FHLAcquisition of Additional Equity of FHL(165,112)(165,112)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHLChange in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHL(16,502)(16,502)
Balance at September 30, 2021Balance at September 30, 2021$18,300 $37,172 $55,472 Balance at September 30, 2021$18,300 $37,172 $55,472 
The activity in 2021 includes $892.1 million of contributions from noncontrolling interests in subsidiaries as a result of a purchase-in-kind investment into a previously consolidated VRE. This was a noncash transaction and was therefore excluded from the Consolidated Statements of Cash Flows.
(17) Commitments and Contingencies
(a) Contractual
From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes is obligated to make future payments under various agreements to which it is a party. See Note (8) for additional information regarding these payments.
(b) Guarantees and Indemnifications
On an intercompany basis, various subsidiaries of Federated Hermes guarantee certain financial obligations of Federated Hermes, Inc. and of other consolidated subsidiaries, and Federated Hermes, Inc. guarantees certain financial and performance-related obligations of various wholly-owned subsidiaries. In addition, in the normal course of business, Federated Hermes has entered into contracts that provide a variety of indemnifications. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated Hermes, under which Federated Hermes agrees to hold the other party harmless against losses arising out of the contract, provided the other party’s actions are not deemed to have breached an agreed-upon standard of care. In each of these circumstances, payment by Federated Hermes is contingent on the other party making a claim for indemnity, subject to Federated Hermes’ right to challenge the claim. Further, Federated Hermes’ obligations under these agreements may be limited in terms of time and/or amount. It is not possible to predict the maximum potential amount of future
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Notes to the Consolidated Financial Statements
(unaudited)
(in thousands)Consolidated Investment CompaniesHFML and other entitiesTotal
Balance at December 31, 2019$19,872 $192,214 $212,086 
Net Income (Loss)(2,802)1,889 (913)
Other Comprehensive Income (Loss), net of tax(11,454)(11,454)
Subscriptions—Redeemable Noncontrolling Interest Holders5,577 5,577 
Consolidation/(Deconsolidation)(4,019)(4,019)
Stock Award Activity2,153 2,153 
Distributions to Noncontrolling Interest in Subsidiaries(6,039)(6,039)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests1,870 1,870 
Balance at March 31, 2020$12,589 $186,672 $199,261 
Net Income (Loss)2,560 1,045 3,605 
Other Comprehensive Income (Loss), net of tax(435)(435)
Subscriptions—Redeemable Noncontrolling Interest Holders6,225 6,225 
Stock Award Activity2,087 2,087 
Distributions to Noncontrolling Interest in Subsidiaries(4,058)(4,058)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests(2,013)(2,013)
Balance at June 30, 2020$17,316 $187,356 $204,672 
Net Income (Loss)1,473 (611)862 
Other Comprehensive Income (Loss), net of tax7,316 7,316 
Subscriptions—Redeemable Noncontrolling Interest Holders3,212 3,212 
Stock Award Activity2,164 2,164 
Distributions to Noncontrolling Interest in Subsidiaries(358)(358)
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests(3,567)(3,567)
Balance at September 30, 2020$21,643 $192,658 $214,301 
payments under these or similar agreements due to the conditional nature of Federated Hermes’ obligations and the unique facts and circumstances involved in each particular agreement. As of September 30, 2022, management does not believe that a material loss related to any of these matters is reasonably possible.
(c)Legal Proceedings
Like other companies, Federated Hermes has claims asserted and threatened against it in the ordinary course of business. As of September 30, 2022, Federated Hermes does not believe that a material loss related to any of these claims is reasonably possible.
(18) Income TaxesSubsequent Events
As a result of legislation previously enacted in the United Kingdom (UK) that increases the UK corporate income tax rate from 19% to 25% effective AprilEffective October 1, 2023,2022, Federated Hermes recorded ancompleted the CWH Acquisition. See Note (3) for additional $14.5 million to the Income Tax Provision in the second quarter 2021 as a result of the revaluation of the foreign deferred tax assets and liabilities associated with the change.
(19) Subsequent Eventsinformation.
On October 28, 2021, the27, 2022, Federated Hermes’ board of directors declared a $0.27 per share dividend to Federated Hermes’ Class A and Class B common stock shareholders of record as of November 8, 20212022 to be paid on November 15, 2021.2022.
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Part I, Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (unaudited)
The discussion and analysis below should be read in conjunction with the consolidated financial statementsConsolidated Financial Statements appearing elsewhere in this report. Management has presumed that the readers of this interim financial information have read or have access to Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020.2021.
General
Federated Hermes is one of the largest investment managersa global leader in the U.S.active, responsible investing with $634.1$624.4 billion in managed assets as of September 30, 2021.2022. The majority of Federated Hermes'Hermes’ revenue is derived from advising Federated Hermes Funds and Separate Accounts in both domestic and international public and private markets. Federated Hermes also derives revenue from providing administrative and other fund-related services (including distribution and shareholder servicing) as well as stewardship and real estate development services.
Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based and are generally calculated as a percentage of the average net assets of managed investment portfolios. Federated Hermes'Hermes’ revenue is primarily dependent upon factors that affect the value of managedmanaged/serviced assets including market conditions and the ability to attract and retain assets. Generally, managed assets in Federated Hermes'Hermes’ public market investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement.requirement, while managed assets in Federated Hermes private market investment products and strategies are subject to restrictions on withdrawals. Fee rates for Federated Hermes'Hermes’ services generally vary by asset and service type and may vary based on changes in asset levels. Generally, advisory fees charged for services provided to equity and multi-asset products and strategies are higher than advisory fees charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than advisory fees charged to money market products and strategies. Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts. Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and product types. Federated Hermes may implement Fee Waivers for competitive reasons such as Voluntary Yield-related Fee Waivers, to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements. Since Federated Hermes'Hermes’ public market products are largely distributed and serviced through financial intermediaries, Federated Hermes pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies. These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income. Certain components of Distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated Hermes generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds.
Federated Hermes'Hermes’ most significant operating expenses are Compensation and Related expense and Distribution expense. Compensation and Related expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, the overall results of operations of Federated Hermes, investment management performance and sales performance.
The discussion and analysis of Federated Hermes'Hermes’ financial condition and results of operations are based on Federated Hermes'Hermes’ Consolidated Financial Statements. Management evaluates Federated Hermes'Hermes’ performance at the consolidated level. Therefore, Federated Hermes operates in one operating segment, the investment management business. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated Hermes'Hermes’ growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by Fee Waivers. Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds.funds and, as required by law, fund shareholders. Management believes that meaningful indicators of Federated Hermes'Hermes’ financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Business Developments
Business Combination
Effective October 1, 2022, Federated Hermes completed the CWH Acquisition. See Note (3) to the Consolidated Financial Statements for additional information.
Equity Acquisition
On August 31, 2021,March 14, 2022, Federated Hermes completed the 20212022 Acquisition of HFMLFHL Noncontrolling Interest.Interests. See Note (3) to the Consolidated Financial Statements for additional information.
Pandemic
Federated Hermes continues to actively monitor the ongoing Pandemic and resulting developments and their potential impact on Federated Hermes’ employees, business, and operations. The outbreakPandemic has adversely impacted the global economy and contributed to significant volatility in financial markets. Over the course of the Covid-19 respiratory disease was first detected in China in late 2019, spread globally in 2020Pandemic, many jurisdictions instituted quarantines, imposed limitations on travel, and continuesrestricted access to spread in 2021. The Pandemic initially resulted in travel bans, closingoffices and public venues, some of borders, changes to the ways in which healthcare workers prepareare ongoing or may reoccur, and deliver services, enhanced monitoring and increased health screenings/testing, increased data analytics, efforts to develop effective vaccines without harmful side effects and identify effective therapeutics, enhanced disinfection and contamination procedures, stay-at-home orders, quarantines, cancellations and disruptions to supply chains, workflow, operations and customer activity,many businesses implemented similar precautionary measures. Such measures, as well as the general concernuncertainty surrounding the containment and uncertainty. Theimpact of the Pandemic, also initially resultedhave created significant disruption in economic uncertainty, market volatility, trading halts, market illiquidity and declining and variable stock prices, among other effects. See Item 1A - Risk Factors underactivity. Throughout the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19) in Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding the impacts, and potential impacts, resulting from the Pandemic.
Policymakers responded to certain apparent and acute economic and market consequences with multiple monetary and fiscal policy actions. Regulators pursued and, to a lesser degree, have continued actions focused on facilitating market function and preserving market integrity, as well as providing guidance and relief to market participants affected by the Pandemic. See the Business Developments - Current Regulatory Environment sections of Management's Discussion and Analysis for additional information regarding the monetary and fiscal policy actions taken by governmental authorities.
As of September 30, 2021, economies of various countries have rebounded from the global economic shutdown that began in the late first quarter and early second quarter 2020. With the world vaccination rate at over 46%, and vaccination rates nearing or exceeding 50% or greater in several jurisdictions, including the United States, economies in many jurisdictions have reopened as national, state/provincial and local governments have removed or lessened travel restrictions and requirements for staying-at-home and quarantining, as well as other Pandemic-imposed restrictions. Spikes of coronavirus cases, however, continue to occur in certain jurisdictions. These spikes are reportedly being driven by more contagious and potentially more deadly variants of the initial strain of the coronavirus, including the Delta variant. Breakthrough infections of vaccinated individuals are also prevalent in certain jurisdictions. These variants, spikes and breakthrough infections have resulted in certain jurisdictions continuing or re-imposing certain restrictions, although in many cases not to the extent of those initially imposed. As a result, while many governments have taken action to open economies, economic, market, regulatory and other uncertainty persists as a result of the Pandemic. While economic uncertainty and market volatility have continued, in many cases it is not to the degree initially seen late in the first quarter and early in the second quarter 2020.
Federated Hermes has not instituted its business continuity plans in its U.S. offices asPandemic, there has not been a significant disruption of itsFederated Hermes’ business processes, allowing it to remain fully operational and to continue to provide services to its customers. Federated Hermes' London office, which includes the international business of Federated Hermes, did implement its business continuity plans on March 20, 2020 to support the transition to a remote working environment per the advice of the UK's government and regulators.
Federated Hermes designated an internal task force (which meets as necessary) to address events related to the Pandemic that have impacted or that can potentially impact Federated Hermes' business. With input and guidance from senior management and this task force, increased vaccinations, and the removal of Pandemic-related restrictions, beginning in April 2021, Federated Hermes encouraged (but did not require) its employees to begin to return to working from its U.S. offices. Beginning on July 6, 2021, Federated Hermes has implemented a structured return to office plan that requires most of its U.S. employees to work from Federated Hermes' offices at least two days a week, or at least three days every other week, depending on their work location and office or work station configuration. Federated Hermes has extended this structured return to office plan through year-end 2021, and has advised its employees that it is delaying, until sometime in the fourth quarter 2021, decisions regarding a further and more significant return to the office for U.S. employees. In the UK, in line with the "gradual return" principle outlined by the UK government, a hybrid office, remote working plan has been implemented under which UK employees work in the office two to three days a week, with occupancy restricted to 50% of office capacity. Any structured return to office plans for Federated Hermes' non-U.S. employees will be consistent with applicable government requirements.
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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Federated Hermes has developed and implemented a series of return to office protocols intended to assure employees that it is taking the safety and well-being of its employees seriously as return to office plans are implemented. Federated Hermes continues to review and, in certain cases, revise or enhance these protocols to provide for the safety of its employees, to seek to ensure the resiliency of Federated Hermes' business and to keep its customers informed.
Among other actions, Federated Hermes has taken the following steps:
Federated Hermes has made technology investments, including laptops for employees, expanded internet bandwidth, video conferencing and collaboration software, and additional video equipment. Federated Hermes also has increased usage and reliance on virtual meeting tools and prioritized the deployment of additional equipment and technology. These actions have allowed Federated Hermes to remain fully operational, support a remote and current hybrid working environment and continue to deliver Federated Hermes' investment products and services to customers.
Federated Hermes continues to undertake to comply with any remaining requirements applicable to Federated Hermes under relevant Federal, state and local government orders or laws, as well as remaining requirements applicable to Federated Hermes under the Center for Disease Control and Prevention's (CDC) and state health departments' guidance and cleaning procedures.
In addition to continuing cleaning protocols and other measures, Federated Hermes continues to make available hand sanitizer stations and disinfectant wipes for employees in the office, and continues to encourage employees to take standard precautions such as washing their hands with soap and water and staying home if sick.
As a result of a travel advisory issued by the CDC, the company instituted a travel ban on February 27, 2020 to certain countries, including those designated as high risk by the CDC. Federated Hermes now recommends that employees follow national, state/provincial, local and CDC recommendations when traveling, as well as specific venue requirements when planning or attending conferences or other events. Planning activity for conferences and events scheduled for later in 2021 and 2022 further increased in the third quarter 2021 over the first and second quarters 2021. Air travel and car and hotel reservations also further increased in the third quarter 2021 over the first and second quarters 2021, but remain below pre-Pandemic levels.
Federated Hermes Fund Board meetings, Federated Hermes corporate Board meetings, and offshore fund and subsidiary Board meetings, are being held in person as well as via teleconference allowing those who prefer to participate remotely to do so.
Federated Hermes has continued to on-board new hires, providing necessary equipment to them and conducting training remotely when necessary.
Federated Hermes investment professionals and strategists continue to publish fresh content to the Insights section of Federated Hermes' website, offering their unique perspectives to investors.
Federated Hermes continues to take a measured approach that involves implementing procedures aimed at safeguarding employee health while maintaining a high level of customer service. Federated Hermes expects those procedures and related timelines to vary by location in order to meet local regulatory requirements and support community health practices. Federated Hermes is also prepared to continue to implement a variety of other strategies to ensure the resiliency of its business. Examples include transferring processes to alternate personnel, prioritizing technology resources to service critical processing, and leveraging service providers and counterparties to promote efficient delivery of services.
Federated Hermes continues to monitor the ongoing global health situation through resources provided by, or contact with, the CDC, the SEC, the World Health Organization and the Securities Industry and Financial Markets Association (SIFMA), a financial services industry trade association, among others. As of September 30, 2021,2022, while Federated Hermes'Hermes’ stock price has fluctuated amidst the volatility in stock prices on major exchanges, and Federated Hermes'Hermes’ business operations have had to adapt to a remote and current hybrid working environment, the Pandemic has not materially affected Federated Hermes' financial condition or cash flowsHermes’ Financial Condition (as defined below) except to the extent that the increased net Voluntary Yield-related Fee Waivers discussed below resulting from the near-zero interest rate environment that existed throughout 2021 and into the second quarter 2022 can be attributed to the Pandemic. With the increase in short-term interest rates beginning in March 2022, net Voluntary Yield-related Fee Waivers were greatly diminished in the second quarter 2022 and ceased early in the third quarter 2022. See Item 1A - Risk Factors under“Low Short-Term Interest Rates” below for additional information on Voluntary Yield-related Fee Waivers. A further prolonged period of economic and financial distress and volatility as a result of the caption General Risk Factors - Other General Risks - Potential Adverse EffectsPandemic could exacerbate human resource capital management, economic, market and other risks, and could impact, including in a material way, Federated Hermes’ Financial Condition. The aggregate extent to which the Pandemic, including existing and new variants, and its related impact on the global economy and financial markets, affects Federated Hermes’ Financial Condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of Unpredictable Events the Pandemic and any recovery period, the emergence and spread of variants, any prevalence of severe, unconstrained and/or Consequences (including Covid-19)escalating rates of infection in Federated Hermes' Annual Report on Form 10-K forcertain countries and regions, the year ended December 31, 2020 for information regarding the risksavailability, adoption and efficacy of treatments and vaccines, and future actions taken by governmental authorities, central banks and other third parties in response to Federated Hermes presented by the Pandemic.
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Low Short-Term Interest Rates
In March 2020, in response to disrupted economic activity as a result of the Pandemic, the FOMC decreased the federal funds target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds iswas not sufficient to cover all of the fund'sfund’s operating expenses. Beginning in the first quarter 2020, Federated Hermes has implemented Voluntary Yield-related Fee Waivers. These waivers have beenwere partially offset by related reductions in distribution expense as a result of Federated Hermes'Hermes’ mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers. In response to global economic activity and elevated inflation levels, the FOMC has raised the federal funds target rate multiple times in 2022. The range is currently 3.00% - 3.25% as of the September 2022 FOMC meeting. These rate increases have eliminated the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers.
There were no material Voluntary Yield-related Fee Waivers during the quarter ended September 30, 2022. During the nine months ended September 30, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million. These fee waivers were partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to Federated Hermes was $18.8 million for the nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, Voluntary Yield-related Fee Waivers totaled $109.2 million and $310.2 million, respectively. These fee waivers were partially offset by related reductions in distribution expenses of $72.3 million and $204.9 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $36.9 million and $105.3 million for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, Voluntary Yield-related Fee Waivers totaled $36.8 million and $56.9 million, respectively. These fee waivers were partially offset by related reductions in distribution expense
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Table of $33.0 million and $51.0 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $3.8 million and $5.9 million for the three and nine months ended September 30, 2020, respectively.Contents
Assuming asset levels and mix remain constant and based on recent and projected market conditions, including potential additional government measures to further stimulate the economy, Voluntary Yield-related Fee Waivers for the fourth quarter of 2021 may result in a net negative pre-tax impact on income of approximately $39 million. While the level of these fee waivers is impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would likely reduce the negative pre-tax impact of these fee waivers. Similarly, a decrease in short-term interest rates would likely increase the negative pre-tax impact of these fee waivers. The actual amount of future Voluntary Yield-related Fee Waivers and the resulting negative impact of these fee waivers could vary, including in a material way, from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, changes in yields on instruments available for purchase by the money market funds, including changes due to the level of government measures to further stimulate the economy which could result in the issuance of additional Treasury debt instruments, actions by the FOMC, the U.S. Department of Treasury, the SEC, Financial Stability Oversight Council (FSOC) and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in money market product structures and offerings, demand for competing products, changes in distribution models, changes in the distribution fee arrangements with third parties, Federated Hermes' willingness to continue the Voluntary Yield-related Fee Waivers and changes in the extent to which the impact of these fee waivers is shared by any one or more third parties. As fund portfolio yields decrease, the impact of the Voluntary Yield-related Fee Waivers on Federated Hermes generally accelerates as the ability of distributors to share the impact of these fee waivers is reduced or exhausted.
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Current Regulatory Environment
Domestic
In 2020,The following discussion focuses on various aspects of the Pandemic shifted thecurrent regulatory environment in which Federated Hermes operated its business during the U.S.,third quarter 2022. Please see Federated Hermes’ prior public filings, including the discussions under Item 1 – Business – Current Regulatory Environment – Domestic and globally, toward the adoption of measures intended to provide regulatory flexibility and market stabilization. See Item 1A - Risk Factors under the caption General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including Covid-19)1 – Business – Current Regulatory Environment – International, in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion2021, and Part I, Item 2 of the risks posedQuarterly Report on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, for historical information on the regulatory environment, and related regulatory developments, for periods prior to June 30, 2022, which also includes further background information relevant to certain of the matters discussed below.
Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S. Federated Hermes and its products, such as the Federated Hermes Funds, and strategies are subject to: various federal securities laws, such as the 1933 Act, 1934 Act, 1940 Act, and Advisers Act; state laws regarding securities fraud and registration; regulations or other rules promulgated by the Pandemic. Through the third quarter of 2021, the SEC (among othervarious regulatory authorities, self-regulatory organizations, or exchanges) continuedexchanges; and various foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities. Regulatory actions taken to address the effects of the Pandemic, any other laws and regulations that have or are expected to be re-examined, modified, or reversed, or that become effective, and any new proposed laws, rules, regulations and directives or consultations (collectively, both domestically and internationally, as applicable, Regulatory Developments) continue to impact the investment management industry generally, and will continue to impact, to various degrees, Federated Hermes’ business, results of operations, financial condition, cash flows and/or stock price (collectively, Financial Condition).
Domestic
The pace of new proposed and final laws, rules and regulations and other regulatory activity has increased (and is expected to continue to increase) in 2022. According to the SEC’s 53-item Spring 2022 Unified Agenda of Regulatory and Declaratory Actions (Spring Reg Flex Agenda), the SEC indicated that it expected to issue final rules on 16 previously-promulgated proposed rules by October 2022, including rules regarding money market fund reform, tailored shareholder reports, listing standards for erroneously awarded compensation, pay versus performance, proxy voting advice, share repurchase disclosure modernization, enhanced reporting of proxy votes by registered management investment companies, and the securities transaction settlement cycle, among others. The SEC further indicated that it expects to issue final rules on an additional 10 previously-promulgated proposed rules by April 2023, including rules regarding Rule 10b5-1 and insider trading, cybersecurity risk governance, modernization of beneficial ownership reporting, amendments to Form PF relating to large equity advisor and large liquidity fund advisor disclosure and reporting, private fund advisors, short sale disclosure reforms, and loan or borrowing of securities, among others. The Spring Reg Flex Agenda also signals additional upcoming proposals on, among others, corporate board diversity, Rule 144A holding periods, human capital management disclosure, special purpose acquisition companies (SPACs), amendments to the custody rules pertaining to investment advisors, open-end fund liquidity and dilution management, and fund fee disclosure and reform. On October 7, 2022, due to technology issues with its internet comment form between June 2022 and August 2022, the SEC issued a release reopening the comment period on 12 proposed regulatory rules and eight proposed self-regulatory organization rules, including its proposals on money market fund reform, share repurchase disclosure modernization, reporting on securities loans, cybersecurity risk management, strategy, governance and incident disclosure, private fund advisor documentation of registered investment advisor compliance reviews, the enhancement and standardization of climate-related disclosures for investors, SPACs, investment company names, and enhanced disclosures by certain investment advisors and investment companies about environmental, social, and governance investment practices, among others. The comment period on these proposals reopened for 14 days on October 19, 2022, and will end on November 1, 2022. With the reopening of these comment periods, to the extent the SEC intended to issue final rules based on these proposals in October 2022, the issuance of such final rules will be delayed until later in 2022 or the first quarter 2023.
Regulators continue to focus on maintaining the continuitymarket conditions that existed in March 2020, and their impact on open-end funds, including institutional prime and municipal (or tax-exempt) money market funds. For example, similar to other regulatory or government bodies, in its May 2022 “Financial Stability Report” the Board of its operations (including enforcementGovernors of the Federal Reserve System (Governors) reported that certain money market funds continue to have structural vulnerabilities that make them prone to withdrawal of assets (or runs) and investor protection efforts), monitoringredemption risks. As noted above, the SEC has issued a proposed rule on money market functions and risks, and providing or extending regulatory relief in responsefund reforms. According to the Pandemic, while atSEC, the same time continuingproposed money market fund reforms would improve the resilience and transparency of money market funds by: (1) increasing minimum liquidity requirements for daily and weekly liquid assets to 25% and 50%, respectively, to provide a more substantial buffer in the event of rapid redemptions; (2) removing the ability of money market funds to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, which would eliminate an incentive for preemptive redemptions; (3) requiring certain money market funds (e.g., institutional prime and institutional municipal (or tax-exempt) money market funds) to implement "physical distancing" requirements for its personnel by continuing inswing pricing, which involves a full telework posture with limited exceptions, which is expected to last at least through January 3, 2022. The SEC has indicated that it continues to advance rulemaking initiatives, conduct risk-based examinations, bring enforcement actions, and review and comment on issuer and fund filings.
The full impactprocess of the continuing Pandemic on the regulatory environment in the U.S., and globally, remains uncertain. It is possible that the impact of the Pandemic could continue to decrease (but likely not completely dissipate) as 2021 concludes due to the continued distribution of vaccines onadjusting a larger scale, continued, but lessened, market intervention from the U.S. Federal Reserve Board (Fed), and additional stimulus packages, similar to the $900 billion Consolidated Appropriations Act, 2021,fund’s
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
passed by Congresscurrent NAV such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders, so that they bear the liquidity costs of their redemptions; (4) enhancing certain reporting requirements (e.g., Form N-MFP and Form N-CR) to improve the SEC’s ability to monitor and analyze money market fund data; and (5) requiring stable NAV money market funds to convert to a floating NAV if future market conditions result in December 2020 andnegative money market fund yields. The comment period for the $1.9 trillion American Rescue Plan Act of 2021 passed by Congress in March 2021.SEC’s proposed money market fund reforms ended on April 11, 2022 but has been reopened as noted above. While the number of new or proposed laws, rules and regulations affecting the investment management industry continued to be slow in the third quarter 2021 in the U.S., with the SEC's aggressive rulemaking schedule announcedSEC initially indicated in its Spring 2021 Unified Agenda of Regulatory and Declaratory Actions (Spring Reg Flex Agenda),Agenda that it intended to finalize its proposed money market fund reforms by October 2022, it is expected that a final rule on money market fund reform will not be issued until later in 2022 or the expectation remains thatfirst quarter 2023.
On March 3, 2022, the paceSEC also requested comment on the information collection and reporting requirements applicable to money market funds under Rule 2a-7 under the 1940 Act. Among other comment requests, the SEC invited comments on: (1) whether the proposed collection of newinformation is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (2) ways to enhance the quality, utility, and clarity of the information collected; and (3) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. The comment period ended on May 9, 2022 and was not reopened.
After the SEC’s issuance of its proposed and final laws, rules and regulations andmoney market fund reforms, other regulatory activity will increase during the remainder of 2021 and into 2022. U.S. and global regulators also continuecontinued to focus ondiscuss the impact of the Pandemicmoney market funds on the marketsmarket turmoil, decreased liquidity, and re-examine existing laws, rules and regulations. The regulatory actions to address the Pandemic, any other laws and regulations that have or are expected to be re-examined, modified or reversed, or that become effective, and any new proposed laws, rules and regulations, continue to impact the investment management industry (collectively, both domestically and abroad, as applicable, Regulatory Developments).
Asfactors in March 2020. At a joint meeting of September 30, 2021, the Fed's balance sheet was approaching $8.5 trillion. On July 28, 2021, the FOMC announcedand Governors on January 25, 2022, the establishmentpotential vulnerabilities of two standing repurchase agreement (repo) facilities—prime money market funds to a domestic repo facility against Treasury securities, agency debt securities,sudden withdrawal of liquidity were discussed. At its February 4, 2022 meeting, the Financial Stability Oversight Council (FSOC) recognized that open-end funds were not the sole or primary cause of market turmoil in 2020 but concluded that the size of their asset liquidations indicates that they were one of the significant contributors to the market stress. At the same meeting, the FSOC reviewed the SEC’s proposed money market fund reforms and agency mortgage-backed securities with a $500 billion daily limit,indicated that the FSOC supports the SEC’s efforts to reform money market funds and a repo facility for foreign and international monetary authorities against their holdings of Treasury securities maintained in custody atto strengthen short-term funding markets.
The FSOC’s conclusion that open-end funds were significant contributors to the Federal Reserve Bank of New York with a $60 billion per counterparty limit. Facilities such as the Secondary Market Corporate Credit Facility (SMCCF), Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF) and Term Asset-Backed Securities Loan Facility (TALF) established by the Fed in March 2020 expired or ceased funding duringturmoil contradicts the first halfInvestment Company Institute’s (ICI) November 2020 report titled, “Experiences of 2021. These facilities, among others, were established in order to address market inefficiencies and provide financial backstops totaling more than $2.3 trillion. The Fed has announced that, as of August 31, 2021, all of the SMCCF's holdings or corporate bonds and ETFs had either been sold off or matured. As of September 30, 2021, the Federal Reserve Bank of New York had no loans outstanding under the SMCCF, approximately $1.5 billion in loans outstanding under the TALF, which ceased extending credit on December 31, 2020, and no loans outstanding under the CPFF. The CPFF ceased purchasing commercial paper on March 31, 2021 and is no longer operational. As of September 30, 2021, the Federal Reserve Bank of Boston had no loans outstanding under the MMLF as the MMLF ceased extending credit on March 31, 2021 and is no longer operational. According to a report entitled "Experiences of USU.S. Money Market Funds During the Covid-19 Crisis" published by the Investment Company Institute (ICI) in November 2020Crisis” (ICI MMF Report), prime money market funds' use of the MMLF in 2020 (peaking at approximately $53 billion) was much less than a similar facility that was created and utilized during the 2008 financial crisis (peaking at approximately $152 billion).
In March 2020, in response to disrupted economic activity as a result of the Pandemic, the FOMC also decreased the federal funds target rate range to 0% - 0.25%. The federal funds target rate drives short-term interest rates. During its April 27–28, 2021 meeting, the FOMC indicated that the federal funds rate would likely stay at or near zero at least until the first quarter of 2023. During its June 15-16, 2021 meeting, the FOMC indicated that the median respondent to the FOMC Desk's survey of primary dealers and market participants continued to expect the first federal funds rate increase to occur in the third quarter 2023. At that same meeting, the FOMC raised the rate on its Reverse Repurchase Agreement Facility and Interest on Excess Reserves by five basis points each, to five basis points and 15 basis points, respectively, which helped to increase interest rates on short-term securities to slightly above near-zero levels. During its July 27-28, 2021 and September 21-22, 2021 meetings, the FOMC announced that it would hold the target range until labor market conditions and inflation stabilizes to levels consistent with the FOMC's assessments. Nevertheless, these low interest rates, and the possibility of negative interest rates, have caused the investment management industry to engage with the SEC (and other regulators globally), to discuss regulatory guidance permitting the implementation of reverse distribution mechanisms or share cancellation methodologies, reverse stock splits, and other tools to maintain the stability of money market fund NAVs in a negative rate environment, and to develop disclosures regarding the possible use of these tools. Any solution to the difficulties presented by a negative interest rate environment can require significant internal and external resources to implement necessary changes, including system programming and implementing disclosure changes, both for money market funds and their service providers or vendors (service providers).
U.S. and global regulators continue to focus on the market conditions that existed in March 2020, and their impact on open-end funds, including institutional prime and municipal (or tax-exempt), money market funds. In its 2020 Annual Report, the Financial Stability Oversight Council (FSOC) noted that, "[s]tresses on prime and tax-exempt [money market funds] revealed continued structural vulnerabilities that led to increased redemptions and, in turn, contributed to and increased the stress in short-term funding markets." It has been reported that, during her testimony prior to her confirmation by the Senate on January 25, 2021, Treasury Secretary Janet Yellen expressed comfort with the idea of looking at whether activities of asset managers represent a systemic risk rather than whether asset management firms pose systemic risk. It has been reported that, at the June 11, 2021 meeting of FSOC, Treasury Secretary Yellen recounted the "extreme policy interventions" by the Fed and Treasury Department to support short-term funding markets, including money market funds. It has been reported that fellow
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FSOC member and Fed Chair Jerome Powell cited rapid redemptions in money market funds as a catalyst for liquidity pressures, which, according to Chair Powell, alleviated only after the Fed intervened with the MMLF that included $10 billion in backing from the Treasury Department. It has been further reported that, during closed-door sessions, FSOC heard reform proposals from the SEC staff intended to improve the resilience of short-term funding markets during times of financial crisis. In a prepared statement for the June 11, 2021 FSOC meeting, SEC Chair Gary Gensler indicateddemonstrated that the March 2020 market "events brought particular focus to prime money market funds,turmoil resulted from the Pandemic and their interrelation with investments in commercial paperthe unprecedented global response and certificates of deposit [which] have limited liquidity in good times,economic shut-down, and in critical weeks of stress last spring virtually disappeared." He indicated that he was "directing SEC staff to look into these issues, and to consider any further reforms needed." On October 5, 2021, while testifying before the House Financial Services Committee, SEC Chair Gensler reiterated that he has asked SEC staff for recommendations to address the challenges to money market funds experienced in the spring of 2020, and stated that he believes "it is time to reflect upon the reforms of 2014 and 2010 to see if we can further improve resiliency, particularly in times of stress." It has been reported that FSOC Chairperson Yellen stated that she fully supported the SEC's reform efforts. In the open session of FSOC's June 11, 2021 meeting, FSOC voted to approve a statement highlighting the importance of money market fund reform and supporting the SEC's focus on money market funds. In FSOC's Statement on Money Market Fund Reform, FSOC indicated that "the [FSOC] is encouraged by the SEC's engagement on this critical issue" and, "[g]iven the interconnectedness of financial institutions and markets, the [FSOC] will continue to monitor this initiative in the broader context of efforts by financial regulators to strengthen short-term funding markets and support orderly market functioning, including during periods of heightened market stress."
On April 15, 2021, the SEC Division of Investment Management's Analytics Office issued an article "Prime MMFs at the Onset of the Pandemic: Asset Flows, Liquidity Buffers, and NAVs," which concluded (among other things) that March 2020 outflows reduced prime money market funds' liquidity buffers and that volatility of prime money market funds' NAV per share increased at the onset of the Pandemic. On December 22, 2020, the President's Working Group on Financial Markets (PWG) issued a report titled "Overview of Recent Events and Potential Reform Options for Money Market Funds" (PWG Report). The PWG Report outlines ten possible money market fund reforms, including: (1) removing the tie between the 30% weekly liquid asset threshold for money market fund liquidity and redemption gates and liquidity fees; (2) reforming the conditions for imposing redemption gates; (3) utilizing a minimum balance at risk mechanism for shareholder accounts; (4) requiring certain liquidity management changes, such as an additional weekly liquid asset threshold; (5) permitting weekly liquid asset requirements the flexibility to automatically decline in certain circumstances, such as when redemptions are large; (6) requiring a floating NAV for all prime and municipal (or tax-exempt), money market funds, including retail funds; (7) requiring swing pricing; (8) imposing capital buffer requirements; (9) requiring membership in a private liquidity exchange bank capitalized by the money market funds and their sponsors; and (10) establishing requirements for fund sponsor support to a money market fund.
Contrary to the focus placed by the PWG Report and regulators on money market funds as a cause of the market turmoil in March 2020, the ICI MMF Report supports the view that the Treasury securities markets, rather than money market funds, triggered the market turmoil. The ICI MMF Report rebukesrebuked suggestions that money market funds, particularly institutional prime money market funds, were a primary, if not the sole, cause of market distress in March 2020, noting that, "[“[t]hese suggestions are inconsistent with the data and early press reports." The ICI MMF Report points to the fact that the market dislocations were widespread, including in markets in which institutional prime money market funds are not significant players, such as the U.S. Treasury bonds, longer-term U.S. agency securities, municipal securities, corporate bonds, and foreign exchange markets. The ICI MMF Report also studied institutional prime money market fund asset flows and spreads in the Treasury bond market, concluding, "by“by March 11[, 2020] these spreads had widened substantially, yet prime money market funds had seen virtually no outflows." The ICI MMF Report also notesnoted that, "press“press reports do not support the theory that money market funds were at the forefront of the market stress"stress” and that, "Treasury“Treasury markets were in the news several days before any real mention of money market funds . . ."..”
On December 23, 2020,April 11, 2022, Federated Hermes submitted two comment letters, a Primary Comment Letter (115 pages) and a separate Swing Pricing Comment Letter (45 pages). These comment letters strongly oppose a majority of the SEC's Division of Investment Management released a statement on the PWG Report requesting comments to assist the SEC staff in providing recommendations to the SEC. The SEC staff requested comments in regard to three specific areas: (1) potential stress points for funds and short-term funding markets; (2) measures that can enhance the resilience and function of short-term funding markets; and (3) measures that can reduce the likelihood of future official sector interventions. On February 4, 2021, the SEC staff reissued a request for comment on the PWG Report, including the effectiveness of previously-enactedSEC’s money market fund reformsreform proposals.
In its Primary Comment Letter, Federated Hermes concurred with the ICI that money market funds are critically important for (1) over 50 million retail investors, as well as corporations, municipalities, and other institutional investors, who rely on the implementation of the potential policy measures described in the PWG Report. The SEC staff also requested comments on other topics that are relevant to potential$5 trillion money market fund reforms, including other approaches for improving the resilienceindustry as a low cost, efficient, transparent, cash management investment vehicle that offers market-based rates of return, and (2) governments (federal, state and local), businesses, and financial institutions who utilize money market funds as an important source of financing. Federated Hermes also agreed (with only a few differences) with the ICI’s comments on the SEC’s money market fund reform proposal regarding: (1) the application of liquidity fees; (2) availability of discretionary redemption gates; (3) increases to the required daily and short-term funding markets generally.weekly liquidity requirements; (4) support of reverse distribution mechanisms (RDMs) as the most appropriate means to manage money market funds in a negative interest rate environment; and (5) opposition to swing pricing.
Federated Hermes specifically agreed with the SEC that the link between liquidity fees and redemption gates and the 30 percent weekly liquid asset requirement in Rule 2a-7 under the 1940 Act should be eliminated. Federated Hermes asserted that, unlike the SEC’s proposal, it supports the retention of a fund board’s ability to impose either a liquidity fee or a redemption gate, in its
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discretion and in accordance with its fiduciary duty, when doing so is in the best interest of the fund and its shareholders, without reference to any specific level of liquidity. Federated Hermes along withopposed increasing required daily and weekly liquidity requirements for money market funds because of the ICInegative effect such increased requirements would have on money market fund yields, and other industry participants, have submitted comment letters that strongly disagree withonce unencumbered from the conclusions reached in the PWG Report. In its first comment letter, dated April 12, 2021,perils of an inappropriate linkage between liquidity levels and liquidity fees and redemption gates, Federated Hermes emphasized, among other points,believes that money market funds did not cause or exacerbatehave sufficient liquidity levels currently to protect investors from dilution. Federated Hermes opposed the turmoil inSEC’s prohibition on the financial markets in March 2020, anduse of RDMs to maintain the stable NAVs of government money market funds have no "structural vulnerabilities" warrantingbecause, among other reasons, the more significant policy options outlined inSEC’s prohibition on the PWG Report, suchuse of RDMs: (1) does not reflect any formal investment management industry feedback; and (2) will eliminate the use of government money market funds as capital buffers and holdbacks.sweep investments. Federated Hermes stressedalso asserted that, due to the significant technology investments that would be necessary for market participants to modify transaction systems to process transactions in a hypothetical negative yield scenario without using RDMs, the absence of RDMs could lead to material outflows in U.S. government money market funds to bank deposits or non-regulated investment products, consistent with the notion of regulating government money market funds out of existence. Federated Hermes argued that the use of RDMs is the clear investor preference and would preserve money market turmoilfunds as an investment product for all stakeholders, and that the SEC’s concerns over investor confusion regarding the operation of RDMs can be addressed through disclosure. Federated Hermes concluded its Primary Comment Letter on the SEC’s proposed money market fund reforms by asserting that: (1) the SEC’s final rule should be limited to (a) delinking compliance with daily and weekly liquidity levels to considerations on imposition of liquidity fees and redemption gates, (b) requiring fluctuating NAV money market funds to use bid prices on portfolio assets to calculate NAV and purchase and redemption prices, and (c) specifying criteria upon which a money market fund board’s independent trustees/directors could impose a discretionary liquidity fee or redemption gate; and (2) the remaining aspects of the SEC’s proposed money market fund reforms should not be adopted, including in March 2020 was created byparticular the Pandemicswing pricing proposal, as they will (a) not achieve the desired result to reduce investor redemptions in stressed market conditions, but instead will be harmful to investors in money market funds and those who use money market funds to obtain short-term financing, and (b) interfere with capital formation and the unprecedented global government responsestability and economic shut-downefficiency of short-term markets.
In its Swing Pricing Comment Letter, Federated Hermes opposed the SEC’s proposal for the mandatory use of swing pricing because, among other reasons, swing pricing would eliminate a fundamental tenet of money market funds – the ability for investors to stemtransact intra-day and same day. Federated Hermes asserted that swing pricing for money market funds is deeply flawed, and investors would be damaged, not protected, by its implementation. Federated Hermes asserted that swing pricing will fail to reduce systemic risk while creating other significant adverse consequences. Among other things, Federated Hermes argued that swing pricing would cause investors to pre-emptively redeem from money market funds, as they did before the spreadeffective date of the coronavirus. In its comment letter, Federated Hermes supported the SEC eliminating the requirement for a fund's board to consider imposing redemption gates and liquidity fees if weekly liquid assets drop below 30% of the fund's total assets. This is one of the requirements that was imposed under the SEC'sSEC’s structural, operational, and other money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (2014 Money Fund Rules) and related guidance (collectively, the 2014 Money Fund Rules and Guidance). Compliance with the 2014 Money Fund Rules and Guidance was required on October 14, 2016. In its second comment letter, dated June 1, 2021, Federated Hermes recommended certain structural reformsfurther asserted that addressthis would cause more short-term commercial paper to be directly owned, or owned through less regulated vehicles, without the root causesprofessional management provided through regulated money market funds that seek safety and stability of money market fund NAVs. Federated Hermes also asserted that swing pricing would inevitably lead to efforts to market-time or “game” trading in a manner that would harm investors and the integrity of money market funds generally, based, among other things, on known heavy redemptions at month and quarter ends, and at tax payment dates, and other factors. Federated Hermes identified significant new operational and compliance costs to implement swing pricing or to mitigate the new risks created by it, which would be borne by money market fund shareholders with no corresponding benefit. Federated Hermes identified significant market impacts that could result from implementing swing pricing, including the potential that institutional prime and tax-exempt money market funds could no longer qualify to be designated as “cash and cash equivalents,” and the elimination of the failure of critical funding markets in March 2020impacted money market funds from use as sweep investments. Federated Hermes also set forth several recommendations and the consequent systematic risks, including:conclusions, including, among others, that: (1) the provisionSEC should abandon its swing pricing proposal, and eliminate the link between the 30 percent weekly liquid asset requirement and mandatory liquidity fees and redemption gates; (2) discretionary liquidity fees are preferable to swing pricing; (3) mandatory liquidity fees, as contemplated by some commenters, would have the effect of liquiditytriggering preemptive redemptions in stressed markets as well as reformsinvestors would try to promote market-making in stressed conditions; (2) amendments to rule 2a-7 to delinkascertain the consideration of redemption gates andcriteria for triggering the mandatory liquidity fees from publicly available data; (4) discretionary liquidity fees are preferable to mandatory liquidity fees because they preserve the 30%role and responsibility of the money market funds’ board to act to prevent material dilution or other unfair results for all fund shareholders based on actual circumstances; (5) the SEC should not be ensnared in a fund's total assets threshold; (3)redirection or usurpation of its defined mission toward goals that cannot be reconciled with its statutory mandate; and (6) Congress should require that banking regulators fix the problems created by the array of post-financial crisis reforms tothat materially impaired market-making, particularly in stressed market conditions.
Following a May 24, 2022 meeting with the short-term market structure itself to improve liquidity in times of stress;SEC Chairman and (4) considerations for balancing the SEC's statutory mandate with liquidity and financial stability concerns. InSEC staff, on May 26, 2022, Federated Hermes submitted a third comment letter in which it emphasized that: (1) swing pricing will regulate institutional prime money market funds out of
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existence; (2) discretionary fees and gates administered by fund boards through the exercise of their fiduciary duty are the best answer for money market funds; (3) eliminating the link between mandatory fees and gates and a 30% liquid asset requirement is the right thing to do; and (4) a four digit NAV for government money market funds to deal with the possibility of negative interest rates is not a better solution than allowing the use of RDMs. In letters dated June 9, 2022, June 14, 2022, August 10, 2022, and September 21, 2021,22, 2022, Federated Hermes submitted similar comments to SEC Commissioners Pierce, Crenshaw, Uyeda, and Lizárraga after meetings with them on June 3, 2022, June 7, 2022, August 2, 2022, and September 20 2022, respectively.
Following a July 22, 2022 meeting with the SEC staff, on July 28, 2022, Federated Hermes submitted another comment letter in which Federated Hermes expressed its beliefconcern that the combinationSEC’s proposal to mandate U.S. Government money market funds move to a four-digit NAV in a negative rate environment would lead to a loss of delinkingat least $1 trillion in investments into U.S. Government money market funds via sweep accounts and potentially an additional $1 trillion in investments into U.S. Government money market funds made as position trades. In that letter, Federated Hermes argued that properly disclosed RDMs can both accomplish the SEC’s goals and prevent negative consequences to U.S. investors and markets in a negative interest rate environment. On August 30, 2022, Federated Hermes followed-up on its July 28, 2022 comment letter by submitting to the SEC further information and examples of how RDMs could be utilized in a negative interest rate environment in such a way as to minimize any potential impositioninvestor confusion. On September 15, 2022, the Securities Industry and Financial Markets Association (SIFMA) and ICI jointly submitted a similar letter to the SEC that provided an example of redemption gates and liquidity fees withlanguage that a money market fund's weekly liquid asset requirements, adoptionfund could use to describe how RDMs work and how they would impact an individual investor in a negative interest rate environment.
On August 3, 2022, Federated Hermes submitted a response to the SEC’s Director of certain liquidity fee procedures,the Division of Investment Management regarding remarks the Director made regarding swing pricing and enhancements tothe SEC’s pending money market funds' abilityfund reforms at a July 26, 2022 industry seminar. In this response, Federated Hermes noted: (1) European money market funds have never used swing pricing for money market funds; (2) there is no data supporting the need for swing pricing to "know their customer" via an amendment to Rule 22c-2 under the 1940 Act, when combineddeal with consideration of and improvementspotential material dilution caused by redeeming shareholders; (3) Federal Reserve Regulation Q, which formerly forbid price competition in the short-term markets generally, can addressbanking industry for deposits, did not cause money market funds to succeed and grow; (4) adopting money market fund reforms that will reduce competition for cash balances, harm investors, negatively impact capital raising and impede market efficiency would be clearly contrary to the concerns identified inSEC’s statutory directive; and (5) money market funds did not cause the PWG Report without adversely impactingfinancial crises of 2007-2009 and March-April 2020.
On September 19, 2022, Federated Hermes also responded to questions received from the viabilityGeneral Accounting Office (GAO) as part of the GAO’s review of the effects of the Pandemic on money market funds and their benefits to investors, issuers and capital formation.liquidity risks. Among other topics, in its responses, Federated Hermes also has expended, and will continue to expend, significant internal and external resources to engage with regulators on potentialreiterated many of the points regarding the proposed money market fund reforms including through additional comment letters and meetings with U.S. and global regulators, the ICI and other industry participants.noted above.
Management believes money market funds provide a more attractive investment opportunity than other competing products, such as insured deposit account alternatives. Management also believes that money market funds are resilient investment products that have proven their resiliency during the Pandemic. While Federated Hermes believes that some regulations could be improved, such improvements should be measured and appropriate, preserving investors'investors’ ability to invest in all types of money market funds. Federated Hermes believes that regulators should look closely at the redemption gates and liquidity fee requirement from the 2014 Money Fund Rules and Guidance and supports efforts to reduce regulation, including the PWG Report's recommendation to eliminate the redemption gates and liquidity fee requirement. Federated Hermes also continues to support efforts to permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the 2014 Money Fund Rules and Guidance for, institutional and municipal (or tax-exempt) money market funds. Legislation has been re-introduced in both the Senate and is being reintroduced in the House of Representatives in a continuing effort to get these revisions to money market fund reform revisions regarding the use of amortized cost passed and signed into law.
WithOn August 16, 2022, the transitionInflation Reduction Act of Presidential administrations, and new agency leadership, certain regulations promulgated by2022 became law in the SEC or Department of Labor (DOL) in 2020 are being re-examined and could be reversed or modified. On January 20, 2021, the new administration issued a number of regulatory directives freezing regulatory rulemaking, rescinding various executive orders concerning the regulatory process issued by the previous administration, and establishing a framework for modernizing the review of regulatory actions. On June 11, 2021, in its Spring Reg Flex Agenda, the DOL indicated that it would be proposing another new fiduciary rule; however, as of September 30, 2021, a new fiduciary rule is not enumerated among the DOL's list of regulations open for comment.U.S. It has been reported that a proposed new fiduciary rule will be issuedthe law aims to curb inflation by reducing the enddeficit, lowering prescription drug prices, and investing into domestic energy production while promoting clean energy. It also has been reported that the law is expected to raise $738 billion and authorize $391 billion in spending on energy and climate change, $238 billion in deficit reduction, three years of 2021.Affordable Care Act subsidies, prescription drug reform to lower prices, and certain tax reforms (discussed below). The DOL's April 2016 fiduciary rule was vacatedlaw’s emphasis on clean energy is consistent with regulatory efforts to enhance ESG-related (or climate) disclosures.
As indicated in June 2018 by the United States Court of Appeals forSEC’s Spring Reg Flex Agenda discussed above, the Fifth Circuit. On December 15, 2020,SEC has also increased its focus on ESG-related disclosures. Following the DOL issued the final versionSEC’s creation of a re-proposed fiduciary rule to regulate "investment advice fiduciaries" (Final DOL Fiduciary Rule), which became effectiveClimate Change and ESG Task Force in the SEC’s Division of Enforcement (DOE) on February 16, 2021. On February 12,March 4, 2021, the DOL announcedSEC’s Division of Examinations’ April 9, 2021 ESG product and service risk alert, the FSOC’s recognition that its temporary enforcement policy, under whichclimate change is an emerging and increasing threat to U.S. financial stability, and other regulatory actions, statements and industry commentary, on March 21, 2022, the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently on compliance with relevant componentsSEC issued a climate disclosure proposal titled, “The Enhancement and Standardization of the Final DOL Fiduciary Rule, will remain in place until December 20, 2021. On October 25, 2021, the DOL issued Field Assistance Bulletin No. 2021-02 in which the DOL announced that,Climate-Related Disclosures for the period from December 21, 2021 through January 31, 2022, it will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently and in good faith to comply with the Impartial Conduct Standards for exempt transactions under the Final DOL Fiduciary Rule or treat such fiduciaries as violating the applicable prohibited transaction rules. In this Field Assistance Bulletin, the DOL also announced that, for the period from December 21, 2021 through June 30, 2022, it will not pursue prohibited transactions claims against investment advice fiduciaries who are otherwise in compliance with the Final DOL Fiduciary Rule but for their failure to comply with theInvestors.” The proposal mandates, among other things,
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certain climate-risk disclosures by public companies, including on Form 10-K, about a company’s governance, risk management, and strategy with respect to climate-related risks. The proposal incorporates certain concepts and vocabulary from the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol) as part of the proposed disclosure regime. For example, the proposal would require disclosure of quantitative metrics to assess a company’s exposure to greenhouse gas emissions. A company would be required to disclose its Scope 1 and documentation requirements set forthScope 2 greenhouse gas emissions, which would be emissions under the GHG Protocol that “result directly or indirectly from facilities owned or activities controlled by a registrant.” Certain registrants also would be required to disclose Scope 3 emissions, which would be the emissions from upstream and downstream activities in a company’s value chain, if such emissions were material to investors or if the company had made a commitment that included reference to Scope 3 emissions. On May 9, 2022, the SEC extended the comment period on the proposal from May 9, 2022, to June 17, 2022. On June 17, 2022, Federated Hermes submitted a comment letter to the SEC in which it supported the ICI’s comments to the SEC on the proposal, including, among other comments, that: (1) any final rule should only require companies to provide material climate risk-related information in a company’s Form 10-K, with any non-material information required by any amendments to Regulation S-K to be provided in a new climate report; (2) the SEC not amend Regulation S-X to require a company to provide material financial metrics in footnotes to its financial statements; and (3) it is premature to require disclosure of Scope 3 emissions data. As noted above, the SEC has reopened the comment period on this proposal for 14 days due to a technology issue with its internet comment form.
On October 3, 2022, the FSOC established the Climate-related Financial Risk Advisory Committee to aid in the assessment of climate-related financial risk. This followed FSOC Chairperson Yellen’s praise for the SEC’s climate risk disclosure proposal on March 21, 2022: “The SEC’s proposal is an important step to protect investors and strengthen the overall resilience of the financial system. Investors and businesses have for years asked for reliable information that can be used to assess climate-related risks and opportunities. I commend Chair Gensler and the SEC for their work on this critical issue.” On April 5, 2022, certain Republican senators, including members of the Senate Banking and Environment and Public Works Committees, issued a letter to SEC Chair Gensler calling on the SEC to withdraw the proposal. Consistent with its June 14, 2021 comment letter submitted in response to then acting SEC Chair Allison Herren Lee’s request for public comment on the SEC’s disclosure rules and guidance as they apply to climate change and other ESG-related disclosures, Federated Hermes believes that any SEC rule on climate disclosure should: (1) supplement its principles-based disclosure regime, not replace it with prescriptive metrics; (2) focus on material disclosures; and (3) maintain the global competitiveness of U.S. capital markets.
The SEC’s aggressive rulemaking and Final Rules, particularly regarding money market fund reform, and climate/ESG disclosure, may be challenged by legislators and in the courts by investment management industry participants and other industry groups. Particularly in the context of climate/ESG disclosures, the likely success of any challenge may be bolstered in light of the U.S. Supreme Court’s decision in West Virginia vs. Environmental Protection Agency, in which the Supreme Court weakened the deference given to an administrative agency’s regulatory authority by applying the “Major Questions Doctrine,” which the Supreme Court has used to require courts to defer to Congress rather than administrative agencies regarding matters that it concludes have significant economic and/or political impact if it believes that Congress did not specifically grant such powers to an agency.
In addition to the SEC and the FSOC, regulations adopted, and actions taken, by the Department of Labor (DOL) impact the investment management industry, including Federated Hermes. The DOL’s April 2016 fiduciary rule was vacated in June 2018 by the United States Court of Appeals for the Fifth Circuit. On December 15, 2020, the DOL issued the final version of a re-proposed fiduciary rule to regulate “investment advice fiduciaries” (Final DOL Fiduciary Rule), which became effective on February 16, 2021. On February 12, 2021, the DOL announced that its temporary enforcement policy, under which the DOL would not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently on compliance with relevant provisionscomponents of the Final DOL Fiduciary Rule, or treat such fiduciaries as violatingwould remain in place until December 20, 2021. In Field Assistance Bulletin No. 2021-02, the applicableDOL provided further transition relief by extending its position on pursuing prohibited transaction rules.claims through January 31, 2022. The DOL also stated that it would not enforce the specific documentation and disclosure requirements for individual retirement account rollovers through June 30, 2022, but that all other requirements of the Final DOL Fiduciary Rule would be subject to full enforcement as of February 1, 2022. In its Spring 2022 Agency Rule List (DOL’s Spring Reg Flex Agenda), the DOL indicated that it would be proposing another new fiduciary rule by December 2022. According to the DOL'sDOL’s Spring Reg Flex Agenda, the new proposed fiduciary rule will amend the regulatory definition of the term "fiduciary"“fiduciary” to more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual retirement accounts (IRA) are fiduciaries for purposes of ERISA and the Internal Revenue Code. The DOL also has indicated that, in conjunction with this rulemaking, the Employee Benefits Security Administration (EBSA) will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors. It has been reported that a proposed new fiduciary rule will not be forwarded to the Office of Management and Budget (OMB) for consideration until the first quarter of 2023. In itsthe DOL’s Spring Reg Flex
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Agenda, the DOL also indicated that as requiredit expects to issue a final “Prudence and Loyalty in Selection Plan Investments and Exercising Shareholder Rights” rule (New DOL ESG/Proxy Voting Rule) by Executive Order 14030,December 2022. On October 6, 2022, the DOL submitted a final rule to the OMB for review, and it has been reported that the final New DOL ESG/Proxy Voting Rule will be published in November 2022. The DOL had previously issued its proposed New DOL ESG/Proxy Voting Rule on October 13, 2021. The New DOL ESG/Proxy Voting Rule would undertake a review of, and propose new rules regarding,replace the DOL'sDOL’s final proxy voting and shareholder rights rule (Final DOL Proxy Voting Rule), which was issued on December 11, 2020, and its final rule restricting fiduciaries from selecting plan investments on the basis of non-pecuniary factors, such as ESG factors (Final DOL ESG Rule), which was issued on October 30, 2020. Executive Order 14030, which was issuedPreviously, on May 20, 2021, also directs the Secretary of Labor to consider publishing, by September 2021, a proposed rule to suspend, revise, or rescind the Final DOL Proxy Voting Rule and Final DOL ESG Rule. On March 10, 2021, the DOL issued an indefinite non-enforcement policy with respect to the Final DOL ESG Rule and the Final DOL Proxy Voting Rule.
On October 13, 2021, the DOL issued for comment, its proposed "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" rule, which would replace the Final DOL ESG Rule and Final DOL Proxy Voting Rule (New DOL Proposed ESG/Proxy Voting Rule). The New DOL Proposed ESG/Proxy Voting Rule, wouldif enacted as proposed, would: (1) amend the "Investment Duties"“Investment Duties” regulation, which addresses the duties of prudence and loyalty in selecting plan investments and exercising of shareholder rights, including proxy voting. The New DOL Proposed ESG/Proxy Voting Rule wouldvoting; (2) retain the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on material risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan, but clarify that, when considering investment returns, a fiduciary'sfiduciary’s duty of prudence may require an evaluation of the economic effects of climate change and other ESG factors on a particular investment or investment course of action. The New DOL Proposed ESG/Proxy Voting Rule also wouldaction; and (3) apply the same standards to qualified default investment alternatives as apply to other investments.
In a change from the Final DOL ESG Rule, if enacted as proposed, the New DOL Proposed ESG/Proxy Voting Rule also wouldwould: (1) amend the "tie-breaker"“tie-breaker” standard by: (1)(a) imposing a standard that would require a fiduciary to conclude prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon; and (2)(b) permitting a fiduciary to select an investment, or an investment course of action, based on economic or non-economic benefits other than investment returns. The New DOL Proposed ESG/Proxy Voting Rule also wouldreturns; and (2) adjust the Final DOL Proxy Voting Rule'sRule’s requirements for the exercise of shareholder rights, including proxy voting, by: (1)(a) removing from the current regulation the statement that "the“the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right;" (2)” (b) removing from the current regulation safe harbors relating to proxy voting that permit (a)(i) a policy to limit voting resources to particular types of proposals that a fiduciary has prudently determined are substantially related to the issuer'sissuer’s business activities or are expected to have a material effect on the value of the investment and (b)(ii) a policy of refraining from voting on proposals or particular types of proposals when a plan'splan’s holding in a single issuer relative to the plan'splan’s total investment assets is below a quantitative threshold; and (3) eliminating from(c) the current regulationelimination of the requirement that, when deciding whether to exercise, and in exercising, shareholder rights, a plan fiduciary must maintain records on proxy voting activities and other exercises of shareholder rights. In a December 10, 2021 comment letter, Federated Hermes intends to commentcommented on the New DOL Proposed ESG/Proxy Voting RuleDOL’s October 13, 2021 proposed rule with respect to, among other points, the interrelationinterrelationship between the NewFinal DOL ProposedFiduciary Rule and Final DOL ESG/Proxy Voting Rule and the exclusive benefit rule under a relevant fiduciary lawfiduciary’s own prudent analysis, which in Federated Hermes’ view would unnecessarily subject fiduciaries to regulatory and litigation risk and expose any final rulemaking to further scrutiny over time.
Federated Hermes, like other investment managers, also has prepared to comply with Rule 2a-5 under the United States.1940 Act. The comment period for the New DOL Proposed ESG/Proxy VotingSEC adopted Rule ends2a-5 on December 13, 2021.
On3, 2020, it went effective on March 258, 2021, and 26, 2021, joint resolutions were introducedcompliance was required by September 8, 2022. Rule 2a-5 establishes an updated regulatory framework for fund valuation practices by establishing requirements for determining fair value in good faith for purposes of the Senate1940 Act. The rule expressly permits boards, subject to continued board oversight and House of Representativescertain other conditions, to rescind the amendments adopted in September 2020 to the SEC's proxy voting rules that, among other things, raised eligibility and resubmission thresholds for shareholder proposals. Under the Congressional Review Act, Congress can rescind rules that were sent to Congress in the previous 60 legislative days (or, in this case, beginning August 21, 2020). As of September 30, 2021, these resolutions have not progressed in Congress. The SEC also has been adjusting, or terminating, the targeted, temporary Pandemic-related relief and assistance it provided to the investment management industry. The SEC staff also is considering issuing updated guidance to enable broader use of electronic delivery of disclosure documents and indicated support for related issuesdesignate certain parties, such as remote work, e-authorizationfund investment advisors, to perform the fair value determinations. The rule also defines when market quotations are “readily available” for purposes of the 1940 Act, the threshold under Rule 2a-4 under the 1940 Act for determining whether a fund must fair value a security. Under Rule 2a-5, a market quotation is “readily available” only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the fund can access at the measurement date. The rule further provides that a quotation will not be readily available if it is not reliable. This definition contradicts common practices for cross-trades between affiliated funds under Rule 17a-7 under the 1940 Act. Rule 17a-7 permits cross trades of securities for which market quotations are readily available between affiliated funds, which allows funds to transfer such securities without incurring trading costs. The definition of “readily available” in Rule 2a-5 essentially limits Rule 17a-7 to equity securities because fixed-income securities are not traded on an exchange and dematerialization of physical security certificates.would not have a “quoted price (unadjusted) in active markets.” Federated Hermes supports manyis relying on previously-issued SEC no-action letters to continue to conduct cross trades in its fixed-income funds (unless and until the SEC rescinds those no-action letters). The inability to conduct cross-trades between Federated Hermes fixed-income funds can increase trading expenses and have a negative impact on fund performance.
Since the beginning of these recommended actions, particularly allowing for increased use of electronic delivery of disclosure documents.
The number of new or proposed laws, rules and regulations remained low in the third quarter of 2021 in the U.S. On June 11, 2021, the SEC set forth in its Spring Reg Flex Agenda an aggressive schedule for proposing (or in certain cases, re-proposing) and/2022, other proposed rules, new guidance and other actions have been issued or finalizing 49 separate rules and regulations in the next year, several of which willtaken that impact the U.S. investment management industry participants, including Federated Hermes. For example, it includesexample:
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On October 26, 2022, the SEC held an Open Meeting during which the SEC Commissioners voted to adopt a final rule, “Tailored Shareholder Reports for Mutual Funds and Exchange Traded Funds; Fee Information in Investment Company Advertisements,” and related form amendments, that purportedly will require open-end management investment companies to transmit concise and visually engaging annual and semi-annual reports directly to shareholders that highlight key information for investors, and amend certain advertising rules for registered investment companies and regulations on: climate risk disclosure; human capital management disclosure; cybersecurity risk governance; special purpose acquisition companies; proxy voting advice; custodybusiness development companies. The SEC adopted the rule largely as proposed although with some changes from the proposal, most notably the SEC did not adopt proposed amendments to registration statement disclosures. The SEC adopted a “layered approach” to disclosure, whereby registered funds are required to make available summary information to retail shareholders directly, while providing more detailed information online (e.g., schedule of investments, other financial statement elements) that may be more relevant to investors and financial professionals who desire more in-depth information. The SEC Commissioners also voted to adopt a final rule, “Listing Standards for Recovery of Erroneously Awarded Compensation,” which implements Section 10D of the 1934 Act, as added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) by requiring securities exchanges to adopt listing standards that require issuers to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. The rule also requires a listed issuer to file the policy as an exhibit to its annual report and to include disclosures related to its recovery policy and recovery analysis where a recovery is triggered. The SEC proposed the rule in 2015 and reopened the comment periods in 2021 and 2022. Most of the changes from the proposal are non-substantial, although one important change is that the SEC narrowed the scope of compensation for recovery to only those amounts earned while the subject individual was an executive officer. Finally, the SEC voted to propose a new rule under the Advisers Act; rule 17a-7 amendments under the 1940 Act; money market reforms; mattersAct, “Outsourcing by Investment Advisers,” purportedly to addressseek to establish minimum and consistent oversight requirements for registered investment advisors that outsource certain services or functions to service providers, and to amend certain related to ESG factors for investment companiesrecordkeeping and investment advisers; open end-fund liquidity and dilution management; market structure modernization; and tailored shareholder reports. OtherForm ADV reporting requirements. Federated Hermes is reviewing these newly adopted final rules and regulationsthe new proposed rule.
On October 13, 2022, the SEC staff issued an Frequently Asked Questions (FAQ) relating to investment advisor consideration of diversity, equity and inclusion (“DEI”) factors when recommending or selecting other investment advisors for clients. The FAQ states that an advisor may consider DEI factors among a variety of factors, provided that the use of such factors is consistent with a client’s objectives, the scope of the relationship, and the advisor’s disclosures. The SEC staff also stated that advisors are not required to pre-qualify consideration of DEI factors on the basis of minimum AUM or length of track record.
On October 12, 2022, the SEC adopted amendments to the electronic recordkeeping requirements for broker-dealers, security-based swap dealers and major security-based swap participants that purport to modernize recordkeeping requirements and make the requirements adaptable to new technologies in electronic recordkeeping. The amendments also are intended to facilitate examinations of these entities by the SEC.
On September 19, 2022, the SEC Division of Examinations published a risk alert to inform SEC-registered investment advisors (investment advisors or advisors), including advisors to private funds, about upcoming review areas during examinations focused on amended Advisers Act Rule 206(4)-1 (Marketing Rule), which comes into effect on November 4, 2022.
On September 14, 2022, the SEC proposed amendments to the standards applicable to covered clearing agencies for U.S. Treasury securities to require that such covered clearing agencies have written policies and procedures reasonably designed to require that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty. The SEC also proposed additional amendments to the standards with respect to risk management, and proposed to amend the broker-dealer customer protection rule to permit margin required and on deposit with covered clearing agencies for U.S. Treasury securities to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers subject to certain conditions. The comment period for the proposed amendments ends 60 days after the publication of the proposed amendments in the Federal Register. These proposed amendments followed the SEC issuing on August 8, 2022, proposed rules to establish new governance requirements for all registered clearing agencies, including requirements for board composition and independent directors, conflict of interest identification and mitigation, and board oversight of service providers, among others. The comment period for these proposed requirements ended on October 7, 2022.
On August 25, 2022, the SEC adopted final rules amending Item 402 of Regulation S-K to implement the “pay versus performance” requirement as required by Congress in the Dodd-Frank Act. The final rules require registrants to disclose, in
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includedproxy or information statements in which executive compensation disclosure is required, how executive compensation actually paid by the registrants related to the financial performance of the registrants over the time horizon of the disclosure. Registrants are required to comply with the final rules in proxy and information statements for fiscal years ending on or after December 16, 2022.
On August 10, 2022, the SEC and Commodity Futures Trading Commission (CFTC) jointly proposed amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisors to private funds, to: (1) enhance reporting; (a) by hedge fund advisors on qualifying hedge funds, (b) on certain basic information about investment advisors and the private funds they advise, and (c) regarding hedge funds; (2) amend how investment advisors report complex structures; and (3) remove aggregate reporting for large hedge fund advisors. The comment period for the proposed amendments ended on October 11, 2022.
On July 27, 2022, the DOL proposed amendments to Prohibited Transaction Class Exemption 84-14 (the QPAM Exemption) clarifying how the restrictions against individuals who have been convicted or released from imprisonment apply in the context of a foreign crime. The proposed amendments also would require QPAMs to report their reliance on the SEC's Spring Reg Flex AgendaQPAM exemption to the DOL and introduce: (1) language requiring that will likely impact Federated Hermes asQPAMs have sole responsibility for transactions; (2) a public company include,new contractual indemnity of the plan by the manager; and (3) new recordkeeping requirements, among other things. The comment period for example, corporate board diversity, erroneously-awarded compensation, share repurchase disclosure, reporting of proxy votesthe proposed amendments ended on executive compensation, incentive-based compensation and pay versus performance. On April 16, 2021,October 11, 2022, but the SEC voted toDOL has announced that it will reopen the comment period after a public hearing on the proposed amendments is held on November 17, 2022.
On July 13, 2022, the SEC adopted amendments to the proxy rules for the use of universal proxy cards in all non-exempt solicitations for contested director elections. On June 1, 2021, SEC Chair Gensler issued a statement directing the staff to consider whether to recommend further regulatory action regardinggoverning proxy voting advice.
advice as proposed in 2021. These final amendments undo rules promulgated during the prior Presidential administration that required proxy advisory firms to deliver their shareholder advice about issuers to those companies at the same time the proxy advisory firm sends the information to its clients and to provide clients with access to any response the company provides on voting advice before those clients vote (Prior Requirements). According to the SEC, these final amendments purportedly enhance proxy advisory firms’ ability to deliver independent proxy voting advice to their clients in a timely manner. The SEC hasfinal amendments rescind certain conditions from the proxy rule exemptions for proxy voting advice and related guidance to investment advisors. They also increased its focus on ESG-related disclosure. On April 9, 2021,remove a note that provided examples of situations in which the SEC's Division of Examinations issued a risk alertfailure to highlight observations from recent exams of investment advisers, registered investment companies, and private funds offering ESG products and services. On March 15, 2021, SEC Commissioner and then acting SEC Chair Allison Herren Lee issued a statement reminding issuersdisclose certain information in proxy voting advice may be considered misleading within the meaning of the SEC's 2010 climate change disclosure guidance and soliciting public commentproxy rules’ prohibition on material misstatements or omissions. These final amendments to the SEC's disclosureproxy rules and guidance as they applybecame effective on September 19, 2022. Federated Hermes is currently reviewing these final amendments to climate change and other ESG-related disclosures. In its June 4, 2021 comment letter, the ICI called onproxy rules. On July 21, 2022, two trade groups filed a lawsuit against the SEC to mandate disclosure of greenhouse gas emissions and workforce diversity to give fund managers the consistent, comparable, and reliable data they need to better assess current and future sustainability-related risks. However, the ICI also warned against an overly prescriptive approach to ESG disclosure, statingalleging that the SEC should developexceeded its authority in an arbitrary and capricious manner by rescinding the Prior Requirements. A proxy advisor firm also is continuing a regulatory frameworklawsuit against the SEC alleging that designating proxy advice as solicitation under the proxy rules exceeds the SEC’s authority and is flexible enougharbitrary and capricious.
On July 13, 2022, the SEC staff proposed amendments to allow disclosure practicesExchange Act Rule 14a-8, the shareholder proposal rule, which requires companies subject to develop organically over time. In its June 14, 2021the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The proposed amendments would: (1) revise three substantive bases for exclusion of shareholder proposals under Rule 14a-8-the substantial implementation exclusion, the duplication exclusion, and the resubmission exclusion; (2) purportedly provide greater certainty and transparency to shareholders and companies as they evaluate whether these bases for exclusion would apply to particular shareholder proposals; and (3) purportedly facilitate communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues. The comment letter,period for these proposals ended on September 12, 2022. Federated Hermes urgedis currently reviewing the SEC to:proposed amendments.
Federated Hermes continues to monitor developments regarding previously issued regulatory proposals and developments, including: (1) supplement, not replace, its principles-based disclosure regime with prescriptive metrics;the SEC’s proposed rule on “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices” (SEC ESG Disclosure Rule); (2) focusthe SEC’s proposed rule on material disclosures;“Investment Company Names,” which would amend Rule 35d-1 (Names Rule) under the 1940 Act; and (3) maintain the global competitiveness of U.S. capital markets. EOS atSEC’s request for comment on certain information providers acting as investment advisors. On August 16, 2022, Federated Hermes also submitted a comment letter that supportedto the SEC requiring companies to report on material climate-related information that may impact the long-term value of companies to allow investors the ability to access timely, accurate, comprehensive, consistent and comparable information.
In a July 28, 2021 speech, SEC Chair Gensler outlined his views on likely components of the SEC's forthcoming climate disclosure rulemaking proposal. Chair Gensler discussed that the proposal could include: (i) mandatory climate risk disclosure; (ii) qualitative and quantitative data disclosures; (iii) climate-related risk management and strategy disclosures; and (iv) disclosure of metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals. Chair Gensler indicated that he asked for SEC staff to consider recommendations regarding emission disclosures, industry-specific disclosures, whether fund managers should disclose the criteria and underlying data they use to make ESG-related claims about their products, and whether the SEC should reviewESG Disclosure Rule 35d-1in which Federated Hermes expressed concerns regarding the new proposed disclosure requirements and endorsed the ICI’s comments on the proposed rule. Also, on August 16, 2022, Federated Hermes submitted a comment letter to the SEC regarding the proposed amendments to the Names Rule in which, among other comments, Federated Hermes advocated to retain the current approach for the 80% investment policy requirement and temporary investment exceptions under the 1940 Act (Names Rule) holistically. Chair Gensler also indicated thatNames Rule and endorsed the proposal may consider which data or metrics companies might useICI’s comments on the proposed amendments. In addition, on August 16, 2022, Federated Hermes submitted a comment letter to inform investors about how they are meeting their climate-related pledges. He also noted that the SEC will likely developin response to its own disclosure requirements rather than relyrequest for comment on external standard setters, and may look to existing frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) for guidance. On September 1, 2021, Chair Gensler stated that he has instructed SEC staff to prepare a "proposal for climate risk disclosure requirements" and that the proposal should be informed by other frameworks, including the TCFD. On September 14, 2021, Chair Gensler reiterated that "[t]oday's investors are looking for consistent, comparable, and decision-useful disclosures around climate risk," and that the SEC should "step in" when there is high demand for relevant information. Chair Gensler further noted that proposals developed by the SEC will be "informed by economic analysis" and will be available for public comment. On September 22, 2021, the SEC's Division of Corporation Finance published a sample comment letter that the SEC staff intends to issue to public companies regarding their climate change disclosures in SEC filings. In his remarks to the House Financial Services Committee at the October 5, 2021 SEC oversight hearing, SEC Chair Gary Gensler signaled a phased-in climate disclosure approach that would take into account company size and the types of disclosure required.In his fireside chat on October 19, 2021, SEC Chair Gensler reaffirmed his previous remarks to the UN Principles for Responsible Investment that the SEC may look to international standard setters when setting climate change disclosure requirements, but will promulgate US-specific disclosure requirements. On October 21, 2021, the FSOC released a report on climate-related risks to financial stabilityinformation providers in which, it recognizes that climate change is an emerging and increasing threat to U.S. financial stability and, among other recommendations, recommends that FSOC members issuing requirements for climate-related disclosures considercomments, Federated Hermes questioned whether such disclosures should include disclosure of greenhouse gas emissions,any regulatory purpose would be served by treating information providers as appropriate and practicable, to help determine exposure to material climate-related financial risks.
Since the beginning of the third quarter 2021, other proposed rules, new guidance and other actions have been issued or taken that impact U.S. investment management industry participants, including Federated Hermes. For example:
On October 14, 2021, the SEC re-opened the comment period for its proposal to implement the provisions of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The proposed rule and rule amendments would direct the national securities exchanges and national securities associations to establish listing standards that would require each issuer to develop and implement a policy providing for the recovery (or claw back), under certain circumstances, of incentive-based compensation based on financial information required to be reportedadvisors under the securities laws that isAdvisers Act,
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received by current or former executive officers, and require disclosure of the policy. The proposal was initially issued by the SEC in 2015. The comment period ends on November 22, 2021.
On September 29, 2021, the SEC proposed changesopposed deeming information providers to Form N-PX to enhance disclosure for mutual fund and ETF proxy voting records. The SEC indicated that the purpose of the proposal is to enhance the scope of N-PX reporting and to impose structured data reporting so that investors can more easily compare and analyze mutual fund and ETF proxy voting decisions, particularly in the areas of say-on-pay votes, and votes on ESG-related issues. The comment period ends on December 14, 2021.
Investment management industry participants, such as Federated Hermes, also continued, and will continue, to monitor, plan for and implement certain changes in response to previously-issued, new, proposed or adopted rules and guidance. Previously proposed and final rules and guidance included, among others: (1) final rules and amendments to thebe investment advisor advertising and solicitation rules; (2) a final rule providing an updated regulatory framework for fund valuation practices; (3) a final rule regulating the use of derivatives in mutual funds and other funds registeredadvisors under the 1940 Act; (4) final rulesAct, and amendmentsexpressed concern that any proposed rule could be construed to the existing regulatory framework governingapply beyond index providers, model portfolio providers and pricing services, have unintended consequences and further increase upfront and ongoing costs that would likely be passed on to clients or fund of funds arrangements among investment funds governed by the 1940 Act; (5) proposed extensive changes to fund shareholder reports and other fund disclosure documents; (6) SEC staff statements and other communications related to registered investment companies investing in Bitcoin futures; (7) rule changes intended to enhance the ability to clear certain trades, particularly those involving repurchase agreements through the Fixed Income Clearing Corporation; and (8) the Presidential executive order prohibiting investment in companies linked to the Republic of China's military and state security apparatus, and related SEC risk alerts and other staff statements. The SEC also has requested comment on the Names Rule to determine whether it can be improved to help ensure that fund names inform and do not mislead investors.
It remains uncertain the degree to which regulators will change,shareholders with little or Congress will require regulators to change, certain recent Regulatory Developments. It also remains unclear whether, or to what degree, investment advisors, broker/dealers or other intermediaries will roll-back, modify or continue changes made prior to the original, vacated DOL fiduciary rule, or make new or additional changes in light of the Final DOL Fiduciary Rule, the DOL's final investment duty amendments, Final DOL Proxy Voting Rule, Final DOL ESG Rule, Regulation Best Interest, Form CRS, or SEC fiduciary duty interpretations. As noted above, the DOL has taken non-enforcement positions with respect to the Final DOL Fiduciary Rule, and has proposed the New DOL Proposed ESG/Proxy Voting Rule, which increases this uncertainty.
Federated Hermes continues to analyze the potential impact of these Regulatory Developments on Federated Hermes' business, results of operations, financial condition and/or cash flows. Please refer to our prior public filings for more detailed discussions of these, and other, previously-issued proposed and final rules and guidance.no benefit.
In addition to the above Regulatory Developments, the SEC staff continues to engage in a series of investigations, enforcement actions and/or examinations involving investment management industry participants, including investment advisors and investment management companies such as Federated Hermes'Hermes’ investment managementadvisory subsidiaries and the Federated Hermes Funds. It has been reported that the SEC's enforcement focus under the new administration could shift back to publicly-traded company matters (such as insider trading, issuer reporting, and accounting fraud), and to a more aggressive investor protection stance with a reinstitution of a "broken windows" enforcement philosophy under which enforcement actions are brought for minor violations. On October 13, 2021, the SEC's new Director of Enforcement announced that he intends to recommend aggressive use of available remedies in enforcement actions, including, among other tools, requiring admissions of wrongdoing in certain cases. On March 3, 2021,30, 2022, the SEC Division of Enforcement (DOE)SEC’s DOE released its examination priorities for 2021, which include,2022, including, among other priorities: (1) private funds; (2) ESG investing; (3) retail investors; (4) cybersecurity; (5) fintech; and (6) digital assets. The DOE’s focus in the areas of investment advisors and investment companies remains largely on perennial issues such as marketing practices, advisory fee calculations, portfolio management, brokerage and execution, conflicts of interest, compliance with Regulation Best Interest and Form CRS, as well as investment advisor fiduciary duties; (2) information security and operational resilience; (3) financial technology innovation; (4) anti-money laundering programs; (5) the transition from the London Inter-Bank Offered Rate (LIBOR) to an alternate reference rate; (6) investment advisor and fund ESG disclosures and practices; (7) fund valuationprograms, service provider oversight, and other disclosures and fund governance practices; (8) the design, implementation and maintenance of investment advisor and fund compliance programs and fund liquidity risk management programs; and (9) money market fund compliance with stress-testing requirements. On March 4, 2021, the SEC announced the creation of a Climate Change and ESG Task Force in the SEC's DOE to develop initiatives to proactively identify ESG-related misconduct, with an initial focus on identifying any material gaps or misstatements in issuers' disclosure of climate risks under existing rules. The task force will also analyze disclosure and compliance issues relating to investment advisors' and funds' ESG strategies.related matters. In addition to routine examinations, additional sweep examinations addressing various topics have been conducted. For example, the SEC examinations have includedhas been conducting sweep examinations involving various topics. For example, as previously announced in June 2021,regarding ETF revenue sharing payments, ESG practices and disclosures, and approval of registered investment company advisory fees, among others. The SEC DOE is taking a more aggressive stance on enforcement and is signaling a return to a “broken windows” philosophy under which the SEC conductedwould likely seek to enforce every violation big and small. The SEC has begun to bring enforcement actions based on ESG disclosures not matching actual investment processes, and the SEC and CFTC have brought enforcement actions involving conducting business on personal devices without proper monitoring and recordkeeping. On September 27, 2022, the SEC entered into a sweep exam regarding the cyberattack involving the compromiseseries of software createdsettlement orders with 15 broker-dealers and one affiliated investment advisor for widespread failures by the SolarWinds Corp. In additionfirms to its Pandemic-related actionspreserve electronic communications. The firms were required to pay combined penalties exceeding $1.1 billion. One broker-dealer agreed to pay the SEC $125 million and guidance, the CFTC $75 million to resolve probes into employee communications on messaging platforms that had not been approved by the company. Another financial institution has reserved approximately $200 million for a regulatory matter connected to the unauthorized use of personal phones for employees’ work-related communications, such as text messages and emails, during the work-from-home period of the Pandemic. The SEC also has entered into nine settlement orders with investment advisors relating to failures to comply with requirements for safekeeping client assets and to timely update SEC required disclosures, (i.e., Form ADV), to reflect the status of audits of financial statements for private funds. The SEC staff has also issued various guidance statements, investor bulletins and risk alerts on a variety of compliance issues, including private funds and crypto asset interest-bearing accounts, among others, fixed income principalothers. On September 8, 2022, SEC Chair Gensler stated in a speech to the Practicing Law Institute that he believes that “the vast majority [of crypto tokens] are securities.” He noted that it is important that investors receive disclosure on these tokens so they can make sound investment decisions and cross trades, managing client assets in wrap programs, ESG investingbe protected against “fraud and product offerings, anti-money laundering, suspicious activity monitoringmanipulation,” and, reporting, digital assets,
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Tabletherefore, he has asked the SEC staff to work with entrepreneurs to have their tokens registered and regulated as securities, where appropriate. He also stated that, depending on their attributes, the mechanisms used to maintain value or how they are offered, sold, or used, stablecoins may be considered shares of Contents
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securities issued by special purpose acquisition companies (or SPACs), the Executive Order on Securities Investmentsa money market fund or another kind of security that Finance Communist Chinese Military Companies, cyber-security, large trader obligations, investment advisor compliancewould need to be registered and the transition from LIBOR.provide investor protections.
These investigations, examinations and actions have led, and can lead, to further regulation, guidance statements and scrutiny of the investment management industry. The degree to which regulatory investigations, actions and examinations will continue, as well as their frequency and scope, can vary and is uncertain.
Regulation or potential regulation by regulators other than the SEC and DOL also continued, and can continue, to affect investment management industry participants, including Federated Hermes. For example, on October 8, 2021, the Financial Industry Regulatory Authority (FINRA) issuedMay 24, 2022, FINRA adopted amendments to Rule 6730 (Transaction Reporting) to require members to append a regulatory notice encouraging FINRA member firmsmodifier to incorporate government-wide anti-money launderinga corporate bond trade that is part of a portfolio trade when reporting to FINRA’s Trade Reporting and countering financing of terrorism priorities into their anti-money laundering programs. On August 13, 2021, FINRA issued a regulatory notice reminding firms of their supervisory obligations relatedCompliance Engine (TRACE). The amendments to outsourcing to third party vendors.Rule 6730 will take effect on May 15, 2023. On June 23, 2021,17, 2022, FINRA issuedsolicited comments on a regulatoryproposal to establish a new trade reporting requirement for transactions in over-the-counter options on securities with terms that are identical or substantially similar to listed options. Changes to reporting requirements for over-the-counter equity securities will take effect on November 14, 2022. These FINRA actions follow its March 8, 2022 publication of its Regulatory Notice 22-08 regarding complex products and options in which FINRA expressed concerns about retail investors trading these products without understanding their characteristics and risks. On May 9, 2022, Federated Hermes submitted comments to FINRA regarding Regulatory Notice 22-08 in which Federated Hermes generally supported the ICI’s comments to FINRA on the notice reminding firms ofand asserted, among other comments, that: (1) “complex products” should be defined narrowly as not to cover mutual funds, ETFs, tender offer funds, and closed-end funds with traditional investment strategies; and (2) investment companies, including mutual funds, ETFs, tender offer funds, and closed-end funds, are already sufficiently regulated under the requirements concerning best execution1940 Act and payment for order flow. On March 4, 2021, FINRA issued a regulatory notice regarding common sales charge discounts and waivers for mutual funds. FINRA has also undertaken, and continues to undertake, examinations. FINRA continues to review firms' systems and procedures for providing customer waivers and rebates available through rights of reinstatement on mutual fund purchases. Other FINRA examinations have included, among others, options trading, bank sweep programs, zero commission and cyber-security sweep examinations.SEC regulation, such as Regulation Best Interest. In a 2021its 2022 Report on its Examination and Risk Monitoring Program, published on February 9, 2022, FINRA identified, among other areas of concern, anti-money laundering, outside business activities, private securities transactions, Regulation Best Interest and Form CRS, compliance, misrepresentation relating to cash management accounts and digital assets,the Consolidated
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Audit Trail, order handling, best execution, and liquidity risk management controls as areasconflicts of focusinterest, mobile apps, SPACs, cybersecurity, complex products, anti-money-laundering, outside business activities, net capital, books and potential examination.records, firm short positions and fails-to-receive in municipal securities, trusted contact persons, funding portals and crowdfunding offerings, disclosure of order routing information, portfolio margining, and intraday trading. In addition to federal regulation, various state legislatures or regulators also have adopted or are beginning to adopt state-specific cyber-security and/or privacy requirements that can apply to varying degrees to investment management industry participants, including Federated Hermes.
The activities of the FSOC also continue to be monitored by the investment management industry, including Federated Hermes. In December 2019, FSOC changed its systemically important designation approach for non-bank financial companies from an entity-based approach to an activities-based approach under which an individual firm would only be so designated if it were determined that efforts to address the financial stability risks of that firm's activities by its primary federal and state regulators have been insufficient. Since then, FSOC has been required first to focus on regulating activities that pose systemic risk through actions by primary regulators.The FSOC has focused on potential risks in the asset management industry, including money market funds, and other types of cash management vehicles (such as local government investment pools), that continue to use amortized cost or have a stable NAV but are not subject to the 2014 Money Fund Rules and Guidance. As discussed above, the market volatility and liquidity stress onthat money market funds experienced as a result of the Pandemic beginning in March 2020 has drawn the attention of U.S. and global regulators, including the FSOC. Certain policy advocates are beginning to callhave called for the FSOC to reverse its 2019 decision to change its approach to designating individual firms as outlined abovesystemically important (from its current activities-based approach, under which an individual firm would be designated only if it were determined that efforts to address the financial stability risks of that firm’s activities by its primary federal and state regulators have been insufficient, to the FSOC’s prior entity-based approach) in order to better fulfill its statutory mandate to mitigate risks to financial stability. Any possibility of the FSOC reverting to its pre-December 2019prior systemically important designation practices and recommending new or heightened regulation for non-banknonbank financial companies,institutions, which the Fed's Board of Governors (Governors) have indicated can include open-end investment companies, such as money market funds and other mutual funds, increases the potential for further regulation of the investment management industry, including Federated Hermes and the Federated Hermes Funds.
As On February 4, 2022, the FSOC issued a candidate,Statement on Nonbank Financial Intermediation in which the current President statedFSOC recounted that, he is openin 2021, it had made it a priority to: (1) evaluate and address the risks to U.S. financial stability posed by hedge funds, open-end funds and money market funds; (2) indicated that at its February 4, 2022, meeting it had received updates on these three types of nonbank financial institutions; and (3) announce that it will continue in 2022 to evaluate, monitor, and address the risks that these institutions pose to financial stability. According to the ideasummary of the most recent FSOC meeting on April 8, 2022, FSOC also is shifting its focus to asset valuations, nonfinancial and financial leverage, and funding risk in the commodities and derivatives markets, and on the development of the digital asset markets.
While a U.S. financial transactions tax (FTT) on securities transactions,, an idea proposed by certain former Democratic candidates, including the current Vice President. Prior federal legislative attemptsincrease to enact an FTT would have imposed a 0.1%28% corporate income tax, and a wealth tax on stock, bond and derivative transactions, which would have appliedunrealized investment income on individuals with net wealth over $100 million continue to sales made in the U.S. or by U.S. persons, while initial securities issuances and short-term debt wouldbe discussed to varying degrees, as of September 30, 2022, none of these proposed tax changes have been exempt. A later proposal would have taxed stock trades at 0.5%, bond trades at 0.1%, and derivatives transactions at 0.005% coupled with an income tax credit for individuals with income of less than $50,000 ($75,000 for married couples), which was intended to offset the burdenenacted. As part of the Inflation Reduction Act of 2022, however, among other tax reforms, a 15 percent minimum tax on corporate book income for such individuals.corporations with average annual adjusted financial statement income that exceeds $1 billion for any three consecutive prior tax years and a one percent tax on corporate share repurchases have been enacted. These taxes will apply beginning in 2023. The Wall Street Tax Act,law also includes a large expansion and modernization effort for the Internal Revenue Service (IRS).
International
UK regulators are continuing with the process of rationalizing the EU legislation and regulatory requirements that were quickly “on-shored” upon Brexit taking effect. On September 22, 2022, the UK government introduced in the HouseUK Parliament the previously announced Retained EU Law (Revocation and Reform) Bill (i.e., the Brexit Freedoms Bill), among other legislation, to implement a renewed regulatory framework in the UK. Among other things, under the Brexit Freedoms Bill, all EU legislation will be amended, repealed or replaced, which will end the special status of Representatives on January 15, 2021 togetherall retained EU law and re-categorize all remaining retained EU law as “assimilated law” by December 31, 2023, and enable the UK government to create regulations to fit the UK’s needs, cut administrative obstacles to support business investment and stimulate the UK economy. The December 31, 2023, deadline may be extended until June 23, 2026. The Brexit Freedoms Bill applies to all EU law, including the area of financial services, with its companion Senate bill introduced on March 18, 2021,certain exceptions that exclude certain legislation identified in the 2022-23 Financial Services and Markets Bill and certain amendments to revoked instruments from the revocation deadline. The revocation deadline also will not apply to any rules of the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) or Bank of England (BoE) or to any Payment Systems Regulator that are generally applicable requirements or directions of general application. The Brexit Freedoms Bill will ensure that it is no longer possible for EU case law to override UK legislation, subject to a relevant national authority’s right to reinstate certain rights, powers, or obligations, including to apply interpretative principles to produce an effect that is equivalent to the effects of EU interpretive principles. The Brexit Freedoms Bill also grants relevant national authorities the power until June 23, 2026 to specify that certain UK laws are to be read in a way which is “compatible” with retained EU law and subject to retained EU law to the extent “incompatible.” Absent any use of the power to require compatibility with retained EU legislation, the Brexit Freedoms Bill would impose if enacted, a 0.1% tax on stock, bond and derivatives transactions and reportedly would raise an estimated $777 billion over a decade.new priority rule under which standard UK legislation will trump retained EU legislation. The Tax on Wall Street Speculation Act, introduced in the Senate and House of Representatives on April 21, 2021, would impose an FTT of 0.5% on stock trades, 0.1% on bond trades, and 0.005% on derivative transactions. These proposals are being introduced for a variety of reasons, including to fund infrastructure programs and college education programs or in an attempt to reduce speculation on Wall Street. While Congressional hearings have taken place during which the FTT proposals have been discussed, none of the bills introduced to date have progressed in Congress. The President has proposed a 15% minimum corporate tax rate and the President has proposed (and the House Ways and Means Committee has approved a reconciliation tax bill) raising the corporate income tax rate to 26.5%. The President hasBrexit Freedoms Bill also proposed a "wealth tax" on thewill end free movement
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investment income of Americans with at least $1 billion in assets, which reportedly is supported by certain Senators who initially opposed the President's budget proposals. While these tax increases, among others, are being proposed to fund a $1 trillion infrastructure plan and a roughly $1.75 trillion to $2 trillion budget proposal, the President has not proposed a specific FTT for broad application. Legislation also has been introduced in various states, such as New York, New Jersey and Illinois, that, if enacted, would have imposed FTTs on various types of securities, commodities or other financial transactions. In March 2021, a bill was re-introduced into the U.S. House of Representatives that would prohibit states from imposing FTTs on security industry participants. As of September 30, 2021, that bill has not progressed in Congress. Management believes that an FTT, particularly if enacted with broad application, would be detrimental to investors and Federated Hermes' business and could adversely affect, potentially in a material way, Federated Hermes' business, results of operations, financial condition and/or cash flows.
The regulatory environment has impacted, and will continue to impact, to various degrees, Federated Hermes' business, results of operations, financial condition and/or cash flows. For example, Regulatory Developments can result in shifts in product structures, as well as changes in asset flows and mix and customer relationships. It remains uncertain whether, and to what degree, investment advisors, broker/dealers or other intermediaries will roll-back, modify or continue changes made in response to the original, vacated DOL fiduciary rule, the New DOL Fiduciary Rule, any changes to the New DOL Fiduciary Rule proposed by the DOL and other Regulatory Developments. If intermediaries continue to reduce the number of Federated Hermes Funds offered on their platforms, mutual fund-related sales and distribution fees earned by Federated Hermes can decrease. In that case, similar to other investment management industry participants, Federated Hermes could experience a further shift in asset mix and AUM, and a further impact on revenues and operating income. On the other hand, management continues to believe that Federated Hermes' business can be positively affected because separately managed account/wrap-fee strategies work well in level wrap-fee account structures and can provide transparency and potential tax advantages to clients, while Federated Hermes' experience with bank trust departments and fiduciary experience and resources presents an opportunity to add value for customers.
Federated Hermes has dedicated, and continues to dedicate, significant and additional internal and external resources to monitor, analyze and address regulatory responses to the impact from the Pandemic and Regulatory Developments generally, and their effect on Federated Hermes' business, results of operations, financial condition and/or cash flows. Additional internal and external resources have been, and will continue to be, devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters. These efforts included, and will continue to include, having conversations internally, and with intermediaries, customers, service providers, counsel and other advisors regarding Regulatory Developments, and analyzing and/or affecting legislative, regulatory, product offering, development and structure adjustments, technology or information system development, reporting capabilities, business processes and other options, in an effort to comply, and/or to assist Federated Hermes' intermediaries and customers to comply, with new Regulatory Developments or minimize the potential impact of any adverse consequences stemming therefrom. As appropriate, Federated Hermes also participated, and will continue to participate, either individually or with industry groups, in the comment process for proposed regulations. Federated Hermes continues to expend legal and compliance resources to examine corporate governance, public company and other disclosure proposals and final rules issued by the SEC, to adopt, revise and/or implement policies and procedures, and to respond to examinations, inquiries and other matters involving its regulators, including the SEC, customers or other third parties. Federated Hermes also has devoted, and will continue to devote, resources to technology and system investment, business continuity, cybersecurity and information governance, and the development of other investment management and compliance tools, to enable Federated Hermes to, among other benefits, be in a better position to address Regulatory Developments. In connection with the Pandemic, Federated Hermes has devoted internal and external resources to complying with the requirements of federal and state orders imposing work- and travel-related restrictions, and the requirements under the CDC's and state and local health departments' guidance, as well as enhanced disinfection and contamination procedures.
Federated Hermes is unable to fully assess at this time whether, or the degree to which, any continuing efforts or potential options being evaluated in connection with modified or new Regulatory Developments ultimately will be successful. The degree of impact of Regulatory Developments on Federated Hermes' business, results of operations, financial condition and/or cash flows can vary, including in a material way, and is uncertain.
Management also continues to monitor and assess the potential impact of the Pandemic generally, and the impact of the low interest rate environment on money market fund and other fund asset flows, and related asset mixes, as well as the degree to which these factors impact Federated Hermes' prime and municipal (or tax-exempt) money market business and Federated Hermes' business, results of operations, financial condition and/or cash flows generally. Management also continues to monitor, and expend resources in connection with, the potential for additional regulatory scrutiny of money market funds, including prime and municipal (or tax-exempt) money market funds.
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The Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or can impact, Federated Hermes' intermediaries, other customers and service providers, their preferences and their businesses. For example, these developments have caused, and/or can cause, certain product line-up, structure, pricing and product development changes, as well as money market, equity, fixed-income, alternative/private markets or multi-asset fund products to be less attractive to institutional and other investors, reductions in the number of Federated Hermes Funds offered by intermediaries, changes in the fees Federated Hermes, retirement plan advisors and intermediaries will be able to earn on investment products and services sold to retirement plan clients, changes in work arrangements and facility-related expenses, and reductions in AUM, revenues and operating profits. In addition, these developments have caused, and/or can cause, changes in asset flows, levels and mix, as well as customer and service provider relationships.
Federated Hermes will continue to monitor regulatory actions in response to the Pandemic and other Regulatory Developments as necessary and can implement additional changes to its business and practices as it deems necessary or appropriate. Further analysis and planning, or additional refinements to Federated Hermes' product line and business practices, can be required in response to market conditions, customer preferences or new or modified Regulatory Developments, such as the new investment advisor advertising, valuation, derivatives, and fund of funds rules, any proposed changes to the Final DOL Fiduciary Rule, the New DOL Proposed ESG/Proxy Voting Rule and other Regulatory Developments, or any additional regulation or guidance issued by the SEC, DOL or other regulatory authorities.
In addition to the impact on Federated Hermes' AUM, revenues, operating income and other aspects of Federated Hermes' business described above, Federated Hermes' regulatory, product development and restructuring, and other efforts in response to the Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had, and can continue to have, on a cumulative basis, a material impact on Federated Hermes' expenses and, in turn, financial performance.
As of September 30, 2021, given the regulatory environment, the Pandemic and the possibility of future additional modified or delayed regulation or oversight, Federated Hermes is unable to fully assess the impact of regulatory actions in response to the Pandemic or other adopted or proposed regulations, and other Regulatory Developments, and Federated Hermes' efforts related thereto, on its business, results of operations, financial condition and/or cash flows. Modified or new Regulatory Developments in the current regulatory environment, and Federated Hermes' efforts in responding to them, could have a material and adverse effect on Federated Hermes' business, results of operations, financial condition and/or cash flows. As of September 30, 2021, management also believes that any designation as a systemically important non-bank financial company, or any reforms ultimately put into effect by FSOC, would be detrimental to Federated Hermes' money market fund business and could materially and adversely affect Federated Hermes' business, results of operations, financial condition and/or cash flows.
International
Similar to the U.S., in 2020, the outbreak of the Pandemic shifted the regulatory environment in the UK and European Union (EU) toward the adoption of measures intended to provide regulatory flexibility and market stabilization. While the full impact of the Pandemic remains unclear through the third quarter of 2021, regulators in the UK and EU are continuing to allow certain regulatory relief granted in 2020 to expire, while extending other relief, and to advance new and proposed consultations, directives, regulations and laws while generally remaining in a remote working environment. These Regulatory Developments continue to impact the investment management industry in the UK and EU.
In the UK, the transition period under the European Union Withdrawal Agreement Bill (Withdrawal Agreement Bill), which implemented the withdrawal agreement reached between the UK and other European nations, The Brexit Freedoms Bill will maintain all of the other 27UK’s international commitments and build on the UK government’s progress post-Brexit, which include, among others, restoring democratic control over law making within the UK Parliament, restoring the UK Supreme Court as the final arbiter of the law that applies to the UK, striking new trade agreements with over 70 countries, and certain value-added-tax reforms. The Brexit Freedoms Bill also prescribes a new test to be applied by higher courts when considering whether to depart from retained EU Member Statescase law or whether to depart from retained UK case law, establishes a new reference procedure enabling a lower court which is bound by retained case law to refer a point of law to a higher court (which is not so bound) to decide, and set outestablishes a new procedure for a law officer of the arrangements forUK government or the UK's withdrawal fromdevolved administrations to refer a point of retained case law to a relevant higher court and certain rights of intervention.
On July 22, 2022, the 2022-23 Financial Services and Markets Bill (FSM Bill) also was introduced in the UK Parliament. The FSM Bill would revoke retained EU (Brexit)law relating to financial services and empower His Majesty’s Treasury (HM Treasury), ended on December 31, 2020. On December 30, 2020,relevant national authorities (i.e., financial service regulators), and the EU–UK Trade and Cooperation Agreement (TCA) became effective.BoE to modify or replace existing retained EU laws or to prepare new transitional amendments to bring about a new UK-specific regulatory regime. Among other things, the TCA provides for free trade for goods and limited mutual market access for services, creates certain border checkpoints, imposes visa requirements on UK nationals staying more than 90 days inFSM Bill is intended to: (1) implement the EU in a 180-day period, removes any role for the European Courtoutcomes of Justice in the UK, and eliminates the requirement for the UK to comply with EU data protection directives. The TCA also provides for cooperation between the UK and EU regarding a range of policy areas and UK participation in certain EU programs.
Political, economic, legal and regulatory uncertainty continues regarding the impact of Brexit on a post-Brexit UK. See Item 1A - Risk Factors under the captions General Risk Factors - Economic and Market Risks - Potential Adverse Effects of a Decline or Disruption in the Economy or Markets and General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules in Federated Hermes' Form 10-K for the year ended December 31, 2020 for further discussion of the risks of political instability, currency abandonment and other market disruptions on Federated Hermes and its business. Brexit has affected, and will likely continue to affect, the requirements and/or timing of implementation of
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legislation and regulations applicable to doing business in the EU and UK, including the laws and regulations applicable to Federated Hermes, as well as to the sponsoring, management, operation and distribution of Federated Hermes' products and services, both within and outside the EU and UK. On October 1, 2020, the European Securities and Markets Authority (ESMA) issued an updated statement on the consequences of Brexit under the Benchmark Regulation, which indicates that EU-supervised entities can continue to use third-country UK benchmarks until December 31, 2021 and that this transition period is also recognized in the UK. On September 20, 2021, the UK House of Commons Treasury Committee published the UK Government's response (Response) to its report on the Future Regulatory Framework (FRF) Review, which included consultations that concluded on February 9, 2022, (2) maintain the UK’s position as an open and global financial hub, (3) harness the opportunities of Financial Services, which was published on June 30, 2021. Among other key points, the Response expresses support for incorporating into UK law EUinnovative technologies in financial services, rules that were "on-shored" intoand (4) bolster the competitiveness of UK markets and promote the effective use of capital.
On February 21, 2022, the UK government published regulations that made the overseas funds regime (OFR) effective as of February 23, 2022. The OFR is targeted at Undertakings for the Collective Investment in Transferable Securities (UCITS) and is a result of Brexit, and indicates thatlong-term replacement to the UK Government will be setting forth more detailed proposals in the fall of 2021,
While the TCA addresses the financial services industry, it does so on a limited basis and does not provide for passporting rights nor address equivalence decisions. Passporting ended at the expiration of the Brexit transition period and firms now must rely on temporary permission regimes and comply with the local laws of each country. The UK Financial Conduct Authority (FCA) has implemented a temporary permissions regime that allows European Economic Area (EEA)-domiciled investmentwhich enabled Federated Hermes’ Irish UCITS funds that were marketed in the UK under a passport to continue temporarily to be marketed in the UK after December 31, 2020. Federated Hermes has received permission from the FCA to allow certain Irish-domiciled UCITS funds and allows EEA-based firms that passported into the UKLuxembourg-based direct lending funds to continue new and existing regulated business within the scope of their permissionsto be marketed in the UK for up to five years, while they seek full FCA authorization. On March 4, 2021,under the temporary permissions regime. HM Treasury is working with the FCA provided further guidance on the UK temporary permissions regime by advising firms of the openingto undertake equivalence assessments for different countries and closing dates during which firms must either apply for full permission or cancel their temporary permission and then cease any regulated financial conductdifferent fund types in the UK. The UK also has created a financial services contracts regimeorder to identify those that allows, for a limited time, EEA-based firms not takingcan take advantage of the temporary permissions regime in the UK to continue to service UK customers under contracts entered into prior to the endOFR. An assessment of the transition periodEuropean Economic Area’s (EEA) assessment commenced in order for them to conduct an orderly exit from the UK. In addition to the UK, EU governments, such as, among others, France, the Netherlands, Italy and Germany, also have adopted similar temporary permission regimes or other laws to permit UK products to be sold, and EU-UK financial transactions to continue, for a period of time in their countries. Pursuant to amendments implemented by the Withdraw of the United Kingdom from the European Union (Consequential Provisions) Bill 2020, a firm that is authorized in the UK and/or Gibraltar, which has previously passported into Ireland, will be deemed to be authorized for specific and limited purposes in Ireland for a 15 year period following the end of the transition period, subject to the fulfillment of certain conditions.
October 2022. The FCA ESMAis continuing to consider the requirements that will apply under the OFR and EU regulators previously signed memorandawhether those funds will need to put in place some form of understandings (MoUs) covering cooperation and exchange of information that came into effect at the end of the transition period (i.e., on December 31, 2020) and provide for some level of regulatory coordination until a new regime is agreed and in place. In a joint declaration dated December 24, 2020, the EU and UK committed to agreeing to a framework for regulatory cooperation and mutual equivalence which would be set forth in a subsequent MoU by March 2021. On March 26, 2021, Her Majesty's Treasury (HM Treasury) announced that technical discussions had concluded, and that the UK and the EU agreed to a MoU that creates a framework for voluntary regulatory cooperation in financial services and establishes a Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services matters. The MoU, however, does not reflect progress on equivalency determinations. In addition to a few other equivalency decisions, such as two time-limited equivalency decisions in connection with the UK relating to central counterparty clearing and settlement of Irish securities, on June 26, 2021, the European Commission issued two adequacy decisions recognizing the level of protection of the UK's data protection laws as "essentially equivalent" with EU laws. These adequacy decisions allow EU to UK data flow to continue after Brexit. In September 2021, as part of a broader announcement on the future of the UK's data protection regime, the UK Government announced plans to work on granting adequacy decisions regarding the data protection laws of other countries, including the U.S., Australia, Singapore and others. HM Treasury has granted over 25 equivalency decisions to the EU, in addition to those granted to 32 other jurisdictions. UK regulators also are continuing with an "onshoring" process of amending EU legislation and regulatory requirements so that they work in the UK. In October 2020, the FCA, the Bank of England (BoE) and other UK regulators granted firms until March 31, 2022 to comply with certain of these regulatory changes including, among others, certain reporting obligations and market abuse requirements.value assessment process.
Despite these developments, thereThere remains a risk of regulatory divergence between the UK and the EU. On July 1, 2021, Rishi Sunak,EU post-Brexit. For example, the UK Chancellor of the Exchequer, called an end to negotiations with the EU on regulatory equivalence (or common regulations) with EU financial services regulation. This decision means that the UK is electinghas elected to have its own financial rules. EU investment firms in EU Member States wereare required to comply with the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR) by June 26, 2021, the effective date of; however, the IFD and IFR in the EU. On March 5, 2021, the European Banking Authority (EBA) published draft standards on supervisory reporting and disclosures for investment firms as defined in the IFR, which are intended to ensure a proportionate implementation of the new prudential framework for investment firms
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taking into account their different activities, sizes and complexity. On May 31, 2021, the EBA, together with ESMA, published a provisional list of instruments and funds that EU national competent authorities (NCAs) may use as own-funds for small investment firms. The IFD and IFR, however, do not bind the UK, and a new UK prudential regime for Markets in Financial Instruments (MiFID) firms titled Investment Firms Prudential Regime (IFPR) wasis included in the Financial Services Bill 2019-2021, which was based on the IFD and IFR. On December 14, 2020, the FCA issued "Consultation Paper 20/24: A new UK prudential regime for MiFID investment firms," in which the FCA solicited comment on its proposed rules on the IFPR. The consultation period closed on February 5, 2021. On April 19, 2021, the FCA issued "Consultation Paper 21/7: A new UK prudential regime for MiFID investment firms" in which the FCA solicited comment on its second set of proposed rules on IFPR. The consultation period closed on May 28, 2021. On April 29, 2021, the Financial Services Bill 2019-2021 received Royal Assent and became UK law as theUK’s Financial Services Act 2021. Among other things, this Act introduces theThe IFPR, aswhich became effective on January 1, 2022, introduced a new UKsingle prudential regime, and represents a significant change for FCA-authorized investment firms amendsin the UK's on-shored Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) to provideUK that are authorized under MiFID, including alternative investment fund managers with MiFID top-up permissions. On March 4, 2022, the FCA with additional powersreleased a Consultation Paper setting out proposed amendments to clarify the scope of the regulations and amend the requirements within the PRIIPs Key Information Document (KID), increases the powerPrudential sourcebook for MiFID investment firms (MIFIDPRU) section of the FCA Handbook. The proposed amendments provide for a MIFIDPRU TP 7, which is the form that firms must use to ensure a smooth transition away from LIBOR, simplifies the process enabling non-UK investmentcount their existing instruments as own funds if they were not previously subject to be marketed in the UK and requiresCapital Requirements Regulation (CRR). The FCA-proposed amendments provided more flexibility for firms to come into compliance by June 29, 2022. In its Quarterly Consultation Paper No. 36, issued on October 6, 2022, the FCA proposed updates to consult on whether it should make general rules providing that authorized persons owe a duty of careits IFPR reporting forms and accompanying guidance for MiFID firms to consumers. On June 29, 2021,assist firms in completing the FCA issued its first of three policy statements based on its first consultation onforms, fully conform the IFPR that sets forth "near final" rules on consolidation, own-fund requirements, and concentration risk, which will apply to UK-authorized MiFID firms. On July 26, 2021, the FCA issued its second policy statement, which sets forth industry feedbackforms to the first policy statement,FCA’s systems, and additional "near-final" rules to supplement and amplify those rules that were set forth in the first policy statement. On August 6, 2021, the FCA published its third and final consultation on the IFPR with additional disclosure requirements and other technical changes.make certain corrections. The consultation period closedfor this Quarterly Consultation ended on September 17, 2021. UK regulators are targeting an implementation date for the IFPR of January 1,July 18, 2022.
As another example, EU regulators have previously issued or proposed directives, rules, and laws regarding sustainable finance, including the Sustainability-Related Disclosures Regulation or Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation. The Taxonomy Regulation establishes a framework to facilitate sustainable investment, including when Member States establish measures (e.g., labels or standards), setting requirements regarding financial products or corporate bonds presented as "environmentally“environmentally sustainable." On November 5, 2020, ESMA published a consultation setting out draft advice” Pursuant to the Sustainable Finance Package issued by the European Commission, on Article 8 of the Taxonomy Regulation specifying the content, methodology and presentation of the key performance indicators for sustainable activitiesfirms had a 12-month period that non-financial undertakings and asset managers are requiredended in October 2022 to disclose. The consultation period ended on December 4, 2020. On February 4, 2021, the European Supervisory Authorities (ESAs) published a final report containing draft regulatory technical standards on the content, methodologies and presentation of sustainability-related disclosures (the proposed "Level 2" requirements). On March 17, 2021, the ESAs published a consultation package setting out the proposed standards on content and presentation for disclosures under the SFDR. The consultation period ended on May 12, 2021. On April 21, 2021, the European Commission issued a Sustainable Finance Package that contains: (1) an EU Taxonomy Climate Delegated Act, which aims to support sustainable investment by clarifying which economic activities most contribute to meet the EU's environmental objectives; (2) a proposal for a Corporate Sustainability Reporting Directive (CSRD) and revisions to the Non-Financial Reporting Directive, which aim to makeimplement certain sustainability reporting by companies more consistent, so that financial firms, investors, and the broader public can use comparable and reliable sustainability information; and (3) amendments to delegated acts to better reflect sustainability preferences in insurancerequirements and investment advice and sustainability considerations in connection with product governance and fiduciary duties. The amendments are subject to scrutiny by the European Parliament and the Council of the EU for a period of three months, which can be extended once by three additional months, and provide for a 12-month implementation period that is expected to end in October 2022.
On May 7,Following its 2021 the European Commission published a draft delegated act setting out definitive standards for the disclosure of information on environmental sustainability that certain large companies must make, as required under the Taxonomy Regulation. On June 8, 2021, ESMA published a "Trends,“Trends, Risks and Vulnerabilities (TRV) Report" in which it assesses EU investment funds' exposure to climate-sensitive economic sectors and identifies certain key risks. On July 6, 2021,Report,” on February 15, 2022, the European Commission adoptedSecurities and Markets Authority (ESMA) published a delegated regulation that supplements certain disclosure requirements underrevised TRV which, for the Taxonomy Regulation which specify the content, methodology and presentationfirst time, designated environmental risk as a distinct category of information that certain large financial and non-financial entities must disclose concerning their environmentally-sustainable economic activities. By letter dated July 23, 2021, addressed to the ESAs,risk. On March 24, 2022, the European Commission stated that, due to the length and technical detail of the Level 2 technical standards, their late submissions to the European Commission, and forthcoming amendments to the draft Level 2 technical standards by the European Commission, the European Commission will bundle all of the regulatory technical standards inSupervisory Authorities (ESAs) issued a single delegated act and defer the date of application from January 1, 2022 to July 1, 2022. On July 26, 2021, the European Commission published updated Questions and Answers concerning a number of questions raised by the ESAs regardingrevised joint supervisory statement on the application of the SFDR, which includes a new timeline for compliance, expectations about the explicit quantification of the product disclosures under Article 5 and 6 of the Taxonomy Regulation, and the use of estimates. The ESAs recommended that national competent authorities (NCAs) and market participants utilize the period to January 1, 2023 to prepare for the
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including the application of the European Commission’s delegated regulation, which will contain SFDR to AIFMs and AIFs.Level 2 regulatory technical standards (RTS). On August 2, 2021,April 6, 2022, the European Commission adopted the final RTS supplementing the SFDR, specifying the mandatory website, pre-contractual, and periodic reporting templates for financial market participants and in-scope financial products. On May 31, 2022, ESMA published additionala Supervisory Briefing covering disclosures under SFDR and integration of sustainability risks for alternative investment fund managers (AIFMs) and UCITS. On May 25, 2022, the European Commission released a new Questions and Answers document providing its responses to questions raised by the ESAs in relation to the interpretation of the SFDR and the EU Taxonomy Regulation. On June 2, 2022, the ESAs published further clarification on the draft RTS for the SFDR. The ESAs statements include a clarification that the reference to “sustainability indicators” relates to a different set of disclosures from the reference to “principal adverse impact” indicators, and clarifications regarding the principal adverse impact indicator calculation methodology and the “look through” approach regarding when indirect investments ought to be included in the calculation. The final RTS were published in the Official Journal of the EU on July 25, 2022 and will apply beginning on January 1, 2023. On July 28, 2022, the ESAs published a report on the extent of voluntary disclosure of principal adverse impact under the SFDR. The report’s findings are that: (1) voluntary compliance varies significantly across jurisdictions and financial market participants under the scope of SFDR, and it is difficult to identify definite trends; (2) to the extent that voluntary disclosures were made, they lack sufficient detail; and (3) there is an overall low level of disclosure of the degree of alignment with the objective of the international treaty on climate referred to as the “Paris Agreement.”
Various delegated Directives and Regulations to the Alternative Investment Fund Managers Directive (“AIFMD”), UCITS and MIFID regulations arising from SFDR also began to apply beginning in August 2022. For AIFMs, beginning on August 1, 2022, a Delegated Regulation on sustainability risks and factors requires AIFMs to: (1) take into account sustainability risks (and principal adverse impacts, if they consider them) in the investment due diligence process and sustainability risks in their risk management policy; (2) update conflicts of interest policies for conflicts that may arise from the integration of sustainability risks; and (3) take into account sustainability risks in overall organizational requirements, including responsibilities of their governing body. For MiFID firms, beginning on August 2, 2022, a directivenew MiFID Delegated Regulation on integration of sustainability factors and preferences into firms’ organizational requirements and operating conditions requires MiFID firms to: (1) take into account a client’s sustainability preferences as part of its sustainable finance initiatives regardinga suitability check where a MiFID firm provides investment advice or portfolio management to a client; and (2) take into account sustainability risks in overall organizational requirements, in risk management policies and in conflicts of interest policies (where a conflict may affect the sustainability factors to be taken into account by AIFs, UCITS and investment firms, among other regulated entities. On August 3, 2021, the Platform on Sustainable Finance: Technical Working Group published a draft report on preliminary recommendations for technical screening criteria for the Taxonomy Regulation. Comments on the report were due by September 24, 2021, with a final report expected in November 2021. On October 7, 2021, the European Parliament issued a press release announcing the rejectionpreferences of a supplement to the Taxonomy Regulation that would have specified the technical screening criteria under which certain economic activities qualify as contributing substantially to climate change mitigation and climate change adaptation and for determining whether those activities cause significant harm to any other relevant environmental objectives.client).
Rather than adopt the SFDR, the UK announced on November 9, 2020 that it will introduce ESG disclosure rules aligningdecided to align with the TCFD, making the UK the first country to adopt that approach.Task Force on Climate-Related Financial Disclosure (TCFD). On December 22, 2020, the Financial Stability Board (FSB) issued a statement encouraging the International Financial Reporting Standards Foundation and financial authorities to use the TCFD's recommendations as the basis for standards for climate-related financial disclosures. In a consultation launched on March 24, 2021, the UK government solicited views on proposals to require that UK companies with more than 500 employees that are traded on a UK-regulated market disclose TCFD-aligned climate-related information. The consultation stated that new regulations would come into force on April 6, 2022. It also has been reported that an ESG Template for funds to explain their ESG features is expected to be proposed in 2021, to supplement the MiFID Template, which is being revised to include ESG fields. On June 22,November 3, 2021, the FCA published "Consultationa Discussion Paper, 21/17: Enhancing climate-related disclosures by asset managers, life insurers“Sustainability Disclosure Requirements (SDR) and FCA-regulation pension providers"investment labels” in which the FCA proposes to introduce TCFD-alignedsought views on new sustainability disclosure requirements for asset managers life insurers and FCA-regulated pension providers, withasset owners, as well as a focus on the information needs of clientsnew classification and consumers. The FCA also proposed to extend the TCFD-aligned climate disclosure requirements to all companies with standard listed equity shares, exceptlabelling system for standard listedsustainable investment entities and shell companies.products. The consultation period ended on September 10, 2021.January 7, 2022. On June 7, 2021,October 13, 2022, the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures issued its “2022 Status Report” in which it provided an overview of current disclosure practices in terms of their alignment with the TCFD’s prior recommendations and highlights progress firms are making toward disclosures aligned with the TCFD beganover the past five years.
On March 31, 2022, the International Sustainability Standards Board (ISSB) published a Consultation Paper setting forth its first two draft sustainability disclosure standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (“General Disclosure Proposals”) and IFRS S2 Climate-related Disclosures (“Climate Disclosure Proposals”), and a six-point plan for how it will build on Sustainability Accounting Standards Board (SASB) standards and embed SASB’s industry-based standards development approach into its own. The two draft standards propose disclosure of (among other things): (1) all material information about all significant sustainability-related risks and opportunities to seek public commentwhich a company is exposed; (2) information regarding a company’s governance and risk management processes, controls and procedures used to monitor and manage climate-related risks and opportunities; (3) sustainability-related financial information as part of a company’s general-purpose financial reporting; (4) a company’s strategy for managing and making decisions in light of climate-related risks and opportunities; (5) performance and outcome measures that support the qualitative disclosures across governance, risk management, and strategy disclosure requirements; and (6) targets that a company uses to measure its performance goals related to significant climate-related risks and opportunities. These draft standards build upon TCFD recommendations and incorporate industry-based disclosure requirements derived from SASB standards. IOSCO has issued a statement welcoming the publication of these two draft standards for proposed climate and general sustainability disclosure requirements. The consultation period ended on two documents, Proposed GuidanceJuly 29, 2022. The ISSB received nearly 700 comments on Climate-related Metrics, Targets,its General Disclosure Proposals and Transition Plansmore than 600 comments on its Climate Disclosure Proposals, and is now in the process of assessing those comments.
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On September 7, 2022, the Central Bank of Ireland (CBI) published a Financial Stability Note regarding “Climate Risks in the Financial System: An Overview of Channels, Impact, and Heterogeneity,” in which physical and transition climate risks, their translation to the real economy, and their impact on the financial sector are discussed. If the Brexit Freedoms Bill and the associated Measuring Portfolio Alignment: Technical Supplement,FSM Bill are enacted as introduced, the broad powers given to relevant national authorities under them to amend, repeal or replace EU laws in order to update its final recommendations on climate-related financial disclosuresthe UK, as disclosure practiceswell as the other changes contemplated under that legislation, will likely increase the risk of regulatory divergence and the usecomplexity of disclosures by financialdoing business in the UK and non-financial organizations have continued to progress since 2017. InEU from a July 10, 2021 statement, the G20 Finance Ministers indicated that, "[w]e will work to promote implementation of disclosure requirements or guidance, building on the [TCFD] framework, in line with domestic regulatory frameworks, to pave the way for future global coordination efforts, taking into account jurisdictions' circumstances, aimed at developing a baseline global reporting standard."perspective.
The post-Brexit regulatory environment (particularly the need to obtain full authorizations on a country-by-country basis), also creates a level of uncertainty regarding the ability and requirements to distribute products and provide investment management services between the UK and EU, increasing regulatory burdens and compliance and other costs for UK funds being distributed in the EU and EU funds (such as Irish-domiciled funds) being distributed in the UK. The ability to engage investment managers for EU funds and UK funds also could be impacted, resulting in structural and other changes for UK- and EU-domiciled funds.
In March 2020, HM Treasury released a consultation paper proposing an Overseas Fund Regime (OFR) which The impact of Brexit on Federated Hermes’ UK domiciled funds is targeted at Undertakings fordifficult to quantify and remains uncertain given the Collective Investment in Transferable Securities (UCITS)overlap with the Pandemic and would be a long-term replacement to the temporary permissions regime which enabled Federated Hermes' Irish UCITS funds to continue to be marketedrecent surge in the number of ESG-related money market funds in both the EU and UK. As of September 30, 2022, EU-resident shareholders in Federated Hermes’ UK after December 31, 2020. HM Treasury proposed this equivalence regime which will determine countries which are equivalentdomiciled funds and the UK-resident shareholders in Federated Hermes’ Irish-domiciled funds were permitted to remain in the UK and will work withfunds. Subscriptions also can continue as long as there is not a proactive sales effort. Regarding the FCA to determine countries of equivalence. HM Treasury used the Financial Services Act 2021 to formally introduce the OFR as an equivalence regime for overseas retail funds to be able to market to UK investors, including retail investors, on appropriate terms. HM Treasury has also proposed a separate regimeregulatory environment for money market funds post-Brexit, UK-domiciled money market funds remain on par with current EU regulatory requirements; however, it is possible that the UK may deviate from, or simply not adopt, any new or amended EU money market fund laws, rules or regulations that may be adopted in the future.
On May 23, 2022, the FCA and BoE, with endorsement of HM Treasury, issued a joint Discussion Paper on reforming money market funds and published finalized guidance on the UK Money Market Fund Regulation (MMFR). The Discussion Paper is intended to contribute to an assessment of the vulnerabilities of money market funds and how they contribute to risks to UK financial stability and investor protection. The Discussion Paper aims to solicit, among other things, feedback that will strengthen the resilience of money market funds and the financial system in supporting the UK economy. Among other things, the finalized guidance reminds market participants that as per UK MMFR articles 24 and 25, if a money market fund’s liquidity ceases to meet the portfolio requirements, then the money market fund manager needs to prioritize the correction of that situation, taking due account of the fund investors’ interests, and balance the speed at which it can return the money market fund to a position where the relevant portfolio requirements are satisfied against investor outcomes. The consultation period ended on July 23, 2022. On July 23, 2022, Federated Hermes submitted a response to the Discussion Paper in which Federated Hermes advocated for: (1) delinking liquid asset thresholds and the potential imposition of a fee or gate (“delinking”); (2) increasing the required liquidity levels of variable NAV (VNAV) money market funds from 7.5% daily and 15% weekly liquidity, to 10% daily and 30% weekly liquidity requirements (consistent with other UK, EU and U.S. money market funds); (3) removing the arbitrary 17.5% restriction on including high quality government securities as weekly liquid assets for money market funds as, through both the financial crisis in 2008 and the March 2020 market turmoil, high quality government securities proved to be ablethe most liquid; (4) permitting UK money market funds to include in their weekly liquid assets, investments in five-day repurchase agreements; (5) enhancing “Know Your Customer” requirements by amending UK MMFR (or UK MiFID) to impose an obligation on intermediaries (distributors) to provide information regarding the profile of individual end investors to enable money market fund managers to all investors, noting thatunderstand the process will be different ifmoney market funds’ liquidity risk; and (6) addressing the fund wants tovulnerability in the short-term markets, which impacted the functioning of the entire money markets, by conducting a broad and thorough review which addresses the root causes of the pressures experienced in the short-term markets during the March 2020 market to retail or professional investors. These regimes will function similarly toturmoil.
The activities of the existing EU approach to equivalence. Federated Hermes has received permission fromIOSCO and the FCA to allow certain Irish-domiciled UCITS funds and Luxembourg-based direct lending funds toFSB also continue to be marketed inmonitored by the UK post-Brexit underinvestment management industry, including Federated Hermes. Building on consultations and other reports published from 2015 through 2021 regarding methodologies for identifying nonbank, noninsurance company global systemically important financial institutions, recommendations to address structural vulnerabilities from asset management activities, and liquidity risk management, IOSCO and the temporary permissions regime.
Despite negative deposit interest rates, euro-denominated EuropeanFSB have continued, and will continue, to assess, recommend and implement regulatory reforms affecting open-end funds, including money market funds, have successfully operatedliquidity risk management, derivatives, leverage, and provided investors with high quality diversified investmentsother aspects of the investment management industry. On April 13, 2022, the FSB and IOSCO publicly invited submissions of papers for a conference on the financial stability risks arising from liquidity mismatches in open-ended funds and on policies to address them. According to the FSB and IOSCO, the conference, which continuewill form part of the FSB’s 2022 work program to enhance the resilience of nonbank financial intermediation, will provide same day liquidity, first throughan opportunity for participants to discuss the usefindings of an approved share cancellation methodology and more recently through the use of accumulating share classes. Federated Hermes has worked with the FCAIOSCO’s and the Central BankFSB’s work on the experience of Ireland (CBI) on appropriate permissionsopen-end funds in the March 2020 market turmoil as well as provide input to operateongoing work by the FSB and IOSCO to assess their respective recommendations in each jurisdiction, in a manner similar to euro-denominated money market funds, should official rates in U.S. dollars or British pound sterling become negative.this area.
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The activitiesConsistent with remarks by the Chair of the International Organization of Securities Commissions (IOSCO)FSB to the G20 Finance Ministers and Central Bank Governors on February 14, 2022, the FSB also continue to be monitored byincluded the investment management industry, including Federated Hermes. Building on consultationsfollowing areas and other reports published from 2015 through 2020 regarding methodologies for identifying non-bank, non-insurance company global systemically important financial institutions, recommendations to address structural vulnerabilities from asset management activities, and liquidity risk management, IOSCO and FSB have continued, and will continue, to assess, recommend and implement regulatory reforms affecting money market funds, liquidity risk management, derivatives, leverage, and other aspectsinitiatives (among others) in its 2022 work program: (1) enhancing the resilience of the investment management industry.nonbank intermediation sector, while preserving its benefits; (2) harnessing the benefits of digital innovation while containing its risks; (3) addressing risks from climate change; and (4) cyber and operational resiliency. In its 2021-2022 work program, published February 26, 2021, IOSCO indicated that among other priorities, its priorities include financial stability and systemic risks of non-banknonbank financial intermediation activities, as well as risks exacerbated by the Pandemic, such as misconduct risks, fraud, and operational resilience. IOSCO also indicated that, among other efforts, it will continue efforts (headed by the Sustainable Finance Task Force) to improve the completeness, consistency, and comparability of sustainability reporting. On June 30,IOSCO also previously published on November 2, 2021 IOSCO published a consultation reportFinal Report setting forth its “Recommendations on "Recommendations for Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management" inManagement,” which IOSCO focuses on asset managers and investor protection issues with an aim at improvingaims to improve sustainability-related practices, policies, procedures, and disclosures. In this consultation report, IOSCO also encourages asset managers to take sustainability-related risks and opportunities into account in their investment decision-making and risk management processes and address greenwashing risk through transparency. IOSCO's recommendationsdisclosures in the report also cover product disclosures, supervisionasset management industry.
Following various consultations, reports, and enforcement, terminology, and financial and investor education.
On November 20, 2020,speeches by representatives of IOSCO published its final report providing a thematic review of the consistency in implementation of money market reforms across the nine largest money market fund jurisdictions. In this report, IOSCO concluded that these jurisdictions generally implemented money market fund reforms in line with 2012 IOSCO policy recommendations for money market funds, but that market conditions in March 2020 highlighted continuing vulnerabilities in certain types of money market funds and the need for further reforms. Similar to the PWG ReportFSB in the U.S., IOSCO issued a paper on "Money Market Funds during the March-April Episode" (IOSCO Paper) in November 2020. The IOSCO Paper calls for further consideration of the functioning of money market funds, investor behavior2020 and elements of the existing regulatory framework for money market funds which could have played a role in accelerating the outflow of assets from non-government money market funds in March 2020.
In a speech, the Vice Chair for Supervision of the Fed, who also serves as Chair of the FSB, identified nonbank financial intermediation, money market funds and cross-border payments as the FSB's priorities for 2021. In its 2020 Annual Report regarding the "Implementation and Effects of the G20 Financial Regulatory Reforms", among other topics, the FSB reviewed the status of money market fund reforms across G20 jurisdictions, ongoing vulnerabilities from liquidity and leverage in asset management, and measures taken by financial regulators relating to funds (including money market funds) in response to the Pandemic. The FSB also issued a report on its "Holistic Review of the March Market Turmoil" (FSB Review) on November 17, 2020, in which it specifically reviewed the impact of the markets in March 2020 on open-end funds, including money market funds. In its FSB Review, among other conclusions, the FSB concluded that redemptions from money market funds were "exacerbated by certain fund structures and regulations that could have created perceptions of first-mover advantage." Among other recommendations, the FSB Review calls for an examination of risk factors, including "liquidity risks, core functions and aspects of the structure or regulations in non-government [money market funds], which experienced large outflows and contributed to the stress in short-term funding markets." In its December 16, 2020 "Global Monitoring Report on Non-Bank Financial Intermediation", the FSB further examined the impact of the Pandemic on the markets and the role of non-bank financial intermediaries, including the importance of money market funds in this sector, particularly in the U.S. and UK. In this report, the FSB noted that U.S. regulations allow fund boards to impose redemption gates and liquidity fees if a money market fund's weekly liquid assets fall below 30% of the fund's total assets, and that a concern that redemptions could be limited or suspended might have led to additional outflows. On June 30, 2021, the FSB published a consultation report, "Policy Proposals to Enhance Money Market Fund Resilience," in which it identified characteristics of money market funds that, in their view, make them susceptible to vulnerabilities, such as sudden and disruptive redemptions and the forced sale of assets to meet significant redemptions. The FSB also evaluated policy proposals purporting to enhance funds' resilience, including: (1) swing pricing; (2) minimum balance at risk; (3) capital buffers; (4) removing ties between regulatory thresholds and imposition of fees and gates; (5) removing stable NAVs; (6) limiting eligible assets; and (7) imposing additional liquidity requirements and escalation procedures. The FSB held a virtual workshop on the policy proposals on July 12, 2021.
As a result of these IOSCO and FSB reports, similar to the SEC in the U.S., UKESMA, the BoE, the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), and EUthe International Monetary Fund (IMF), among other regulators, arehave been re-examining existing money market fund regulation, soliciting public comment on proposed money market fund reforms, and issuing reports and recommendations.
On February 16, 2022, ESMA published an opinion, “ESMA Opinion on the review of Money Market Fund Regulation,” which makes recommendations to improve the resiliency of money market funds. Among other recommendations, it recommends: (1) addressing the threshold effects for constant NAV money market funds by removing the possibility to use amortized cost for low volatility NAV money market funds; (2) decoupling regulatory thresholds from suspensions, gates and redemption fees for low volatility NAV and constant NAV money market funds; (3) addressing liquidity concerns by ensuring mandatory availability of at least one liquidity management tool for all money market funds; (4) amending daily liquid asset and weekly liquid asset ratios; (5) adjusting the pool of eligible assets to require money market funds to hold public debt assets, which could be used to satisfy the daily and weekly asset liquidity ratios; (6) reinforcing the possibility of temporarily using liquidity buffers in 2021.times of stress; and (7) enhancing reporting and disclosure requirements and the stress testing framework for money market funds. On March 26, 2021,February 14, 2022, ESMA published a consultation paperseparate final report, “Guidelines on stress test scenarios under the MMF Regulation,” in which it sets forth updated guidelines and specifications on the legislative reviewtypes of the EU money market regulation. Similarfund stress tests and their calibration in order to the PWG Report, IOSCO Paper and FSB Review, this consultation reviews the role played by money market funds in the March 2020 market turmoil, perceived structural vulnerabilitiesallow managers of money market funds to have the information needed to complete the reporting required under the EU Money Market Fund Regulation. ESMA has sent its opinion to the European Commission and possibleis expected to work closely together throughout the Review of the EU’s Money Market Fund Regulation.
While money market fund regulatoryreform continues to be discussed in the UK and the EU, new proposals for reform have not been promulgated. Management believes that a final SEC rule on money market fund reforms could influence the UK and EU regulators, but that couldnew UK and EU reform proposals will likely not be adopted. Mostissued until 2023 or 2024.
As discussed above, Federated Hermes believes that money market funds are resilient investment products that have proven their resiliency during the Pandemic. Federated Hermes intends to continue to engage with UK and EU (as well as U.S.) regulators in 2022, 2023 and beyond, both individually and through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the erosion of benefits that money market funds provide.
Since the beginning of the third quarter 2022, UK and EU regulators issued, proposed, reformsor adopted other new consultations, directives, rules, laws, and guidance that impact UK and EU investment management industry participants, including Federated Hermes. For example:
On October 13, 2022, the FSB published a “Progress Report on Climate-Related Disclosures” and a “Final Report on supervisory and regulator approaches to client-related risks.” In the Progress Report, the FSB covers, among other topics: (1) the progress made by the ISSB in developing its global baseline climate reporting standard and the work of other international standard-setters on assurance over sustainability-related reporting; (2) the progress made in the area of assurance, including the work of the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA), and the work by IOSCO to support the work on both disclosure and assurance standards; (3) the progress made by jurisdictions on climate-related disclosure practices, including implementing FSB recommendations, as well as steps being taken by jurisdictions to prepare for adopting, applying or otherwise making use of the ISSB climate-related disclosure reporting standard; and (4) the progress made by firms on disclosure and reporting. In the Final Report, the FSB provides recommendations regarding, among other topics: (1) the collection of climate-related data from financial institutions; (2) system-wide supervisory and regulatory approaches and the extent to which supervisory and regulatory tools and policies address climate-related risk; and (3) early considerations of other potential macroprudential policies and tools relating to client risk and disclosure.
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•    On October 11, 2022, the ESMA published a Call for Evidence regarding the “Implementation of [Shareholder Rights Directive 2 (SRD2)] provisions on proxy advisors and the investment chain,” in which it seeks to gather information on how market participants perceive the appropriateness of the scope and the effectiveness of the SRD2 provisions on the identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights, as well as on transparency of proxy advisors. The comment period ends on November 28, 2022. Federated Hermes is currently reviewing this Call for Evidence.
•    On October 11, 2022, the FSB published a Consultative Document regarding “Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets,” a Consultation Report regarding “Review of the FSB High-level recommendations of the Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements,” and a related request for comment regarding “International Regulation of Crypto-asset activities: A proposed framework – questions for consultation,” in which the FSB: (1) analyzes the interconnectedness of crypto-asset markets; (2) provides an overview of applicable international standards and regulatory and supervisory approaches; (3) identifies issues, challenges and gaps, and provides high-level recommendations, relating to supervisory and oversight approaches to crypto-asset activities; and (4) proposes revisions to the FSB’s high-level recommendations regarding stablecoin arrangements. The FSB also invites comments on: (1) proposed recommendations to promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto-asset activities and markets and to strengthen international cooperation, coordination and information sharing; and (2) a review of the previous 10 FSB high-level recommendations from 2020 for the regulation, supervision and oversight of “global stablecoin” arrangements. The comment period ends on December 15, 2022. Federated Hermes is currently reviewing this consultation request. This consultation request followed a July 11, 2022 FSB “Statement on International Regulation and Supervision of Crypto-asset Activities.”
•    On October 3, 2022, the FCA issued a Consultation Paper regarding “Creation of baseline financial resilience regulatory return,” in which the FCA seeks to rationalize and standardize baseline financial resilience data collection with a view to increasing the quality and consistency of financial resilience data. The FCA seeks to reduce the burden of the existing survey by changing the collection of financial resilience data from an ad-hoc survey to a specific (and shortened) quarterly return within the FCA’s data collection system. The consultation period ends on December 2, 2022. Federated Hermes is currently reviewing the Consultation Paper.
•    On October 3, 2022, the CBI published a Discussion Paper regarding its “Consumer Protection Code Review,” in which the CBI sets forth proposals regarding securing, and acting in, the best interests of consumers. Against the backdrop of technological innovation, changing consumer preferences and the important role that the financial system will play in the transition to carbon neutral, the CBI seeks feedback on a number of key topics, including, but not limited to: (1) availability and choice of financial products; (2) firms acting in the best interests of consumers; (3) innovation and disruption; (4) digitalization; (5) vulnerability; and (6) financial literacy. The comment period ends on March 31, 2023. Federated Hermes is currently reviewing the Discussion Paper.
•     On September 22, 2022, the FCA issued a Consultation Paper regarding “Guidance on the trading venue perimeter,” in which the FCA proposed new guidance on the regulatory perimeter for trading venues. The FCA issued the new guidance to provide firms with greater certainty about the permissions required to carry on their business to maintain a level playing field and to assist with the protection of the integrity of the UK’s financial system. The consultation period ends on November 25, 2022. Federated Hermes is currently reviewing the Consultation Paper.
•    On September 22, 2022, the ESMA issued a Consultation Paper regarding “Market Outages,” in which it seeks comments on its proposed guidance regarding how trading venues should communicate with market participants in the case of an outage. The comment period ends on December 1, 2022. Federated Hermes is currently reviewing the Consultation Paper.
•    On September 15, 2022, the IOSCO issued a paper “IOSCO encourages standard-setters’ work on assurance of sustainability-related corporate reporting,” in which IOSCO reviewed the current landscape of sustainability-related assurance reporting and certain considerations as that landscape develops, promoted a focus on transparency in reporting, and encouraged the IAASB and the IESBA to work towards high-quality, global assurance and ethics standards that are similarprofession-agnostic and can support limited, and ultimately reasonable, assurance of sustainability-related information.
•    On August 3, 2022, the FCA confirmed new rules to thoseimprove oversight of, and make authorized firms more responsible for, appointed representatives, who are permitted to offer certain financial services or products under the responsibility of FCA-authorized firms. The new rules are intended to prevent mis-selling and other misconduct by authorized representatives by requiring: (1) enhanced oversight; (2) assessment and monitoring of risks that authorized representatives pose to consumers and markets; (3) review of information regarding authorized representative activities, business and senior management
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annually; (4) notification to the FCA of future authorized representative appointments thirty days before such appointment becomes effective; and (5) provision of complaints and certain revenue information for each authorized representative annually. The FCA also indicated that it will undertake targeted supervision of registered firms relating to use of authorized representatives. Federated Hermes is currently reviewing these new rules.
•    On August 1, 2022, the FCA issued a Consultation Paper regarding “Broadening retail access to the long-term asset fund,” in which the FCA sets forth proposals for extending the retail distribution of long-term asset funds with certain restrictions and including further investor protections. Among other proposals, the FCA proposes to remove the 35% restrictions on illiquid assets in unit-linked products, where the investor is a qualifying default pension scheme. The consultation period ended on October 10, 2022. Federated Hermes is currently reviewing the Consultation Paper.
•    On August 1, 2022, the FCA finalized stronger rules addressing misleading advertisements that encourage consumers to invest in high-risk investments. Under these rules, FCA-authorized firms must have appropriate expertise and, for certain high-risk investments, conduct better suitability reviews. Such FCA-authorized firms also are required to use clearer and more prominent risk warnings, and certain incentives to invest, such as “refer a friend” have been banned. Federated Hermes is currently reviewing these new rules. These rules do not apply to crypto-asset promotions pending resolution as to how crypto-assets will be governed by the FCA, at which time the FCA indicated that additional crypto-asset-related rules will be published.
•    On July 29, 2022, the ESMA issued a Call for Evidence regarding “Pre-Hedging,” in which it reviews arguments in favor and against such practice, and requests comments on the permissibility of the practice in the context of the Market Abuse Regulation and MiFID and Markets in Financial Instruments Regulation (MiFIR). According to the ESMA, “pre-hedging” can be characterized as any trading activity undertaken by an investment firm, where: (1) the investment firm is dealing in its own account, and the transaction activity is (2) undertaken to mitigate an inventory risk which is foreseen due to a possible incoming transaction, (3) undertaken before that foreseeable transaction has been executed, and (4) undertaken, at least partially, in the interest and benefit of the client or to facilitate the trade. The comment period ended on September 30, 2022. Federated Hermes is currently reviewing the Call for Evidence.
•    On July 29, 2022, the EBA issued a final report containing guidelines specifying the criteria under which NCAs may exempt certain investment firms from the IFR liquidity requirements. These guidelines specify the set of investment services and activities that are provided by an investment firm to be eligible for the exemption from liquidity requirements. The guidelines also specify that NCAs should have due consideration for ancillary services provided by an investment firm as well as for on- and off-balance-sheet positions, because such services or positions may give rise to liquidity risk.
•    On July 27, 2022, the FCA published a policy statement accompanied by finalized guidance and confirmed its plans to establish a new “Consumer Duty” intended to prove how FCA-registered firms service consumers by setting higher and clearer standards of consumer protection and require firms to put their customers’ needs first. The new “Consumer Duty” will include requirements for: (1) ending certain charges (referred to as “rip-off charges”); (2) improving the ability for consumers to switch or cancel products; (3) providing helpful and assessable customer support; (4) providing timely and clear information for financial decision-making; (5) providing suitable products; and (6) focusing on customer needs and circumstances. Firms generally have 12 months (or until July 31, 2023) to implement the new rules for all new and existing products, and an additional 12 months to implement the new rules for closed products that are no longer offered for sale. On October 5, 2022, the FCA issued additional guidance on the new “Consumer Duty.” Federated Hermes is currently reviewing the requirement of this new “Consumer Duty.”
On July 21, 2022, the BoE, PRA and FCA published a Discussion Paper setting forth potential measures to oversee critical third parties (CTPs) to strengthen the resilience of services provided by such CTPs to the UK financial sector. The Discussion Paper sets out potential measures for how supervisory authorities could use their proposed powers to establish: (1) a framework for identifying potential CTPs; (2) minimum resilience standards; and (3) a framework for testing the resilience of material services provided by CTPs. The comment period ends on December 23, 2022. Federated Hermes is currently reviewing the Discussion Paper.
•    On July 20, 2022, ESMA published an updated Questions and Answers (Q&A) on cross-border marketing and cross-border management of alternative investment funds and UCITS. The Q&A confirmed that the responsibility for ensuring that marketing communications comply with the requirements of the regulation on the cross-border distribution of collective investment funds lies with the AIFM or the UCITS management company irrespective of any contractual relationship with a third-party distributor that distributes the fund. Federated Hermes continues to review this Q&A.
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forth in the PWG Report, including decoupling the link between regulatory liquid asset thresholds and redemption fees and gates. The consultation period closed on June 30, 2021.•    On July 18, 2022, ESMA is expected to consider responses from the consultation inpublished an opinionupdated Q&A on the MiFIR. The Q&A clarifies that trades placed with the assistance of automated trade order management qualify as logarithmic trading and firms that use such trading must comply with Article 17 of MiFID II and RTS 6. Federated Hermes continues to review this Q&A.
•    On July 12, 2022, the FCA issued a Consultation Paper on “Margin requirements for non-centrally cleared derivatives: Amendments to BTOS 2016/2251” in which it sets out the PRA’s and FCA’s proposals to update the list of instruments as eligible collateral for bilateral margin, to introduce fallback transitional provisions for certain firms who come into the scope requirements for the first time, and to update the application of the EU money market regulations in the second half of 2021.
The BoE also published a May 12, 2021 speech by BoE Governor Andrew Bailey in which he advocated for reformsrequirements to money market regulations in response to the March 2020 "dash for cash". The proposals outlined by Mr. Bailey in that speech align to the proposals of other global regulators, including U.S. regulators. The five proposals discussed were: (1) redemption terms should be aligned with the underlying liquidity of assets; (2) running minimal maturity mismatch risk; (3) money market funds should not hold less liquid assets on a scale that would make them more suitable to be traditional investment funds; (4) money market funds should not be designed with regulatory thresholds or cliff-edges which create adverse incentives and amplify first-mover advantage behavior; and (5) reforms should improve the ability of funds to support short-term funding markets, including by making them more resilient. On July 13, 2021, the BoE published a report, "Assessing the resilience of market-based finance," which sets forth the conclusions from a joint BoE and FCA review of the vulnerabilities associated with liquidity mismatch in open-end funds, including money market funds. Regarding money market funds, the report states: "To address vulnerabilities in the global money market fund sector, a robust and coherent package of international reforms needs to be identified. As noted in a speech by the Governor of the [BoE], it is important that any package removes the adverse incentives introduced by liquidity thresholds related to the use of suspensions, gates and redemption fees." The report identifies the following three priorities for remediating vulnerabilities in market-based finance: (1) limiting the demand for liquidity rising unduly in stress periods; (2) increasing the resilience of the supply of liquidity in stress periods; and (3) agreeing upon appropriate options for central banks to backstop market function. The report also discusses possible frameworks for consistently and realistically classifying the liquidity of fund assets and enhancing the calculation and use of swing pricing.
On July 1, 2021, the European Systemic Risk Board (ESRB) published an "Issues note on systemic vulnerabilities of and preliminary policy considerations to reform money market funds (MMFs)," in which the ESRB provides an overview of the money market fund sector in the EU, sets out its analysis of systemic vulnerabilities in money market funds, and identifies a broad set of preliminary policy options for money market fund reform. The Issues note, which primarily focuses on non-public debt money market funds (i.e., non-Government money market funds), identifies the following systemic vulnerabilities: (1) the large footprint for these money market funds in the commercial paper and certificate of deposit markets; (2) high portfolio overlap; (3) lack of reliable asset liquidity in the commercial paper and certificate of deposit markets; and (4) interconnectedness and the pressure a low interest rate environment places on liquidity. The Issues note also identifies the following initial policy options for money market fund reform, among others: (1) decoupling regulatory thresholds; (2) capital requirements and buffers; (3) implementing redemption holdbacks; (4) imposing notice periods for redemptions; (5) removing stable NAV money market funds; and (6) improved availability and use of swing pricing.
On July 26, 2021, the EBA published a consultation paper "Draft Regulatory Technical Standards [(RTS)] on criteria for the identification of shadow banking entities under Article 394(4) of Regulation (EU) No 575/2013" that purports to set out criteria for the identification of shadow banking entities for the purposes of reporting large exposures. In the consultation, the EBA discusses money market UCITS funds as conducting shadow banking, which the EBA defines as entities that offer banking services and perform banking activities as defined in the draft RTS but are not regulated and are not being supervised in accordance with any of the acts that form the regulated framework for banking. Among other things, the consultation solicits comments on whether money market funds should be considered shadow banking entities.counterparties. The consultation period ended on October 26, 2021.12, 2022. Federated Hermes continues to review the Consultation Paper.
•    On September 17, 2021, the Managing DirectorJuly 11, 2022, ESMA issued a Consultation Paper on “The Clearing and Derivative Trading Obligations in View of the International Monetary Fund released a report stating that2022 Status of the March 2020 global financial crisis exposed fundamental vulnerabilities that could affect global financial stability, and advocating that global financial regulators work together to boost the resilience of investment funds. The Managing Director identified money market funds as particularly vulnerable to redemptions triggered by economic shocks and advocated for certain policy measures to address the identified vulnerabilities.
On October 11, 2021, the FSB issued its "Policy Proposals to Enhance Money Market Fund Resilience: Final Report" ("FSB Final Report") in which the FSB set forth its final policy proposals for money market fund reform.Benchmark Transition.” In the FSB Final Report, the FSB finds that money market funds are subject to two broad typesConsultation Paper, ESMA builds an initial set of vulnerabilities that can be mutually reinforcing: (1) susceptibility to sudden and disruptive redemptions, and (2) challenges in selling assets, particularly under stressed conditions. The proposals include mechanisms to: (1) impose on redeeming fund investors the cost of their redemptions; (2) absorb credit losses; (3) address regulatory thresholds that may give rise to cliff effects; and (4) reduce liquidity transformation. In the FSB Final Report, the FSB notes that it will be working with IOSCO to review progress made by member jurisdictions in adopting reforms to enhance MMF resilience, which are to be completed by the end of 2023, and then to assess the effectiveness of those measures in addressing risks to financial stability by 2026.
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Federated Hermes does not believe money market funds are shadow banking entities. As discussed above, Federated Hermes believes that money market funds are resilient investment products that have proven their resiliency during the Pandemic. In an August 16, 2021 comment letter to the FSB, among other comments, Federated Hermes expressed its belief that the combination of delinking the potential imposition of redemption gates and liquidity fees with a money market fund's weekly liquid asset requirements and enhancing money market funds' ability to "know their customer", when combined with consideration of and improvementschanges created in the short-term funding markets generally, can address the FSB's concerns without adversely impacting the viability of money market funds and their benefits to investors, issuers and capital formation. In June 2021, among other comments, Federated Hermes provided similar comments to ESMA in response to its consultation. Federated Hermes intends to continue to engage with UK and EU (as well as U.S.) regulators in 2021, both individually and through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the erosion of benefits that money market funds provide.
Since the beginningframework of the third quarter 2021, UKbenchmark transition, with the discontinuation of rates such as LIBOR and EU regulators issued, proposed or adopted other new consultations, directives, rules, laws and guidance that impact UK and EU investment management industry participants, including Federated Hermes. For example:
On September 24, 2021, ESMA published a "Consultation Paper: Review of the MiFID II framework on best execution reports," in which ESMA requests comments from execution venues, investment firms and other market participants regarding standards for the content, format and data required by a best execution reporting regime required under MiFID II. The consultation period ends on December 23, 2021.
On September 21, 2021, ESMA published a "Consultation Paper: Review of certain aspects of the Short Selling Regulation," in which ESMA requests, as partdevelopment of a systematic reviewnew set of the Short Selling Regulation, comments from issuers, investment firms and other market participants who engage in short sales or transactions resulting in net short positions. The consultation period ends on November 19, 2021.
On September 9, 2021, the FCA and Prudential Regulation Authority (PRA) published a Dear CEO letter to firms that carry on trade finance activity to reiterate the FCA's and PCA's expectations of such firms, including an expectation to demonstrate that they have taken a risk sensitive approach to their control environment to ensure that the inherent risks within trade finance activity are effectively mitigated.
On September 7, 2021, the European Commission adopted a delegated regulation that amended the technical standards regarding the KIDs for retail and insurance-based investment products. Among other amendments, the regulation amends the technical standards regarding the methodology and presentation of performance scenarios, cost presentation, the methodology for the calculation of summary cost indicators, past performance presentation and information, and the presentation of costs by PRIIPs offering a range of investment options. The delegated regulation becomes effective on July 1, 2022.
On September 7, 2021, IOSCO published a "Final Report" on the use of artificial intelligence and machine learning by market intermediaries and asset managers. In addition to recognizing the significant efficiencies and benefits that can be derived from the use of technology, IOSCO notes that this use can also create or amplify risks. IOSCO also proposes six measures reflecting expected standards of conduct by intermediaries and asset managers, including considering requiring firms to have a designated senior manager responsible for the oversight of the development, testing, deployment, monitoring and controls of such technology.
On August 18, 2021, ESMA published the final guidelines on Markets in Financial Instruments Directive II (MiFID II) applicable to market data providers. National Competent Authorities (NCAs) must within two months of publication notify ESMA whether they (1) comply, (2) do not comply but intend to comply, or (3) do not comply and do not intend to comply with the guidelines.
On August 2, 2021, ESMA published its final guidelines for marketing communications under the new EU Cross-Border Distribution of Funds Regulation, which applies to EU UCITS and AIFs.
On July 26, 2021, IOSCO published a consultation report soliciting feedback onrisk-free rates through a set of proposed recommendations regarding ESG Ratings and Data Products Providers. The consultation requests comments on a set of proposed recommendations to address challenges faced by users of products and services from ESG ratings and data providers, and the companies that are the subject of these ESG ratings and data products. The consultation period ended on September 6, 2021.
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On July 20, 2021, the FCA published a consultation titled "PRIIPs - Proposed scope rules and amendments to Regulatory Technical Standards," in which the FCA requests comments on proposed amendments to the PRIIPs disclosure regime. The amendments are intended to, among other things, clarify the scope of PRIIPs and address misleading performance scenarios and summary risk indicators.draft RTS. The consultation period ended on September 30, 2021.2022. Federated Hermes continues to review the Consultation Paper.
On July 11, 2022, ESMA issued a Consultation Paper regarding “Amendment of Article 19 2021, the FCA published a "Dear Chair" letter to AFMs setting forth the FCA's guidanceof CSDR RTS on the design, delivery and disclosures of ESG and sustainable investment funds.
On July 19, 2021, ESMA published a "Consultation Paper: Guidelines on certain aspects of the MiFID II remuneration requirements,"Settlement Discipline” in which ESMA requests commentssolicits views on certain aspectsa possible amendment to the Commission Delegated Regulation (EU) 2018/12291 with the aim of simplifying the process of collection and distribution of cash penalties for settlement fails relating to cleared transactions under Regulation (EU) No 909/2014 on Central Securities Depositories (CSDR). The consultation period ended on September 9, 2022. Federated Hermes continues to review the Consultation Paper.
•    On July 8, 2022, ESMA issued a Consultation Paper regarding “Consultation on Review of the Guidelines on MiFID II remuneration requirements forProduct Governance Requirements” in which ESMA proposes to update the purposes of enhancing clarity and fostering convergence2017 product governance guidelines. The main proposals in the applicationdraft guidelines relate to: (1) the specification of any sustainability-related objectives with which a product is compatible; (2) the requirements.practice of identifying a target market per cluster of products instead of per individual product (clustering approach); (3) the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales; and (4) the periodic review of products. The consultation period ended on October 19, 2021.7, 2022. Federated Hermes continues to review the Consultation Paper.
On July 15, 2021,5, 2022, the FCA published its 2021-2022 business plan,issued a Consultation Paper on “Improving Equity Secondary Markets” in which indicate that the FCAs priorities for the coming business year include,FCA sets forth proposals intended to improve how UK equity-based markets operate by changing, among other things, (1) adapting the regulatory framework to facilitate a market-based transition to net-zero carbon emissions; (2) amendments to the regulatory framework for money market funds; (3) adapting legacy EU regulatory regimes;aspects of trade reporting and (4) LIBOR transition.
On July 15, 2021, the European Commission published a draft directive that would extend the exemptionwaivers from the KID requirement under the PRIIPs Regulation for an additional six months from December 31, 2021 to June 30,pre-trade transparency. The consultation period ended on August 16, 2022. On July 27, 2021, the European Commission then invited the Joint Committee of the ESAs to provide advice on certain areas concerning the PRIIPs Regulation, including, among others, the use of KIDs across the EU, the practical application of the rules under the PRIIPs Regulation, and the amount and nature of costs per PRIIP to various market participants. The European Commission asked the Joint Committee of the ESAs for responses by April 30, 2022.
On July 7, 2021, the FSB published the "FSB Roadmap for Addressing Client-Related Financial Risks," in which the FSB sets forth considerations to support and promote international coordination on disclosures, data collection, vulnerabilities analysis and regulation, and purports to set out a comprehensive and coordinated plan for addressing climate-related financial risks.
Investment management industry participants, such as Federated Hermes also have continued and will continue,continues to monitor, plan for and implement certain changes in response to previously issued new, proposed or adopted consultations, directives, rules, laws and guidance. Previously proposed and final consultations, directives, rules, laws and guidance included, among others: (1)review the ongoing amendment and implementation of MiFID II; (2) HM Treasury's ongoing review of the UK retail disclosure regime and the PRIIPs Regulation; (3) efforts by ESMA to update and modify collection of information for monitoring systemic risk among AIFMs; (4) ESMA guidance on marketing communications under the Regulation on Cross-Border Distribution of Funds; (5) ESMA regulation of financial institutions, including AIFMs, UCITs management companies, and MiFID investment firms, outsourcing to cloud service providers; (6) the FCA's expected framework for long-term asset funds; (7) proposals to amend the FCA financial promotion rules for high-risk investments; (8) ESMA's updated guidelines for money market fund stress tests under the Money Market Fund Regulation; (9) the FCA's proposed rules on the IFPR, which is the new prudential regime for UK firms authorized under MiFID II; (10) ESMA's report regarding the preparedness of investment funds with significant exposure to corporate debt and real estate assets for potential future adverse liquidity conditions and valuation shocks; (11) a call for input from HM Treasury on its review of the UK funds regime to identify options that will make the UK a more attractive location to set up, manage and administer funds; and (12) the CBI's draft cross-industry guidance on outsourcing, which was published in February 2021, remained open for consultation until July 26, 2021, and, when finalized by the CBI later in 2021, will require Irish management companies to assess functions that are outsourced and maintain and submit to the CBI, beginning in January 2022, a register of all outsourcing arrangements.Consultation Paper.
In addition to the above Regulatory Developments, the FCA, CBI and other global regulators continue to monitor investment management industry participants by examining various reports, financial statements and annual reports and conducting regular review meetings and inspections. They also continue to take enforcement action when determined necessary. ExamplesFor example, the FCA has recently fined broker-dealers and other investment-related firms for failures relating to the detection of recent reviews include reviews regarding closet index fund managers, CP86 compliance, fitnessmarket abuse and probity, best execution, client asset arrangements, and operational resilience. It has been reported that FCA enforcement priorities for 2021 will include financial crime market abuse, non-financial misconduct and alternative investment managers. On February 8, 2021, the CBI published a Securities Market Risk Outlook Report that identifies key conduct risks to securities markets, actions investment firms should take to identify, mitigate and manage those risks, and the CBI's supervisory priorities. The CBI's priorities for 2021 include, among others, dealing with the Pandemic and Brexit, fund governance, money market fund reform, diversity and
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inclusion, climate change, and bolstering systems to identify, mitigate and manage misconduct risk, including market abuse risk.
Federated Hermes continues to analyze the potential impact of these Regulatory Developments on Federated Hermes' business, results of operations, financial condition and/or cash flows. Please refer to our prior public filings for more detailed discussions of these, and other, previously proposed and final rules and guidance.controls.
An EU FTT also continues to be discussed, although it remains unclear if or when an agreement will be reached regarding its adoption. Since the European Commission first proposed an EU FTT in 2011, proponents of the FTT have sought the widest possible application of the FTT with low tax rates. In December 2019, Germany proposed a draft directive that would impose a 0.2% tax on purchases of shares of large companies worth more than €1 billion, which would cover over 500 companies. Initial public offerings (IPOs) would be excluded, and each Member State would be free to tax equity funds and similar products for private pensions. Under the GermanThe last proposal the five countries with the highest incomes would share a small part of their revenues with the other countries, so that each participating country would receive at least €20 million of FTT revenue. No formal action has been taken on this German proposal.
On February 24, 2021, Portugal, the successor to the German Presidency of the EU Council, proposed at a meeting of the Working Party on Tax Questionswas to begin discussions at the EU level regarding the design of an EU FTT involving a gradual implementation by Member States based on the FTTs already implemented in France and Italy. Member States that would want to implement an FTT more quickly would behave been permitted to do so. Member States were invited to provide input on the proposed approach to the EU FTT design, whether the FTTs in France and Italy would be a solid basis for an EU FTT, and whether an EU FTT should apply to equity derivative transactions. Subject to certain exemptions, the French FTT levies a tax of up to 0.3% on stock purchases of French publicly traded companies with a market value over €1 billion, American and European depository receipts of covered company securities, high frequency trades, credit default swaps against EU sovereign debt, and certain corporate actions. Subject to certain exemptions, the Italian FTT levies a tax on equity transactions, certain derivative transactions on equities and certain high frequency trades of up to 0.2% of the value of the net balance of purchase and sale transactions executed on the same day on the same financial instrument by the same party. The Italian FTT applies to shares issued by Italian companies with a capitalization of at least €500 million, cash equity contracts, equity derivative contracts, and certain other equity transactions. It has been reported that Austria's Finance Minister has spoken out against the Portuguese proposal on the basis that an EU FTT would harm business. The Portuguese proposal on an EU FTT invited Member States electing not to participate in the enhanced cooperation initiative to provide input on whether the need to find additional sources for financing the EU recovery effort might increase their interest in further working on an EU FTT.
As attention turns tocontinues on a post-Pandemic economy and as the EU and EU Member States continue to look to fund their budgets and the Pandemic-related measures that have been adopted, an EU FTT on securities transactions, or even bank account transactions, remains a potential additional source of revenue. On May 18, 2021, the European Commission issued a communication on "Business Taxation for the 21st Century," in which the European Commission indicated that, after July 2021, it would make certain additional proposals, which could include an FTT. In a meeting of theThe Council of the EU on June 3, 2021, the Councilhas recognized that the European Commission recentlyhas clarified that, if there is no agreement by the end of 2022, the European Commission will, based on impact assessments, propose a new resource for the EU budget based on a new FTT and that the European Commission will endeavor to make those proposals by June 2024 with the FTT'sFTT’s planned introduction by January 1, 2026. The Council also has indicated at its June 3, 2021 meeting that further work will be required before final policy choices are made and an agreement on a possible FTT can be reached.
The exact time needed to reach a final agreement on an EU FTT, implement any agreement and enact legislation is not known at this time. As discussed above, certain individual EU Member States, such as Italy and France, have implemented FTTs at the Member State-level. Spain's 0.2% FTT on certain securities transactions, effective on January 16, 2021, is another example. The weakened economy in Europe can increase the risk that additional jurisdictions propose to implement single-country FTTs. The Labour Party in the UK has also previously proposed a UK FTT (in addition to the existing UK stamp duty), but it has not been advanced to date. The Pandemic also could further delay agreement on, and the implementation of, an FTT in the EU, UK, or other European countries.
Notwithstanding the impact of the Pandemic, global securities regulators are urging the adoption of new risk free reference rates as alternatives to LIBOR. Separate working groups have been formed in the UK, the U.S., the EU, and other jurisdictions (e.g., Japan and Switzerland), to recommend an alternative to LIBOR for their respective markets. The FCA, the BoE and the PRA, as well as other global regulators, continue efforts started in September 2018 regarding the transition from LIBOR to the Sterling Overnight Index Average (SONIA) by the end of 2021. On March 5, 2021, Intercontinental Exchange, Inc. (ICE) published a feedback statement from the ICE Benchmark Administration Limited, a wholly-owned subsidiary of ICE and the
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The transition from LIBOR also continues. On March 5, 2021, Intercontinental Exchange, Inc. (ICE) published a feedback statement from ICE Benchmark Administration Limited, a wholly-owned subsidiary of ICE and the administrator of LIBOR, formally confirming its intention to: (1) cease the publication of the one-week and two-month USD LIBOR after December 31, 2021; (2) cease publication of the EUR, CHF, JPY and GBP LIBOR for all tenors after December 31, 2021; and (3) cease the publication of all other tenors of USD LIBOR after June 30, 2023. On June 2, 2021, IOSCO issued a statement urging all global market participantsThe LIBOR tenors specified in (1) and (2) above ceased to "discontinue new usebe published as of USD LIBOR-linked contracts, as soon as practicable and no later than the end of 2021, to avoid the safety and soundness risks associated with the continued use." On June 2, 2021, the FSB released statements and reports that set out recommendations for financial and non-financial sector firms, as well as the authorities, to consider as they seek to transition away from LIBOR by the end of 2021. The statements and reports include: (1) a summary of high-level steps firms will need to take now and over the course of 2021 to complete their transition; (2) a paper reviewing overnight risk-free rates and term rates; (3) a statement on the use of the International Swaps and Derivatives Association's (ISDA) spread adjustments in cash products; and (4) a statement encouraging authorities to set globally consistent expectations that regulated entities should cease the new use of USD LIBOR in line with the relevant timelines for that currency, regardless of where those trades are booked. On May 13, 2021, the FCA and BoE published a statement encouraging market users and liquidity providers in the sterling exchange-traded derivatives market to switch the default-traded instrument from LIBOR to SONIA from June 17, 2021. On April 19, 2021, the Working Group on Sterling-Free Rates, of which the BoE and FCA are ex-officio members, published a paper supporting the transition of legacy structured products where GBP LIBOR is used and encouraging market participants to amend existing structured products now and to issue new structured products based on compounded-in-arrears SONIA. On March 26, 2021, the FCA and BoE issued a "Dear CEO" letter urging firms to meet the deadlines for the transition away from LIBOR to alternative reference rates and advising that they are intensifying their focus on firms' management and oversight of the risks associated with the transition. In September 2021, the FCA issued a "Feedback Statement: FCA use of powers over use of critical benchmarks," in which the FCA discussed, among other topics, its authority to prohibit some or all new uses of a critical benchmark, which includes LIBOR in the UK.January 1, 2022. On September 9,29, 2021, the FCA also updated its website, and issued a consultation titled 'Proposed decisions on the use of LIBOR (Articles 23C and 21A BMR)," setting forth further guidance and requests for comment regarding further arrangements for the orderly wind-down of LIBOR by the end of 2021. Although the FCA found that market participants have made good progress in actively transitioning contracts away from LIBOR, the FCA concluded that it will not be practicable to convert all outstanding sterling and Japanese yen LIBOR contracts by year-end. Consequently, to avoid disruption to legacy contracts that reference the 1 month, 3 month1-month, 3-month and 6 month sterling6-month GBP and Japanese yenJPY LIBOR settings,tenors, the FCA required the LIBOR benchmark administrator to publish these settingstenors under a 'synthetic'‘synthetic’ methodology, based on term risk-free rates, for the duration of 2022. The synthetic panels are not intended for new issues, as the FCA also proposed to prohibit new use of overnight, 1 month, 3 month, 61-month, 3-month, 6- month and 12 month U.S. dollar12-month USD LIBOR, which will continue to be published through June 30, 2023. On April 5, 2022, the FSB issued a statement, “FSB Statement Welcoming a Smooth Transition Away from LIBOR,” in which it advised that (among other things): (1) given the significant use of USD LIBOR globally, firms must have plans in place to ensure their preparedness for the cessation of USD LIBOR; and (2) firms should have ceased new use of USD LIBOR, as the continued use of some USD LIBOR tenors through June 30, 2023 is intended only to allow legacy contracts to mature. On August 16, 2022, the FCA issued a statement (1) encouraging issuers of remaining LIBOR-linked bonds issued under English or other non-U.S. laws which make consent solicitation practicable to schedule consent solicitations to covert to fair alternative rates, (2) reminding issuers and bondholders that the publication of yen LIBOR will cease at the end of 2022, 1- and 6-month synthetic sterling LIBOR will cease at the end of March 2023, and U.S. dollar LIBOR will end at the end of June 2023, and (3) reminding issuers and bondholders that certain bonds issued under U.S. law may benefit from U.S. legislation to convert LIBOR rates at the end of June 2023.
Legislators and regulators in the U.S. and other countries are also working on the transition from LIBOR, with particular emphasis on legacy financial agreements that lack sufficient "fallback"“fallback” language to transition to a new reference rate in the event of LIBOR'sLIBOR’s cessation. TheIn addition to efforts by the SEC, the Governors, the International Swaps and other regulatorsDirectives Association (ISDA), the New York legislature, and others, on March 15, 2022, the Adjustable Interest Rate (LIBOR) Act of 2021 became law in the U.S. are undertaking effortsThis legislation is the first U.S. federal law addressing the cessation of LIBOR and is similar to identify risks and prepare for the transition from LIBOR to the Secured Overnight Financing Rate (SOFR) by the end of 2021. The SOFR was selected as the preferred LIBOR replacement in the U.S. by the Alternative Reference Rates Committee (ARRC) at the Federal Reserve Bank of New York. On May 6, 2021, the ARRC published market indicators that would support a recommendation of term SOFR and confirmed that "a recommended term rate is now in clear sight" and the recent guidance "would allow the ARRC to recommend a SOFR-based term rate relatively soon." Despite the extension of the transition deadline to June 30, 2023 for certain tenors of USD LIBOR, U.S. regulators continue to urge financial institutions to stop entering into new LIBOR transactions by the end of 2021. The Governors have indicated that, "[n]ew contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR's discontinuation." On October 23, 2020, ISDA published its ISDA 2020 IBOR Fallbacks Protocol, which enables parties to protocol-covered documents to amend their terms to: (1) regarding a protocol-covered document which incorporates, or references, a rate as defined in a Covered ISDA Definitions Booklet, include either the terms of, or a particular defined term included in, the Supplement to the 2006 ISDA Definitions; and (2) in respect of a protocol-covered document which otherwise references a relevant interbank lending rate (IBOR), include new fallbacks for that relevant IBOR. This protocol became effective January 25, 2021. On March 24, 2021, New York legislation passed a lawin 2021 that implements fallback provisions that favor the transition to SOFR plusSOFR-plus a spread adjustment for contracts without effective fallback provisions that are written under New York law. The New York law also providesto provide for a safe harbor from litigation where SOFR is selected as a replacement rate for USD LIBOR. Regulators have also taken note of the growing market demand for credit sensitive rates as alternativessmooth transition process to SOFR because term SOFR is not yet available and credit sensitive rates have a term component built in, which is operationally similar to LIBOR. During the open session of the June 11, 2021 FSOC meeting, SEC Chair Gensler delivered prepared remarks regardingreplace the LIBOR transitionreference rate in which he specifically condemned one such rate,legacy contracts. The law directed the Bloomberg Short Term Bank Yield Index (BSBY), as featuring many ofGovernors to issue a rule to be approved by September 9, 2022, leaving only a small opportunity for comment and engagement with the same flaws as LIBOR,financial industry. The Governors issued a proposed rule on July 28, 2022, and generally advocatedthe comment period for term SOFR over BSBY.
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of Financial Condition and Results of Operations (unaudited)
the proposed rule ended on August 29, 2022.
The phase-out of LIBOR can cause the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which investment management industry participants, including Federated Hermes and its products, customers or service providers, are parties, alter the accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among other effects, could require additional internal and external resources, and can increase operating expenses. The extent of such renegotiation or re-pricing could be mitigated by the adoption of, or advocacy for, a historical five-year median difference spread adjustment methodology by certain regulators, self-regulatory organizations, and trade groups (including, for example, the ARRCAlternate Reference Rates Committee and ISDA). Federated Hermes has closely monitored regulatory statements and industry developments regarding the obligations of registered investment advisors and funds when recommending and purchasing securities or other investments that use LIBOR as a reference rate or benchmark. Federated Hermes has focused on identifying LIBOR-linked securities or other investments, including, but not limited to: derivatives contracts; floating-rate notes; municipal securities; and tranches of securitizations, including collateralized loan obligations. With respect to LIBOR-linked securities or other investments with maturities after the applicable LIBOR tenor cessation date, Federated Hermes has sought to proactively address transition-related questions with the issuers or lead arrangers of such securities and other investments, as applicable, including, for example, questions regarding transition events, benchmark replacement, and benchmark replacement adjustments. As necessary, Federated Hermes has sought to negotiate modifications to benchmark fallback language for such securities and other instruments to contemplate the permanent cessation of LIBOR. Federated Hermes will be continuing these efforts with respect to any remaining securities or other investments held by Federated Hermes’ products and strategies that continue to use a USD LIBOR tenor with a cessation date of June 30, 2023. For example, Federated Hermes has sent over 550 letters to issuers or lead arrangers setting forth its expectations regarding the transition from LIBOR. Federated Hermes also negotiated fall back language that provides for the use of an alternative reference rate or benchmark in its corporate credit facility and has an interest rate-based on SOFR-plus a spread in its U.S.-registered Federated Hermes Funds’ credit facility. Federated Hermes continues to assessmonitor the impact that the transition from LIBOR will have on Federated Hermes and Federated Hermes'Hermes’ products and strategies, customers, and service providers.
While BrexitEU policymakers and regulators have also sought to establish a global corporate tax rate of 15 percent. The proposal has been hampered by resistance from numerous countries, including certain EU member states. On June 30, 2022, it was reported that
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
the French Prime Minister stated that the EU is working on alternative ways to implement a global corporate tax rate of 15 percent within the coming months despite the opposition of Hungary, Poland and potentially other EU Member States. On September 9, 2022, the finance ministers of Germany, France, Italy, Spain and the Netherlands pledged to swiftly introduce a minimum 15 percent effective corporate tax rate in their countries and indicated a desire to have the corporate tax rate in place by 2023.
With the transition to a new Prime Minister in the UK in the third quarter 2022, and market conditions, including continuing market volatility and inflation rates, the BoE and the UK government have taken actions aimed at addressing market and economic concerns. For example, on September 28, 2022, the BoE launched a market intervention plan aimed at restoring order to the UK’s bond market by increasing its purchase of UK government bonds. After the UK’s now former finance minister announced, on September 23, 2022, a £45 billion (or $50.5 billion) tax-cutting program and that the planned increase in the UK corporate tax rate from 19% to 25% from April 2023 would not had a significantoccur, the then new (and recently resigned) UK prime minister announced on October 14, 2022, that the increase in the UK corporate tax rate to 25% would proceed in April 2023 as previously scheduled in order to increase public finances by approximately £18 billion (or $20 billion).
Federated Hermes continues to monitor, analyze, and assess the potential impact of current and previous Regulatory Developments, both domestic and international, on its Financial Condition, as well as plan for and implement certain changes in response to such Regulatory Developments. Federated Hermes' business as of September 30, 2021, givenHermes also continues to monitor, analyze, and assess the post-Brexit regulatory environment and potential continuing impact of the Pandemic, Federated Hermes remains unable to fully assess the degree that any potential Brexit impactRussia’s invasion of Ukraine, and resulting changes could have on Federated Hermes' business, results of operations, financial condition and/or cash flows. The 2018 HFML Acquisition and the 2021 Acquisition of HFML Noncontrolling Interest (together the HFML Acquisition), the HCL Acquisition, and HFML's acquisition of MEPC Limited effective as of January 1, 2020 (MEPC Acquisition), each increased the potential Brexit impact to Federated Hermes. Management also believes that a UK FTT or EU FTT, particularly if enacted with broad application, would be detrimental to Federated Hermes' business and could adversely affect, potentially in a material way, Federated Hermes' business, results of operations, financial condition and/or cash flows.
Management continues to monitor and evaluate the impact of Regulatory Developments (including potential newan increasing interest rate environment on money market fund reforms) on Federated Hermes' business, results of operations, financial condition and/or cash flows. Regulatory changes stemming from Brexit, money marketand other fund reform, a EU or UK FTT, or FCA, CBI, ESMA, FSB, IOSCO or other initiatives or Regulatory Developments,asset flows, and related asset mixes, as well as the potential politicaldegree to which these factors impact Federated Hermes’ institutional prime and economic uncertainty surrounding Brexitmunicipal (or tax-exempt) money market business and the Pandemic, also can adversely affect, potentially in a material way, Federated Hermes' business, results of operations, financial condition and/or cash flows. Similar to its efforts in the U.S., Hermes’ Financial Condition.
Federated Hermes has dedicated, and continues to dedicate, significant internal and external resources to monitor, analyze, assess, and address European reformsRegulatory Developments (including, without limitation, the potential for additional regulatory scrutiny of money market funds), its responses to the impact from the Pandemic and Regulatory Developments, and their effect on Federated Hermes’ Financial Condition. Additional internal and external resources have been, and will continue to be, devoted to technology, legal, compliance, operations, and other internationalefforts to address Regulatory Development-related matters. These efforts included, and will continue to include, having conversations internally, and with intermediaries, customers, service providers, counsel and other advisors regarding Regulatory Developments, thatand analyzing and/or affecting legislative, regulatory, product offering, development and structure adjustments, technology or information system development, reporting capabilities, business processes and other options, in an effort to comply, and/or to assist Federated Hermes’ intermediaries and other customers to comply, with new Regulatory Developments or minimize the potential impact of any adverse consequences stemming therefrom. As appropriate, Federated Hermes'Hermes also participated, and will continue to participate, either individually or with industry groups, in the comment process for proposed Regulatory Developments. Federated Hermes continues to expend legal and compliance resources to examine disclosure proposals and final rules issued by the SEC and other regulators, to adopt, revise and/or implement policies and procedures, and to respond to examinations, inquiries and other matters involving its regulators, including the SEC, customers or other third parties. Federated Hermes also has devoted, and will continue to devote, resources to technology and system investment, business continuity, cybersecurity and information governance, and the development of other investment management and stewardship business.compliance tools, to enable Federated Hermes to, among other benefits, be in a better position to address Regulatory Developments. Federated Hermes has also expended, and will continue to expend, significant internal and external resources to engage with regulators on potential money market fund reforms, including through meetings with U.S. and global regulators and legislators, the ICI and other industry participants.
EuropeanThe Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or can impact, Federated Hermes' efforts relating thereto,Hermes’ intermediaries, other customers and service providers, their preferences, and their businesses. For example, these developments have had,caused, and/or can cause, certain product line-up, structure, pricing and product development changes, as well as money market, equity, fixed-income, alternative/private markets or multi-asset fund products to be less attractive to institutional and other investors, reductions in the number of Federated Hermes Funds offered by intermediaries, changes in the fees Federated Hermes, retirement plan advisors and intermediaries will be able to earn on investment products and services sold to retirement plan or other clients, changes in work arrangements and facility-related expenses, and reductions in AUM, revenues and operating profits. In addition, these developments have caused, and/or can cause, changes in asset flows, levels, and mix, as well as customer and service provider relationships.
Federated Hermes will continue to monitor regulatory actions in response to the Pandemic and other Regulatory Developments as necessary and can continueimplement additional changes to have, an impact on Federated Hermes' expensesits business and practices as it deems necessary or appropriate in turn, financial performance. response thereto.
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
As of September 30, 2021,2022, given the regulatory environment, the continuing Pandemic and the possibility of future additional regulation or oversight, Federated Hermes is unable to fully assess the potential impact that an FTT or other internationalof Regulatory Developments, can haveand Federated Hermes’ efforts related thereto, on its business, results of operations, financial condition and/or cash flows.Financial Condition. Federated Hermes is also is unable to fully assess at this time whether, or the degree to which, any continuing efforts or potential options being evaluated in connection with modified or new Regulatory Developments ultimately will be successful. Modified or new Regulatory Developments in the current regulatory environment, and Federated Hermes, any of its investment management subsidiaries or any of the Federated Hermes Funds, including money market funds, or any of its other products,Hermes’ efforts in responding to them, could ultimately be determined to behave a non-bank, non-insurance company global systemically important financial institution. The HFML Acquisition, HCL Acquisitionmaterial and MEPC Acquisition each increased the potential impact that the above matters can haveadverse effect on Federated Hermes' business, results of operations, financial condition and/or cash flows.

Hermes’ Financial Condition.
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Asset Highlights
Managed Assets at Period End
 September 30,Percent
Change
(in millions)20212020
By Asset Class
Equity$97,425 $80,405 21 %
Fixed-Income97,226 79,546 22 
Alternative / Private Markets22,064 18,146 22 
Multi-Asset3,692 3,737 (1)
Total Long-Term Assets220,407 181,834 21 
Money Market413,713 432,952 (4)
Total Managed Assets$634,120 $614,786 %
By Product Type
Funds:
Equity$58,218 $46,093 26 %
Fixed-Income60,262 49,779 21 
Alternative / Private Markets14,299 11,393 26 
Multi-Asset3,518 3,546 (1)
Total Long-Term Assets136,297 110,811 23 
Money Market292,311 325,940 (10)
Total Fund Assets428,608 436,751 (2)
Separate Accounts:
Equity39,207 34,312 14 
Fixed-Income36,964 29,767 24 
Alternative / Private Markets7,765 6,753 15 
Multi-Asset174 191 (9)
Total Long-Term Assets84,110 71,023 18 
Money Market121,402 107,012 13 
Total Separate Account Assets205,512 178,035 15 
Total Managed Assets$634,120 $614,786 %
















 September 30,Percent
Change
(in millions)20222021
By Asset Class
Equity$74,684 $97,425 (23)%
Fixed-Income85,365 97,226 (12)
Alternative / Private Markets20,182 22,064 (9)
Multi-Asset2,902 3,692 (21)
Total Long-Term Assets183,133 220,407 (17)
Money Market441,294 413,713 
Total Managed Assets$624,427 $634,120 (2)%
By Product Type
Funds:
Equity$40,633 $58,218 (30)%
Fixed-Income44,896 60,262 (25)
Alternative / Private Markets12,680 14,299 (11)
Multi-Asset2,784 3,518 (21)
Total Long-Term Assets100,993 136,297 (26)
Money Market309,859 292,311 
Total Fund Assets410,852 428,608 (4)
Separate Accounts:
Equity34,051 39,207 (13)
Fixed-Income40,469 36,964 
Alternative / Private Markets7,502 7,765 (3)
Multi-Asset118 174 (32)
Total Long-Term Assets82,140 84,110 (2)
Money Market131,435 121,402 
Total Separate Account Assets213,575 205,512 
Total Managed Assets$624,427 $634,120 (2)%


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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Average Managed Assets
Three Months EndedNine Months Ended Three Months EndedNine Months Ended
September 30,Percent ChangeSeptember 30,Percent ChangeSeptember 30,Percent ChangeSeptember 30,Percent Change
(in millions)(in millions)2021202020212020(in millions)2022202120222021
By Asset ClassBy Asset ClassBy Asset Class
EquityEquity$100,076 $80,403 24 %$98,136 $78,930 24 %Equity$81,809 $100,076 (18)%$86,543 $98,136 (12)%
Fixed-IncomeFixed-Income93,685 76,798 22 89,676 71,823 25 Fixed-Income87,042 93,685 (7)90,419 89,676 
Alternative / Private Markets1
21,446 18,270 17 20,257 18,091 12 
Alternative / Private MarketsAlternative / Private Markets21,193 21,446 (1)22,090 20,257 
Multi-AssetMulti-Asset3,713 3,786 (2)3,918 3,808 Multi-Asset3,144 3,713 (15)3,368 3,918 (14)
Total Long-Term AssetsTotal Long-Term Assets218,920 179,257 22 211,987 172,652 23 Total Long-Term Assets193,188 218,920 (12)202,420 211,987 (5)
Money MarketMoney Market414,141 448,795 (8)418,285 442,381 (5)Money Market438,601 414,141 429,878 418,285 
Total Average Managed AssetsTotal Average Managed Assets$633,061 $628,052 %$630,272 $615,033 %Total Average Managed Assets$631,789 $633,061 %$632,298 $630,272 %
By Product TypeBy Product TypeBy Product Type
Funds:Funds:Funds:
EquityEquity$59,918 $46,020 30 %$58,471 $44,106 33 %Equity$45,135 $59,918 (25)%$48,353 $58,471 (17)%
Fixed-IncomeFixed-Income59,618 48,418 23 57,346 45,221 27 Fixed-Income47,489 59,618 (20)52,025 57,346 (9)
Alternative / Private Markets1
13,704 11,539 19 12,882 11,342 14 
Alternative / Private MarketsAlternative / Private Markets13,432 13,704 (2)14,158 12,882 10 
Multi-AssetMulti-Asset3,533 3,590 (2)3,732 3,619 Multi-Asset3,012 3,533 (15)3,222 3,732 (14)
Total Long-Term AssetsTotal Long-Term Assets136,773 109,567 25 132,431 104,288 27 Total Long-Term Assets109,068 136,773 (20)117,758 132,431 (11)
Money MarketMoney Market289,566 338,814 (15)293,320 328,730 (11)Money Market301,940 289,566 289,577 293,320 (1)
Total Average Fund AssetsTotal Average Fund Assets426,339 448,381 (5)425,751 433,018 (2)Total Average Fund Assets411,008 426,339 (4)407,335 425,751 (4)
Separate Accounts:Separate Accounts:Separate Accounts:
EquityEquity40,158 34,383 17 39,665 34,824 14 Equity36,674 40,158 (9)38,190 39,665 (4)
Fixed-IncomeFixed-Income34,067 28,380 20 32,330 26,602 22 Fixed-Income39,553 34,067 16 38,394 32,330 19 
Alternative / Private MarketsAlternative / Private Markets7,742 6,731 15 7,375 6,749 Alternative / Private Markets7,761 7,742 7,932 7,375 
Multi-AssetMulti-Asset180 196 (8)186 189 (2)Multi-Asset132 180 (27)146 186 (22)
Total Long-Term AssetsTotal Long-Term Assets82,147 69,690 18 79,556 68,364 16 Total Long-Term Assets84,120 82,147 84,662 79,556 
Money MarketMoney Market124,575 109,981 13 124,965 113,651 10 Money Market136,661 124,575 10 140,301 124,965 12 
Total Average Separate Account AssetsTotal Average Separate Account Assets206,722 179,671 15 204,521 182,015 12 Total Average Separate Account Assets220,781 206,722 224,963 204,521 10 
Total Average Managed AssetsTotal Average Managed Assets$633,061 $628,052 %$630,272 $615,033 %Total Average Managed Assets$631,789 $633,061 %$632,298 $630,272 %
1    The average balance for the nine months ended September 30, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment. Effective March 1, 2020, HGPE became a consolidated subsidiary. See Note (3) to the Consolidated Financial Statements for additional information.


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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Equity Fund and Separate Account Assets
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in millions)(in millions)2021202020212020(in millions)2022202120222021
Equity FundsEquity FundsEquity Funds
Beginning AssetsBeginning Assets$59,933 $43,723 $54,312 $48,112 Beginning Assets$44,207 $59,933 $57,036 $54,312 
SalesSales2,655 2,937 11,758 10,423 Sales2,581 2,655 10,210 11,758 
RedemptionsRedemptions(3,522)(3,299)(11,717)(12,431)Redemptions(3,033)(3,522)(11,122)(11,717)
Net Sales (Redemptions)Net Sales (Redemptions)(867)(362)41 (2,008)Net Sales (Redemptions)(452)(867)(912)41 
Net ExchangesNet Exchanges3 31 (360)(56)Net Exchanges9 (145)(360)
Acquisitions/(Dispositions)Acquisitions/(Dispositions)408 408 Acquisitions/(Dispositions)0 408 0 408 
Impact of Foreign Exchange1
Impact of Foreign Exchange1
(283)306 (463)61 
Impact of Foreign Exchange1
(667)(283)(1,635)(463)
Market Gains and (Losses)2
Market Gains and (Losses)2
(976)2,395 4,280 (16)
Market Gains and (Losses)2
(2,464)(976)(13,711)4,280 
Ending AssetsEnding Assets$58,218 $46,093 $58,218 $46,093 Ending Assets$40,633 $58,218 $40,633 $58,218 
Equity Separate AccountsEquity Separate AccountsEquity Separate Accounts
Beginning AssetsBeginning Assets$40,573 $33,136 $37,476 $40,899 Beginning Assets$36,781 $40,573 $39,680 $37,476 
Sales3
Sales3
1,677 1,249 5,700 4,422 
Sales3
2,552 1,677 8,510 5,700 
Redemptions3
Redemptions3
(2,185)(2,253)(7,938)(8,243)
Redemptions3
(1,918)(2,185)(8,463)(7,938)
Net Sales (Redemptions)3
Net Sales (Redemptions)3
(508)(1,004)(2,238)(3,821)
Net Sales (Redemptions)3
634 (508)47 (2,238)
Net ExchangesNet Exchanges0 403 (6)Net Exchanges0 0 403 
Acquisitions/(Dispositions)0 0 (71)
Impact of Foreign Exchange1
Impact of Foreign Exchange1
(227)272 (471)188 
Impact of Foreign Exchange1
(520)(227)(1,205)(471)
Market Gains and (Losses)2
Market Gains and (Losses)2
(631)1,908 4,037 (2,877)
Market Gains and (Losses)2
(2,844)(631)(4,471)4,037 
Ending AssetsEnding Assets$39,207 $34,312 $39,207 $34,312 Ending Assets$34,051 $39,207 $34,051 $39,207 
Total EquityTotal EquityTotal Equity
Beginning AssetsBeginning Assets$100,506 $76,859 $91,788 $89,011 Beginning Assets$80,988 $100,506 $96,716 $91,788 
Sales3
Sales3
4,332 4,186 17,458 14,845 
Sales3
5,133 4,332 18,720 17,458 
Redemptions3
Redemptions3
(5,707)(5,552)(19,655)(20,674)
Redemptions3
(4,951)(5,707)(19,585)(19,655)
Net Sales (Redemptions)3
Net Sales (Redemptions)3
(1,375)(1,366)(2,197)(5,829)
Net Sales (Redemptions)3
182 (1,375)(865)(2,197)
Net ExchangesNet Exchanges3 31 43 (62)Net Exchanges9 (145)43 
Acquisitions/(Dispositions)Acquisitions/(Dispositions)408 408 (71)Acquisitions/(Dispositions)0 408 0 408 
Impact of Foreign Exchange1
Impact of Foreign Exchange1
(510)578 (934)249 
Impact of Foreign Exchange1
(1,187)(510)(2,840)(934)
Market Gains and (Losses)2
Market Gains and (Losses)2
(1,607)4,303 8,317 (2,893)
Market Gains and (Losses)2
(5,308)(1,607)(18,182)8,317 
Ending AssetsEnding Assets$97,425 $80,405 $97,425 $80,405 Ending Assets$74,684 $97,425 $74,684 $97,425 
1    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
2    Reflects the approximate changes in the fair value of the securities held by portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
3    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Fixed-Income Fund and Separate Account Assets
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2022202120222021
Fixed-Income Funds
Beginning Assets$48,215 $58,486 $59,862 $53,557 
Sales3,956 7,273 13,711 24,724 
Redemptions(6,058)(5,587)(22,614)(18,434)
Net Sales (Redemptions)(2,102)1,686 (8,903)6,290 
Net Exchanges(17)43 79 (10)
Acquisitions/(Dispositions)0 17 0 17 
Impact of Foreign Exchange1
(161)(71)(409)(90)
Market Gains and (Losses)2
(1,039)101 (5,733)498 
Ending Assets$44,896 $60,262 $44,896 $60,262 
Fixed-Income Separate Accounts
Beginning Assets$38,038 $32,315 $37,688 $30,720 
Sales3
3,725 5,662 8,385 9,982 
Redemptions3
(526)(1,017)(2,357)(3,872)
Net Sales (Redemptions)3
3,199 4,645 6,028 6,110 
Net Exchanges0 (50)(1)(48)
Impact of Foreign Exchange1
(70)(18)(151)(34)
Market Gains and (Losses)2
(698)72 (3,095)216 
Ending Assets$40,469 $36,964 $40,469 $36,964 
Total Fixed-Income
Beginning Assets$86,253 $90,801 $97,550 $84,277 
Sales3
7,681 12,935 22,096 34,706 
Redemptions3
(6,584)(6,604)(24,971)(22,306)
Net Sales (Redemptions)3
1,097 6,331 (2,875)12,400 
Net Exchanges(17)(7)78 (58)
Acquisitions/(Dispositions)0 17 0 17 
Impact of Foreign Exchange1
(231)(89)(560)(124)
Market Gains and (Losses)2
(1,737)173 (8,828)714 
Ending Assets$85,365 $97,226 $85,365 $97,226 
1    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
2    Reflects the approximate changes in the fair value of the securities held by portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
3    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Alternative / Private Markets Fund and Separate Account Assets
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2022202120222021
Alternative / Private Markets Funds
Beginning Assets$13,911 $13,225 $14,788 $12,100 
Sales537 1,140 1,637 2,325 
Redemptions(835)(494)(2,020)(1,483)
Net Sales (Redemptions)(298)646 (383)842 
Net Exchanges3 7 (2)
Acquisitions/(Dispositions)0 81 0 81 
Impact of Foreign Exchange1
(1,013)(345)(2,390)(225)
Market Gains and (Losses)2
77 692 658 1,503 
Ending Assets$12,680 $14,299 $12,680 $14,299 
Alternative / Private Markets Separate Accounts
Beginning Assets$7,874 $7,737 $8,132 $6,984 
Sales3
409 179 1,069 802 
Redemptions3
(94)(39)(505)(227)
Net Sales (Redemptions)3
315 140 564 575 
Impact of Foreign Exchange1
(625)(209)(1,440)(136)
Market Gains and (Losses)2
(62)97 246 342 
Ending Assets$7,502 $7,765 $7,502 $7,765 
Total Alternative / Private Markets
Beginning Assets$21,785 $20,962 $22,920 $19,084 
Sales3
946 1,319 2,706 3,127 
Redemptions3
(929)(533)(2,525)(1,710)
Net Sales (Redemptions)3
17 786 181 1,417 
Net Exchanges3 7 (2)
Acquisitions/(Dispositions)0 81 0 81 
Impact of Foreign Exchange1
(1,638)(554)(3,830)(361)
Market Gains and (Losses)2
15 789 904 1,845 
Ending Assets$20,182 $22,064 $20,182 $22,064 
1    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
2    Reflects the approximate changes in the fair value of the securities held by portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
3    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
49

Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Fixed-Income Fund and Separate Account Assets
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2021202020212020
Fixed-Income Funds
Beginning Assets$58,486 $46,046 $53,557 $44,223 
Sales7,273 7,183 24,724 21,811 
Redemptions(5,587)(4,497)(18,434)(17,474)
Net Sales (Redemptions)1,686 2,686 6,290 4,337 
Net Exchanges43 (36)(10)(5)
Acquisitions/(Dispositions)17 17 
Impact of Foreign Exchange1
(71)105 (90)(23)
Market Gains and (Losses)2
101 978 498 1,247 
Ending Assets$60,262 $49,779 $60,262 $49,779 
Fixed-Income Separate Accounts
Beginning Assets$32,315 $27,097 $30,720 $24,800 
Sales3
5,662 2,676 9,982 6,426 
Redemptions3
(1,017)(400)(3,872)(2,618)
Net Sales (Redemptions)3
4,645 2,276 6,110 3,808 
Net Exchanges(50)(48)
Acquisitions/(Dispositions)0 0 (1)
Impact of Foreign Exchange1
(18)30 (34)32 
Market Gains and (Losses)2
72 364 216 1,128 
Ending Assets$36,964 $29,767 $36,964 $29,767 
Total Fixed-Income
Beginning Assets$90,801 $73,143 $84,277 $69,023 
Sales3
12,935 9,859 34,706 28,237 
Redemptions3
(6,604)(4,897)(22,306)(20,092)
Net Sales (Redemptions)3
6,331 4,962 12,400 8,145 
Net Exchanges(7)(36)(58)(5)
Acquisitions/(Dispositions)17 17 (1)
Impact of Foreign Exchange1
(89)135 (124)
Market Gains and (Losses)2
173 1,342 714 2,375 
Ending Assets$97,226 $79,546 $97,226 $79,546 
1    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
2    Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
3    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Alternative / Private Markets Fund and Separate Account Assets
Three Months EndedNine Months Ended
September 30,September 30,
(in millions)2021202020212020
Alternative / Private Markets Funds
Beginning Assets1
$13,225 $11,037 $12,100 $11,389 
Sales1,140 471 2,325 1,799 
Redemptions(494)(386)(1,483)(1,511)
Net Sales (Redemptions)646 85 842 288 
Net Exchanges0 (2)(1)
Acquisitions/(Dispositions)81 81 
Impact of Foreign Exchange2
(345)440 (225)(258)
Market Gains and (Losses)3
692 (169)1,503 (25)
Ending Assets$14,299 $11,393 $14,299 $11,393 
Alternative / Private Markets Separate Accounts
Beginning Assets$7,737 $6,448 $6,984 $6,713 
Sales4
179 115 802 467 
Redemptions4
(39)(25)(227)(443)
Net Sales (Redemptions)4
140 90 575 24 
Acquisitions/(Dispositions)0 0 452 
Impact of Foreign Exchange2
(209)268 (136)(188)
Market Gains and (Losses)3
97 (53)342 (248)
Ending Assets$7,765 $6,753 $7,765 $6,753 
Total Alternative / Private Markets
Beginning Assets1
$20,962 $17,485 $19,084 $18,102 
Sales4
1,319 586 3,127 2,266 
Redemptions4
(533)(411)(1,710)(1,954)
Net Sales (Redemptions)4
786 175 1,417 312 
Net Exchanges0 (2)(1)
Acquisitions/(Dispositions)81 81 452 
Impact of Foreign Exchange2
(554)708 (361)(446)
Market Gains and (Losses)3
789 (222)1,845 (273)
Ending Assets$22,064 $18,146 $22,064 $18,146 
1    The beginning assets for the nine months ended September 30, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment. Effective March 1, 2020, HGPE became a consolidated subsidiary. See Note (3) to the Consolidated Financial Statements for additional information.
2    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
3    Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
4    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Multi-Asset Fund and Separate Account Assets
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in millions)(in millions)2021202020212020(in millions)2022202120222021
Multi-Asset FundsMulti-Asset FundsMulti-Asset Funds
Beginning AssetsBeginning Assets$3,517 $3,516 $3,744 $4,000 Beginning Assets$3,001 $3,517 $3,608 $3,744 
SalesSales71 44 224 164 Sales54 71 170 224 
RedemptionsRedemptions(99)(146)(779)(538)Redemptions(130)(99)(397)(779)
Net Sales (Redemptions)Net Sales (Redemptions)(28)(102)(555)(374)Net Sales (Redemptions)(76)(28)(227)(555)
Net ExchangesNet Exchanges9 (4)27 (23)Net Exchanges0 6 27 
Acquisitions/(Dispositions)Acquisitions/(Dispositions)54 54 Acquisitions/(Dispositions)0 54 0 54 
Market Gains and (Losses)1
Market Gains and (Losses)1
(34)136 248 (57)
Market Gains and (Losses)1
(141)(34)(603)248 
Ending AssetsEnding Assets$3,518 $3,546 $3,518 $3,546 Ending Assets$2,784 $3,518 $2,784 $3,518 
Multi-Asset Separate AccountsMulti-Asset Separate AccountsMulti-Asset Separate Accounts
Beginning AssetsBeginning Assets$182 $189 $204 $199 Beginning Assets$134 $182 $172 $204 
Sales2
Sales2
0 2 27 
Sales2
0 1 
Redemptions2
Redemptions2
(4)(9)(38)(20)
Redemptions2
(2)(4)(10)(38)
Net Sales (Redemptions)2
Net Sales (Redemptions)2
(4)(8)(36)
Net Sales (Redemptions)2
(2)(4)(9)(36)
Net ExchangesNet Exchanges0 1 Net Exchanges0 0 
Impact of Foreign Exchange3
Impact of Foreign Exchange3
0 (1)
Impact of Foreign Exchange3
0 0 (1)
Market Gains and (Losses)1
Market Gains and (Losses)1
(4)6 (16)
Market Gains and (Losses)1
(14)(4)(45)
Ending AssetsEnding Assets$174 $191 $174 $191 Ending Assets$118 $174 $118 $174 
Total Multi-AssetTotal Multi-AssetTotal Multi-Asset
Beginning AssetsBeginning Assets$3,699 $3,705 $3,948 $4,199 Beginning Assets$3,135 $3,699 $3,780 $3,948 
Sales2
Sales2
71 45 226 191 
Sales2
54 71 171 226 
Redemptions2
Redemptions2
(103)(155)(817)(558)
Redemptions2
(132)(103)(407)(817)
Net Sales (Redemptions)2
Net Sales (Redemptions)2
(32)(110)(591)(367)
Net Sales (Redemptions)2
(78)(32)(236)(591)
Net ExchangesNet Exchanges9 (4)28 (23)Net Exchanges0 6 28 
Acquisitions/(Dispositions)Acquisitions/(Dispositions)54 54 Acquisitions/(Dispositions)0 54 0 54 
Impact of Foreign Exchange3
Impact of Foreign Exchange3
0 (1)
Impact of Foreign Exchange3
0 0 (1)
Market Gains and (Losses)1
Market Gains and (Losses)1
(38)145 254 (73)
Market Gains and (Losses)1
(155)(38)(648)254 
Ending AssetsEnding Assets$3,692 $3,737 $3,692 $3,737 Ending Assets$2,902 $3,692 $2,902 $3,692 
1    Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
2    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
3    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.


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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Total Changes in Total Long-Term Assets
Three Months EndedNine Months EndedThree Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(in millions)(in millions)2021202020212020(in millions)2022202120222021
Total Long-Term Fund AssetsTotal Long-Term Fund AssetsTotal Long-Term Fund Assets
Beginning Assets1
$135,161 $104,322 $123,713 $107,724 
Beginning AssetsBeginning Assets$109,334 $135,161 $135,294 $123,713 
SalesSales11,139 10,635 39,031 34,197 Sales7,128 11,139 25,728 39,031 
RedemptionsRedemptions(9,702)(8,328)(32,413)(31,954)Redemptions(10,056)(9,702)(36,153)(32,413)
Net Sales (Redemptions)Net Sales (Redemptions)1,437 2,307 6,618 2,243 Net Sales (Redemptions)(2,928)1,437 (10,425)6,618 
Net ExchangesNet Exchanges55 (9)(345)(85)Net Exchanges(5)55 (53)(345)
Acquisitions/(Dispositions)Acquisitions/(Dispositions)560 560 Acquisitions/(Dispositions)0 560 0 560 
Impact of Foreign Exchange2
(699)851 (778)(220)
Market Gains and (Losses)3
(217)3,340 6,529 1,149 
Impact of Foreign Exchange1
Impact of Foreign Exchange1
(1,841)(699)(4,434)(778)
Market Gains and (Losses)2
Market Gains and (Losses)2
(3,567)(217)(19,389)6,529 
Ending AssetsEnding Assets$136,297 $110,811 $136,297 $110,811 Ending Assets$100,993 $136,297 $100,993 $136,297 
Total Long-Term Separate Accounts AssetsTotal Long-Term Separate Accounts AssetsTotal Long-Term Separate Accounts Assets
Beginning AssetsBeginning Assets$80,807 $66,870 $75,384 $72,611 Beginning Assets$82,827 $80,807 $85,672 $75,384 
Sales4
7,518 4,041 16,486 11,342 
Redemptions4
(3,245)(2,687)(12,075)(11,324)
Net Sales (Redemptions)4
4,273 1,354 4,411 18 
Sales3
Sales3
6,686 7,518 17,965 16,486 
Redemptions3
Redemptions3
(2,540)(3,245)(11,335)(12,075)
Net Sales (Redemptions)3
Net Sales (Redemptions)3
4,146 4,273 6,630 4,411 
Net ExchangesNet Exchanges(50)356 (6)Net Exchanges0 (50)(1)356 
Acquisitions/(Dispositions)0 0 380 
Impact of Foreign Exchange2
(454)571 (642)33 
Market Gains and (Losses)3
(466)2,228 4,601 (2,013)
Impact of Foreign Exchange1
Impact of Foreign Exchange1
(1,215)(454)(2,796)(642)
Market Gains and (Losses)2
Market Gains and (Losses)2
(3,618)(466)(7,365)4,601 
Ending AssetsEnding Assets$84,110 $71,023 $84,110 $71,023 Ending Assets$82,140 $84,110 $82,140 $84,110 
Total Long-Term AssetsTotal Long-Term AssetsTotal Long-Term Assets
Beginning Assets1
$215,968 $171,192 $199,097 $180,335 
Sales4
18,657 14,676 55,517 45,539 
Redemptions4
(12,947)(11,015)(44,488)(43,278)
Net Sales (Redemptions)4
5,710 3,661 11,029 2,261 
Beginning AssetsBeginning Assets$192,161 $215,968 $220,966 $199,097 
Sales3
Sales3
13,814 18,657 43,693 55,517 
Redemptions3
Redemptions3
(12,596)(12,947)(47,488)(44,488)
Net Sales (Redemptions)3
Net Sales (Redemptions)3
1,218 5,710 (3,795)11,029 
Net ExchangesNet Exchanges5 (9)11 (91)Net Exchanges(5)(54)11 
Acquisitions/(Dispositions)Acquisitions/(Dispositions)560 560 380 Acquisitions/(Dispositions)0 560 0 560 
Impact of Foreign Exchange2
(1,153)1,422 (1,420)(187)
Market Gains and (Losses)3
(683)5,568 11,130 (864)
Impact of Foreign Exchange1
Impact of Foreign Exchange1
(3,056)(1,153)(7,230)(1,420)
Market Gains and (Losses)2
Market Gains and (Losses)2
(7,185)(683)(26,754)11,130 
Ending AssetsEnding Assets$220,407 $181,834 $220,407 $181,834 Ending Assets$183,133 $220,407 $183,133 $220,407 
1    The beginning assets for the nine months ended September 30, 2020 includes $8.2 billion of fund assets managed by a previously non-consolidated entity, HGPE, in which Federated Hermes held an equity method investment. Effective March 1, 2020, HGPE became a consolidated subsidiary. See Note (3) to the Consolidated Financial Statements for additional information.
2    Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.
32    Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.
43    For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Changes in Federated Hermes'Hermes’ average asset mix period-over-period across both asset classes and product types have a direct impact on Federated Hermes'Hermes’ operating income. Asset mix impacts Federated Hermes'Hermes’ total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type for the periods presented:
Percent of Total Average Managed AssetsPercent of Total Revenue Percent of Total Average Managed AssetsPercent of Total Revenue
Nine Months EndedNine Months EndedNine Months EndedNine Months Ended
September 30, 2021September 30, 2020September 30, 2021September 30, 2020 September 30, 2022September 30, 2021September 30, 2022September 30, 2021
By Asset ClassBy Asset ClassBy Asset Class
Money MarketMoney Market66 %72 %19 %42 %Money Market68 %66 %37 %19 %
EquityEquity16 %13 %52 %37 %Equity14 %16 %38 %52 %
Fixed-IncomeFixed-Income14 %12 %18 %13 %Fixed-Income14 %14 %15 %18 %
Alternative / Private MarketsAlternative / Private Markets3 %%8 %%Alternative / Private Markets3 %%7 %%
Multi-AssetMulti-Asset1 %%2 %%Multi-Asset1 %%2 %%
OtherOther %--1 %%Other %— %1 %%
By Product TypeBy Product TypeBy Product Type
Funds:Funds:Funds:
Money MarketMoney Market46 %53 %16 %39 %Money Market46 %46 %34 %16 %
EquityEquity9 %%41 %29 %Equity8 %%29 %41 %
Fixed-IncomeFixed-Income9 %%15 %11 %Fixed-Income8 %%12 %15 %
Alternative / Private MarketsAlternative / Private Markets2 %%5 %%Alternative / Private Markets2 %%5 %%
Multi-AssetMulti-Asset1 %%2 %%Multi-Asset1 %%2 %%
Separate Accounts:Separate Accounts:Separate Accounts:
Money MarketMoney Market20 %19 %3 %%Money Market22 %20 %3 %%
EquityEquity7 %%11 %%Equity6 %%9 %11 %
Fixed-IncomeFixed-Income5 %%3 %%Fixed-Income6 %%3 %%
Alternative / Private MarketsAlternative / Private Markets1 %%3 %%Alternative / Private Markets1 %%2 %%
OtherOther %— %1 %%Other %— %1 %%
Total managed assets represent the balance of AUM at a point in time, while total average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
As of September 30, 2021, totalTotal average managed assets increased 3% from September 30, 2020, primarily due to increases in fixed-income and equity assets, partially offset by a decrease in money market assets. Total average money market assets decreased 8% and 5%remained flat for the three and nine months ended September 30, 2021, respectively,2022, as compared to the same periods in 2020. Period-end2021. As of September 30, 2022, total managed assets decreased 2% from September 30, 2021. Average money market assets decreased 4% at September 30, 2021 as compared to September 30, 2020. Average equity assets increased 24% for both the three6% and nine months ended September 30, 2021, respectively, as compared to the same periods in 2020. Period-end equity assets increased 21% at September 30, 2021 as compared to September 30, 2020 primarily due to market appreciation. Average fixed-income assets increased 22% and 25%3% for the three and nine months ended September 30, 2021,2022, respectively, as compared to the same periods in 2020.2021. Period-end fixed-incomemoney market assets increased 22%7% at September 30, 20212022 as compared to September 30, 20202021. Average equity assets decreased 18% and 12% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. Period-end equity assets decreased 23% at September 30, 2022 as compared to September 30, 2021 primarily due to market depreciation, net salesredemptions and foreign exchange rate fluctuations. Average fixed-income assets decreased 7% and increased 1% for the three and nine months ended September 30, 2022, respectively, as compared to a lesser extent,the same periods in 2021. Period-end fixed-income assets decreased 12% at September 30, 2022 as compared to September 30, 2021 primarily due to market depreciation and net redemptions. Average alternative/private market assets decreased 1% and increased 9% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. Period-end alternative/private market assets decreased 9% at September 30, 2022 as compared to September 30, 2021 primarily due to foreign exchange rate fluctuations, partially offset by market appreciation.
Equity markets continued to rally the first two months of the third quarter before taking a volatile turn in September as uncertainties ranging from the Delta variant's spreadContinuing elevated inflation, rapid and stubborn inflation to a slowing China and political brinkmanship in Washington, D.C., weighed on markets. Despite posting its worst month since March 2020, the Standard and Poor's 500 index managed to eke out a 0.6% return for the quarter, while both the Nasdaq Composite Index and Dow Jones Industrial Average slipped 0.2% and 1.5%, respectively, for the three months. Overseas markets were similar with the MSCI World ex USA Index down 1.2% for the quarter and the MSCI All Country World ex USA down 3.6%. In the fixed-income markets, a July 2021 rally reversedlarge increases in the subsequent two monthsfed funds target rate and particularly near quarter-end, whensigns of softening in the Fed signaledeconomy undercut equity and bond returns for a slightly more aggressive policy tilt, leaving longer yields largely unchangedthird straight quarter for the three months despite intra-period volatility. The yieldended September 30, 2022. August headline and core personal consumption expenditure prices accelerated, while overseas, eurozone consumer prices increased an annualized 10% in September 2022 and are expected to worsen as the Russian-Ukraine war puts further upward pressure on the 10-year
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Treasury endedalready high energy prices. Against the backdrop of a strong labor market where job openings outnumber the unemployed, the FOMC focused on attempts to rein in inflation with back-to-back 75 basis-point increases at its July and September 2022 meetings. The central bank in September 2022 also indicated that additional increases totaling 125 basis points are likely by the end of the year. For the third quarter, the Dow Jones Industrial Average returned -6.7%, the S&P returned -5.3% and the Nasdaq Composite returned -4.1%. Overseas, the MSCI World ex USA Index returned -9.8% and the MSCI All Country World ex USA Index returned -10.6%. In fixed-income markets, the combination of interest rates at generational lows to start the year and the biggest spike in inflation in decades saw all sectors within the taxable bond market post negative returns, with the broad-based Bloomberg US Aggregate Bond Index returning -4.8% during the quarter, at 1.49%lowering its year-to-date return to -14.6%, up 2 basis points from where it started, whilea record decline for the yield on the 30-year Treasury dipped 4 basis points to end the quarter at 2.05%.first nine months of a year.
Results of Operations
Revenue. Revenue decreased $37.9increased $54.6 million for the three-month period ended September 30, 20212022 as compared to the same period in 20202021 primarily due to an increasea decrease of $72.4$109.2 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact) and a decrease in money market revenue of $17.5 million due to lower average money market assets. These decreases were. This increase was partially offset by an increasea decrease in equity and fixed-income revenue of $34.5$45.9 million and $11.9$10.8 million, respectively, due to higherlower average assets.
Revenue decreased $105.5increased $93.1 million for the nine-month period ended September 30, 20212022 as compared to the same period in 20202021 primarily due to an increasea decrease of $253.3$224.9 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact). This increase was partially offset by (1) a decrease in money marketequity revenue of $32.9$100.2 million due to lower average money market assets. These decreases were partially offset by an increaseassets, (2) a decrease in equity and fixed-income revenue of $110.4$12.5 million due to a change in the mix of average assets, (3) a decrease in performance fees of $6.7 million and $37.7(4) a decrease of $5.5 million respectively, duein carried interest (including the impact of foreign exchange rate fluctuations) primarily related to higher average assets, an increase of $9.3 millioncarried interest recorded in the first quarter 2021 as a result of the initial consolidation of certain VIEs not previously consolidated prior to the first quarter of 2021 related to the HCL Acquisition (see Note (3) to the Consolidated Financial Statements) and an increase in alternative/private market revenue of $7.3 million primarily due to the revenue of a previously nonconsolidated entity being recorded to operating revenue beginning in March 2020.VIEs.
For the nine-month periodperiods ended September 30, 2022 and 2021, and 2020, Federated Hermes'Hermes’ ratio of revenue to average managed assets was 0.21%0.22% and 0.23%0.21%, respectively. The decreaseincrease in the rate was primarily due to the reduction ofincrease in revenue from higherlower Voluntary Yield-related Fee Waivers, partially offset by a higher proportion ofdecrease in revenue earned onfrom lower average equity and fixed-income assets during the first nine months of 20212022 compared to the same period in 2020.2021.
Operating Expenses. Total Operating Expenses for the three-month period ended September 30, 2021 decreased $22.92022 increased $56.2 million as compared to the same period in 20202021 primarily due to a decreasean increase of $35.2$52.5 million in Distribution expense primarily related to a decrease in expense of $39.3 million due to an increase of $72.3 million resulting from a decrease in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact). This was, partially offset by an increasea decrease in Compensationcompetitive payments ($8.1 million), a decrease due to lower average equity fund assets ($5.2 million) and Related expense of $5.8 million driven primarily by the increase in the average Great British Pound (GBP)/United States Dollar (USD) exchange rate for the three-month period ended September 30, 2021 as compareda decrease due to the same period in 2020.mix of average money market fund assets ($4.8 million).
Total Operating Expenses for the nine-month period ended September 30, 2021 decreased $79.92022 increased $97.8 million as compared to the same period in 20202021. Distribution expense increased $102.8 million primarily related to an increase of $138.4 million due to a decrease of $137.9 million in Distribution expense primarily related to a decrease in expense of $153.9 million due to an increase in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact). This was, partially offset by an increasea decrease due to a change in the mix of average money market fund assets ($12.3 million), a decrease due to lower average equity fund assets ($12.2 million) and a decrease in competitive payments ($7.2 million). Compensation and Related expense decreased $19.7 million primarily due to (1) a decrease of $43.3 million driven primarily by (1) an increase of $12.9$13.9 million due to the increasedecrease in the average GBP/USD exchange rate for the nine-month period ended September 30, 20212022 as compared to the same period in 2020,2021 and (2) an increasea decrease of $9.2$4.7 million related primarily to the compensation expense recorded in the first quarter 2021 as a result of the initial consolidation of certain VIEs not previously consolidated prior to 2021 related to the HCL Acquisition (see Note (3) to the Consolidated Financial Statements), (3) an increase of $6.1 million related to the compensation expenses of a previously nonconsolidated entity being recorded to Compensation and Related expense beginning in March 2020 and (4) an increase of $5.2 million related to an increase in staff. Systems and Communications expense increased $9.9 million primarily due to technology-related projects.VIEs.
Nonoperating Income (Expenses). Nonoperating Income (Expenses), net decreased $8.0$5.8 million for the three-month period ended September 30, 20212022 as compared to the same period in 2020.2021. The decrease is primarily due to a $6.5$6.2 million decrease in Gain (Loss) on Securities, net primarily due to a larger decrease in the market value of investments in the third quarter 2020 including2022 as compared to the same period in 2021.
Nonoperating Income (Expenses), net decreased $49.0 million for the nine-month period ended September 30, 2022 as compared to the same period in 2021. The decrease is primarily due to a $46.4 million decrease in Gain (Loss) on Securities, net primarily due to a decrease in the market value of investments in the first nine months of 2022 as compared to an increase in the market value of investments compared to a slight decrease in the third quarter 2021 and a $1.3 million loss recorded to Nonoperating Income (Expenses) - Other, net related to a derivative financial instrument associated with the 2021 Acquisition of HFML Noncontrolling Interest in the third quarter of 2021 (FX Forward Loss).
Nonoperating Income (Expenses), net decreased $6.3 million for the nine-month period ended September 30, 2021 as compared toduring the same period in 2020. The decrease is primarily due to a $7.5 million gain from a fair value adjustment to an equity investment of a previously nonconsolidated entity recorded in Nonoperating Income (Expenses) - Other, net in March 2020 and the $1.3 million FX Forward Loss recorded in the third quarter of 2021. These decreases were partially offset by a $3.1 million
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
increase in Gain (Loss) on Securities, net primarily due to higher gains recorded from the increase in the market value of investments in the first nine months of 2021 as compared to the same period in 2020.
Income Taxes. The income tax provision was $23.2$21.6 million for the three-month period ended September 30, 20212022 as compared to $32.9$23.2 million for the same period in 2020.2021. The effective tax rate was 24.3% for the three-month period ended September 30, 2022 as compared to 24.0% for the same period in 2021.
The income tax provision was $58.1 million for the nine-month period ended September 30, 2022 as compared to $83.4 million for the same period in 2021. The decrease in the income tax provision was primarily due to (1) higher taxes in 2020 duea $14.5 million increase to an increased deferred tax expense recorded in the second quarter 2021 associated with the change in the UK tax rate from 17%19% to 19% ($3.3 million)25% effective April 1, 2023 and (2) lower taxable income before income taxes ($6.210.6 million). The effective tax rate was 24.0%25.2% for the three-monthnine-month period ended September 30, 20212022 as compared to 27.5%29.3% for the same period in 2020.2021. The decrease in the effective tax rate was primarily due to the increase in deferred tax expense recorded in 2020the second quarter 2021 associated with the 2020 UK tax rate increase from 17% to 19%.
The income tax provision was $83.4 million for the nine-month period ended September 30, 2021 as compared to $81.9 million for the same period in 2020. The increase in the income tax provision was primarily due to the net increase in deferred taxes associated with the change in the UK tax rate in 2020 from 17% to 19% and in 2021 from 19% to 25% effective April 1, 2023 ($11.2 million), partially offset by a decrease in taxable income ($8.3 million). The effective tax rate was 29.3% for the nine-month period ended September 30, 2021 as compared to 25.9% for the same period in 2020. The increase in the effective income tax rate was primarily due to the increase in deferred tax expense associated with the aforementioned UK tax rate increase from 19% to 25%.increase.
Net Income Attributable to Federated Hermes, Inc. Net income decreased $14.5$1.9 million for the three-month period ended September 30, 20212022 as compared to the same period in 2020,2021, primarily as a result of the changes in revenues, expenses, nonoperating income (expenses) and income taxes noted above. Diluted earnings per share for the three-month period ended September 30, 2021 decreased $0.122022 increased $0.05 as compared to the same period in 20202021 primarily due to a decrease in shares outstanding resulting from share repurchases ($0.07), partially offset by decreased net income.income ($0.02).
Net income decreased $29.5$18.7 million for the nine-month period ended September 30, 20212022 as compared to the same period in 2020,2021, primarily as a result of the changes in revenues, expenses, nonoperating income (expenses) and income taxes noted above. Diluted earnings per share for the nine-month period ended September 30, 20212022 decreased $0.25$0.02 as compared to the same period in 20202021 primarily due to decreased net income.income ($0.19), partially offset by a decrease in shares outstanding resulting from share repurchases ($0.17).
Liquidity and Capital Resources
Liquid Assets. At September 30, 2021,2022, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents, investments and receivables, totaled $411.8$508.2 million as compared to $432.5$492.7 million at December 31, 2020.2021. The change in liquid assets is discussed below.
At September 30, 2021,2022, Federated Hermes'Hermes’ liquid assets included investments in certain money market and fluctuating-value Federated Hermes Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), Russia, China and certain other countries subject to economic sanctions. Federated Hermes'Hermes’ experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis. Further, regarding international exposure, certain money market funds (representing approximately $152$251 million in AUM) that meet the requirements of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated Hermes'Hermes’ credit analysis process.
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $101.0$191.5 million for the nine months ended September 30, 20212022 as compared to net cash provided totaling $243.5$101.0 million for the same period in 2020.2021. The decrease of $142.5 millionincrease in cash provided was primarily due to (1) a net increasedecrease of $122.1$103.4 million in cash paid for trading securities for the nine months ended September 30, 20212022 as compared to the same period in 2020,2021, (2) a decreasean increase in cash received related to the $105.5$93.1 million decreaseincrease in revenue previously discussed, and (3) an increasea decrease of $24.0$9.0 million in cash paid for incentive compensation for the nine months ended September 30, 20212022 as compared to the same period in 2020.2021 and (4) a decrease of $6.0 million in cash paid for taxes for the nine months ended September 30, 2022 as compared to the same period in 2021. These decreasesincreases in cash were partially offset by a decrease(1) an increase in cash paid related to the $137.9$102.8 million decreaseincrease in Distribution expense previously discussed.discussed, (2) the $28.0 million initial closing payment for the CWH acquisition (see Note (3)) and (3) an increase of $6.2 million in cash paid for interest for the nine months ended September 30, 2022 as compared to the same period in 2021 primarily related to the $350.0 million Notes issued in March 2022.
Cash ProvidedUsed by Investing Activities. During the nine-month period ended September 30, 2021,2022, net cash providedused by investing activities was $13.0$1.3 million, which primarily represented $33.3$18.6 million paid for purchases of Investments—Affiliates and Other and $4.1 million paid for property and equipment, partially offset by $21.4 million in cash received from redemptions of Investments—Affiliates and Other partially offset by $7.8 million paid for property and equipment, $7.2 million paid for purchases of Investments—Affiliates and Other and $5.3 million paid for an asset purchase during 2021.
Cash Used by Financing Activities. During the nine-month period ended September 30, 2021, net cash used by financing activities was $213.4 million due primarily to the payment to acquire additional equity of HFML (see Note (3) to theOther.
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Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Consolidated Financial Statements), $92.4Cash Used by Financing Activities. During the nine-month period ended September 30, 2022, net cash used by financing activities was $90.0 million paid fordue primarily to (1) $311.7 million of debt payments, (2) $211.2 million of treasury stock purchases $79.7and (3) $73.8 million or $0.81 per share of dividends paid in dividends to holders of itsFederated Hermes common shares and $55.0 million paidshares. These decreases in connection with its debt obligations. This wascash were partially offset by $101.3(1) $488.3 million of new borrowings, including amounts borrowed under Federated Hermes’ revolving credit facility and the proceeds from the $350.0 million in Notes issued in March 2022 and (2) $50.1 million of contributions from noncontrolling interests in subsidiaries and $82.2 million borrowed fromsubsidiaries.
Long-term Debt. On March 17, 2022, pursuant to a Note Purchase Agreement, Federated Hermes revolving credit facility.
Borrowings.issued unsecured senior Notes in the aggregate amount of $350.0 million at a fixed interest rate of 3.29% per annum, payable semiannually in arrears on the 17th day of March and September in each year of the agreement. The entire principal amount of the Notes will become due March 17, 2032. Citigroup Global Markets Inc. and PNC Capital Markets LLC acted as lead placement agents in relation to the Notes and certain subsidiaries of Federated Hermes are guarantors of the obligations owed under the Note Purchase Agreement. As of September 30, 2021,2022, the outstanding balance of Federated Hermes'Hermes’ Notes Payable was $347.5 million, net of unamortized issuance costs in the amount of $2.5 million, and was recorded in Long-Term Debt on the Consolidated Balance Sheets. The proceeds were or will be used to supplement its cash flow from operations, to fund share repurchases and potential acquisitions, to partially pay down Federated Hermes’ debt under the Credit Agreement and for other general corporate purposes. See Note (11) to the Consolidated Financial Statements for additional information on the Note Purchase Agreement.
As of September 30, 2022, Federated Hermes’ Credit Agreement consists of a $350$350.0 million revolving credit facility with an additional $200$200.0 million available via an optional increase (or accordion) feature. The original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases. As of September 30, 2021,2022, Federated Hermes has $247.8$300.0 million available to borrow under the Credit Agreement. See Note (11) to the Consolidated Financial Statements for additional information on the Credit Agreement.
TheBoth the Note Purchase Agreement and Credit Agreement includesinclude an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions. Federated Hermes was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the nine months ended September 30, 2021.2022. An interest coverage ratio of at least 4 to 1 is required and, as of September 30, 2021,2022, Federated Hermes'Hermes’ interest coverage ratio was 38657 to 1. A leverage ratio of no more than 3.0 to 1 is required and, as of September 30, 2021,2022, Federated Hermes'Hermes’ leverage ratio was 0.230.9 to 1. The
Both the Note Purchase Agreement and the Credit Agreement also hashave certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
Future Cash Needs. Management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, purchasing ordinary shares of a subsidiary, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology). Any number of factors may cause Federated Hermes'Hermes’ future cash needs to increase. As a result of the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for compliance and investment management personnel, compliance systems and technology and related professional and consulting fees may continue to increase.
On October 28, 2021, the27, 2022, Federated Hermes’ board of directors declared a $0.27 per share dividend to Federated Hermes’ Class A and Class B common stock shareholders of record as of November 8, 20212022 to be paid on November 15, 2021.2022.
After evaluating Federated Hermes'Hermes’ projected liquid assets, expected continuing cash flow from operations, cash available from the Note Purchase Agreement, its borrowing capacity under the Amended Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet both its presentshort-term and reasonably foreseeable long-term cash needs.
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Financial Position
The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations. This discussion excludes certain material fluctuations primarily due to the HCL Acquisition (see Note (3) to the Consolidated Financial Statements).
Investments—Consolidated Investment Companies at September 30, 2021 decreased $37.3 million from December 31, 2020 primarily due to a decrease of $73.0 million related to the deconsolidation of three VREs and the liquidation of a VRE during the first nine months of 2021. This decrease was partially offset by an increase of $34.5 million due to the consolidation of a VRE and a VIE in the first nine months of 2021.
Investments—Affiliates and Other at September 30, 2021 increased $43.7 million from December 31, 2020 primarily due to the deconsolidation of two VREs in the first nine months of 2021 which reclassified Federated Hermes' investment into Investments—Affiliates and Other.
Accrued Compensation and Benefits at September 30, 2021 decreased $37.5 million from December 31, 2020 primarily due to the 2020 accrued annual incentive compensation being paid in the first quarter of 2021 ($133.9 million), partially offset by 2021 incentive compensation accruals recorded at September 30, 2021 ($95.9 million).
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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
Long-Term Deferred Tax Liability,Financial Position
The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Investments—Consolidated Investment Companies at September 30, 2022 increased $1.7 million from December 31, 2021 primarily due to an increase of (1) $23.1 million related to the consolidation of a VIE and a VRE and (2) $14.8 million in net purchases in existing consolidated funds during the first nine months of 2022. These increases were partially offset by a decrease of (1) $20.3 million net depreciation on existing consolidated funds during the first nine months of 2022 and (2) $15.9 million related to the deconsolidation of VREs.
Investments—Affiliates and Other at September 30, 2022 decreased $18.4 million from December 31, 2021 primarily due to (1) $17.8 million in net depreciation, (2) a decrease of $4.3 million related to the consolidation of a VIE and a VRE which reclassified Federated Hermes' investments into Investments—Consolidated Investment Companies, (3) a decrease of $3.6 million due to foreign exchange rate fluctuations on existing investments and (4) $2.9 million in net redemptions. These decreases were partially offset by an increase of $10.1 million related to the deconsolidation of a VRE in the first nine months of 2022 which reclassified Federated Hermes’ investment into Investments—Affiliates and Other.
Intangible Assets, net at September 30, 2021 increased $17.42022 decreased $64.4 million from December 31, 20202021 primarily due to a $55.8 million decrease in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate fluctuations and $9.3 million of amortization expense.
Right-of-Use Assets, net at September 30, 2022 decreased $15.0 million from December 31, 2021 due primarily to annual amortization and Long-Term Lease Liabilities at September 30, 2022 decreased $16.9 million from December 31, 2021 primarily due to payments made on leases during 2022.
Accrued Compensation and Benefits at September 30, 2022 decreased $44.1 million from December 31, 2021 primarily due to the revaluation of the foreign net deferred tax liability associated with the change2021 accrued annual incentive compensation being paid in the UK tax ratefirst quarter 2022 ($123.4 million), partially offset by 2022 incentive compensation accruals recorded at September 30, 2022 ($78.3 million).
In July 2022, Federated Hermes’ board of directors authorized the retirement of 10 million treasury shares which restored these shares to authorized but unissued status. Federated Hermes recorded a $313.8 million reduction to Treasury Stock, at cost using the specific-identification method and a $42.7 million reduction to Class B common stock, at cost using the average cost method. The difference was recorded as a reduction to Retained Earnings and Additional Paid-In Capital from 19%Treasury Stock Transactions. There was no impact to 25% effective April 1, 2023.total equity as a result of this non-cash transaction.
Legal Proceedings    
Federated Hermes has claims asserted against it from time to time. See Note (15)(17) to the Consolidated Financial Statements for additional information.
Critical Accounting Policies
Federated Hermes'Hermes’ Consolidated Financial Statements have been prepared in accordance with GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management continually evaluates the accounting policies and estimates it uses to prepare the Consolidated Financial Statements. In general, management'smanagement’s estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates made by management and those differences may be material.
Of the significant accounting policies described in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020,2021, management believes that its policies regarding accounting for asset acquisitions and business combinations, goodwill andindefinite-lived intangible assets included in its Goodwill and Hermes redeemable noncontrolling interest involveIntangible Assets policy involves a higher degree of judgment and complexity. See Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020,2021, Item 7 - Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations under the section Critical Accounting Policies for a complete discussion of these policies.this policy.
The continued uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed beginning in the first quarter of 2020 for certain indefinite-lived intangible assets totaling £150.3 million ($202.5167.8 million as of September 30, 2021)2022) acquired in connection with the 2018 HFML Acquisition.acquisition of a controlling interest in FHL. A discounted cash flow
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Table of Contents
Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (unaudited)
analysis resulted in no impairment as of each quarter end for 2020 andsince the first and second quartersquarter of 2021 since2020 as the estimated fair value of these intangible assets exceeded the carrying value. An additional discounted cash flow analysis prepared as of September 30, 20212022 resulted in the estimated fair value exceeding the carrying value by less than 5%10%. The key assumptions in the discounted cash flow analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows. The risk of future impairment increases with a decrease in projected cash flows and/or an increase in the discount rate. As of September 30, 2021,2022, assuming all other assumptions remain static, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 6% and 5%, respectively.. An increase or decrease of 10% in pre-tax profit margins would result in a corresponding change to estimated fair value of approximately 12%. An increase or decrease in the discount rate of 25 basis points would result in an inverse change to estimated fair value of approximately 3%2%. The market volatility and other events relatedFurther reductions to the Pandemic could further reduce the AUM, revenues and earnings or increases in the discount rate associated with these intangible assets and may result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which may result in an impairment. For additional information on risks related to the Pandemic, see Item 1A - Risk Factors included in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
Federated Hermes has certain investments in foreign operations, whose net assets and results of operations are exposed to foreign currency risk when translated into U.S. dollars upon consolidation. During 2021, a British Pound Sterling-denominated, majority-owned subsidiary of Federated Hermes entered into foreign currency forward transactions in order to hedge against foreign exchange rate fluctuations in the U.S. Dollar (combined notional amount of £67.6 million as of September 30, 2021). This subsidiary is exposed to foreign currency exchange risk as a result of a portion of its revenue being earned in U.S. Dollars. Management considered a hypothetical 20% fluctuation in the currency exchange rate and determined that the impact of such a fluctuation could impact Federated Hermes’ financial condition and results of operations by approximately $10 million.
As of September 30, 2021,2022, there were no other material changes to Federated Hermes'Hermes’ exposures to market risk that would require an update to the disclosures provided in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020.2021.
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Part I, Item 4. Controls and Procedures
(a)Federated Hermes carried out an evaluation, under the supervision and with the participation of management, including Federated Hermes'Hermes’ President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of Federated Hermes'Hermes’ disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2021.2022. Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that Federated Hermes'Hermes’ disclosure controls and procedures were effective at September 30, 2021.2022.
(b)There has been no change in Federated Hermes'Hermes’ internal control over financial reporting that occurred during the quarter ended September 30, 20212022 that has materially affected, or is reasonably likely to materially affect, Federated Hermes'Hermes’ internal control over financial reporting.
Part II, Item 1. Legal Proceedings 
Information regarding this Item is contained in Note (15)(17) to the Consolidated Financial Statements.
Part II, Item 1A. Risk Factors 
There are no material changes toAs discussed in Item 1A – Risk Factors – General Risk Factors – Economic and Market Risks – Potential Adverse Effects of a Decline or Disruption in the risk factors includedEconomy or Markets in Federated Hermes'Hermes’ Annual Report on Form 10-K for the year ended December 31, 2020.2021, geopolitical tensions or military escalation or other instability in certain countries or regions, and technology-related interruptions or cyber-attacks, can cause or contribute to volatility, illiquidity, economic or market downturns, loss of value, market and supply-chain disruptions or other conditions and have potentially adverse effects. See also Item 1A – Risk Factors – General Risk Factors – Other General Risks – Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic) in Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2021. Russia’s February 24, 2022 invasion of Ukraine and annexation of Ukrainian territory has generated substantial geopolitical uncertainty in Europe that has disrupted the European and global energy and other markets.Russia’s aggression also has led to sanctions being imposed against Russia, certain Russian nationals, and Belarus. Based on the Russian government’s aggression in Ukraine, many countries around the world - including the U.S., UK, Canada, Germany, and France - reduced Russia’s access to the world’s financial system through sanctions ranging from freezing assets to removing Russian banks from the SWIFT global transactions banking network, among others. Sanctions can result, among other effects, in the devaluation of Russian currency, downgrades in the country’s credit rating, and/or a decline in the value and liquidity of Russian securities, property or interests. These sanctions can also result in the freeze of Russian securities and/or funds invested in prohibited assets, impairing the ability to buy, sell, receive, or deliver those securities and/or assets. These sanctions or the threat of additional sanctions could also result in Russia taking counter measures or retaliatory actions, which may further impair the value and liquidity of Russian securities. For example, the Russian invasion of Ukraine has increased, or created the possibility of increased, cybersecurity attacks. Economic sanctions and other actions against Russian institutions, companies,
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and individuals resulting from the ongoing conflict can also have a substantial negative impact on other economies and securities markets both regionally and globally, as well as on companies with operations in the conflict region. Any further sanctions, actions or escalation of cyber-attacks can exacerbate these risks. The impact of these geopolitical tensions and escalation, and resulting sanctions, actions, and escalation of cyber-attacks, is uncertain and can vary, including in material ways. Federated Hermes’ will continue to monitor developments regarding these geopolitical tensions and military escalation, and the resulting sanctions, actions, and escalation of cyber activity, and assess their impact on Federated Hermes’ Financial Condition.
Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) not applicable.
(b) not applicable.
(c) The following table summarizes stock repurchases under Federated Hermes'Hermes’ share repurchase program during the third quarter of 2021.2022.
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
Maximum Number of Shares that
May Yet Be Purchased Under the
Plans or Programs1
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
Maximum Number of Shares that
May Yet Be Purchased Under the
Plans or Programs1
July2
July2
1,900 $3.00 3,166,755 
July2
90,300 $31.91 85,000 5,077,000 
August130,000 32.58 130,000 3,036,755 
September2
461,719 29.16 425,000 2,611,755 
August2
August2
2,000 3.00 5,077,000 
SeptemberSeptember119,585 33.86 119,585 4,957,415 
TotalTotal593,619 $29.82 555,000 2,611,755 Total211,885 $32.74 204,585 4,957,415 
1    In AprilDecember 2021, the board of directors authorized a share repurchase program with no stated expiration date that allowed the repurchase of up to 7.5 million shares of Class B common stock. This program was fulfilled in September 2022. In June 2022, the board of directors authorized a share repurchase program with no stated expiration date that allows the repurchase of up to 4.05.0 million shares of Class B common stock. No other program existed as of September 30, 2021.2022. See Note (13) to the Consolidated Financial Statements for additional information on this program.these programs.
2    In July and September 2021, 1,900August 2022, 5,300 and 36,7192,000 shares, respectively, of Class B common stock with a weighted-average price of $3.00 and $0.87 per share respectively, were repurchased as employees forfeited restricted stock.


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Part II, Item 6. Exhibits

The following exhibits required to be filed or furnished by Item 601 of Regulation S-K are filed or furnished herewith and incorporated by reference herein:

Exhibit 31.1 – Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit 31.2 – Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit 32 – Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

Exhibit 101.INS – Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB – Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104 – Cover Page Interactive Data File (embedded within the Inline XBRL document)


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
      Federated Hermes, Inc.
   (Registrant)
Date October 29, 2021November 1, 2022 By: /s/ J. Christopher Donahue
   J. Christopher Donahue
   President and Chief Executive Officer
   
Date October 29, 2021November 1, 2022 By: /s/ Thomas R. Donahue
   Thomas R. Donahue
   Chief Financial Officer
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