T. Rowe Price Group, Inc.
PRICE T ROWE GROUP INC (Form: 10-K, Received: 02/07/2017 17:15:04)
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, 2016
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 $72.97 per share (the NASDAQ Official Closing Price on June 30, 2016 , the last business day of the registrant’s most recently completed second fiscal quarter) was $17.7 billion .
The number of shares outstanding of the registrant's common stock as of the latest practicable date, February 6, 2017 , is 243,415,300 .
DOCUMENTS INCORPORATED BY REFERENCE: In Part III, the Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
Exhibit index begins on page 72 .


Table of Contents                                  

   
 
PAGE
 
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.



Page 1


Table of Contents                                  

PART I

Item 1.
Business.

GENERAL.

T. Rowe Price Group, Inc. is a financial services holding company that provides global investment management services through its subsidiaries to investors worldwide. We provide an array of company sponsored U.S. mutual funds, other sponsored pooled investment vehicles, subadvisory services, separate account management, recordkeeping, and related services to individuals, advisors, institutions, financial intermediaries, and retirement plan sponsors. We are focused on delivering global investment management excellence to help clients around the world achieve their long-term investment goals.

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, 2016 , we had $810.8 billion in assets under management, including $514.2 billion in the T. Rowe Price mutual funds distributed in the U.S. (Price Funds) and $296.6 billion in other investment portfolios.

2016 DEVELOPMENTS.

U.S. stocks rose strongly in 2016 , with major indexes finishing the year near record highs. Small-cap stocks substantially outperformed large-caps, and it was the eighth consecutive year for a positive S&P 500 Index total return. The S&P 500 Index and the NASDAQ Composite Index, which is heavily weighted in technology companies, returned 12.0% and 7.5% , respectively, in 2016 . Developed non-U.S. equity markets significantly underperformed U.S. shares for the year, as returns to U.S. investors were hurt by a stronger dollar versus some major currencies. Global bond returns were mostly positive in 2016 .

The table below presents financial results on a U.S. GAAP basis, as well as a non-GAAP basis, to adjust for the non-recurring charge related to the Dell appraisal rights matter, the impact of our consolidated sponsored investment portfolios, and other non-operating income. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.
 
 
Year ended December 31,
 
 
 
 
(in millions, except per-share data)
 
2015
 
2016
 
Dollar change
 
Percentage change
 
 
 
 
 
 
 
 
 
U.S. GAAP Basis
 
 
 
 
 
 
 
 
Investment advisory fees
 
$
3,687.3

 
$
3,728.7

 
$
41.4

 
1.1
 %
Net revenues
 
$
4,200.6

 
$
4,222.9

 
$
22.3

 
.5
 %
Operating expenses
 
$
2,301.7

 
$
2,489.5

 
$
187.8

 
8.2
 %
Net operating income
 
$
1,898.9

 
$
1,733.4

 
$
(165.5
)
 
(8.7
)%
Non-operating income (1)
 
$
103.5

 
$
227.1

 
$
123.6

 
nm

Net income attributable to T. Rowe Price Group
 
$
1,223.0

 
$
1,215.0

 
$
(8.0
)
 
(.7
)%
Diluted earnings per common share
 
$
4.63

 
$
4.75

 
$
.12

 
2.6
 %
Weighted average common shares outstanding assuming dilution
 
260.9

 
250.3

 
(10.6
)
 
(4.1
)%
 
 
 
 
 
 
 
 
 
Adjusted (2)
 
 
 
 
 
 
 
 
Operating expenses
 
$
2,301.7

 
$
2,416.8

 
$
115.1

 
5.0
 %
Net income attributable to T. Rowe Price Group
 
$
1,160.3

 
$
1,148.9

 
$
(11.4
)
 
(1.0
)%
Diluted earnings per common share
 
$
4.39

 
$
4.49

 
$
.10

 
2.3
 %
 
 
 
 
 
 
 
 
 


Page 2


Table of Contents                                  

Assets under management (in billions)
 
 
 
 
 
 
 
 
Average assets under management
 
$
767.9

 
$
778.2

 
$
10.3

 
1.3
 %
Ending assets under management
 
$
763.1

 
$
810.8

 
$
47.7

 
6.3
 %
(1) Non-operating income varies from year to year due to a number of factors; accordingly the percentage change in non-operating income is not believed to be meaningful.
(2) See the reconciliation to the comparable U.S. GAAP measures at the end of the Results of Operations sections of Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
.

In 2016, we paid our clients $166.2 million to compensate them for the denial of their appraisal rights in connection with the 2013 leveraged buyout of Dell. We made claims with our insurance carriers and, on December 30, 2016 , entered into an agreement with our primary insurance carrier to recover $100 million from the claim. The insurance proceeds were recognized as an offset to the related $166.2 million charge recognized in the second quarter of 2016. Remaining insurance claims filed with respect to this matter that could result in an additional recovery of up to $50 million are still pending.

Our 2016 results were significantly impacted by the adoption of new accounting guidance related to consolidation and stock-based compensation. The new consolidation guidance implemented in 2016 resulted in the consolidation of a larger number of sponsored investment portfolios in which we have provided initial seed capital. The impact of implementing this new guidance is discussed in more detail in the Summary of Significant Accounting Policies section of our consolidated financial statements contained in Item 8 of this filing.

The impact (in millions) the consolidated sponsored investment portfolios have on the individual lines of our 2016 consolidated statement of income is as follows:
Operating expenses reflected in net operating income
$
(13.0
)
Net investment income reflected in non-operating income
121.1

Impact on income before taxes
$
108.1

 
 
Net income attributable to the firm's interest in the consolidated sponsored investment portfolios
$
69.1

Net income attributable to redeemable non-controlling interests (unrelated third-party investors)
39.0

 
$
108.1


Assets Under Management.

Assets under management ended 2016 at $810.8 billion , an increase of $47.7 billion from the end of 2015 . Market appreciation and income, net of distributions not reinvested, of $50.5 billion was offset in part by net cash outflows of $2.8 billion during 2016 . Our net cash outflows for 2016 were largely attributable to clients reallocating to passive investments and the impact of our closed strategies. In 2016 , our net cash flows include $8.1 billion that originated in our target date retirement portfolios, which provide shareholders with single, diversified portfolios that invest in underlying T. Rowe Price funds and T. Rowe Price collective investment trusts. The assets under management in these portfolios totaled $189.2 billion at December 31, 2016 , including $150.9 billion in target date retirement funds and $38.3 billion in target date retirement trusts. These portfolios' assets account for 23.3% of our managed assets at December 31, 2016 , compared with 21.7% at the end of 2015 .

Capital Resources.

At December 31, 2016 , we remain debt-free with ample liquidity, including cash and discretionary sponsored portfolio investment holdings of $1.9 billion . We also have seed capital investments in sponsored investment portfolios of about $1.3 billion that are redeemable, although we generally expect to be invested for several years until unrelated third-party investors substantially reduce our relative ownership percentage. We paid $2.16 per share in regular dividends in 2016 , an increase of 3.8% over the $2.08 per share in regular dividends paid in 2015 . Additionally, we expended $676.9 million to repurchase 10.0 million shares, or 4.0% , of our outstanding common stock in 2016 . We invested  $148 million  during the year in capitalized technology and facilities from existing cash balances.

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 Part II, Item 7, as well as our consolidated financial statements, which are included in Item 8 of this Form 10-K.



Page 3


Table of Contents                                  

STRATEGIC INITIATIVES.

Our core capabilities have enabled us to deliver excellent operating results since our IPO in 1986. We maintain a client-centric culture that is focused on delivering excellent long-term investment performance and world-class service to our clients. We have distributed our broad array of active investment strategies through a diverse set of distribution channels to meet the needs of our clients. Our ongoing financial strength has allowed 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.

The market in which we operate has been evolving quickly and a number of headwinds have arisen over the last few years, including a shifting demand from equities to income-oriented solutions as the population ages, demand for new vehicles to meet client needs, an accelerating regulatory landscape, and passive and alternative investments taking market share from active strategies.

Despite the headwinds, we believe there are significant opportunities that speak to our core capabilities. As such, we are responding with several multi-year initiatives that are designed to strengthen our long-term competitive position and can be categorized into three areas: broadening our product offerings and vehicles; strengthening and deepening distribution across all channels; and strengthening our technology platform and digital capabilities.

INVESTMENT MANAGEMENT SERVICES.

Distribution Channels.

We distribute our products in countries located within three broad geographical regions: North America, Europe Middle East and Africa (EMEA), and Asia Pacific (APAC). We accumulate our assets under management from a diversified client base across five primary distribution channels: U.S. financial intermediaries; EMEA and APAC financial intermediaries; individual U.S. investors on a direct basis; U.S. retirement plan sponsors for which we provide recordkeeping services; and institutional investors globally. Investors domiciled outside the U.S. represent nearly 5% of total assets under management at the end of 2016 . We service clients in 45 countries around the world. The following table outlines the types of vehicles within each distribution channel through which our assets under management are sourced as of December 31, 2016:
U.S. financial intermediaries
 
EMEA & APAC financial intermediaries
 
Individual U.S. investors
 
U.S. retirement plan sponsors
 
Global institutions
 
 
 
 
 
 
 
 
 
U.S. Mutual Funds
 
SICAVs (1)  / FCPs (2)
 
U.S. Mutual Funds
 
U.S. Mutual Funds
 
U.S. Mutual Funds
Collective Investment Trusts
 
Australian Unit Trusts
 
Separate Accounts
 
Collective Investment Trusts
 
SICAVs (1)  / FCPs (2)
Subadvised Accounts
 
OEICs (3)
 
College Savings Plans
 
 
 
Separate Accounts
Managed Accounts / Model Delivery
 
Cayman Funds
 
 
 
 
 
Canadian Pension Pool Funds
College Savings Plans
 
Subadvised Accounts
 
 
 
 
 
 
(1) Société d'Investissement à Capital Variable (Luxembourg), (2) Fonds Commun de Placement (Luxembourg), (3) Open ended investment company (U.K.)

The following table shows our assets under management as of December 31, 2016 , by distribution channel, by vehicle, and account type:
Assets under management by distribution channel
 
  Global intermediaries (1)
$
395.5

  Individual U.S. investors
147.1

  U.S. retirement plan sponsors
100.0

  Global institutions
168.2

Total assets under management
$
810.8

 
 
(1)  Includes U.S., EMEA, and APAC financial intermediaries
 


Page 4


Table of Contents                                  

Assets under management by vehicle
 
Sponsored U.S. mutual funds
$
514.2

Other investment portfolios
 
  Sponsored - collective investment trusts
57.7

  Sponsored - stable value and variable annuity portfolios
18.3

  Sponsored - SICAVs and other funds regulated outside the U.S.
13.7

Subadvised and separately managed accounts
206.9

Total other investment portfolios
296.6

Total assets under management
$
810.8

 
 
Assets under management by account type
 
Defined contribution - investment only
$
255.4

Defined contribution - recordkept assets
97.2

Other retirement and deferred annuity assets
208.1

Total retirement and tax deferred annuity assets
560.7

Other
250.1

Total assets under management
$
810.8


Investment Capabilities.

We manage a broad range of investment strategies in equity, fixed income, and asset allocation across sectors, styles and regions. Our strategies are designed to meet the varied and changing needs and objectives of individual and institutional investors. For the Price Funds, investors select the fund 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 or 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.

The following table sets forth our broad investment capabilities as of December 31, 2016.
Equity
 
Fixed income
 
Asset allocation
U.S.
 
International / Global
 
U.S.
 
International / Global
 
U.S. / International / Global
 
 
 
 
 
 
 
 
 
Large-Cap: Growth, Core, Value
 
Global: All-Cap, Growth, Value
 
Aggregate Bond Index
 
Global Aggregate
 
Target Date
Mid-Cap: Growth, Core, Value
 
International Developed
 
Core Bond
 
Global Multi-Sector
 
Target Allocation
Small-Cap: Growth, Core, Value
 
International Small-Cap
 
Credit Opportunities
 
Global Unconstrained
 
Global Allocation
 
 
Emerging Markets: Global, Regional
 
Corporate
 
Global High Income
 
Managed Volatility
 
 
Europe
 
Bank Loan
 
Emerging Markets
 
Multi-Asset Solutions
 
 
Japan
 
High Yield
 
International Developed
 
Real Assets
 
 
 
 
Stable Value
 
Global Corporate
 
 
 
 
 
 
Securitized
 
Global High Yield
 
 
 
 
 
 
Treasury
 
Global Government
 
 
 
 
 
 
Short Duration
 
 
 
 
 
 
 
 
Municipal
 
 
 
 



Page 5


Table of Contents                                  

Our assets under management, by asset class, were as follows as of December 31, 2016.
Equity
 
$
450.6

Fixed income
 
121.2

Asset allocation
 
239.0

Total assets under management
 
$
810.8


Non-U.S. dollar denominated securities held in client accounts are $95.4 billion , or 11.8% , of our total assets under management at December 31, 2016 .

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, 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, investment vehicles and other products 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 expertise and that its objective will be useful to investors over a long period. In 2016, we launched four new equity funds, including three quantitatively managed funds, one new fixed income fund, and one new money market fund. We also launched a suite of OEICs for distribution through UK intermediaries and continued to add the I-Class shares to certain Price Funds. We beta-tested our new T. Rowe Price ActivePlus Portfolio offering, which is a discretionary advice service, in the fourth quarter of 2016 and will be formally launching to individual investors on a direct basis in early 2017.

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, 2016 , we had seed capital investments of $1.3 billion in sponsored investment portfolios.

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 are closed to new investors.
Strategy / Fund
Date closed
U.S. Mid-Cap Strategy
May 31, 2010
Small-Cap Stock Funds
December 31, 2013
High Yield Funds
April 30, 2012
New Horizons Funds
December 31, 2013
Capital Appreciation Funds
June 30, 2014

Investment Advisory Fees.

We provide investment advisory services through our subsidiaries to the Price Funds; clients on a separately managed or subadvised account basis; and other sponsored investment portfolios, including collective investment trusts, target date retirement trusts, funds offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S.



Page 6


Table of Contents                                  

Ten Price Funds - Growth Stock , Blue-Chip Growth , Mid-Cap Growth , Capital Appreciation , Value , New Income , Equity Income , New Horizons , International Stock , and Emerging Markets Stock  -accounted for approximately 37% of our investment advisory revenues in 2016 , and approximately 30% of our assets under management at December 31, 2016 . Our largest client account relationship, apart from the Price Funds, is with a third-party financial intermediary that accounted for about 6% of our investment advisory revenues in 2016 .

Price Funds.

At December 31, 2016 , assets under our management in the Price Funds aggregated $514.2 billion , an increase of 5.6% or $27.1 billion from the beginning of the year. Investment advisory services are provided to each U.S. mutual 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.

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. 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 approximately $6.0 million or greater in 2016 , varied from a low of 34 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, does 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 and, as a result, our management fee varies with the level of operating expenses a fund incurs. 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 2016 , we continued to voluntarily waive advisory fees and other fund expenses, though to a lesser extent than in recent years, of certain of our money market funds and trusts in order to maintain a positive yield for investors. Total fees waived in 2016 were $10.5 million , or less than 1% of total investment advisory revenues earned during the year, compared to $47.6 million in 2015 . We expect that these fee waivers, if any, will be insignificant in 2017 .



Page 7


Table of Contents                                  

Other investment portfolios.

Our other client investment portfolios had assets under management of $296.6 billion at December 31, 2016 , an increase of $20.6 billion from the beginning of the year. 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.

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 and FCPs, and UK-based OEICs. 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 fund assets. We recognize any related distribution fees paid to financial intermediaries in other operating expenses.

Our subsidiary, T. Rowe Price Trust Company, offers and provides investment management services to collective investment trusts for investments by qualified U.S. retirement plans. In addition to providing investment management services to the Price Funds, our subsidiary, T. Rowe Price Associates, offers separately managed institutional investment management services and subadvised investment management to intermediaries.

Our fees for managing these other 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, end of billing period valuations, or beginning of bill period valuations. In 2016 , approximately 75% of advisory fees were recognized based on daily portfolio valuations, 9% were based on month-end averages, 15% were based on end of billing period valuations, and 1% were based on beginning of billing period valuations.

ADMINISTRATIVE SERVICES.

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 2016 were generally based on the recovery of our related costs to provide these 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. 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.

T. Rowe Price Retirement Plan Services provides participant accounting and plan administration for defined contribution retirement plans that invest in the Price Funds, our sponsored collective investment trusts, and funds outside the Price fund complex. T. Rowe Price Retirement Plan Services also provides transfer agent services to the Price Funds. Plan sponsors and participants compensate us for some of the administrative services while the Price Funds and outside fund families compensate us for maintaining and administering the individual participant accounts for those plans that invest in the respective funds. As of December 31, 2016, we performed recordkeeping services for $156 billion in assets under administration, of which $100 billion are assets we manage.

T. Rowe Price Trust Company also provides administrative trustee services. Through this entity, which is a Maryland-chartered limited service trust company, we 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 staying on track to achieve their financial goals.


Page 8


Table of Contents                                  


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. The I Class of certain Price Funds is 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 limits 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 are 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 funds' 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.

REGULATION.

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 sponsored 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.

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. The Investment Advisers Act of 1940 imposes substantive regulation around, among other things, fiduciary duties to clients, transactions with clients, effective compliance programs, conflicts of interest, advertising, recordkeeping, reporting and disclosure requirements.

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.



Page 9


Table of Contents                                  

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 an affiliate of BNY Mellon, maintains our brokerage’s customer accounts and clears all transactions.

Serving the needs of retirement savers is an important focus of our business.  As a result, such activities are subject to regulators such as the U.S. Department of Labor, and applicable laws and regulations including the Employee Retirement Income Security Act of 1974.

Certain of our subsidiaries are subject to net capital requirements, including those of various federal, state, and international regulatory agencies. Each of our subsidiary's 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 oriented investment strategies, with competitors that offer such products taking market share from active managers like ourselves. While we cannot predict how much market share these competitors will gain, we believe there will always be demand for good active management.

In order to maintain and enhance our competitive position, 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, 2016 , we employed 6,329 associates, up 5.5% from the 5,999 associates employed at the end of 2015 . 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, 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;


Page 10


Table of Contents                                  


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.
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


Page 11


Table of Contents                                  

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 have been 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 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. The interest rate environment experienced since the second half of 2009 until recently 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 have reduced our advisory fee income and net income. Fee waivers have been reduced significantly in 2016, as interest rates have increased over the year. Given the current interest rate environment, we expect that our fee waivers in 2017, if any, will not be significant. 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. 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 Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, 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.

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.

The market environment in recent years has led investors to increasingly favor lower fee passive products. As a result, investment advisors that emphasize passive products have gained and may continue to gain market share from active managers like us. While we cannot predict how much market share these competitors will gain, we believe there will always be demand for good active management.

If current or potential customers decide to move their assets to 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.



Page 12


Table of Contents                                  

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. Due to the global nature of our investment advisory business, our key personnel may have reasons to travel to regions susceptible to higher risk of civil unrest, organized crime or terrorism and we may be unable to ensure the safety of personnel traveling to these regions. 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. Additionally, we are subject to the risk that our employees or third parties acting on our behalf may circumvent controls or act in a manner inconsistent with our policies and procedures. Any real or perceived conflict between our clients’ interests and our own, as well as any fraudulent activity or other exposure of client assets or information, may impair our reputation. Any damage to our brand could impede our ability to attract and retain 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:

expenses incurred in connection with our multi-year strategic plan to strengthen our long-term competitive position;

variations in the level of total compensation expense due to, among other things, bonuses, 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;



Page 13


Table of Contents                                  

changes in the level of our advertising and promotion expenses, including the costs of expanding investment advisory services to investors outside of the U.S. and further penetrating U.S. distribution channels;
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;
changes in the costs incurred for third-party vendors that perform certain administrative and operating services;
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;
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, investment management, trading, and accounting systems.

Under our agreements with the Price funds, we charge the 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 clients' 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 employees,
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


Page 14


Table of Contents                                  

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 investment portfolios. 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 consolidated, held as trading or 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 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. New regulations present areas of uncertainty susceptible to alternative interpretations; regulators and prospective litigants may not agree with reasoned interpretations we adopt. Future changes could require us to modify or curtail


Page 15


Table of Contents                                  

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 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.

In April 2016, the U.S. Department of Labor finalized changes to definitions and rules related to fiduciaries. Although there is some uncertainty about the rule and whether it will be withdrawn or modified, as currently written these changes will require modifications to how we interact with retirement customers and prospects, and may cause us to limit 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. However, if 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 that became effective in October 2016. The reforms 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 can continue using current pricing and accounting methods to seek to maintain a stable NAV. 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.

We remain subject to various state, federal and international laws and regulations related to data privacy and protection of data we maintain concerning our customers and employees. These requirements continue to evolve. For example, the European Union has adopted changes, effective in May 2018, which will, among other things, significantly increase the potential penalties for non-compliance.

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 adopted new regulations that will require mutual funds to adopt liquidity risk management programs with specific requirements for measuring and reporting the liquidity of fund holdings. It also has proposed regulations detailing new exposure limits and asset coverage requirements for 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.



Page 16


Table of Contents                                  

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 beginning on January 3, 2018, unless this date is 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.

In 2016, we paid $166.2 million to compensate certain T. Rowe Price mutual funds, trusts, separately managed accounts, and subadvised clients (collectively, “Clients”) for the denial of their appraisal rights by the Delaware Chancery Court (Court) in connection with the 2013 leveraged buyout of Dell, Inc. (Dell). The Court ruled on May 11, 2016, that the Clients could not pursue an appraisal of any shares they held that were voted in favor of the Dell merger. The appraisal statute governing the transaction required the record holder to vote against or abstain from voting on the transaction in order to assert appraisal rights. After previously voting against prior transaction proposals, the voting instructions submitted on behalf of the Clients in connection with voting on the final proposed transaction were incorrectly submitted in favor of the transaction. On May 31, 2016, the Court determined that the fair value of Dell at the time of the merger was $17.62 per share, as opposed to the $13.75 price offered in the transaction. As a result, any shareholder perfecting appraisal rights is entitled to a payment at $17.62 per share plus statutory interest from the date the Dell transaction closed. The compensation to Clients was intended to make them whole for the voting discrepancy that resulted in the denial of their appraisal rights. On December 30, 2016, we signed a settlement agreement with our insurance carrier for insurance proceeds totaling $100.0 million related to this matter.

In accordance with the compensation payment, the Clients agreed that in the event the findings made by the Court regarding the fair value of Dell or the amount of interest to be applied were modified by the Supreme Court of Delaware on appeal, T. Rowe Price and the Clients would make an appropriate adjustment between themselves, calculated in a manner that is consistent with the methodology used to compensate Clients. In December 2016, several parties, including Dell and the successful appraisal petitioners, filed appeals to the Delaware Supreme Court to challenge the Chancery Court’s valuation ruling. Our settlement agreement with the insurance carrier provides that if the fair value of Dell is reduced, we would work together to make appropriate adjustments.

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.



Page 17


Table of Contents                                  

United Kingdom exit from European Union.

We have a significant locally authorized and regulated presence in the United Kingdom (“UK”) to support our global investment management business. The ultimate impact of the UK exit (“Brexit”) from the European Union (“EU”), on our business operations in the UK and Europe could vary depending on the details of the separation agreement. We are preparing for multiple scenarios, and remain committed to our clients, associates and business expansion across the region.


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,
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 those of our third-party service providers we may use to maintain and transmit such information, 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.



Page 18


Table of Contents                                  

Item 1B. Unresolved Staff Comments.

None.

Item 2.
Properties.

Our corporate headquarters occupies 438,000 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 if 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, Virginia. The remaining two investor centers are located in our owned facilities in Colorado Springs and Owings Mills.

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 2017 and our future minimum rental payments under noncancelable operating leases at December 31, 2016 , 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.

On April 27, 2016, certain shareholders in the T. Rowe Price Blue Chip Growth Fund, T. Rowe Price Capital Appreciation Fund, T. Rowe Price Equity Income Fund, T. Rowe Price Growth Stock Fund, T. Rowe Price International Stock Fund, T. Rowe Price High Yield Fund, T. Rowe Price New Income Fund and T. Rowe Price Small Cap Stock Fund (the “Funds”) filed a Section 36(b) complaint under the caption Zoidis v. T. Rowe Price Assoc., Inc., against T. Rowe Price Associates, Inc. (“T. Rowe Price”) in the United States District Court for the Northern District of California. The complaint alleges that the management fees for the identified funds are excessive because T. Rowe Price charges lower advisory fees to subadvised clients with funds in the same strategy. The complaint seeks to recover the allegedly excessive advisory fees received by T. Rowe Price in the year preceding the start of the lawsuit, along with investments’ returns and profits. In the alternative, the complaint seeks the rescission of each fund’s investment management agreement and restitution of any allegedly excessive management fees. T. Rowe Price believes the claims are without merit and intends to vigorously defend the action.

In addition to the matter discussed above, 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.



Page 19


Table of Contents                                  

Item. Executive Officers of the Registrant.

The following information includes the names, ages, and positions of our executive officers as of February 3, 2017. 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 ( 56 ), 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 ( 61 ), Chairman since 2007, Chief Investment Officer since 2004, and a Vice President since 1985.

Edward C. Bernard ( 60 ), Vice Chairman since 2007, and a Vice President since 1989.

Christopher D. Alderson ( 54 ), Co-Head of Global Equity since 2017, Head of International Equity from 2009 to 2016, and a Vice President since 2002.

Robert W. Sharps, ( 45 ), Co-Head of Global Equity since 2017, Lead Portfolio Manager, Institutional U.S. Large-Cap Equity Growth Strategy from 2001 to 2016, and a Vice President since 2001.

Edward A. Wiese ( 57 ), Head of Fixed Income since January 2015, and a Vice President since 2001.

David Oestreicher, ( 49 ), Corporate Secretary since 2012, Chief Legal Officer since 2008, and a Vice President since 2001.

Kenneth V. Moreland ( 60 ), Treasurer since 2010, and Chief Financial Officer and a Vice President since 2004.

Jessica M. Hiebler ( 41 ), Principal Accounting Officer since 2010 and a Vice President since 2009.



Page 20


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
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

 
 
 
 
 
 
 
 
 
2016 – High price
 
$
74.72

 
$
79.00

 
$
75.12

 
$
78.95

  Low price
 
$
63.57

 
$
67.34

 
$
64.76

 
$
62.97

  Cash dividends declared
 
$
.54

 
$
.54

 
$
.54

 
$
.54


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, 2016 :
 
 
Employee and non-employee director plans
 
Employee stock purchase plan
 
Total
Exercise of outstanding options
 
24,364,322

 

 
24,364,322

Settlement of outstanding restricted stock units
 
4,695,858

 

 
4,695,858

Future issuances
 
14,490,787

 
561,646

 
15,052,433

Total
 
43,550,967

 
561,646

 
44,112,613


The outstanding options included in the table above have a weighted-average exercise price of $61.90 . 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 2016 .
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
 
1,715,455

 
$
66.51

 
1,498,645

 
10,263,968

November
 
751,110

 
$
66.86

 
467,771

 
9,796,197

December
 
567,687

 
$
76.39

 

 
21,796,197

Total
 
3,034,252

 
$
68.44

 
1,966,416

 
 

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 2016 , 886,931 were related to shares surrendered in connection with employee stock option exercises and 180,905 were related to shares withheld to cover tax withholdings associated with the vesting of restricted stock awards.



Page 21


Table of Contents                                  


The remaining 1,966,416 shares of our common stock purchased during the fourth quarter of 2016 were repurchased pursuant to the Board of Directors’ December 10, 2015 , publicly announced authorization. The maximum number of shares that may yet be purchased as of December 31, 2016 , under the Board of Directors’ December 10, 2015 , and December 6, 2016 , publicly announced authorizations is 21,796,197 .

We have 6,799 stockholders of record and approximately 193,000 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, 2016 .


Item 6.
Selected Financial Data.
 
 
Years ended December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
(in millions, except per-share data)
Net revenues
$
3,023

 
$
3,484

 
$
3,982

 
$
4,201

 
$
4,223

Net operating income (1)
$
1,364

 
$
1,637

 
$
1,891

 
$
1,899

 
$
1,733

Net income (1)  
$
884

 
$
1,048

 
$
1,230

 
$
1,223

 
$
1,254

Net income attributable to redeemable non-controlling interest (2)
$

 
$

 
$

 
$

 
$
39

Net income attributable to T. Rowe Price Group (1)
$
884

 
$
1,048

 
$
1,230

 
$
1,223

 
$
1,215

Adjusted net income attributable to
T. Rowe Price Group (3)
$
840

 
$
1,009

 
$
1,161

 
$
1,160

 
$
1,149

 
 
 
 
 
 
 
 
 
 
Per common share information
 
 
 
 
 
 
 
 
 
Basic earnings
$
3.47

 
$
4.02

 
$
4.68

 
$
4.74

 
$
4.85

Diluted earnings
$
3.36

 
$
3.90

 
$
4.55

 
$
4.63

 
$
4.75

Adjusted diluted earnings (3)
$
3.20

 
$
3.76

 
$
4.29

 
$
4.39

 
$
4.49

Cash dividends declared (4)
$
2.36

 
$
1.52

 
$
1.76

 
$
4.08

 
$
2.16

 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
253.4

 
258.3

 
259.6

 
254.6

 
245.5

Weighted-average common shares outstanding assuming dilution
261.0

 
266.3

 
267.4

 
260.9

 
250.3


(1) In 2016, net operating income reflects a non-recurring net charge of $66.2 million related to the Dell appraisal rights matter. Our 2016 net income and net income attributable to T. Rowe Price Group reflect the after-tax impact of this charge.

(2) Net income attributable to redeemable non-controlling interest represents the portion of net income of our consolidated sponsored investment portfolios we recognized in our consolidated statement of income that is attributable to the interests held by third-party investors. In 2016, we implemented new consolidation accounting guidance resulting in the consolidation of a larger number of sponsored investment portfolios in which we have provided initial seed capital. See the Summary of Significant Accounting Policies in the notes to the consolidated financial statements contained in Part II, Item 8 of this filing for more information related to the impact of this new guidance.

(3) Represents non-GAAP financial measures that have been established in order to increase transparency for the purpose of evaluating our core business, for comparing current results with prior period results, and to enable more appropriate comparison with industry peers. See Item 7, Management's Discussion and Analysis - Results of Operations for the definitions of these measures and the related reconciliation from U.S. GAAP.

(4) 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.


Page 22


Table of Contents                                  

 
December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
Balance sheet data (in millions)
 
Total assets
$
4,203

 
$
5,033

 
$
5,644

 
$
5,107

 
$
6,225

Redeemable non-controlling interests
$

 
$

 
$

 

 
$
687

Stockholders’ equity
$
3,846

 
$
4,818

 
$
5,395

 
$
4,762

 
$
5,009

 
 
 
 
 
 
 
 
 
 
Assets under management (in billions)
$
576.8

 
$
692.4

 
$
746.8

 
$
763.1

 
$
810.8



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, open-ended investment products offered to investors outside the U.S., and portfolios offered through variable annuity life insurance plans in the U.S.

We manage a broad range of U.S., international and global stock, bond, and money market mutual funds and other investment portfolios that 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 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.

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.

We expect to increase our pace of spending on a series of key strategic priorities to address evolving client needs and to grow and further diversify our business. Based on these planned initiatives, we currently expect that our planned operating expenses, excluding the net charge related to the Dell appraisal rights matter, will grow in the high-single-digit range in 2017 versus 2016. We could elect to moderate the pace of spending on our planned initiatives should markets decline significantly. In addition, other events not currently planned or expected could impact our expense levels.

BACKGROUND.

U.S. stocks rose strongly in 2016, with major indexes finishing the year near record highs. Small-cap stocks substantially outperformed large-caps, and it was the eighth consecutive year for a positive S&P 500 Index total return. The year began with fears of a global economic slowdown, which caused a short but sharp correction in equities and commodities. U.S. shares bottomed in mid-February and worked their way higher through late June, as commodity prices rebounded and the U.S. dollar weakened due to diminishing expectations for Federal Reserve interest rate increases in 2016. In late June, world equity markets experienced a brief but intense sell-off as the UK unexpectedly voted in favor of leaving the European Union. However, stocks resumed rising amid expectations that global central banks would provide additional monetary stimulus. In the months prior to the November U.S. elections, the U.S. market’s advance was hindered by political uncertainty, as well as uncertainty about the timing of a possible interest rate increase, as Fed officials started cautioning that the case for raising short-term rates had “strengthened.” Stocks surged following the U.S. election results. However, the rally lost some steam in December, as the Fed raised short-term rates in mid-December and projected more-than-expected increases in 2017.
Developed non-U.S. equity markets significantly underperformed U.S. shares for the year, as returns to U.S. investors were hurt by a stronger dollar versus some major currencies. In dollar terms, Asian markets advanced for the year, though Japan,


Page 23


Table of Contents                                  

Hong Kong, and Singapore gained less than 3%. European equity markets were widely mixed, with Italy—one of the worst-performing markets—dropping more than 9%, due in part to its troubled banking sector.

Emerging equity markets outperformed developed non-U.S. markets. Brazil led the Latin America region with a nearly 67% gain, helped by rebounding commodity prices and by a new president pursuing reforms. In emerging Europe, Russian shares soared amid firming oil prices, a stronger ruble, and hopes for better relations with the U.S. Emerging Asian markets were widely mixed.

Results of several major equity market indexes for 2016 are as follows:
S&P 500 Index
12.0%
NASDAQ Composite Index (excluding dividends)
7.5%
Russell 2000 Index
21.3%
MSCI EAFE (Europe, Australasia, and Far East) Index
1.5%
MSCI Emerging Markets Index
11.6%

Global bond returns were mostly positive in 2016. In the U.S., intermediate- and long-term Treasury yields declined in the first half of the year, then rebounded in the second half and finished the year above their year-end 2015 levels. The 10-year Treasury note yield decreased from 2.3% at the end of 2015 to less than 1.4% around midyear, then it rose to around 2.5% by the end of 2016. In the investment-grade universe, corporate bonds were among the best performers. Longer-term Treasuries generated modest returns. Municipal securities were flat for the year, as they surrendered earlier gains during the fourth quarter amid rising interest rates and cash outflows. High yield bonds strongly outperformed, helped by their lower interest rate sensitivity, investors’ demand for securities with attractive yields, and a rebound in oil prices.

Bonds in developed non-U.S. markets produced modest positive returns in dollar terms, as significant first-half gains driven by U.S. currency weakness and falling sovereign debt yields were largely offset by a reversal of these trends in the latter half of the year. Bonds in emerging markets produced solid gains, as first-half returns driven by dollar weakness and investors’ search for attractive yields were only partially eroded by a stronger U.S. dollar in the second half.

Results of several major bond market indexes for 2016 are as follows:
Bloomberg Barclays U.S. Aggregate Bond Index
2.7%
JPMorgan Global High Yield Index    
18.3%
Bloomberg Barclays Municipal Bond Index
.3%
Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index
1.5%
JPMorgan Emerging Markets Bond Index Plus
9.6%



Page 24


Table of Contents                                  

ASSETS UNDER MANAGEMENT.

Our assets under management ended 2016 at $810.8 billion , an increase of $47.7 billion from the end of 2015 . During 2016 , market appreciation and income, net of distributions not reinvested, of $50.5 billion was offset in part by net cash outflows of $2.8 billion . Investment advisory clients outside the U.S. account for about 5% of our assets under management at December 31, 2016 .
Assets under management by investment vehicle
 
As of
(in billions)
December 31,
 
 
2015
 
2016
Sponsored U.S. mutual funds
 
$
487.1

 
$
514.2

Other investment portfolios
 
276.0

 
296.6

Total assets under management
 
$
763.1

 
$
810.8

Assets under management by asset class
 
As of
(in billions)
December 31,
 
 
2015
 
2016
Equity
 
$
439.4

 
$
450.6

Fixed income
 
110.4

 
121.2

Asset allocation
 
213.3

 
239.0

Total assets under management
 
$
763.1

 
$
810.8


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, continue to be a significant part of our assets under management. Assets under management at December 31, 2016 , in these target date portfolios totaled $189.2 billion , including $150.9 billion in target date retirement funds and $38.3 billion in target date retirement trusts.

The following table presents the component changes in assets under management for 2014, 2015, and 2016.
 
 
Sponsored U.S. mutual funds
 
Other investment portfolios
 
Total
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

 
 
 
 
 
 
 


Page 25


Table of Contents                                  

Assets under management at December 31, 2015
 
487.1

 
276.0

 
763.1

 
 
 
 
 
 
 
Net cash flows before client transfers
 
.3

 
(3.1
)
 
(2.8
)
Client transfers from mutual funds to other portfolios
 
(4.9
)
 
4.9

 

Net cash flows after client transfers
 
(4.6
)
 
1.8

 
(2.8
)
Net market appreciation and income
 
32.6

 
18.8

 
51.4

Distributions not reinvested
 
(.9
)
 

 
(.9
)
Change during the period
 
27.1

 
20.6

 
47.7

 
 
 
 
 
 
 
Assets under management at December 31, 2016
 
$
514.2

 
$
296.6

 
$
810.8


In 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 and 2016, assets were transferred from both target date retirement funds and other mutual funds to our collective investment trusts, target date retirement trusts, and separate accounts.

The net cash flows after client transfers (in billions), by investment vehicle and asset class, over the last three years, are as follows:
 
 
Year ended December 31,
 
 
2014
 
2015
 
2016
Sponsored U.S. mutual funds
 
 
 
 
 
 
 Stock and blended asset funds
 
3.7

 
1.5

 
$
(9.9
)
 Bond funds
 
8.3

 
.3

 
4.7

 Money market funds
 
(0.2
)
 
(0.4
)
 
.6

 
 
11.8

 
1.4

 
(4.6
)
Other investment portfolios
 
 
 
 
 
 
 Stock and blended assets
 
(6.4
)
 
(3.8
)
 
(4.9
)
 Fixed income, money market, and stable value
 
(1.7
)
 
4.0

 
6.7

 
 
(8.1
)
 
.2

 
1.8

Total net cash flows after client transfers
 
$
3.7

 
$
1.6

 
$
(2.8
)
 
 
 
 
 
 
 
Net cash flows after client transfers originating in target date
retirement portfolios
 
$
17.7

 
$
16.2

 
$
8.1


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.

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 the transfers into these portfolios were largely concentrated among a small number of institutional clients who redeemed primarily from large-cap U.S. equity strategies. In 2016, our net cash outflows are largely attributable to institutional and intermediary clients reallocating to passive investments and the impact of our closed investment strategies. The general trend to passive also impacted the net cash flows originating in our target date retirement portfolios. This trend has been persistent and has accelerated in recent years. However, over the long term we expect well-executed active management to play an important role for investors, and we are reinvesting in our company with the objective of delivering strong investment performance and excellent client service like we have historically achieved.


Page 26


Table of Contents                                  


INVESTMENT PERFORMANCE.

Strong investment performance and brand awareness is a key driver to attracting and retaining assets—and to our long-term success. Although investment performance relative to our peers has weakened in 2016, it has been strong over the longer term. The percentage of our Price Funds across their share classes that outperformed their comparable Lipper averages on a total return basis and percentage in top Lipper quartile for the 1-, 3-, 5- and 10-years ended December 31, 2016 , were:
 
1 year
3 years
5 years
10 years
US equity
51%
93%
100%
94%
International equity
76%
81%
77%
90%
Fixed income
46%
63%
46%
68%
Asset allocation
49%
97%
95%
94%
All Price Funds (across their share classes)
53%
84%
80%
86%
 
 
 
 
 
Price Funds in top Lipper quartile
26%
39%
54%
55%

In addition, nearly 86% of our Price Funds' assets under management ended December 31, 2016 , with an overall rating of four or five stars from Morningstar. The performance of our institutional strategies against their benchmarks weakened in 2016 but remains very competitive over longer time periods.

RESULTS OF OPERATIONS.

The table below presents financial results on a U.S. GAAP basis, as well as a non-GAAP basis to adjust for the non-recurring charge related to the Dell appraisal rights matter, the impact of the consolidated sponsored investment portfolios, and other non-operating income. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results.
 
 
Year ended December 31,
 
 
 
 
(in millions, except per-share data)
 
2015
 
2016
 
Dollar change
 
Percentage change
 
 
 
 
 
 
 
 
 
U.S. GAAP Basis
 
 
 
 
 
 
 
 
Investment advisory fees
 
$
3,687.3

 
$
3,728.7

 
$
41.4

 
1.1
 %
Net revenues
 
$
4,200.6

 
$
4,222.9

 
$
22.3

 
.5
 %
Operating expenses
 
$
2,301.7

 
$
2,489.5

 
$
187.8

 
8.2
 %
Net operating income
 
$
1,898.9

 
$
1,733.4

 
$
(165.5
)
 
(8.7
)%
Non-operating income (1)
 
$
103.5

 
$
227.1

 
$
123.6

 
nm

Net income attributable to T. Rowe Price Group
 
$
1,223.0

 
$
1,215.0

 
$
(8.0
)
 
(.7
)%
Diluted earnings per common share
 
$
4.63

 
$
4.75

 
$
.12

 
2.6
 %
Weighted average common shares outstanding assuming dilution
 
260.9

 
250.3

 
(10.6
)
 
(4.1
)%
 
 
 
 
 
 
 
 
 
Adjusted (2)
 
 
 
 
 
 
 
 
Operating expenses
 
$
2,301.7

 
$
2,416.8

 
$
115.1

 
5.0
 %
Net income attributable to T. Rowe Price Group
 
$
1,160.3

 
$
1,148.9

 
$
(11.4
)
 
(1.0
)%
Diluted earnings per common share
 
$
4.39

 
$
4.49

 
.10

 
2.3
 %
 
 
 
 
 
 
 
 
 
Assets under management (in billions)
 
 
 
 
 
 
 
 
Average assets under management
 
$
767.9

 
$
778.2

 
$
10.3

 
1.3
 %
Ending assets under management
 
$
763.1

 
$
810.8

 
$
47.7

 
6.3
 %
(1) Non-operating income varies from year to year due to a number of factors; accordingly the percentage change in non-operating income is not believed to be meaningful.
(2) See the reconciliation to the comparable U.S. GAAP measures at the end of the Results of Operations sections of Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.



Page 27


Table of Contents                                  

As detailed in the table above, the percentage increase in investment advisory revenues in 2016 was in line with the increase in our average assets under management. We waived $10.5 million in money market-related fees (including advisory fees and fund expenses) in 2016, a decrease of $37.1 million from the $47.6 million waived in the 2015 period. The fee waivers in 2016 represent less than .5% of total investment advisory revenues earned during the same period. These fees were waived from certain of our money market mutual funds and trusts, which have combined net assets of $15.7 billion at December 31, 2016 . We expect money market fee waivers, if any, will be insignificant in 2017. The annual fee rate earned on our assets under management was 47.9 basis points in 2016, virtually unchanged from the 48.0 basis points earned in 2015. The impact on our effective fee rate from the reduction in money market waivers in 2016 was offset by effective fee rate reductions in certain of our sponsored U.S. mutual funds.

Our operating expenses include a non-recurring charge, net of insurance recovery, of $66.2 million, or $.15 per share after tax related to the Dell appraisal rights matter. In 2016, we paid our clients $166.2 million to compensate them for the denial of their appraisal rights in connection with the 2013 leveraged buyout of Dell. We made claims with our insurance carriers and, on December 30, 2016 , entered into an agreement with our primary insurance carrier to recover $100 million from the claim. The insurance proceeds were recognized as an offset to the related $166.2 million charge recognized in the second quarter of 2016. Remaining insurance claims filed with respect to this matter that could result in an additional recovery of up to $50 million are still pending.

Our operating margin in 2016 was 41.0% compared to 45.2% in the 2015 period. Without the impact of the non-recurring charge relating to the Dell appraisal rights matter, our operating margin in 2016 would have been 42.6%. The additional decline in our 2016 operating margin results primarily from the investments we have been making to broaden and deepen our investment management, distribution, and service capabilities around the world.

Our 2016 results were significantly impacted by the adoption of new accounting guidance related to consolidation and stock-based compensation. The impacts of implementing this new guidance is discussed in more detail in the Summary of Significant Accounting Policies section of our consolidated financial statements contained in Item 8 of this filing.

The impact (in millions) the consolidated sponsored investment portfolios have on the individual lines of our 2016 consolidated statement of income is as follows:
Operating expenses reflected in net operating income
$
(13.0
)
Net investment income reflected in non-operating income
121.1

Impact on income before taxes
$
108.1

 
 
Net income attributable to the firm's interest in the consolidated sponsored investment portfolios
$
69.1

Net income attributable to redeemable non-controlling interests (unrelated third-party investors)
39.0

 
$
108.1


Net revenues

Investment advisory revenues earned from the T. Rowe Price mutual funds distributed in the U.S. increased 1.4% , or $37.5 million , to $2.7 billion . Average mutual fund assets in 2016 were $495.5 billion , an increase of .4% from the average for the comparable 2015 period. The increase in advisory revenues was due in part to the reduction in money market fee waivers realized in 2016 compared with 2015 .

Investment advisory revenues earned on the other investment portfolios for 2016 were $1,023.3 million , an increase of $3.9 million , or .4% , from the $1,019.4 million earned in 2015 . Average assets in these portfolios were $282.7 billion during 2016 , up 3.1% from the comparable 2015 period. In 2016, our advisory revenues are presented net of $7.0 million related to the elimination of management fees earned on the net assets of certain of our consolidated sponsored investment portfolios. We eliminated these advisory fees in preparing our consolidated financial statements.

Administrative fee revenues decrease d $9.3 million to $352.5 million in 2016 . The decrease is primarily attributable to transfer agent servicing activities provided to the mutual funds and their investors, as well as the shift of fund accounting and portfolio recordkeeping operations to BNY Mellon that, prior to August 2015, we provided to our sponsored U.S. mutual funds. 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.



Page 28


Table of Contents                                  

Distribution and servicing fee revenues earned from 12b-1 plans of the Advisor, R, and Variable Annuity II Class shares of our sponsored portfolios were $141.7 million in 2016 , a decrease of $9.8 million from the comparable 2015 period on lower 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.

Operating expenses

Compensation and related costs was $1,494.0 million in 2016 , an increase of $50.4 million , or 3.5% , compared to the 2015 period. The largest part of the increase is attributable to a $56.7 million increase in salaries and related benefits, which resulted from a modest increase in salaries at the beginning of 2016 combined with a 3.2% increase in average headcount from 2015 . Noncash stock-based compensation expense and annual variable compensation were up $12.6 million and $4.9 million , respectively. These increases were offset by a higher level of technology labor capitalized in 2016 compared with 2015 and a reduction in temporary labor cost as the 2016 projects used more professional service resources. The overall increase in compensation and related costs and our average staff size from 2015 were muted by lower compensation costs resulting from shifting 210 associates in August 2015 to BNY Mellon and for the ongoing transition support we provide to them. However, these lower compensation costs are generally offset by increases in costs paid to BNY Mellon to provide these administrative services and other transition-related activities, which are reflected in other operating expenses.

Advertising and promotion costs were $79.9 million in 2016 compared with $79.7 million in 2015 . We currently expect advertising and promotion costs for 2017 to be up to 10% higher than the 2016 year as we execute on a number of strategic initiatives.
 
Occupancy and facility costs, together with depreciation expense, increased $20.7 million , or 7.3% , compared to 2015 . The increase is primarily attributable to the added costs to update and enhance technology capabilities, including related maintenance programs.

Other operating expenses were $401.5 million in 2016 , an increase of $60.1 million from 2015 . About half of this increase is attributable to costs being paid to BNY Mellon since August 2015 for the performance of certain administrative services, as mentioned above. The increase also includes $6.5 million in operating expenses, net of investment advisory fees earned by us, of those sponsored investment portfolios that we began consolidating at the beginning of 2016. The remaining balance of the change is due to increased business demands and our continued investment in capabilities.

Non-operating income

Net non-operating investment activity during 2016 resulted in income of $227.1 million compared with $103.5 million in 2015 . The following table details the components of non-operating income (in millions) during the 2015 and 2016 .

 
 
Year ended December 31,
 
 
 
 
2015
 
2016
 
Dollar change
 
 
 
 
 
 
 
Net gains realized on dispositions of available-for-sale investments
 
$
56.5

 
$
53.0

 
$
(3.5
)
Other-than-temporary impairments of available-for-sale investments
 
(4.8
)
 

 
4.8

Net gains (losses) recognized on deconsolidation of sponsored funds
 
(5.8
)
 
2.2

 
8.0

Ordinary and capital gain dividends from sponsored fund investments
 
39.7

 
16.1

 
(23.6
)
Investment gains (losses) on sponsored equity method and trading investments
 
(2.6
)
 
20.8

 
23.4

Net investment income on sponsored fund investments not consolidated
 
83.0

 
92.1

 
9.1

Other investment income
 
22.3

 
15.9

 
(6.4
)
Total investment income on investments
 
105.3

 
108.0

 
2.7

Net investment income on consolidated sponsored investment portfolios
 
1.5

 
121.1

 
119.6

Other non-operating expense
 
(3.3
)
 
(2.0
)
 
1.3

Non-operating income
 
$
103.5

 
$
227.1

 
$
123.6


The increase in investment gains on sponsored equity method and trading investments is driven by an increase in the number of sponsored funds accounted for as equity method investments as well as market gains. The investment income on consolidated


Page 29


Table of Contents                                  

sponsored investment portfolios has increased in 2016 as the number of portfolios we consolidate, as discussed earlier in this section, increased significantly upon the adoption of the new consolidation accounting guidance. See the Summary of Significant Accounting Policies in the consolidated financial statements contained in Part II, Item 8 of this filing for more information related to the impact of the guidance.

Provision for income taxes

Our effective tax rate for 2016 was 36.0% compared to 38.9% in 2015. The decrease in the effective tax rate is related in part to the increase in net income attributable to redeemable non-controlling interest related to our consolidated sponsored investment portfolios as we do not recognize taxes associated with these earnings. Additionally, the estimated effective tax rate has declined as a result of adopting the new stock-based compensation accounting guidance as discussed in the Summary of Significant Accounting Policies in the consolidated financial statements contained in Part II, Item 8 of this filing. Under the new guidance, tax benefits and shortfalls on exercised options and vested restricted stock relative to the stock-based compensation expense recognized are included in the provision for income taxes rather than as additional paid in capital on the consolidated balance sheet. Our effective income tax rate also 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 jurisdictions may affect our effective income tax rate and overall net income in the future. We currently estimate that our effective tax rate for 2017 to be 36.5% . Our 2017 estimate assumes the tax benefits related to stock-based compensation will be similar to those realized in 2016.

2015 versus 2014
 
 
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 our average assets under management increased $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.

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.

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.


Page 30


Table of Contents                                  


Administrative fee revenues decreased $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.

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 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.

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.



Page 31


Table of Contents                                  

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.

Provision for income taxes

Our effective tax rate was 38.9% in 2015 compared to 38.6% in 2014. 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.



Page 32


Table of Contents                                  

Non-GAAP information and reconciliation

We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing current results with prior period results, and to enable more appropriate comparison with industry peers. However, non-GAAP financial measures should not be considered as a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies. The following schedule reconciles (in millions, except for per-share amounts) U.S. GAAP financial measures to non-GAAP measures for each of the last five years.

in millions, except for per-share amounts
Year ended December 31
 
2012
 
2013
 
2014
 
2015
 
2016
Operating expenses, GAAP basis
$
1,658.2

 
$
1,846.8

 
$
2,091.2

 
$
2,301.7

 
$
2,489.5

Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Expenses of consolidated sponsored investment portfolios, net of elimination of our related management fee (1)

 

 

 

 
(6.5
)
Nonrecurring charge related to Dell appraisal rights matter (3)

 

 

 

 
(66.2
)
Adjusted operating expenses
$
1,658.2

 
$
1,846.8

 
$
2,091.2

 
$
2,301.7

 
$
2,416.8

 
 
 
 
 
 
 
 
 
 
Net income attributable to T. Rowe Price Group, Inc., GAAP basis
$
883.6

 
$
1,047.7

 
$
1,229.6

 
$
1,223.0

 
$
1,215.0

Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Net income of consolidated sponsored investment portfolios, net of redeemable non-controlling interests (1)
(7.1
)
 
(4.5
)
 

 
(1.5
)
 
(69.1
)
Non-operating income, excluding impact of consolidated sponsored investment portfolios (2)
(63.7
)
 
(58.5
)
 
(112.2
)
 
(102.0
)
 
(106.0
)
Non-recurring charge related to Dell appraisal rights matter (3)

 

 

 

 
66.2

Income tax impacts of non-GAAP adjustments (4)
27.5

 
24.5

 
43.9

 
40.8

 
42.8

Adjusted net income attributable to T. Rowe Price Group, Inc.
$
840.3

 
$
1,009.2

 
$
1,161.3

 
$
1,160.3

 
$
1,148.9

 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share, GAAP basis
$
3.36

 
$
3.90

 
$
4.55

 
$
4.63

 
$
4.75

Non-GAAP Adjustments:
 
 
 
 
 
 
 
 
 
Consolidated sponsored investment portfolios (1)
(.02
)
 
(.01
)
 

 
(.01
)
 
(.16
)
Non-operating income, excluding impact of consolidated sponsored investment portfolios (2)
(.14
)
 
(.13
)
 
(.26
)
 
(.23
)
 
(.25
)
Non-recurring charge related to Dell appraisal rights matter (3)