T. Rowe Price Group, Inc.
PRICE T ROWE GROUP INC (Form: 10-K, Received: 02/05/2016 14:53:32)
Table of Contents                                  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Commission file number 000-32191
T. ROWE PRICE GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
52-2264646
State of incorporation
 
IRS Employer Identification No. 
100 East Pratt Street, Baltimore, Maryland 21202
Address, including zip code, of principal executive offices
(410) 345-2000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $.20 par value per share
 
The NASDAQ Stock Market LLC
(Title of class)
 
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     [X]  Yes     [   ]  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    [   ]  Yes     [X]  No
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, and (2) has been subject to such filing requirements for the past 90 days.     [X]  Yes     [   ]  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months.     [X]  Yes     [   ]  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
 
Accelerated filer
 
[   ]
Non-accelerated filer
[   ]
 
Smaller reporting company
 
[   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    [   ]  Yes     [X]  No
The aggregate market value of the common equity (all voting) held by non-affiliates (excludes current executive officers and directors) computed using $77.73 per share (the NASDAQ Official Closing Price on June 30, 2015 , the last business day of the registrant’s most recently completed second fiscal quarter) was $19.4 billion .
The number of shares outstanding of the registrant's common stock as of the latest practicable date, February 3, 2016 , is 248,179,222 .
DOCUMENTS INCORPORATED BY REFERENCE: In Part III, the Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
Exhibit index begins on page 61 .


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ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM.
 
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
 
ITEM 15.



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PART I

Item 1.
Business.

T. Rowe Price Group, Inc. is a financial services holding company that provides global investment management services through its subsidiaries to individual and institutional investors in the sponsored T. Rowe Price mutual funds distributed in the United States and other investment portfolios. These other investment portfolios include separately managed accounts, subadvised funds, and other sponsored investment portfolios, including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the United States, and portfolios offered through variable annuity life insurance plans in the U.S.

The late Thomas Rowe Price, Jr., founded our firm in 1937, and the common stock of T. Rowe Price Associates, Inc. was first offered to the public in 1986. The T. Rowe Price Group corporate holding company structure was established in 2000.

We derive the vast majority of our consolidated net revenue and net income from investment advisory services provided by our subsidiaries, primarily T. Rowe Price Associates and T. Rowe Price International Ltd. Our revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations. At December 31, 2015 , we had $763.1 billion in assets under management, including $487.1 billion in the Price Funds and $276.0 billion in other investment portfolios.

Our assets under management are accumulated from a diversified client base across four primary distribution channels: third-party financial intermediaries that distribute our managed investment portfolios in the U.S. and other countries; individual U.S. investors on a direct basis; U.S. defined contribution retirement plans; and institutional investors globally. As of December 31, 2015 , more than forty-five percent of our assets under management are sourced from our third-party financial intermediary distribution channel with the remaining three distribution channels comprising the balance. We have taken steps to broaden and deepen our distribution reach in overseas markets and with financial intermediaries in the U.S., Europe and Asia. These initiatives are part of multi-year plans designed to further diversify our assets under management and client base. For the foreseeable future, we will continue to make key hires and make investments in infrastructure to support these initiatives.

The assets we manage are a broad range of U.S. and international stock, blended asset, bond, and money market mutual funds and other investment portfolios that are designed to meet the varied and changing needs and objectives of individual and institutional investors. Investors select mutual funds based on the distinct objective that is described in each fund’s prospectus and can exchange balances among the funds as permitted when economic and market conditions and their investment needs change. The investment objectives and investment management approaches employed in our other investment portfolios are similar to those in the Price Funds. We also offer specialized advisory services, including management of stable value investment contracts and a distribution management service for the disposition of equity securities our clients receive from third-party venture capital investment pools.

Investment objectives for our managed investment portfolios, including the Price Funds, accommodate a variety of strategies. Equity investment strategies may emphasize large-cap, mid-cap or small-cap investing; growth, value or core investing; and U.S., global, multi-regional and regional international, emerging market, and sector investing. Our fixed income strategies may focus on high yield, U.S. taxable bond, taxable low-duration, international, global and municipal tax-free investing. We also combine strategies across asset classes to create solutions that help our clients achieve a single investment objective. To this end, we offer systematic, tax-efficient, blended equity, and asset allocation investment strategies, including target-date retirement investment portfolios.

We employ fundamental and quantitative security analysis in the performance of the investment advisory function through substantial internal equity and fixed income investment research capabilities. We perform original industry and company research using such sources as inspection of corporate activities, management interviews, company-published financial and other information, financial newspapers and magazines, corporate rating services, and field checks with suppliers and competitors in the same industry and particular business sector. Our research staff operates primarily from offices located in the U.S. and England with additional staff based in Australia, Hong Kong, Japan, and Singapore. We also use research provided by brokerage firms and security analysts in a supportive capacity and information received from private economists, political observers, commentators, government experts, and market analysts. Our securities selection process for some investment portfolios is based on quantitative analysis using computerized data modeling.

From time to time, we introduce new strategies and investment vehicles to complement and expand our investment offerings, respond to competitive developments in the financial marketplace, and meet the changing needs of our investment advisory clients. We will introduce a new investment strategy if we believe that we have the appropriate investment management


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expertise and that its objective will be useful for investors over a long period. We continued to expand our investment offerings in 2015 with new equity and fixed income strategies, and the launch of new investment vehicles. We have launched three new fixed income products—Global Unconstrained, Global High Income, Global Investment Grade Corporate Bond—and one new equity product Emerging Markets Value. We also launched a new Retirement Date series for institutional investors and added an I-Share class to a number of existing Price Funds. The I-Class shares are designed to meet the needs of institutionally oriented clients who seek investment products with lower shareholder servicing costs and lower expense ratios. We plan to add the I-Share class to other Price Funds in 2016.

We typically provide seed capital for new investment funds and trusts to enable the portfolio manager to begin building an investment performance history in advance of the portfolio receiving sustainable client assets. The length of time we hold our seed capital investment will vary for each new investment portfolio as it is highly dependent on how long it takes to generate cash flows into the portfolio from unrelated investors. We attempt to ensure that the new investment portfolio has a sustainable level of assets from unrelated shareholders before we consider redemption of our seed capital investment in order to not negatively impact the new investment portfolio's net asset value or its investment performance record. At December 31, 2015 , nearly $1.0 billion of our investments in sponsored portfolios and those sponsored portfolio investments reported in other investments is considered seed investments. About 60% of our total seed capital investments of $1.0 billion are investments in fixed income strategies and the remaining are investments in equity and asset allocation strategies.

Conversely, we may also limit new investments into a mutual fund or investment strategy in order to maintain the integrity of the investment strategy and to protect the interests of its existing fund shareholders and investors. At present, the following mutual funds and affiliated other investment portfolio strategies are closed to new investors.
Fund
Date Closed
Institutional Mid-Cap Equity Growth Fund
December 8, 2003
Mid-Cap Growth Fund
May 31, 2010
Mid-Cap Value Fund
May 31, 2010
High Yield Fund
April 27, 2012
Institutional High Yield Fund
April 27, 2012
Institutional Small-Cap Stock Fund
December 31, 2013
New Horizons Fund
December 31, 2013
Small-Cap Stock Fund
December 31, 2013
Capital Appreciation Fund
June 30, 2014
Health Sciences Fund
June 1, 2015

We also provide certain administrative services as ancillary services to our investment advisory clients. These administrative services are provided by several of our subsidiaries and include mutual fund transfer agent, accounting, distribution, and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans investing in our sponsored mutual funds; recordkeeping services for defined contribution retirement plans investing in mutual funds outside the T. Rowe Price complex; brokerage; and trust services. Substantially all of our administrative and distribution and servicing fee revenues in 2015 were determined based generally on the recovery of our related costs to provide these services. Therefore, changes in our administrative fees, distribution and servicing fees, and related expenses generally do not significantly affect our net operating income or net income.

In 2014, we made a long-term strategic decision to change our delivery of certain administrative services, including fund accounting and other investment recordkeeping operations. BNY Mellon was contracted to provide such services and 210 associates became employees of BNY Mellon on August 1, 2015. BNY Mellon will transition our data to its technology platform over time. Though a few line items of our consolidated income statements, including administrative revenues, compensation and related costs, and other operating expenses, will be affected, we do not expect that the net impact on our future operating results will be material.



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2015 DEVELOPMENTS.

U.S. equities, as measured by the S&P 500 Index, rose in 2015 for the seventh consecutive year. The S&P 500 Index and the NASDAQ Composite Index, which is heavily weighted in technology companies, returned 1.4% and 5.7% , respectively, in 2015 . Equities in developed non-U.S. markets were mixed, while emerging market equities fared poorly around the world due in part to the broad currency weakness versus the U.S. dollar which hurt investor returns in dollar terms. Global bonds returns were also mixed in 2015 . In this market environment, our 2015 results were as follows:

 
 
Year ended
(in millions, except per-share data)
 
12/31/2014
 
12/31/2015
 
% change
Investment advisory fees
 
$
3,464.5

 
$
3,687.3

 
6
 %
Net revenues
 
$
3,982.1

 
$
4,200.6

 
5
 %
Operating expenses
 
$
2,091.2

 
$
2,301.7

 
10
 %
Net operating income
 
$
1,890.9

 
$
1,898.9

 
 %
Non-operating investment income
 
$
112.2

 
$
103.5

 
(8
)%
Net income
 
$
1,229.6

 
$
1,223.0

 
(1
)%
 
 
 
 
 
 
 
Diluted earnings per share
 
$
4.55

 
$
4.63

 
2
 %
 
 
 
 
 
 
 
Average assets under management (in billions)
 
$
724.7

 
$
767.9

 
6
 %
Annual management fee rate (in basis points)
 
47.8

 
48.0

 
 

Six Price Funds - Growth Stock , Blue-Chip Growth , Mid-Cap Growth , Value , Capital Appreciation , and Equity Income  -accounted for 27% of our investment advisory revenues in 2015 , and 22% of our assets under management at December 31, 2015 . Our largest client account relationship apart from the Price Funds is with a third-party financial intermediary that accounted for about 5% of our investment advisory revenues in 2015 .

Assets under management ended 2015 at $763.1 billion , an increase of $16.3 billion from the end of 2014 . Market appreciation and income, net of distributions not reinvested, added $14.7 billion and net cash inflows added $1.6 billion in assets under management during 2015 .

Our target-date retirement funds and trusts, which provide shareholders with single, diversified portfolios that invest in underlying T. Rowe Price funds and T. Rowe Price collective investment trusts, continue to be a significant source of our asset growth. In 2015 , our net cash flows include $16.2 billion that originated in these portfolios, including $8.9 billion in our target-date retirement funds. The assets under management in these portfolios totaled $165.7 billion at December 31, 2015 , including $135.5 billion in target-date retirement funds and $30.2 billion in target-date retirement trusts. These portfolios' assets account for 21.7% of our managed assets at December 31, 2015 , compared with 19.9% at the end of 2014 .



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Details of our assets under management (in billions) at December 31, 2015 , are as follows:
Assets under management by investment portfolio
 
Sponsored U.S. mutual funds
$
487.1

Other investment portfolios
276.0

Total
$
763.1

 
 
Assets under management by mandate
 
U.S. stocks and blended asset
$
502.7

International stocks and blended asset
90.1

Total stock and blended asset portfolios
592.8

 
 
U.S. fixed income
151.7

International fixed income
18.6

Total fixed income portfolios
170.3

 
$
763.1

Assets under management by account type
 
Defined contribution retirement assets
$
328.4

Other retirement and deferred annuity assets
197.9

Total retirement and tax deferred annuity assets
526.3

Other
236.8

 
$
763.1


Non-U.S. dollar denominated securities held in client accounts are $105.2 billion , or 13.8% of our total assets under management at December 31, 2015 . Investors domiciled outside the U.S. represent nearly 5% of total assets under management at the end of 2015 . We service clients in 41 countries around the world.

Investment Performance.

Strong investment performance and brand awareness is a key driver to attracting assets and to our long-term success. As of the end of 2015 , 80% of the T. Rowe Price U.S. mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis for the three-year period, 78% outperformed for the five-year period, 88% outperformed for the 10-year period, and 80% outperformed for the one-year period. In addition, T. Rowe Price stock, bond and blended asset funds that were given an overall rating of four or five stars from Morningstar at December 31, 2015 , account for nearly 86% of the assets under management in our rated funds. Our target-date retirement funds continue to deliver very attractive long-term performance, with at least 97% of these funds outperforming their comparable Lipper averages on a total return basis for the three-, five-, and 10-year periods ended December 31, 2015 . The performance of our institutional strategies remains very competitive.

Capital Resources.

At December 31, 2015 , we remain debt-free with ample liquidity and resources, including cash and sponsored portfolio investment holdings of nearly $2.8 billion . During the full year of 2015 , we expended  $987.8 million  to repurchase 13.1 million shares, or 5% of our outstanding common stock. We generally repurchase shares of our common stock over time to offset the dilution created by our equity-based compensation plans. We declared and paid regular quarterly dividends in 2015 that totaled $2.08 per share as well as a special dividend of $2.00 per share.

We also invested  $151 million  during the year in capitalized technology and facilities from existing cash balances. We currently expect total capital expenditures for technology development, facilities and equipment for 2016 to be up to  $180 million , which will be funded from operating resources.

Our substantial liquidity and resources also allow us to take advantage of attractive growth opportunities; invest in key capabilities, including investment professionals, technologies, and new investment strategy offerings; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future. In the coming years, we expect to increase funding for long-term initiatives to sustain and deepen our investment talent, expand capabilities through enhanced technology, and broaden our distribution reach globally.


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Additional information concerning our revenues, results of operations and total assets, and our assets under management during the past three years is contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K as well as our consolidated financial statements, which are included in Item 8 of this report.

PRICE FUNDS.

We provide investment advisory, distribution, and other administrative services to the Price Funds under various agreements. Investment advisory services are provided to each fund under individual investment management agreements that grant the fund the right to use the T. Rowe Price name. The boards of the respective funds, including a majority of directors who are not interested persons of the funds or of T. Rowe Price Group (as defined in the Investment Company Act of 1940), must approve the investment management agreements annually. Fund shareholders must approve material changes to these investment management agreements. Each agreement automatically terminates in the event of its assignment (as defined in the Investment Company Act) and, generally, either party may terminate the agreement without penalty after a 60-day notice. The termination of one or more of these agreements could have a material adverse effect on our results of operations. Independent directors and trustees of the Price Funds regularly review our fee structures.

Advisory Services.

Investment advisory revenues earned from the Price Funds are determined daily based on the net assets managed in each fund. The advisory fee paid monthly by each of the Price Funds is computed on a daily basis by multiplying a fund’s net assets by its effective fee rate. Details of each fund's fee arrangement are available in its prospectus.

For the majority of the Price Funds, the fee rate is equal to the sum of a tiered group fee rate plus an individual fund rate. The tiered group rate is based on the combined net assets of nearly all of the Price Funds. If the combined net assets of these Price Funds exceed $500 billion , the weighted-average fee across pricing tiers is 29.1 basis points for the first $500 billion of net assets plus 27.0 basis points for net assets in excess of $500 billion . To the extent that the combined net assets of the funds included in the group rate calculation increase, the group charge component of a fund's advisory fee rate and the resulting advisory fee rate paid by each fund will decrease.

The individual fund rates are generally flat rates that are set based on the fund’s specific investment objective. Several funds, including the Blue Chip Growth, Equity Income, Growth Stock and Mid-Cap Growth funds, have an effective tiered individual fund rate in which their base individual flat rate is reduced by about 15% on net assets in excess of $15 billion. The New Income and Value funds have their base individual flat rate reduced by about 15% on net assets in excess of $20 billion. The effective fee rates for the stock and bond funds on which we earned annual advisory fees of at least $6.0 million in 2015 varied from a low of 33 basis points for the Limited Duration Inflation Focused Bond fund to a high of 104 basis points for the Emerging Markets Stock, International Discovery, and Latin America funds.

The fee rate of several of the Price Funds, including the Index and Summit funds as well as specific funds offered solely to institutional investors, do not include a group fee component but rather an individual fund fee or an all-inclusive fee. An all-inclusive fee covers both the investment management fee and ordinary operating expenses incurred by the fund. Each of the funds in the series of Spectrum Funds and in the series of target-date retirement funds that we offer invests in a diversified portfolio of other Price Funds and has no separate investment advisory fee; rather, they indirectly bear the expenses of the funds in which they invest.

Each Price fund typically bears all expenses associated with its operation and the issuance and redemption of its securities. In particular, each fund pays investment advisory fees; shareholder servicing fees and expenses; fund accounting fees and expenses; transfer agent fees; custodian fees and expenses; legal and auditing fees; expenses of preparing, printing and mailing prospectuses and shareholder reports to existing shareholders; registration fees and expenses; proxy and annual meeting expenses; and independent trustee or director fees and expenses.

We usually provide that a newly organized fund’s expenses will not exceed a specified percentage of its net assets during an initial operating period. Generally, during the earlier portion of the period, we will waive advisory fees and absorb other mutual fund expenses in excess of these self-imposed limits. During the latter portion of the period, we may recover some or all of the waived fees and absorbed costs, but such recovery is not assured.

In 2015 , we continued to voluntarily waive advisory fees and other fund expenses of all of our money market funds and trusts in order to maintain a positive yield for investors. Total fees waived in 2015 were $47.6 million , or about 1% of total


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investment advisory revenues earned during the year, compared to $58.4 million in 2014 . We expect that these fee waivers will continue in 2016 .

Assets under Management.

At December 31, 2015 , assets under our management in the Price Funds aggregated $487.1 billion , an increase of 2.0% or $9.5 billion from the beginning of the year. The following table presents the net assets (in billions) and the year of formation of our largest Price Funds (net assets in excess of $1.0 billion at December 31, 2015 ) at December 31.
 
2014
 
2015
Stock and blended asset funds:
 
 
 
Balanced (1991)
$
3.9

 
$
3.7

Blue Chip Growth (1993)
26.4

 
31.3

Capital Appreciation (1986)
22.9

 
24.3

Diversified Small-Cap Growth (1997)
1.0

 
2.1

Dividend Growth (1992)
4.6

 
4.7

Emerging Markets Stock (1995)
7.6

 
8.3

Equity Income (1985)
29.8

 
22.7

Equity Index 500 (1990)
24.4

 
25.0

European Stock (1990)
1.4

 
1.7

Global Technology (2000)
1.6

 
2.7

Growth & Income (1982)
1.6

 
1.6

Growth Stock (1950)
43.0

 
45.3

Health Sciences (1995)
11.8

 
14.2

Institutional Large-Cap Core Growth (2003)
1.5

 
2.1

Institutional Large-Cap Growth (2001)
11.7

 
13.6

Institutional Large-Cap Value (2000)
2.2

 
2.5

Institutional Mid-Cap Equity Growth (1996)
5.5

 
5.1

Institutional Small-Cap Stock (2000)
2.0

 
2.2

International Discovery (1988)
3.6

 
4.3

International Growth & Income (1998)
10.2

 
11.5

International Stock (1980)
12.9

 
13.9

Media & Telecommunications (1993)
3.2

 
3.6

Mid-Cap Growth (1992)
24.1

 
24.6

Mid-Cap Value (1996)
12.2

 
10.9

New America Growth (1985)
4.3

 
4.4

New Asia (1990)
4.0

 
2.7

New Era (1969)
3.6

 
2.7

New Horizons (1960)
15.4

 
15.4

Overseas Stock (2006)
9.4

 
11.0

Personal Strategy Balanced (1994)
1.7

 
1.6

Personal Strategy Growth (1994)
1.4

 
1.4

Personal Strategy Income (1994)
1.1

 
1.2

Real Assets (2010)
4.3

 
4.5

Real Estate (1997)
5.1

 
5.6

Science & Technology (1987)
3.7

 
3.6

Small-Cap Stock (1992)
9.8

 
8.3

Small-Cap Value (1988)
9.2

 
7.2

Total Equity Market Index (1998)
1.1

 
1.2

Value (1994)
22.2

 
22.4

Other stock and blended asset funds
7.6

 
7.9

 
373.0

 
383.0



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2014
 
2015
Bond and money market funds:
 
 
 
Emerging Markets Bond (1994)
4.3

 
4.4

GNMA (1985)
1.6

 
1.5

High Yield (1984)
9.4

 
8.6

Inflation Focused Bond (2006)
6.8

 
7.4

Institutional Floating Rate (2008)
3.2

 
3.6

Institutional High Yield (2002)
2.2

 
1.8

International Bond (1986)
4.6

 
5.3

Maryland Tax-Free Bond (1987)
2.0

 
2.1

New Income (1973)
27.4

 
27.3

Prime Reserve (1976)
6.6

 
6.3

Short-Term Bond (1984)
6.5

 
5.7

Summit Cash Reserves (1993)
5.3

 
5.0

Summit Municipal Income (1993)
1.0

 
1.0

Summit Municipal Intermediate (1993)
3.9

 
4.0

Tax-Free High Yield (1985)
3.3

 
3.5

Tax-Free Income (1976)
2.6

 
2.5

Tax-Free Short-Intermediate (1983)
2.1

 
2.1

U.S. Treasury Money (1982)
2.1

 
2.2

Virginia Tax-Free Bond (1991)
1.0

 
1.1

Other bond and money market funds
8.7

 
8.7

 
104.6

 
104.1

 
$
477.6

 
$
487.1


The Spectrum Funds, Target Retirement Funds, and Retirement Date Funds are not presented in the table above because their assets are already included in the assets of their underlying fund holdings.

Our operating subsidiaries invest in many of the T. Rowe Price funds.

Administrative Services.

Our subsidiaries provide advisory-related administrative services to the Price Funds and their shareholders. T. Rowe Price Services provides mutual fund transfer agency and shareholder services, including maintenance of staff, facilities, technology, and other equipment to respond to inquiries from fund shareholders. T. Rowe Price Retirement Plan Services provides participant accounting, plan administration, and transfer agent services for defined contribution retirement plans that invest in both the Price Funds and funds outside the Price fund complex. Plan sponsors and participants compensate us for some of the administrative services while the Price Funds compensate us for maintaining and administering the individual participant accounts for those plans that invest in the Price Funds. Until August 2015, T. Rowe Price Associates provided mutual fund accounting services, including maintenance of financial records, preparation of financial statements and reports, daily valuation of portfolio securities, and computation of daily net asset values per share to the Price Funds. The Price Funds contracted directly with BNY Mellon in August 2015 to provide these services in the future.

We provide trustee services through our subsidiary, T. Rowe Price Trust Company, a Maryland-chartered limited service trust company. Through this entity, we offer collective investment trusts for investment by qualified retirement plans and serve as trustee for employer sponsored retirement plans and other retirement products. T. Rowe Price Trust Company may not accept deposits and cannot make personal or commercial loans.

We also provide non-discretionary advisory planning services to fund shareholders and potential investors through our subsidiary T. Rowe Price Advisory Services. These services are limited in scope and include retirement planning services, such as saving for retirement, transitioning into retirement, and income in retirement. An investment portfolio evaluation service is an integral part of these services. An ongoing checkup service is also available to assist an investor in remaining on track to achieve their financial goals.


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Distribution and Servicing.

The Investor class of all Price Funds can be purchased in the U.S. on a no-load basis, without a sales commission or 12b-1 fee. No-load mutual fund shares offer investors a low-cost and relatively easy method of directly investing in a variety of stock and fixed income portfolios. In 2015, we added an I-Class share to a number of our Price Funds. The I-Class shares are designed to meet the needs of institutionally oriented clients who seek investment products with lower shareholder servicing costs, and lower expense ratios. This share class will limit ordinary operating expenses (other than interest; expenses related to borrowings, taxes, and brokerage; and any non extraordinary expenses) at 5 basis points for a period of time and there will be no external payments for 12b-1 or administrative fee payments.

Certain of the Price Funds also offer Advisor Class and R Class shares that are distributed to mutual fund shareholders, and defined contribution retirement plans, respectively, through third-party financial intermediaries. These share classes pay 12b-1 fees of 25 and 50 basis points, respectively, for distribution, administration, and personal services. Our subsidiary, T. Rowe Price Investment Services, is the principal distributor of the Price Funds and enters into a tri-party agreement with each intermediary and fund. Under the agreement, each fund is responsible to pay the distribution and service fees directly to the applicable intermediaries. In addition, those Price Funds offered to investors through variable annuity life insurance plans have a share class that pays a 12b-1 fee of 25 basis points.

In accounting for 12b-1 fees, the applicable mutual fund share classes incur the related expense and we recognize the corresponding distribution and servicing fee revenue in our consolidated statements of income. We also recognize, as distribution and servicing costs in the consolidated statements of income, the corresponding cost paid to the third-party financial intermediaries who distribute these fund share classes. The fee revenue that we recognize from the funds and the expense that we recognize for the fees paid to third-party intermediaries are equal in amount and, therefore, do not impact our net operating income.

We believe that our lower fund cost structure, distribution methods, and fund shareholder and administrative services help promote the stability of our fund assets under management through market cycles.

Except as noted above for 12b-1 fees, we bear all advertising and promotion expenses associated with the distribution of the Price Funds. These costs are recognized currently, and include advertising and direct mail communications to potential fund shareholders as well as substantial staff and communications capabilities to respond to investor inquiries. Marketing and promotional efforts are focused in print media, television, and Internet. In addition, we direct considerable marketing efforts to defined contribution plans that invest in mutual funds. Advertising and promotion expenditures vary over time based on investor interest, market conditions, new and existing investment offerings, and the development and expansion of new marketing initiatives, including the enhancement of our digital capabilities.

OTHER INVESTMENT PORTFOLIOS.

Our other client investment portfolios had assets under management of $276.0 billion at December 31, 2015 , an increase of $6.8 billion from the beginning of the year. We provide investment advisory services to these clients through our subsidiaries on a separately managed or subadvised account basis and through sponsored investment portfolios, including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S. At December 31, the assets under management in these portfolios included the following investment mandates:

 
2014
 
2015
U.S. equities
$
179.3

 
$
180.3

International equities
27.6

 
29.5

Stable value assets
17.8

 
19.1

Bonds and money market securities
44.5

 
47.1

 
$
269.2

 
$
276.0


We charge fees for investment management to these clients based on, among other things, the specific investment services to be provided. Our standard form of investment advisory agreement for client accounts provides that the agreement may be terminated at any time and that any unearned fees paid in advance will be refunded.


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Our fees for managing these investment portfolios are computed using the value of assets under our management at a contracted annual fee rate. The value of assets under management billed is generally based on daily valuations, month-end average valuations, or end of billing period valuations. In 2015 , approximately 73% of advisory fees were recognized based on daily portfolio valuations, 10% were based on month-end averages, and 17% were based on end of billing period valuations.

Our subsidiaries, T. Rowe Price (Luxembourg) Management Sàrl and T. Rowe Price International provide management company and investment management services, respectively, to our Luxembourg-based SICAVs (Société d'Investissement à Capital Variable) and FCPs (Fonds Commun de Placement). These funds are distributed outside the U.S. through distribution agents and other financial intermediaries. The fees earned for these distribution and marketing services are part of the overall investment management fees earned for managing the SICAV and FCP fund assets. We recognize any related distribution fees paid to financial intermediaries in other operating expenses. At December 31, 2015, assets under management in these funds were $10.3 billion .

REGULATION.

T. Rowe Price Associates, T. Rowe Price International, T. Rowe Price (Canada), Inc., T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd. and T. Rowe Price Advisory Services, Inc. are registered with the Securities and Exchange Commission (SEC) as investment advisers under the Investment Advisers Act of 1940. T. Rowe Price International is also regulated by the Financial Conduct Authority (FCA) in the United Kingdom and, in certain cases, by other foreign regulators in countries in which we have a license to conduct business. The Securities and Futures Commission (SFC) and Monetary Authority of Singapore (MAS) also regulate T. Rowe Price Hong Kong and T. Rowe Price Singapore, respectively. T. Rowe Price (Canada) is also registered with several of the provincial securities commissions in Canada. T. Rowe Price (Luxembourg) Management Sàrl, the management company of our Luxembourg-based FCP (Fonds Commun de Placement) and SICAV funds is regulated by the Commission de Surveillance du Secteur Financier (CSSF). Our branch offices operated outside the U.S. are also registered with and regulated by the local financial authorities.

Our subsidiaries providing transfer agent services are registered under the Securities Exchange Act of 1934, and our trust company is regulated by the State of Maryland, Commissioner of Financial Regulation.

T. Rowe Price Investment Services is a registered broker-dealer and member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. We provide introducing brokerage services through this subsidiary primarily to complement the other services provided to shareholders of the Price Funds. Pershing, a third-party clearing broker and affiliate of the BNY Mellon, maintains our brokerage’s customer accounts and clears all transactions.

All aspects of our business are subject to extensive federal, state, and foreign laws and regulations. These laws and regulations are primarily intended to benefit or protect our clients and the Price Funds' shareholders. They generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict the conduct of our business in the event that we fail to comply with laws and regulations. Possible sanctions that may be imposed on us, in the event that we fail to comply, include the suspension of individual employees, limitations on engaging in certain business activities for specified periods of time, revocation of our investment adviser, and other registrations, censures, and fines.

Certain of our subsidiaries are subject to net capital requirements including those of various federal, state, and international regulatory agencies. Each of our subsidiaries’ net capital, as defined, meets or exceeds all minimum requirements.

For further discussion of the potential impact of current or proposed legal or regulatory requirements, please see the Legal and Regulatory risk factors included in Item 1A of this Form 10-K.

COMPETITION.

As a member of the financial services industry, we are subject to substantial competition in all aspects of our business. A significant number of proprietary and other sponsors’ mutual funds are sold to the public by other investment management firms, broker-dealers, mutual fund companies, banks, and insurance companies. We compete with brokerage and investment banking firms, insurance companies, banks, mutual fund companies, hedge funds, and other financial institutions and funds in all aspects of our business and in every country in which we offer our advisory services. Many of these financial institutions have substantially greater resources than we do. We compete with other providers of investment advisory services primarily based on the availability and objectives of the investment portfolios offered, investment performance, fees and related expenses, and the scope and quality of investment advice and other client services. In recent years, we have faced significant competition from passive and index oriented investment strategies. In order to maintain and enhance our competitive position,


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we may review acquisition and venture opportunities and, if appropriate, engage in discussions and negotiations that could lead to the acquisition of a new equity or other financial relationship.

EMPLOYEES.

At December 31, 2015 , we employed 5,999 associates, up 2.2% from the 5,870 associates employed at the end of 2014 . We may add additional temporary and part-time personnel to our staff from time to time to meet periodic and special project demands, primarily for technology and mutual fund administrative services.

AVAILABLE INFORMATION.
Our Internet address is troweprice.com. At our Investor Relations website, http://trow.client.shareholder.com, we make available free of charge a variety of information for investors. Our goal is to maintain our websites as a portal through which investors can easily find or navigate to pertinent information about us and as a channel of distribution for material company information, including but not limited to:
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file that material with, or furnish them to the SEC;

our financial statement information from our periodic SEC filings in the form of XBRL data files that may be used to facilitate computer-assisted investor analysis;

corporate governance information including our charter, bylaws, governance guidelines, committee charters, senior officer code of ethics and conduct, and other governance-related policies;

other news and announcements that we may post from time to time that investors might find useful or interesting; and

opportunities to sign up for email alerts and RSS feeds to have information pushed in real time.

Unless otherwise expressly stated, information found on our website is not part of this or any other report we file with, or furnish to, the SEC.

Item 1A.
Risk Factors.

An investment in our common stock involves various risks, including those mentioned below and those that are discussed from time to time in our periodic filings with the SEC. Investors should carefully consider these risks, along with the other information contained in this report, before making an investment decision regarding our common stock. There may be additional risks of which we are currently unaware, or which we currently consider immaterial. Any of these risks could have a material adverse effect on our financial condition, results of operations, and value of our common stock.

RISKS RELATING TO OUR BUSINESS AND THE FINANCIAL SERVICES INDUSTRY.

Our revenues are based on the market value and composition of the assets under our management, all of which are subject to fluctuation caused by factors outside of our control.

We derive our revenues primarily from investment advisory services provided by our subsidiaries to individual and institutional investors in the T. Rowe Price mutual funds distributed in the U.S. and other investment portfolios. Our investment advisory fees typically are calculated as a percentage of the market value of the assets under our management. We generally earn higher fees on assets invested in our equity funds and equity investment portfolios than we earn on assets invested in our fixed income funds and portfolios. Among equity investments, there is a significant variation in fees earned from index-based funds and portfolios at the low end and emerging markets funds and portfolios at the high end. Fees also vary across the fixed income funds and portfolios, though not as widely as equity investments, with stable value portfolios and money market securities at the lower end and non-U.S. dollar denominated bonds at the high end. As a result, our revenues are dependent on the value and composition of the assets under our management, all of which are subject to substantial fluctuation due to many factors, including:

Investor Mobility. Our investors generally may withdraw their funds at any time, on very short notice and without any significant penalty.


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General Market Declines. A downturn in stock or bond prices would cause the value of assets under our management to decrease, and may also cause investors to withdraw their investments, thereby further decreasing the level of assets under our management.
Investment Performance. If the investment performance of our managed portfolios is less than that of our competitors or applicable third-party benchmarks, we could lose existing and potential customers and suffer a decrease in assets under management. Institutional investors in particular consider changing investment advisers based upon poor relative investment performance. Individual investors in contrast are more likely to react to poor absolute investment performance. Prolonged periods of strong relative investment performance may result in capacity constraints within certain portfolios, which in turn may negatively impact our ability to achieve strong investment results in subsequent periods.
Investing Trends. Changes in investing trends and, in particular, investor preference for passive or alternative investment portfolios, retirement savings trends, including the prevalence of defined contribution retirement plans and target-date retirement products, may reduce interest in our funds and portfolios and may alter our mix of assets under management.
Interest Rate Changes. Investor interest in and the valuation of our fixed income investment funds and portfolios are affected by changes in interest rates.
International Exposure. Our managed portfolios may have significant investments in international markets that are subject to risk of loss from political or diplomatic developments, government policies, civil unrest, currency fluctuations, and changes in legislation related to foreign ownership. International markets, particularly emerging markets, which are often smaller, may not have the liquidity of established markets, may lack established regulations, and may experience significantly more volatility than established markets.
Tax Regulation Changes. Changes in the status of tax deferred retirement plan investments and tax-free municipal bonds, the capital gains and corporate dividend tax rates, and other individual and corporate tax rates and regulations could adversely affect investor behavior and may cause investors to view certain investment offerings less favorably and withdraw their investment assets, thereby decreasing the level of assets under our management.

A decrease in the value of assets under our management, or an adverse change in their composition, could have a material adverse effect on our investment advisory fees and revenues. For any period in which revenues decline, net income and operating margins will likely decline by a greater proportion because certain expenses will be fixed over that finite period and may not decrease in proportion to the decrease in revenues.

The performance of our money market funds and portfolios are impacted by the historically low interest rate environment.

Our money market funds' and portfolios' performance or yield is dependent on the income earned from the underlying securities exceeding the operating costs of the fund. When interest rates are at or near the historic lows, the operating costs of the funds will become a greater portion of the portfolio's net income, thereby reducing the yield of the funds to very low levels. Since the second half of 2009, such an environment has led us to voluntarily waive our advisory and other fees earned on our money market funds and trusts in order to maintain yields at or above 0% for fund investors. Such actions reduce our advisory fee income and net income. The actual amount of fees waived is dependent on a number of variables including, among others, changes in the net assets held by our money market funds, changes in market yields, changes in the expense levels of the funds, and our willingness to voluntarily continue such fee waivers. Also, bank deposits may become more attractive to investors and money market funds could experience significant redemptions, which could decrease our revenues and net income. For further discussion of the fees we waived in the current period, management's expectation as to future fee waivers, and the net cash flows of our money market funds and trusts, please see our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K.

A significant majority of our revenues are based on contracts with the Price funds that are subject to termination without cause and on short notice.

We provide investment advisory, distribution, and other administrative services to the Price funds under various agreements. Investment advisory services are provided to each Price fund under individual investment management agreements. The board of each Price fund must annually approve the terms of the investment management and service agreements and can terminate the agreement upon 60-days notice. If a Price fund seeks to lower the fees that we receive or terminate its contract with us, we would experience a decline in fees earned from the Price funds, which could have a material adverse effect on our revenues and net income.



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We operate in an intensely competitive industry, which could cause a loss of customers and their assets, thereby reducing our assets under management and our revenues and net income.

We are subject to competition in all aspects of our business from other financial institutions. Many of these financial institutions have substantially greater resources than we do and may offer a broader range of financial products across more markets. Some operate in a different regulatory environment than we do which may give them certain competitive advantages in the investment products and portfolio structures that they offer. We compete with other providers of investment advisory services primarily based on the availability and objectives of the investment portfolios offered, investment performance, fees and related expenses, and the scope and quality of investment advice and other client services. Some institutions have proprietary products and distribution channels that make it more difficult for us to compete with them. Most of our investment portfolios are available without sales or redemption fees, which means that investors may be more willing to transfer assets to competing funds.

If current or potential customers decide to use one of our competitors, we could face a significant decline in market share, assets under management, revenues, and net income. In the event that we were to decide to reduce the fees we charge for investment advisory services in response to competitive pressures, revenues and operating margins could be adversely impacted.

Our success depends on our key personnel and our financial performance could be negatively affected by the loss of their services.

Our success depends on our highly skilled personnel, including our portfolio and fund managers, investment analysts, sales and client relationship personnel, and corporate officers, many of whom have specialized expertise and extensive experience in our industry. Strong financial services professionals are in demand, and we face significant competition for highly qualified employees. Our key employees do not have employment contracts, and generally can terminate their employment with us at any time. We cannot assure that we will be able to retain or replace key personnel. We have near- and long-term succession planning processes, including programs to develop our future leaders, which are intended to address future talent needs and minimize the impact of losing key talent. However, in order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income. The loss of key personnel could damage our reputation and make it more difficult to retain and attract new employees and investors. Losses of assets from our client investors would decrease our revenues and net income, possibly materially.

Our operations are complex and a failure to perform operational tasks or the misrepresentation of products and services could have an adverse effect on our reputation and subject us to regulatory sanctions, fines, penalties, litigation, and a decrease in revenues.

Operating risks include:

failure to properly perform or oversee fund or portfolio recordkeeping responsibilities, including portfolio accounting, security pricing, corporate actions, investment restrictions compliance, daily net asset value computations, account reconciliations, and required distributions to fund shareholders to comply with tax regulations;
failure to properly perform transfer agent and participant recordkeeping responsibilities, including transaction processing, supervision of staff, tax reporting, and record retention;
sales and marketing risks, including the intentional or unintentional misrepresentation of products and services in advertising materials, public relations information, or other external communications, and failure to properly calculate and present investment performance data accurately and in accordance with established guidelines and regulations; and
our reliance on third-party vendors who, now or in the future, may perform or support important parts of our operations as there can be no assurance that they will perform properly or that our processes and plans to transition or delegate these functions to others will be successful or that there will not be interruptions in services from these third parties.

Any damage to our reputation could harm our business and lead to a loss of revenues and net income.

We have spent many years developing our reputation for integrity, strong investment performance, and superior client services. Our brand is a valuable intangible asset, but it is vulnerable to a variety of threats that can be difficult or impossible to control, and costly or even impossible to remediate. Regulatory inquiries and rumors can tarnish or substantially damage our reputation, even if those inquiries are satisfactorily addressed. Any damage to our brand could impede our ability to attract and retain


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customers and key personnel, and reduce the amount of assets under our management, any of which could have a material adverse effect on our revenues and net income.

Our expenses are subject to significant fluctuations that could materially decrease net income.

Our operating results are dependent on the level of our expenses, which can vary significantly for many reasons, including:

changes in the level of our advertising expenses, including the costs of expanding investment advisory services to investors outside of the U.S. and further penetrating U.S. distribution channels;
variations in the level of total compensation expense due to, among other things, bonuses, stock option grants and other stock-based awards, changes in employee benefit costs due to regulatory or plan design changes, changes in our employee count and mix, competitive factors, and inflation;
a future impairment of investments recognized in our consolidated balance sheet;
a future impairment of goodwill that is recognized in our consolidated balance sheet;
unanticipated material fluctuations in foreign currency exchange rates applicable to the costs of our operations abroad;
expenses and capital costs incurred to maintain and enhance our administrative and operating services infrastructure, such as technology assets, depreciation, amortization, and research and development;
unanticipated costs incurred to protect investor accounts and client goodwill; and
disruptions of third-party services such as communications, power, and mutual fund transfer agent and accounting systems.

Under our agreements with the T. Rowe Price mutual funds, we charge the mutual funds certain administrative fees and related expenses based upon contracted terms. If we fail to accurately estimate our underlying expense levels or are required to incur expenses relating to the mutual funds that are not otherwise paid by the funds, our operating results will be adversely affected. While we are under no obligation to provide financial support to any of our sponsored investment products, any financial support provided would reduce capital available for other purposes and may have an adverse effect on revenues and net income .

We have contracted with third-party financial intermediaries that distribute our investment portfolios in the U.S. and abroad and such relationships may not be available or profitable to us in the future.

These contracted third-party intermediaries generally offer their clients various investment products in addition to, and in competition with, our investment offerings, and have no contractual obligation to encourage investment in our portfolios. It would be difficult for us to acquire or retain the management of those assets without the assistance of the intermediaries, and we cannot assure that we will be able to maintain an adequate number of investment product offerings and successful distribution relationships. In addition, some investors rely on third-party financial planners, registered investment advisers, and other consultants or financial professionals to advise them on the choice of investment adviser and investment portfolio. These professionals and consultants can favor a competing investment portfolio as better meeting their particular client’s needs. We cannot assure that our investment offerings will be among their recommended choices in the future. Further, their recommendations can change over time and we could lose their recommendation and their client assets under our management. Mergers, acquisitions, and other ownership or management changes could also adversely impact our relationships with these third-party intermediaries. The presence of any of the adverse conditions discussed above would reduce revenues and net income, possibly by material amounts.

Natural disasters and other unpredictable events could adversely affect our operations.

Armed conflict, terrorist attacks, cyber-attacks, power failures, and natural disasters could adversely affect our revenues, expenses, and net income by:

decreasing investment valuations in, and returns on, the investment portfolios that we manage,
causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive,
incapacitating or inflicting losses of lives among our associates,


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interrupting our business operations or those of critical service providers,
triggering technology delays or failures, and
requiring substantial capital expenditures and operating expenses to remediate damage, replace our facilities, and restore our operations.

A significant portion of our business operations are concentrated in the Baltimore, Maryland region and in London, England. We have developed various backup systems and contingency plans but we cannot be assured that they will be adequate in all circumstances that could arise or that material interruptions and disruptions will not occur. In addition, we rely to varying degrees on outside vendors for disaster contingency support, and we cannot be assured that these vendors will be able to perform in an adequate and timely manner. If we lose the availability of any associates, or if we are unable to respond adequately to such an event in a timely manner, we may be unable to timely resume our business operations, which could lead to a tarnished reputation and loss of customers that results in a decrease in assets under management, lower revenues, and materially reduced net income.

Our investment income and asset levels may be negatively impacted by fluctuations in our investment portfolio.

We currently have a substantial portion of our assets invested in sponsored stock, blended asset, and bond funds. All of these investments are subject to investment market risk and our non-operating investment income could be adversely affected by the realization of losses upon the disposition of our investments or the recognition of significant other-than-temporary impairments in the case of our available-for-sale portfolio and the recognition of unrealized losses related to our sponsored investment portfolios that are held as trading and accounted for under the equity method. In addition, related investment income has fluctuated significantly over the years depending upon the performance of our corporate investments, including the impact of market conditions and interest rates, and the size of our corporate money market and longer-term mutual fund holdings. Fluctuations in other investment income are expected to occur in the future.

We may review and pursue acquisition and venture opportunities in order to maintain or enhance our competitive position.

Any strategic transaction can involve a number of risks, including additional demands on our staff; unanticipated problems regarding integration of investor account and investment security recordkeeping, additional or new regulatory requirements, operating facilities and technologies, and new employees; adverse effects in the event acquired intangible assets or goodwill become impaired; and the existence of liabilities or contingencies not disclosed to or otherwise known by us prior to closing a transaction.

We own a 26% investment in UTI Asset Management Company Ltd (UTI), an Indian asset management company, and we may consider non-controlling minority investments in other entities in the future. We may not realize future returns from such investments or any collaborative activities that may develop in the future.

We are exposed to a number of risks arising from our international operations.

We operate in a number of jurisdictions outside of the U.S. and have an equity investment in UTI. Our international operations require us to comply with the legal and regulatory requirements of various foreign jurisdictions and expose us to the political consequences of operating in foreign jurisdictions. Our foreign business operations are also subject to the following risks:

difficulty in managing, operating, and marketing our international operations;
fluctuations in currency exchange rates which may result in substantial negative effects on assets under our management, revenues, expenses, and assets in our U.S. dollar based financial statements; and
significant adverse changes in international legal and regulatory environments.

LEGAL AND REGULATORY RISKS.

Compliance within a complex regulatory environment imposes significant financial and strategic costs on our business, and non-compliance could result in fines and penalties.

If we are unable to maintain compliance with applicable laws and regulations, we could be subject to criminal and civil liability, the suspension of our employees, fines, penalties, sanctions, injunctive relief, exclusion from certain markets, or temporary or permanent loss of licenses or registrations necessary to conduct our business. A regulatory proceeding, even if it does not result in a finding of wrongdoing or sanctions, could consume substantial expenditures of time and capital. Any


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regulatory investigation and any failure to maintain compliance with applicable laws and regulations could severely damage our reputation, adversely affect our ability to conduct business, and decrease revenue and net income.

Legal and regulatory developments in the mutual fund and investment advisory industry could increase our regulatory burden, impose significant financial and strategic costs on our business, and cause a loss of, or impact the servicing of, our clients and fund shareholders.

Our regulatory environment is frequently altered by new regulations and by revisions to, and evolving interpretations of, existing regulations. Future changes could require us to modify or curtail our investment offerings and business operations, or impact our expenses and profitability. Additionally, some regulations may not directly apply to our business but may impact the capital markets, service providers or have other indirect effects on our ability to provide services to our clients.

Potential impacts of current or proposed legal or regulatory requirements include, without limitation, the following:

As part of the debate in Washington, D.C. related to the economy and the U.S. deficit, there has been increasing focus on the framework of the U.S. retirement system. We could incur increased costs if new regulatory requirements are adopted since retirement plans are a significant part of our client base and other types of retirement accounts invest in our mutual funds. In addition, changes to the current framework may impact our business in other ways. For example, proposals to reduce contributions to Individual Retirement Accounts and Defined Contribution plans for certain individuals, as well as potential changes to Defined Benefit plans, may result in increased plan terminations and reduce our opportunity to manage and service retirement assets.

The U.S. Department of Labor is planning to finalize changes to definitions and rules related to fiduciaries. These changes are likely to require modifications to our distribution activities and may impact our ability to service clients or engage in certain types of distribution or other business activities. The Securities and Exchange Commission (SEC) is considering its own fiduciary rule proposal. Any such rule may also have an impact on our business activities.

The Federal Reserve Board has adopted final regulations related to non-bank Systemically Important Financial Institutions (SIFIs), and other jurisdictions are contemplating similar regulation. It has been suggested that large mutual funds, particularly money market funds, should be designated as SIFIs. We do not believe that mutual funds should be deemed SIFIs. Further, we do not believe SIFI designation was intended for traditional asset management businesses. If, however, any T. Rowe Price fund or T. Rowe Price affiliate is deemed a SIFI, increased regulatory oversight would apply, which may include enhanced capital, liquidity, leverage, stress testing, resolution planning, and risk management requirements.

On July 23, 2014, the SEC adopted additional reforms regulating money market funds. The reforms will require institutional non-government money market funds to operate with a floating net asset value (NAV) and require all non-government money market funds to impose liquidity fees and redemption gates under certain conditions. Government and retail money market funds will continue using current pricing and accounting methods to seek to maintain a stable NAV. The SEC adopted other reforms for money market funds, including additional disclosure and reporting requirements, tightening of diversification requirements, and enhanced stress testing. These reforms could have a negative impact on the attractiveness of such funds to investors and also subject us to additional regulatory requirements and costs to comply with such requirements.

The Commodity Futures Trading Commission has adopted certain amendments to its rules that would limit the ability of mutual funds and certain other products we sponsor to use commodities, futures, swaps, and other derivatives without additional registration. If our use of these products on behalf of client accounts increases so as to require registration, we would be subject to additional regulatory requirements and costs associated with registration.

There has been increased global regulatory focus on the manner in which intermediaries are paid for distribution of mutual funds. Changes to long-standing market practices related to fees or enhanced disclosure requirements may negatively impact sales of mutual funds by intermediaries, especially if such requirements are not applied to other investment products.

Global regulations on OTC derivatives are evolving, including new and proposed regulations under The Dodd-Frank Wall Street Reform and Consumer Protection Act and European Market Infrastructure Regulation relating to central clearing counterparties, trade reporting, and repositories. In addition, the SEC has proposed new regulations that will require mutual funds to: (1) adopt liquidity risk management programs with specific requirements for measuring and reporting the liquidity of fund holdings; and (2) comply with new exposure limits and asset coverage requirements for


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investments in derivatives, as well as adopting derivatives risk management programs. There remains uncertainty related to various requirements under these regulations and the exact manner in which they will impact current trading strategies for our clients.

The revised Markets in Financial Instruments Directive (MiFID II Directive) and Regulation (MiFIR) (together “MiFID II”) will apply across the European Union (EU) and member states of the European Economic Area from January 3, 2017, unless extended. Implementation of MiFID II will significantly impact both the structure and operation of EU financial markets. Some of the main changes introduced under MiFID II include applying enhanced disclosure requirements, enhancing conduct of business and governance requirements, broadening the scope of pre and post trade transparency, increasing transaction reporting requirements, transforming the relationship between client commissions and research, and further regulation of trading venues. Compliance with MiFID II will increase our costs.

We cannot predict the nature of future changes to the legal and regulatory requirements applicable to our business, nor the extent of the impacts that will result from current or future proposals. However, any such changes are likely to increase the costs of compliance and the complexity of our operations. They may also result in changes to our product or service offerings. The changing regulatory landscape may also impact a number of our service providers and to the extent such providers alter their services or increase their fees it may impact our expenses or those of the products we offer.

We may become involved in legal and regulatory proceedings that may not be covered by insurance.

We are subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such proceeding could involve substantial financial penalties. From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. There also has been an increase in litigation and in regulatory investigations in the financial services industry in recent years, including customer claims, class action suits, and government actions alleging substantial monetary damages and penalties.

We carry insurance in amounts and under terms that we believe are appropriate. We cannot be assured that our insurance will cover every liability and loss to which we may be exposed, or that our insurance policies will continue to be available at acceptable terms and fees. Certain insurance coverage may not be available or may be prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase our expenses and reduce our net income.

Net capital requirements may impede the business operations of our subsidiaries.

Certain of our subsidiaries are subject to net capital requirements imposed by various federal, state, and foreign authorities. Each of our subsidiaries’ net capital meets or exceeds all current minimum requirements; however, a significant change in the required net capital, an operating loss, or an extraordinary charge against net capital could adversely affect the ability of our subsidiaries to expand or even maintain their operations if we were unable to make additional investments in them.

Government action related to continued membership in the European Union

We have a significant locally authorized and regulated presence in the United Kingdom ("UK") to support our global investment management business. It is likely the UK will hold a referendum regarding continued membership in the European Union ("EU"). A UK exit from the EU would be extremely disruptive to our operations and require us to analyze potential changes to our corporate structure and European product and distribution strategies. Any such changes, if required, would likely subject us to additional regulatory requirements and costs.


TECHNOLOGY RISKS.

We require specialized technology to operate our business and would be adversely affected if we fail to maintain adequate infrastructure to conduct or expand our operations or if our technology became inoperative or obsolete.

We depend on highly specialized and, in many cases, proprietary technology to support our business functions, including among others:

securities analysis,
securities trading,


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portfolio management,
customer service,
accounting and internal financial reporting processes and controls, and
regulatory compliance and reporting.

All of our technology systems, including those provided by vendors, are vulnerable to disability or failures due to cyber-attacks such as hacking or viruses, natural disasters, power failures, acts of war or terrorism, sabotage, and other causes. A suspension or termination of vendor-provided software licenses or related support, upgrades, and maintenance could cause system delays or interruption. Although we have robust business and disaster recovery plans, if our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of customers and could harm our reputation. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our customers.

In addition, our continued success depends on our ability to effectively integrate operations across many countries, and to adopt new or adapt existing technologies to meet client, industry, and regulatory demands. We might be required to make significant capital expenditures to maintain competitive infrastructure. If we are unable to upgrade our infrastructure in a timely fashion, we might lose customers and fail to maintain regulatory compliance, which could affect our results of operations and severely damage our reputation.

We could be subject to losses if we fail to properly safeguard sensitive and confidential information.

As part of our normal operations, we maintain and transmit confidential information about our clients as well as proprietary information relating to our business operations. We maintain a system of internal controls designed to provide reasonable assurance that fraudulent activity, including misappropriation of assets, fraudulent financial reporting, and unauthorized access to sensitive or confidential data is either prevented or timely detected. Our systems or our third-party service providers’ systems could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information. Such disclosure could, among other things:

seriously damage our reputation,
allow competitors access to our proprietary business information,
subject us to liability for a failure to safeguard client data,
result in the termination of contracts by our existing customers,
subject us to regulatory action, and
require significant capital and operating expenditures to investigate and remediate the breach.

Item 1B.
Unresolved Staff Comments.

None.

Item 2.
Properties.

Our corporate headquarters occupies 422,000 square feet of space under lease until 2027 at 100 East Pratt Street in Baltimore, Maryland. We have offices in 16 countries around the world, including the U.S.

Our operating and servicing activities are largely conducted at owned facilities in campus settings comprising 1.2 million square feet on three parcels of land in close proximity to Baltimore in Owings Mills, Maryland and about 290,000 square feet in Colorado Springs, Colorado. We also maintain a nearly 60,000 square foot technology support facility in Hagerstown, Maryland, and own a 72 -acre parcel of land in Pasco County, Florida to accommodate potential future development as business demands require.

We have six investor centers for walk-in traffic and investor meetings, four of which are in leased facilities located in Baltimore, Maryland, Tampa, Florida, Washington, D.C, and McLean, VA. The remaining two investor centers are located in our owned facilities in Colorado Springs and Owings Mills.



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Table of Contents                                  

We lease all our offices outside the U.S. with London and Hong Kong being our largest, as well as our business operations recovery site in Maryland and our customer service call center in Tampa.

Information concerning our anticipated capital expenditures in 2016 and our future minimum rental payments under noncancelable operating leases at December 31, 2015 , is set forth in the capital resources and liquidity and contractual obligations discussions in Item 7 of this Form 10-K.

Item 3.
Legal Proceedings.

From time to time, various claims against us arise in the ordinary course of business, including employment-related claims. In the opinion of management, after consultation with counsel, the likelihood that an adverse determination in one or more pending claims would have a material adverse effect on our financial position or results of operations is remote.

Item 4.
Mine Safety Disclosures.

Not applicable.

Item. Executive Officers of the Registrant.

The following information includes the names, ages, and positions of our executive officers. There are no arrangements or understandings pursuant to which any person serves as an officer. The first six individuals are members of our management committee.

William J. Stromberg ( 55 ), President and Chief Executive Officer since 2016. Mr. Stromberg was previously the Head of Equity from 2010 to 2015 and a Vice President from 1990 to 2015.

Brian C. Rogers ( 60 ), Chairman since 2007, Chief Investment Officer since 2004, and a Vice President since 1985.

Edward C. Bernard ( 59 ), Vice Chairman since 2007, and a Vice President since 1989.

Christopher D. Alderson ( 53 ), Head of International Equity since 2009 and a Vice President since 2002.

Eric L. Veiel, ( 44 ), Head of US Equity since 2016, and a Vice President since 2006.

Edward A. Wiese ( 56 ), Head of Fixed Income since January 2015, and a Vice President since 2001.

David Oestreicher, ( 48 ), Corporate Secretary since 2012, Chief Legal Officer since 2008, and a Vice President since 2001.

Kenneth V. Moreland ( 59 ), Treasurer since 2010, and Chief Financial Officer and a Vice President since 2004.

Jessica M. Hiebler ( 40 ), Principal Accounting Officer since 2010 and a Vice President since 2009.



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Table of Contents                                  

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock ($.20 par value per share) trades on the NASDAQ Global Select Market under the symbol TROW. The high and low trade price information and dividends per share during the past two years were:
 
 
1st
Quarter
 
2nd
Quarter
 
3rd
Quarter
 
4th
Quarter
2014 – High price
 
$
84.41

 
$
84.89

 
$
85.74

 
$
88.64

  Low price
 
$
75.57

 
$
76.76

 
$
75.61

 
$
71.78

  Cash dividends declared
 
$
.44

 
$
.44

 
$
.44

 
$
.44

 
 
 
 
 
 
 
 
 
2015 – High price
 
$
87.22

 
$
83.52

 
$
79.74

 
$
77.71

  Low price
 
$
77.96

 
$
77.29

 
$
67.76

 
$
65.88

  Cash dividends declared
 
$
2.52

 
$
.52

 
$
.52

 
$
.52


The cash dividends declared during the first quarter of 2015 include a special dividend of $2.00 per share that was declared in February 2015 and paid in April 2015.

Our common stockholders have approved all of our equity-based compensation plans. These plans provide for the following issuances of shares of our common stock at December 31, 2015 :
 
 
Employee and Non-Employee Director Plans
 
Employee Stock Purchase Plan
 
Total
Exercise of outstanding options
 
30,818,229

 

 
30,818,229

Settlement of outstanding restricted stock units
 
2,275,340

 

 
2,275,340

Future issuances
 
12,907,212

 
3,497,692

 
16,404,904

Total
 
46,000,781

 
3,497,692

 
49,498,473


The outstanding options included in the table above have a weighted-average exercise price of $59.24 . Under the terms of the 2012 Long-Term Incentive Plan, approved by stockholders in April 2012, the number of shares provided and available for future issuance will increase as we repurchase common stock in the future with the proceeds from stock option exercises. No shares have been issued under our Employee Stock Purchase Plan since its inception; all shares have been purchased in the open market.

The following table presents repurchase activity during the fourth quarter of 2015 .
Month
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Maximum Number of
Shares that May Yet
Be Purchased Under
the Program
October
 
655,053

 
$
68.83

 
634,979

 
9,090,304

November
 
51,731

 
$
76.50

 

 
9,090,304

December
 
1,512,352

 
$
71.47

 
1,298,873

 
19,791,431

Total
 
2,219,136

 
$
70.81

 
1,933,852

 
 

Shares repurchased by us in a quarter may include repurchases conducted pursuant to publicly announced board authorization, outstanding shares surrendered to the company to pay the exercise price in connection with swap exercises of employee stock options, and shares withheld to cover the minimum tax withholding obligation associated with the vesting of restricted stock awards. Of the total number of shares purchased during the fourth quarter of 2015 , 92,734 were related to shares surrendered in connection with employee stock option exercises and 192,550 were related to shares withheld to cover tax withholdings associated with the vesting of restricted stock awards. The remaining 1,933,852 shares of our common stock purchased during the fourth quarter of 2015 , were repurchased pursuant to the Board of Directors’ December 11, 2014 , publicly announced


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Table of Contents                                  

authorization. The maximum number of shares that may yet be purchased as of December 31, 2015 , under the Board of Directors’ December 11, 2014 and December 10, 2015 publicly announced authorizations is 19,791,431 .

We have 6,130 stockholders of record and approximately 164,000 beneficial stockholder accounts held by brokers, banks, and other intermediaries holding our common stock. Common stock owned outright by our associates, combined with outstanding vested stock options and unvested restricted stock awards, total nearly 17% of our outstanding shares and outstanding vested stock options at December 31, 2015 .

Item 6.
Selected Financial Data.
 
 
2011
 
2012
 
2013
 
2014
 
2015
 
(in millions, except per-share data)
Net revenues
$
2,747

 
$
3,023

 
$
3,484

 
$
3,982

 
$
4,201

Net operating income
$
1,227

 
$
1,364

 
$
1,637

 
$
1,891

 
$
1,899

Net income
$
773

 
$
884

 
$
1,048

 
$
1,230

 
$
1,223

 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
948

 
$
903

 
$
1,233

 
$
1,291

 
$
1,506

 
 
 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
 
 
Basic earnings
$
3.01

 
$
3.47

 
$
4.02

 
$
4.68

 
$
4.74

Diluted earnings
$
2.92

 
$
3.36

 
$
3.90

 
$
4.55

 
$
4.63

Cash dividends declared (1)
$
1.24

 
$
2.36

 
$
1.52

 
$
1.76

 
$
4.08

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
255.6

 
253.4

 
258.3

 
259.6

 
254.6

Weighted-average common shares outstanding assuming dilution
263.3

 
261.0

 
266.3

 
267.4

 
260.9


(1) Cash dividends declared in 2012 and 2015 include special dividends per share of $1.00 and $2.00, respectively, that we paid during those years.

 
December 31,
 
2011
 
2012
 
2013
 
2014
 
2015
Balance sheet data (in millions)
 
Total assets
$
3,770

 
$
4,203

 
$
5,033

 
$
5,644

 
$
5,107

Stockholders’ equity
$
3,421

 
$
3,846

 
$
4,818

 
$
5,395

 
$
4,762

 
 
 
 
 
 
 
 
 
 
Assets under management (in billions)
$
489.5

 
$
576.8

 
$
692.4

 
$
746.8

 
$
763.1





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Table of Contents                                  

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL.

Our revenues and net income are derived primarily from investment advisory services provided to individual and institutional investors in our sponsored U.S. mutual funds and other investment portfolios. The other investment portfolios include separately managed accounts, subadvised funds, and other sponsored investment portfolios including collective investment trusts, target-date retirement trusts, Luxembourg-based funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S. Investment advisory clients outside the U.S. account for nearly 5% of our assets under management at December 31, 2015 .

We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment portfolios, which meet the varied needs and objectives of individual and institutional investors. Investment advisory revenues depend largely on the total value and composition of assets under our management. Accordingly, fluctuations in financial markets and in the composition of assets under management affect our revenues and results of operations.

We remain debt-free with ample liquidity and resources that allow us to take advantage of attractive growth opportunities, invest in key capabilities, including investment professionals, technologies, and new product offerings; and, most importantly, provide our clients with strong investment management expertise and service both now and in the future. We expect to continue our investment in long-term initiatives to sustain and deepen our investment talent, add investment capabilities both in terms of new strategies and new investment vehicles, expand capabilities through enhanced technology, and broaden our distribution reach globally.

In 2014, we made a long-term strategic decision to change our delivery of certain administrative services, including fund accounting and other investment recordkeeping operations. BNY Mellon was contracted to provide such services, and 210 associates became employees of BNY Mellon on August 1, 2015. BNY Mellon will transition our data to its technology platform over time. Though a few line items of our consolidated income statements, including administrative revenues, compensation and related costs, and other operating expenses, will be affected, we do not expect that the net impact on our future operating results will be material.


BACKGROUND.

Major U.S. stock index returns were narrowly mixed in 2015, but it was the seventh consecutive year for a positive S&P 500 Index total return. In the first part of the year, equities benefited from steady economic and employment growth, generally favorable corporate earnings outside of the energy sector, and merger and acquisition activity. During the summer, U.S. and global equities fell sharply in response to an unexpected devaluation of China’s currency and subsequent plunge in Chinese stocks, raising concerns about China’s decelerating economy, and uncertainty regarding China’s leadership and policy responses. U.S. markets pared their losses in the final months of the year as global market volatility subsided amid hopes for additional stimulus measures in Europe and Asia, even as the Federal Reserve prepared to raise short-term U.S. interest rates. On December 16, 2015, the U.S. central bank raised the fed funds target rate range to 25 to 50 basis points. It had been 0 to 25 basis points since December 2008.

Stocks in developed non-U.S. markets were mixed. Japanese stocks strongly outpaced other developed Asian markets in dollar terms, helped by the Bank of Japan’s stimulus efforts, lower energy prices, and increased capital spending. The Japanese economy narrowly avoided a recession as it grew modestly in the third quarter following a second-quarter contraction. European markets rose in local currency terms, but a 10% decline in the euro versus the dollar reduced returns in dollar terms. Eurozone inflation and economic growth remained stubbornly weak throughout the year despite the European Central Bank’s (ECB) quantitative easing program, and many investors were disappointed with the ECB’s relatively mild expansion of its stimulus efforts in early December.

Emerging markets equities fared poorly around the world, as large resource-exporting countries Brazil and Russia were in recession, in part, because of the collapse in commodity prices, and broad currency weakness versus the U.S. dollar hurt returns in dollar terms. Most Asian markets declined, as Chinese stocks fell sharply in the second half of 2015.



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Table of Contents                                  

Results of several major equity market indexes for the full year 2015 are as follows:
Index
 
S&P 500 Index
1.4
 %
NASDAQ Composite Index (excluding dividends)
5.7
 %
Russell 2000 Index
(4.4
)%
MSCI EAFE (Europe, Australasia, and Far East) Index
(.4
)%
MSCI Emerging Markets Index
(14.6
)%

Global bond returns were mixed in 2015. In the U.S., rising interest rates generally weighed on bond prices, offsetting income. Treasury yields climbed for the year, especially short-term yields, as the economy expanded and investors anticipated a short-term interest rate increase from the Federal Reserve. The 10-year Treasury note yield rose from 2.2% at the end of 2014 to 2.3% at the end of 2015. Tax-free municipal bonds outperformed taxable bonds amid strong demand and declining issuance in the latter part of the year. Investment-grade corporate bonds recorded modest losses amid heavy new issuance as companies took advantage of low interest rates. High yield bonds declined as falling oil and commodity prices weighed on energy and metals and mining issuers, which together represent about one-fifth of the high yield sector.

Bonds in developed non-U.S. markets declined over the last year as a stronger U.S. dollar versus other major developed market currencies, especially the euro, resulted in negative returns in dollar terms. U.S. dollar-denominated emerging markets debt advanced modestly but significantly outperformed local currency bonds, which posted steep losses as nearly all developing market currencies weakened versus the dollar. Plunging commodity prices, expectations for rising short-term U.S. interest rates, and country-specific factors weighed on local currency bond performance.

Results of several major bond market indexes for the full year 2015 are as follows:
Index
 
Barclays U.S. Aggregate Bond Index
.6
 %
Credit Suisse High Yield Index
(4.9
)%
Barclays Municipal Bond Index
3.3
 %
Barclays Global Aggregate Ex-U.S. Dollar Bond Index
(6.0
)%
JPMorgan Emerging Markets Index Plus
1.8
 %

ASSETS UNDER MANAGEMENT.

Our assets under management ended 2015 at $763.1 billion , an increase of $16.3 billion from the end of 2014 . Market appreciation and income, net of distributions not reinvested, added $14.7 billion , and net cash inflows added $1.6 billion in assets under management during 2015 .

Assets under management (in billions) at the end of the year and changes during each of the last three years are detailed below.

Assets under management by investment portfolio
 
 
 
 
 
 
December 31,
 
2013
 
2014
 
2015
Sponsored U.S. mutual funds
$
435.3

 
$
477.6

 
$
487.1

Other investment portfolios
257.1

 
269.2

 
276.0

Total
$
692.4

 
$
746.8

 
$
763.1




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Table of Contents                                  

Assets under management by investment objective
 
 
 
 
 
 
December 31,
 
2013
 
2014
 
2015
Stock and blended asset portfolios
$
537.0

 
$
579.9

 
$
592.8

Fixed income portfolios
155.4

 
166.9

 
170.3

Total
$
692.4

 
$
746.8

 
$
763.1


Components of changes in assets under management
 
 
 
 
 
 
 
 
Sponsored U.S. Mutual Funds
 
Other Investment Portfolios
 
Total
Assets under management at December 31, 2012
 
$
346.9

 
$
229.9

 
$
576.8

 
 
 
 
 
 
 
Net cash flows before client transfers
 
17.9

 
(29.9
)
 
(12.0
)
Client transfers from mutual funds to other portfolios
 
(7.7
)
 
7.7

 

Net cash flows after client transfers
 
10.2

 
(22.2
)
 
(12.0
)
Net market appreciation and income
 
79.0

 
49.4

 
128.4

Distributions not reinvested
 
(.8
)
 

 
(.8
)
Change during the period
 
88.4

 
27.2

 
115.6

 
 
 
 
 
 
 
Assets under management at December 31, 2013
 
435.3

 
257.1

 
692.4

 
 
 
 
 
 
 
Net cash flows before client transfers
 
17.1

 
(13.4
)
 
3.7

Client transfers from mutual funds to other portfolios
 
(5.3
)
 
5.3

 

Net cash flows after client transfers
 
11.8

 
(8.1
)
 
3.7

Net market appreciation and income
 
32.2

 
20.2

 
52.4

Distributions not reinvested
 
(1.7
)
 

 
(1.7
)
Change during the period
 
42.3

 
12.1

 
54.4

 
 
 
 
 
 
 
Assets under management at December 31, 2014
 
477.6

 
269.2

 
746.8

 
 
 
 
 
 
 
Net cash flows before client transfers
 
7.9

 
(6.3
)
 
1.6

Client transfers from mutual funds to other portfolios
 
(6.5
)
 
6.5

 

Net cash flows after client transfers
 
1.4

 
.2

 
1.6

Net market appreciation and income
 
9.6

 
6.7

 
16.3

Distributions not reinvested
 
(1.5
)
 
(.1
)
 
(1.6
)
Change during the period
 
9.5

 
6.8

 
16.3

 
 
 
 
 
 
 
Assets under management at December 31, 2015
 
$
487.1

 
$
276.0

 
$
763.1


In 2013 and 2014, the majority of the assets transferred by clients from our sponsored mutual funds to our other investment portfolios disclosed in the table above were moved from our target-date retirement funds to our collective investment trusts and target-date retirement trusts. In 2015, assets were transferred primarily from the mutual funds to our collective investment trusts, target-date retirement trusts, and separate accounts.



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Table of Contents                                  

The net cash inflows in our sponsored U.S. mutual funds over the last three years were sourced primarily from third-party financial intermediaries across various mandates as detailed below.
 
 
Year ended December 31,
 
 
2013
 
2014
 
2015
Stock and blended asset funds
 
$
5.8

 
$
3.7

 
$
1.5

Bond funds
 
3.5

 
8.3

 
.3

Money market funds
 
.9

 
(.2
)
 
(.4
)
Net cash flows after client transfers
 
$
10.2

 
$
11.8

 
$
1.4


In 2013, a vast majority of the net outflows from our other investment portfolios were concentrated among several large institutional clients outside the U.S. and intermediary clients that changed their investment objectives, repositioned their strategy allocations, or experienced investment performance challenges within their portfolio. In 2014, the net outflows from our other investment portfolios were primarily from a few institutional and subadvisory clients who redeemed significant amounts from a small number of equity and fixed income strategies. In 2015, the net inflows in our other investment portfolios resulted primarily from the client transfers received from the mutual funds. The net outflows prior to transfers in these portfolios in 2015 were largely concentrated among a small number of institutional clients who redeemed primarily from large-cap U.S. equity strategies.

Our target-date retirement portfolios, which invest in a broadly diversified portfolio of other T. Rowe Price funds or T. Rowe Price collective investment trusts, and automatically rebalance to maintain their specific asset allocation weightings, are a significant source of cash flows. Net cash flows after client transfers shown in the previous tables include or are net of the following net cash inflows that originated in our target-date portfolios.
 
Year ended December 31,
 
2013
 
2014
 
2015
Target-date retirement funds
$
6.6

 
$
13.2

 
$
8.9

Target-date retirement trusts
4.9

 
4.5

 
7.3

Total target-date portfolios
$
11.5

 
$
17.7

 
$
16.2


Assets under management at December 31, 2015 , in these target-date portfolios totaled $165.7 billion , including $135.5 billion in target-date retirement funds and $30.2 billion in target-date retirement trusts.

Strong investment performance and brand awareness is a key driver to attracting assets and to our long-term success. For 2015 , 80% of the T. Rowe Price U.S. mutual funds across their share classes outperformed their comparable Lipper averages on a total return basis for the three-year period ended December 31, 2015 , 78% outperformed for the five-year period, 88% outperformed for the 10-year period, and 80% outperformed for the one-year period. In addition, T. Rowe Price stock, bond and blended asset funds that were given an overall rating of four or five stars from Morningstar at December 31, 2015 , account for nearly 86% of the assets under management in our rated funds. Our target-date retirement funds continue to deliver very attractive long-term performance, with at least 97% of these funds outperforming their comparable Lipper averages on a total return basis for the three-, five-, and 10-year periods ended December 31, 2015 . The performance of the firm's institutional strategies remains very competitive.

We incur significant expenditures to attract new investment advisory clients and additional investments from our existing clients. These efforts involve costs that precede any future revenues that we recognize from an increase to our assets under management.



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Table of Contents                                  

RESULTS OF OPERATIONS.

 
 
Year ended December 31,
 
 
 
 
 
 
2014
 
2015
 
Dollar Change
 
Percentage Change
(in millions, except per-share data)
 
 
 
 
 
 
 
 
Investment advisory fees
 
$
3,464.5

 
$
3,687.3

 
$
222.8

 
6.4
 %
Net revenues
 
$
3,982.1

 
$
4,200.6

 
$
218.5

 
5.5
 %
Operating expenses
 
$
2,091.2

 
$
2,301.7

 
$
210.5

 
10.1
 %
Net operating income
 
$
1,890.9

 
$
1,898.9

 
$
8.0

 
.4
 %
Non-operating investment income
 
$
112.2

 
$
103.5

 
$
(8.7
)
 
(7.8
)%
Net income
 
$
1,229.6

 
$
1,223.0

 
$
(6.6
)
 
(.5
)%
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
4.55

 
$
4.63

 
$
.08

 
1.8
 %

Investment advisory revenues earned in 2015 increased over 2014 , as average assets under our management increase d $43.2 billion , or 6.0% , to $767.9 billion . The average annualized fee rate earned on our assets under management was 48.0 basis points in 2015 , up from the 47.8 basis points earned in 2014 , as money market fee waivers declined and equity valuations, which on average carry a higher fee rate, increased in 2015. We waived $47.6 million in money market-related fees in 2015 , including advisory fees and fund expenses, a decrease of $10.8 million from the $58.4 million waived in 2014 . The fee waivers in 2015 represent 1.3% of total investment advisory revenues earned during the same period. Fees were waived from all our money market mutual funds and trusts, which have combined net assets of $15.7 billion at December 31, 2015 . We expect that these fee waivers will continue into 2016 .

Our operating margin in 2015 was 45.2% compared to 47.5% in the 2014 period. The decline is a result of the investments we have been making to broaden and deepen our investment management, distribution, and service capabilities around the world despite the impact of market volatility on our net revenues. We expect continued downward pressure on our operating margin in 2016 and beyond from the market effects on our net revenues and the anticipated continued investment in our capabilities.

Net revenues

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. increased 7.3% , or $182.1 million , to nearly $2.7 billion , on higher average mutual fund assets. Average mutual fund assets in 2015 were $493.6 billion , an increase of 7.1% from the average for the comparable 2014 period.

Investment advisory revenues earned on the other investment portfolios in 2015 were $1.0 billion , an increase of $40.7 million , or 4.2% , from the $978.7 million earned in the comparable 2014 period. Average assets in these portfolios were $274.3 billion in 2015 , up 4.0% from the comparable 2014 period.

Administrative fee revenues decrease d $12.2 million to $361.8 million in 2015 . The decrease includes the reduction in certain administrative service fee rates paid by certain fund shareholders at the beginning of 2015 . Additionally, fees earned from the mutual funds for fund accounting has declined in 2015 compared to 2014 , as such services began to be performed by BNY Mellon in August 2015 . The mutual funds have contracted directly with BNY Mellon to provide such services. Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor Class, R Class, and Variable Annuity II Class shares of our sponsored portfolios were $151.5 million in 2015 , an increase of $7.9 million from 2014 on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs in the consolidated income statements.



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Table of Contents                                  

Operating expenses

Compensation and related costs were $1.4 billion in 2015 , an increase of $114.0 million , or 8.6% , compared to 2014 . The largest part of the increase is attributable to a $52.6 million increase in salaries and related benefits and a $43.0 million increase in our annual variable compensation program. Our average staff size in 2015 has increased 3.7% over 2014 and we employed 5,999 associates at December 31, 2015 . Higher noncash stock-based compensation expense and temporary staff expense account for the remainder of the increase in compensation and related costs in the 2015 period. The increase in compensation and related costs and our average staff size were muted by the lower compensation costs resulting from shifting 210 associates and providing ongoing transition support to BNY Mellon, with whom we contracted to provide fund accounting and recordkeeping operations. However, these lower compensation costs are offset by increases in costs paid to BNY Mellon to provide these administrative services, which are reflected in other operating expenses.

Advertising and promotion costs were $79.7 million in 2015 , an increase of $3.7 million from 2014 . The higher cost is primarily attributable to the creation and launch of a new advertising campaign and increased participation in promotional activities as we broaden our distribution reach. We currently expect advertising and promotion costs for 2016 to be comparable to 2015 levels.

Occupancy and facility costs, together with depreciation expense, increased $29.9 million , or 11.7% , compared to 2014 . The increase is primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs.

Other operating expenses were $341.4 million in 2015 , an increase of $55.0 million from 2014 . About a third of the increase is attributable to costs being paid to BNY Mellon since August 2015 for the performance of certain administrative services. The balance of the change is due to increased business demands and our continued investment in capabilities. These costs include information and third-party service costs, costs related to our defined contribution recordkeeping business, travel-related costs, and other general and administrative costs.

Non-operating investment income

Net non-operating investment activity during 2015 resulted in income of $103.5 million , a decrease of $8.7 million from 2014 . Net losses recognized on our sponsored fund investments of $12.3 million were offset in part by other investment income of $3.6 million . The following table details the components of non-operating investment income (in millions) during 2014 and 2015 .

 
Year ended December 31,
 
 
 
2014
 
2015
 
Dollar Change
 
 
 
 
 
 
 
Net gains realized on sponsored fund dispositions
 
$
49.3

 
$
56.5

 
$
7.2

Ordinary and capital gain dividends
 
50.2

 
43.0

 
(7.2
)
Other-than-temporary impairment
 

 
(4.8
)
 
(4.8
)
Earnings (losses) on equity method fund holdings
 
1.1

 
(2.4
)
 
(3.5
)
Net losses recognized on trading securities
 
(3.8
)
 
(2.0
)
 
1.8

Net loss recognized on deconsolidation of a sponsored fund
 

 
(5.8
)
 
(5.8
)
Net investment gains recognized on sponsored funds
 
96.8

 
84.5

 
(12.3
)
Other investment income
 
15.4

 
19.0

 
3.6

Non-operating investment income

$
112.2

 
$
103.5


$
(8.7
)

The net loss recognized on deconsolidation represents the reclassification of a foreign currency loss that was accumulated in other comprehensive income from the date we made our initial seed capital investment in an Australian dollar-denominated fund. Since the deconsolidation, we are accounting for the investment under the equity method of accounting.



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Provision for income taxes

Our effective tax rate was 38.9% in 2015 compared to 38.6% in 2014 . We currently estimate our effective tax rate for 2016 to be about 38.7% . Our effective income tax rate reflects the relative contribution of pretax income generated by our foreign subsidiaries that are subject to tax rates lower than our U.S. rates. Changes in the relative contribution of pretax income from U.S. and foreign sources or changes in tax rates in relevant foreign jurisdictions may affect our effective income tax rate and overall net income in the future.

 
 
Year ended December 31,
 
 
 
 
 
 
2013
 
2014
 
Dollar Change
 
Percent Change
(in millions, except per-share data)
 
 
 
 
 
 
 
 
Investment advisory fees
 
$
3,022.6

 
$
3,464.5

 
$
441.9

 
14.6
%
Net revenues
 
$
3,484.2

 
$
3,982.1

 
$
497.9

 
14.3
%
Operating expenses
 
$
1,846.8

 
$
2,091.2

 
$
244.4

 
13.2
%
Net operating income
 
$
1,637.4

 
$
1,890.9

 
$
253.5

 
15.5
%
Non-operating investment income
 
$
63.0

 
$
112.2

 
$
49.2

 
78.1
%
Net income
 
$
1,047.7

 
$
1,229.6

 
$
181.9

 
17.4
%
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
3.90

 
$
4.55

 
$
.65

 
16.7
%

Investment advisory fees earned in 2014 were up 14.6% over 2013 as average assets under our management increased $90.9 billion, or 14.3%, to $724.7 billion. The average annualized fee rate earned on our assets under management was 47.8 basis points during 2014, virtually unchanged from the 47.7 basis points earned in 2013 . In 2014, we voluntarily waived $58.4 million in money market-related fees, including advisory fees and fund expenses, in order to maintain a positive yield for fund investors. The fee waivers in 2014 were up $7.2 million from the $51.2 million waived in 2013 and represent about 2% of total investment advisory revenues earned in 2014. Fees were waived from each of our money market funds and trusts, which have combined net assets at December 31, 2014, of $16.0 billion, or 2.1% of our total assets under management.

Greater average assets under management have increased our investment advisory revenues and helped lift our operating margin in 2014 to 47.5% compared to 47.0% in the 2013 period. Non-operating investment income in 2014 includes higher gains of $35.8 million realized from the sale of certain of our sponsored fund holdings. The proceeds from these sales were primarily used to provide additional seed capital to other sponsored funds in support of our distribution efforts outside the U.S.

Net revenues

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. were $2.5 billion in 2014, an increase of 16.9%, or $359.7 million, on higher average mutual fund assets. In 2014, average mutual fund assets were $460.9 billion, an increase of 17.8% from the 2013 average.

Mutual fund assets were $477.6 billion at December 31, 2014, an increase of $42.3 billion from $435.3 billion at the end of 2013 . Investors added net cash inflows during 2014 of $11.8 billion, including $3.7 billion into our stock and blended asset funds and $8.3 billion into our bond funds. The money market funds had net outflows of $.2 billion. These cash flow amounts are presented net of $5.3 billion that clients transferred to the other investment portfolios, primarily our collective investment trusts and target-date retirement trusts. Without these transfers, the mutual funds would have had net cash inflows of $17.1 billion in 2014. Market appreciation and income, net of distributions not reinvested, added $30.5 billion to our mutual fund assets under management in 2014.
 
Investment advisory revenues earned on the other investment portfolios that we manage increased $82.2 million, or 9.2%, to $978.7 million. Average assets in these portfolios were $263.8 billion during 2014, an increase of $21.2 billion, or 8.7%, from the 2013 year. Assets in these portfolios at December 31, 2014, were $269.2 billion, an increase of $12.1 billion from the end of 2013 . Market appreciation and income of $20.2 billion was partially offset by net outflows of $8.1 billion during 2014. Net outflows during 2014 are presented net of the $5.3 billion assets that clients transferred in from the mutual funds. These net outflows were primarily from a few number of institutional and subadvisory clients who redeemed significant amounts from a small number of equity and fixed income strategies.



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Administrative fees increased $30.3 million to $374.0 million in 2014. The increase is primarily attributable to increased costs incurred to provide fund accounting services and transfer agent servicing activities to the mutual funds and their investors. Changes in administrative fee revenues are generally offset by similar changes in related operating expenses that are incurred to provide services to the funds and their investors.

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor Class, R Class, and Variable Annuity II Class shares of our sponsored portfolios were $143.6 million in 2014, an increase of $26.4 million from the comparable 2013 period, on greater average assets under management in these share classes. The 12b-1 fees earned are offset entirely by the costs paid to third-party intermediaries who source these assets. These costs are reported as distribution and servicing costs on the face of our consolidated income statements.

Operating expenses

Compensation and related costs increased 14.9% from 2013 to about $1.3 billion. A significant part of the increase is attributable to a $60.7 million increase in our annual variable compensation program and a $60.8 million increase in salaries and related benefits, which result from a modest increase in salaries at the beginning of 2014 combined with a 4.8% increase in our average staff size over the 2013 period. We continue to increase our staff size to support both business growth and added capabilities. Higher temporary staff expenses, noncash stock-based compensation expense, and other employee costs account for the remainder of the increase in compensation and related costs in the 2014 period. At December 31, 2014, we employed 5,870 associates, an increase of 3.6% from the end of 2013 .

Advertising and promotion expenditures were $76.0 million in 2014, a decrease of $11.0 million from the 2013 period. The decrease in cost from the 2013 period is primarily a result of repurposing this spending to other distribution activities.

Occupancy and facility costs together with depreciation expense increased $29.2 million, or 12.9%, versus 2013 . Nearly half of the increase is attributable to the opening of two new buildings at our Owings Mills campus in the fourth quarter of 2013 and the renovation of certain existing facilities. The increase also includes the added costs to update and enhance our technology capabilities, including related maintenance programs. These increases were offset by the non-recurrence of the $3.5 million in costs recognized to terminate certain facility leases in 2013.

Other operating expenses were $286.4 million in 2014, an increase of $27.1 million from the comparable 2013 period, as higher business demands and our continued investment in our capabilities have increased our costs. These increased costs include those related to our defined contribution recordkeeping business, information and other third-party service costs, travel costs, and other general and administrative costs.

Non-operating investment income

Our non-operating investment income, which includes the recognition of investment gains and losses, was up $49.2 million from the 2013 period. The increase is due in part to the 2014 results including $49.3 million in gains realized on the sale of certain sponsored fund holdings compared with $13.5 million in gains realized in the comparable 2013 period. Larger year-end dividends, including capital gain distributions, earned from our mutual fund investments of $21.8 million were offset in part by a decrease in net investment gains recognized on certain of our other investments in the 2014 period. The 2013 year also included a $1.5 million gain recognized on the sale of our savings bank subsidiary.

Provision for income taxes

Our effective tax rate was 38.6% in 2014 compared to 38.4% in 2013. Our effective income tax rate reflects the relative contribution of pretax income generated by our foreign subsidiaries that are subject to tax rates lower than our U.S. rates. Changes in the relative contribution of pretax income from U.S. and foreign sources or changes in tax rates in relevant foreign jurisdictions may affect our effective income tax rate and overall net income in the future.




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CAPITAL RESOURCES AND LIQUIDITY.

During 2015 , stockholders’ equity decrease d from $5.4 billion to $4.8 billion , which results primarily from us expending $987.8 million to repurchase 13.1 million common shares in 2015. Additionally, we paid $2.08 per share in regular dividends and paid a $2.00 special dividend in 2015 . Our repurchases and dividends were expended using existing cash balances and cash generated from operations. We generally repurchase shares of our common stock over time to offset the dilution created by our equity-based compensation plans.

As detailed below, we have returned $3.3 billion to stockholders over the last three years through stock repurchases, our regular quarterly dividends, and one special dividend.

(in millions)
Recurring Dividends
 
Special Dividend
 
Stock Repurchases
 
Total Cash Returned to Stockholders
2013
$
396.6

 
$

 
$
14.1

 
$
410.7

2014
462.1

 

 
415.5

 
877.6

2015
534.5

 
524.5

 
987.8

 
2,046.8

Total
$
1,393.2

 
$
524.5

 
$
1,417.4

 
$
3,335.1


Tangible book value is $4.1 billion at December 31, 2015 , and our cash and fund investment holdings total $2.8 billion . The cash and fund investment holdings held by our foreign subsidiaries is $.4 billion at December 31, 2015 . Given the availability of these financial resources, we do not maintain an available external source of liquidity.

At December 31, 2015 , we had outstanding commitments to make additional contributions totaling $48.2 million to various investment partnerships in which we have an existing investment. These outstanding commitments, if called, will be funded from operating resources. We currently expect total capital expenditures for facilities, equipment, and technology development for 2016 to be up to $180 million , which will be funded from operating resources.

2015 versus 2014 .

Operating activities during 2015 provided cash flows of $1.5 billion , up $215.1 million from the 2014 period. We used $75.0 million less cash in 2015 compared with the 2014 period as we seeded fewer new sponsored investment portfolios. Higher noncash depreciation and amortization and noncash stock-based compensation in 2015 increased cash flows by $30.2 million Timing differences on the cash settlement of our assets and liabilities increased our operating cash flows by $114.8 million compared to 2014 . More than half of the timing difference on the cash settlement of our assets and liabilities is related to bonus compensation that was deferred by certain employees under the new Supplemental Savings Plan that went into effect in 2015. The Supplemental Savings Plan provides certain senior officers the opportunity to defer any portion of their cash incentive compensation earned for a respective calendar year during which services are provided for a period of two or more years.

Net cash provided by investing activities totaled $109.0 million in 2015 , compared with net cash used of $443.4 million in the comparable 2014 period. In 2015, cash proceeds from the sale of certain sponsored fund holdings, net of new investments, resulted in investing cash flows of $269.7 million . This compares with net investments of $305.3 million that we made into our sponsored fund investments in 2014 . We increased our property and equipment additions by $25.1 million during 2015 compared to the 2014 period.

Net cash used in financing activities was $1,949.2 million in 2015 , up $1,209.4 million from the comparable 2014 period. The payment of a $2.00 special dividend on April 23, 2015, and an 18% increase in our regular quarterly per-share dividend accounted for $596.9 million of the increase from 2014 . We also increased our common stock repurchases by $572.3 million during 2015 compared with 2014 .


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2014 versus 2013 .

Operating activities during 2014 provided cash flows of nearly $1.3 billion, up $58.1 million from the 2013 period. Higher net income, noncash depreciation and amortization, and noncash stock-based compensation in the 2014 period increased cash flows, in aggregate, $221.8 million over the 2013 levels. This aggregate increase was offset by $64.5 million in more cash used in 2014 to seed new sponsored investment portfolios that we are consolidating and treating their underlying investment holdings as trading securities. Timing differences in the cash settlement of our accounts receivable and accrued revenues, payables and accrued liabilities, and other assets and liabilities also decreased our operating cash flows by $69.2 million compared to the 2013 year. Our 2014 operating cash flows were also increased by $35.8 million in higher gains realized from the sale of certain available-for-sale sponsored fund investments as the related proceeds are reflected as an investing activity in our consolidated statements of cash flows.

Net cash used in investing activities totaled $443.4 million, an increase of $5.9 million from 2013. We increased our capital expenditures and other investments activity in 2014 by $20.4 million and $12.1 million, respectively. These increases in net cash used were more than offset by $35.2 million in less net cash invested in our sponsored funds, as we sold more existing investments to fund the new investments in 2014 compared to the 2013 period. The 2013 year also included $8.6 million in net cash proceeds related to our savings bank subsidiary and its sale in December 2013.

Net cash used in financing activities was $739.8 million in 2014, up $463.0 million from the comparable 2013 period. We increased our common stock repurchases by $401.4 million in 2014 compared with the 2013 period. Cash used for dividends paid in 2014 increased $65.4 million due primarily to the 16% increase in our per-share dividend rate.


CONTRACTUAL OBLIGATIONS.

The following table presents a summary of our future obligations (in millions) under the terms of existing operating leases and other contractual cash purchase commitments at December 31, 2015 . Other purchase commitments include contractual amounts that will be due for the purchase of goods or services to be used in our operations and may be cancelable at earlier times than those indicated, under certain conditions that may involve termination fees. Because these obligations are generally of a normal recurring nature, we expect that we will fund them from future cash flows from operations. The information presented does not include operating expenses or capital expenditures that will be committed in the normal course of operations in 2016 and future years. The information also excludes the $5.8 million of unrecognized tax benefits discussed in Note 7 to our consolidated financial statements because it is not possible to estimate the time period in which a payment might be made to the tax authorities.

 
Total
 
2016
 
2017-18
 
2019-20
 
Later
Noncancelable operating leases
$
250

 
$
29

 
$
53

 
$
49

 
$
119

Other purchase commitments
182

 
136

 
38

 
8

 

Total
$
432

 
$
165

 
$
91

 
$
57

 
$
119


We also have outstanding commitments to fund additional contributions to investment partnerships totaling $48.2 million at December 31, 2015 . The vast majority of these additional contributions will be made to investment partnerships in which we have an existing investment. In addition to such amounts, a percentage of prior distributions may be called under certain circumstances.

CRITICAL ACCOUNTING POLICIES.

The preparation of financial statements often requires the selection of specific accounting methods and policies from among several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in our consolidated balance sheets, the revenues and expenses in our consolidated statements of income, and the information that is contained in our significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Accordingly, actual amounts or future results can differ materially from those estimates that we include currently in our consolidated financial statements, significant accounting policies, and notes.



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We present those significant accounting policies used in the preparation of our consolidated financial statements as an integral part of those statements within this 2015 Annual Report. In the following discussion, we highlight and explain further certain of those policies that are most critical to the preparation and understanding of our financial statements.

Other-than-temporary impairments of available-for-sale securities . We generally classify our investment holdings in sponsored funds as available-for-sale if we are not deemed to a have a controlling financial interest nor exercise significant influence over its operating and financial policies. At the end of each quarter, we mark the carrying amount of each investment holding to fair value and recognize an unrealized gain or loss as a component of comprehensive income within the consolidated statements of comprehensive income. We next review each individual security position that has an unrealized loss or impairment to determine if that impairment is other than temporary.

In determining whether a mutual fund holding is other-than-temporarily impaired, we consider many factors, including the duration of time the impairment has existed, the severity of the impairment, any subsequent changes in value, and our intent and ability to hold the security for a period of time sufficient for an anticipated recovery in fair value. Subject to the other considerations noted above, we believe a fund holding with an unrealized loss that has persisted daily throughout the six months between quarter-ends is generally presumed to have an other-than-temporary impairment. We may also recognize an other-than-temporary impairment for losses that have existed for less than six months in our consolidated statements of income if the particular circumstances of the underlying investment do not warrant our belief that a near-term recovery is possible.

Other-than-temporary impairments of equity method investments . We evaluate our equity method investments, including our investment in UTI, for impairment when events or changes in circumstances indicate that the carrying value of the investment exceeds its fair value, and the decline in fair value is other than temporary.

Goodwill . We internally conduct, manage, and report our operations as one investment advisory business. We do not have distinct operating segments or components that separately constitute a business. Accordingly, we attribute goodwill to a single reportable business segment and reporting unit – our investment advisory business.

We evaluate the carrying amount of goodwill in our consolidated balance sheets for possible impairment on an annual basis in the third quarter of each year using a fair value approach. Goodwill would be considered impaired whenever our historical carrying amount exceeds the fair value of our investment advisory business. Our annual testing has demonstrated that the fair value of our investment advisory business (our market capitalization) exceeds our carrying amount (our stockholders’ equity) and, therefore, no impairment exists. Should we reach a different conclusion in the future, additional work would be performed to ascertain the amount of the noncash impairment charge to be recognized. We must also perform impairment testing at other times if an event or circumstance occurs indicating that it is more likely than not that an impairment has been incurred. The maximum future impairment of goodwill that we could incur is the amount recognized in our consolidated balance sheets, $665.7 million .

Stock options . We recognize stock option-based compensation expense in our consolidated statements of income using a fair value-based method. Fair value methods use a valuation model for shorter-term, market-traded financial instruments to theoretically value stock option grants even though they are not available for trading and are of longer duration. The Black-Scholes option-pricing model that we use includes the input of certain variables that are dependent on future expectations, including the expected lives of our options from grant date to exercise date, the volatility of our underlying common shares in the market over that time period, and the rate of dividends that we will pay during that time. Our estimates of these variables are made for the purpose of using the valuation model to determine an expense for each reporting period and are not subsequently adjusted. Unlike most of our expenses, the resulting charge to earnings using a fair value-based method is a noncash charge that is never measured by, or adjusted based on, a cash outflow.

Provision for income taxes . After compensation and related costs, our provision for income taxes on our earnings is our largest annual expense. We operate in numerous states and countries through our various subsidiaries and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations. Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. From time to time, we may also provide for estimated liabilities associated with uncertain tax return filing positions that are subject to, or in the process of, being audited by various tax authorities. Because the determination of our annual provision is subject to judgments and estimates, it is likely that actual results will vary from those recognized in our financial statements. As a result, we recognize additions to, or reductions of, income tax expense during a reporting period that pertain to prior period provisions as our estimated liabilities are revised and actual tax returns and tax audits are settled. We recognize any such prior period adjustment in the discrete quarterly period in which it is determined.


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NEWLY ISSUED BUT NOT YET ADOPTED ACCOUNTING GUIDANCE.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 — Revenue from Contracts with Customers. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that will be applied to determine the measurement of revenue and timing of when it is recognized. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, which defers the effective date of the standard by one year and permits early adoption. We would be required to adopt the new standard on January 1, 2018. We are currently evaluating the impact this standard will have on our financial position and results of operations.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02 — Consolidation (Topic 810): Amendments to the Consolidation Analysis. This standard modifies existing consolidation guidance for reporting companies that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. We will adopt the ASU on January 1, 2016, using the modified retrospective transition method. The adoption of this new guidance will increase the number of sponsored fund investments that we consolidate either because we own the majority of the voting interest of those U.S. mutual funds or are considered the primary beneficiary of those investment vehicles outside the U.S. that will be required to be analyzed as variable interest entities. As a result, the underlying assets and liabilities of the consolidated funds will be included in our consolidated balance sheet and we will recognize redeemable non-controlling interest for the portion of the consolidated funds that are owned by a third-party investor. Additionally, the change in fair value of the consolidated funds, net of taxes, will begin to be recognized in net income instead of other comprehensive income as they will no longer be accounted for as available-for-sale investments. We are evaluating the effect ASU 2015-02 will have on our consolidated financial statements and related disclosures.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01 — Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The new guidance will require the change in fair value of equity investments with readily determinable fair values to be recognized through the income statements. We are currently evaluating the full impact of the standard, however, upon adoption the change in the fair value of our available-for-sale equity investments' will be recognized in our consolidated income statement instead of accumulated other comprehensive income on the balance sheet.

We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our consolidated financial statements, including that which we have not yet adopted. We do not believe that any such guidance will have a material effect on our financial position or results of operation.

FORWARD-LOOKING INFORMATION.

From time to time, information or statements provided by or on behalf of T. Rowe Price, including those within this report, may contain certain forward-looking information, including information or anticipated information relating to: our revenues, net income, and earnings per share on common stock; changes in the amount and composition of our assets under management; our expense levels; our estimated effective income tax rate; and our expectations regarding financial markets, future transactions, dividends, investments, capital expenditures, and other conditions. Readers are cautioned that any forward-looking information provided by or on behalf of T. Rowe Price is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information because of various factors including, but not limited to, those discussed below and in Item 1A, Risk Factors, of this Form 10-K Annual Report. Further, forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.

Our future revenues and results of operations will fluctuate primarily due to changes in the total value and composition of assets under our management. Such changes result from many factors, including, among other things: cash inflows and outflows in the T. Rowe Price mutual funds and other managed investment portfolios, fluctuations in global financial markets that result in appreciation or depreciation of the assets under our management, our introduction of new mutual funds and investment portfolios, and changes in retirement savings trends relative to participant-directed investments and defined contribution plans. The ability to attract and retain investors’ assets under our management is dependent on investor sentiment and confidence; the relative investment performance of the Price mutual funds and other managed investment portfolios as


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compared to competing offerings and market indexes; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; and our level of success in implementing our strategy to expand our business. Our revenues are substantially dependent on fees earned under contracts with the Price funds and could be adversely affected if the independent directors of one or more of the Price funds terminated or significantly altered the terms of the investment management or related administrative services agreements. Non-operating investment income will also fluctuate primarily due to the size of our investments, changes in their market valuations, and any other-than-temporary impairments that may arise or, in the case of our equity method investments, our proportionate share of the investee’s net income.

Our future results are also dependent upon the level of our expenses, which are subject to fluctuation for the following or other reasons: changes in the level of our advertising expenses in response to market conditions, including our efforts to expand our investment advisory business to investors outside the U.S. and to further penetrate our distribution channels within the U.S.; variations in the level of total compensation expense due to, among other things, bonuses, stock option and other equity grants, other incentive awards, changes in our employee count and mix, and competitive factors; any goodwill or other asset impairment that may arise; fluctuation in foreign currency exchange rates applicable to the costs of our international operations; expenses and capital costs, such as technology assets, depreciation, amortization, and research and development, incurred to maintain and enhance our administrative and operating services infrastructure; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties, such as facilities, communications, power, and the mutual fund transfer agent and accounting systems.

Our business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including but not limited to effects on costs that we incur and effects on investor interest in mutual funds and investing in general or in particular classes of mutual funds or other investments.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.

The following table (in millions) presents the equity price risk from investments in sponsored funds that are accounted for as available-for-sale securities or under the equity method by assuming a hypothetical decline in the fair values of fund shares. We have chosen to use a variant of each fund's net asset value to quantify the equity price risk, as we believe the volatility in each fund's net asset value best reflects the underlying risk potential as well as the market trends surrounding each fund's investment objective. The potential future loss of value, before any income tax benefits, of these fund investments at year-end was determined by using the lower of each fund’s lowest net asset value per share during 2015 or its net asset value per share at December 31, 2015 , reduced by 10%. In considering this presentation, it is important to note that: not all funds experienced their lowest net asset value per share on the same day; it is likely that the composition of the fund investment portfolio would be changed if adverse market conditions persisted; and we could experience future losses in excess of those presented below.
 
 
Fair Value 12/31/2015
 
Percentage of Portfolio
 
Potential Lower Value
 
Percentage of Portfolio
 
2015 Potential
Loss
 
2014 Potential
Loss
Stock and blended asset funds
$
599.8

 
37
%
 
$
536.1

 
37
%
 
$
63.7

 
11
%
 
$
76.1

 
10
%
Bond funds
1,012.5

 
63
%
 
911.2

 
63
%
 
101.3

 
10
%
 
115.2

 
10
%
 
$
1,612.3

 
100
%
 
$
1,447.3

 
100
%
 
$
165.0

 
10
%
 
$
191.3

 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method fund investments
$
113.7

 
100
%
 
$
102.3

 
100
%
 
$
11.4

 
10
%
 
$
12.6

 
10
%

For available-for-sale securities, we experienced actual net unrealized losses of $5.0 million in 2015 that are considered temporary in other comprehensive income. We review the carrying amount of each investment on a quarterly basis and recognize an impairment charge in non-operating investment income (loss) whenever an unrealized loss is considered other than temporary. During 2015 , we recognized an other-than-temporary impairment of $4.8 million.

Investments in mutual funds generally moderate market risk because funds, by their nature, are diversified investment portfolios that invest in a number of different financial instruments. T. Rowe Price further manages its exposure to market risk by diversifying its investments among many domestic and international funds. In addition, investment holdings may be altered from time to time in response to changes in market risks and other factors, as management deems appropriate.



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Our equity method investment in UTI of $132.8 million at December 31, 2015 , exposes us to foreign currency risk related to translating our proportionate share of its financial statements, which are denominated in Indian rupees (INR), to U.S. dollars (USD) each reporting period. We do not use derivative financial instruments to manage this foreign currency risk, so both positive and negative fluctuations in the INR against the USD will affect accumulated other comprehensive income and the carrying amount of our investment. We had a cumulative translation loss , net of tax, of $31.4 million at December 31, 2015 , related to our investment in UTI. Given the nature of UTI’s business, should conditions deteriorate in markets in which they operate, we are at risk for loss up to our carrying amount.

We operate in several foreign countries of which the United Kingdom is the most prominent. We incur operating expenses and have foreign currency-denominated assets and liabilities associated with these operations, though our revenues are predominately realized in USD. We do not believe that foreign currency fluctuations materially affect our results of operations.



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Item 8.
Financial Statements and Supplementary Data.
 
 
Page
Index to Financial Statements:
 
Consolidated Balance Sheets at December 31, 2014 and 2015
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2015
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2015
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2015
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2015


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CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
 
12/31/2014
 
12/31/2015
ASSETS
 
 
 
Cash and cash equivalents
$
1,506.1

 
$
1,172.3

Accounts receivable and accrued revenue
442.8

 
446.0

Investments in sponsored funds
1,884.0

 
1,612.3

Other investments
408.3

 
406.6

Property and equipment, net
586.4

 
607.1

Goodwill
665.7

 
665.7

Other assets
151.1

 
196.9

Total assets
$
5,644.4

 
$
5,106.9

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Accounts payable and accrued expenses
$
143.4

 
$
170.6

Accrued compensation and related costs
82.2

 
153.1

Income taxes payable
23.6

 
21.2

Total liabilities
249.2

 
344.9

 
 
 
 
Commitments and contingent liabilities

 

 
 
 
 
Stockholders' equity
 
 
 
Preferred stock, undesignated, $.20 par value - authorized and unissued 20,000,000 shares

 

Common stock, $.20 par value - authorized 750,000,000; issued 261,110,000 shares at December 31, 2014 and 250,469,000 at December 31, 2015
52.2

 
50.1

Additional capital in excess of par value
756.5

 
654.6

Retained earnings
4,450.1

 
3,970.7

Accumulated other comprehensive income
136.4

 
86.6

Total stockholders' equity
5,395.2

 
4,762.0

Total liabilities and stockholders' equity
$
5,644.4

 
$
5,106.9



The accompanying summary of significant accounting policies and notes to consolidated financial statements are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF INCOME
(in millions, except earnings per share)
 
 
Year ended December 31,
 
2013
 
2014
 
2015
Revenues
 
 
 
 
 
Investment advisory fees
$
3,022.6

 
$
3,464.5

 
$
3,687.3

Administrative fees
343.7

 
374.0

 
361.8

Distribution and servicing fees
117.2

 
143.6

 
151.5

Net revenue of savings bank subsidiary
.7

 

 

Net revenues
3,484.2

 
3,982.1

 
4,200.6

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Compensation and related costs
1,156.9