UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2019~~June 30, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from				to



Commission file number:	001-08529




LEGG MASON, INC.
(Exact name of registrant as specified in its charter)

MD						52-1200960
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)



100 International Drive	Baltimore,	,	MD	21202
(Address of principal executive offices)				Zip Code



	(	410	)	539-0000
(Registrant's telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.10 par value	LM	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes	☒	No	☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).



Yes	☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes	☐	No	☒

As of ~~February 3,~~July 28, 2020, there were ~~86,892,028~~90,557,898 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS



		Page

	PART I
	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3

	CONSOLIDATED BALANCE SHEETS

	CONSOLIDATED STATEMENTS OF INCOME ~~(LOSS)~~

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	CONSOLIDATED STATEMENTS OF CASH FLOWS

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3833

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7355

Item 4.	Controls and Procedures	7355

	PART II
	OTHER INFORMATION

Item ~~1A.~~	~~Risk Factors~~	74

~~Item~~ 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7556

Item 6.	Exhibits	7556

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)


	December 31, 2019			March 31, 2019			June 30, 2020			March 31, 2020
ASSETS
Current Assets
Cash and cash equivalents	$	823,665		$	921,071		$	931,605		$	1,018,860
Cash and cash equivalents of consolidated investment vehicles	7,320			4,219			235			620
Restricted cash	17,666			21,213			20,496			28,133
Receivables:
Investment advisory and related fees	461,790			425,470			406,411			407,893
Other	64,920			57,107			66,918			47,634
Investment securities	408,945			377,129			413,310			338,894
Investment securities of consolidated investment vehicles	105,810			129,627			33,811			117,084
Other	85,410			82,131			89,344			80,030
Other current assets of consolidated investment vehicles	406			1,889			62			476
Total Current Assets	1,975,932			2,019,856			1,962,192			2,039,624
Fixed assets, net	138,835			149,989			126,113			134,423
Intangible assets, net	3,377,517			3,386,759			3,356,470			3,355,690
Goodwill	1,896,097			1,883,554			1,862,673			1,847,766
Deferred income taxes	193,792			199,717			165,948			161,977
Right-of-use assets	295,665			—			280,528			291,342
Other	157,938			145,254			162,534			152,985
Other assets of consolidated investment vehicles	3,942			8,993			979			22,313
TOTAL ASSETS	$	8,039,718		$	7,794,122		$	7,917,437		$	8,006,120
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current Liabilities
Accrued compensation	$	591,554		$	571,301		$	261,779		$	574,430
Accounts payable and accrued expenses	159,415			182,921			165,863			156,981
Current portion of long-term debt	—			250,301
Short-term borrowings							250,000			—
Lease liabilities	77,377			—			77,191			77,814
Other	101,150			99,479			110,404			115,788
Other current liabilities of consolidated investment vehicles	1,363			5,742			273			1,044
Total Current Liabilities	930,859			1,109,744			865,510			926,057
Deferred compensation	104,819			85,548			104,354			95,293
Lease liabilities	285,911			—			269,041			278,737
Deferred income taxes	181,115			123,420			167,828			165,038
Other (including unfunded pension benefit obligation of $30,266 and $33,335, respectively)	60,971			122,044
Other							28,992			32,167
Long-term debt, net	1,972,413			1,971,451			1,973,054			1,972,733
TOTAL LIABILITIES	3,536,088			3,412,207			3,408,779			3,470,025
Commitments and Contingencies (Note 9)
REDEEMABLE NONCONTROLLING INTERESTS	668,353			692,376			613,336			714,414
STOCKHOLDERS' EQUITY
Common stock, par value $0.10 per share; authorized 500,000,000 shares; issued 86,821,437 and 85,556,562 shares for December 31, 2019 and March 31, 2019, respectively	8,682			8,556
Common stock, par value $0.10 per share; authorized 500,000,000 shares; issued 90,534,943 and 87,781,705 shares for June 30, 2020 and March 31, 2020, respectively							9,053			8,778
Additional paid-in capital	2,119,181			2,039,671			2,187,177			2,158,755
Employee stock trust	(20,108		)	(21,416		)	(19,126		)	(19,778		)
Deferred compensation employee stock trust	20,108			21,416			19,126			19,778
Retained earnings	1,804,251			1,742,764			1,831,364			1,820,412
Accumulated other comprehensive loss, net	(127,402		)	(131,236		)	(161,246		)	(195,306		)
Total stockholders' equity attributable to Legg Mason, Inc.	3,804,712			3,659,755			3,866,348			3,792,639
Nonredeemable noncontrolling interest	30,565			29,784			28,974			29,042
TOTAL STOCKHOLDERS' EQUITY	3,835,277			3,689,539			3,895,322			3,821,681
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	8,039,718		$	7,794,122		$	7,917,437		$	8,006,120

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME ~~(LOSS)~~

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended June 30,
	2019			2018			2019			2018			2020			2019
OPERATING REVENUES
Investment advisory fees:
Separate accounts	$	266,609		$	256,657		$	791,488		$	778,119		$	245,459		$	260,441
Funds	378,995			361,173			1,121,572			1,128,660			347,876			366,812
Performance fees	39,407			12,619			81,137			68,529			11,414			6,861
Distribution and service fees	67,634			72,185			204,635			230,449			59,859			69,937
Other	1,269			1,688			3,706			4,897			1,578			1,309
Total Operating Revenues	753,914			704,322			2,202,538			2,210,654			666,186			705,360
OPERATING EXPENSES
Compensation and benefits	375,033			316,876			1,132,588			1,043,329			353,208			379,828
Distribution and servicing	104,363			108,842			313,368			339,959			91,349			103,906
Communications and technology	57,101			56,664			166,328			170,893			62,358			55,274
Occupancy	32,490			24,077			84,923			76,333			32,007			25,624
Amortization of intangible assets	6,004			6,089			16,903			18,371			5,505			5,457
Impairment of intangible assets	—			365,200			—			365,200
Contingent consideration fair value adjustments	—			—			(1,165		)	571			—			(1,165		)
Other	48,929			63,001			150,687			171,021			54,051			52,501
Total Operating Expenses	623,920			940,749			1,863,632			2,185,677			598,478			621,425
OPERATING INCOME (LOSS)	129,994			(236,427		)	338,906			24,977
OPERATING INCOME													67,708			83,935
NON-OPERATING INCOME (EXPENSE)
Interest income	2,882			3,126			9,539			7,992			915			4,005
Interest expense	(27,032		)	(28,770		)	(82,846		)	(88,547		)	(28,581		)	(28,483		)
Other income (expense), net	18,009			(7,042		)	29,066			6,837			31,120			10,599
Non-operating income (expense) of consolidated investment vehicles, net	814			2,369			14,904			1,954			(2,158		)	9,561
Total Non-Operating Income (Expense)	(5,327		)	(30,317		)	(29,337		)	(71,764		)	1,296			(4,318		)
INCOME (LOSS) BEFORE INCOME TAX PROVISION	124,667			(266,744		)	309,569			(46,787		)
Income tax provision (benefit)	33,664			(60,354		)	80,466			165
NET INCOME (LOSS)	91,003			(206,390		)	229,103			(46,952		)
INCOME BEFORE INCOME TAX PROVISION													69,004			79,617
Income tax provision													13,930			18,048
NET INCOME													55,074			61,569
Less: Net income attributable to noncontrolling interests	16,228			10,498			41,895			31,043			5,652			16,219
NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.	$	74,775		$	(216,888	)	$	187,208		$	(77,995	)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. STOCKHOLDERS:
NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.													$	49,422		$	45,350
NET INCOME PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. STOCKHOLDERS:
Basic	$	0.83		$	(2.55	)	$	2.09		$	(0.95	)	$	0.54		$	0.51
Diluted	0.83			(2.55		)	2.08			(0.95		)	0.54			0.51

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(Dollars in thousands)

(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended June 30,
	2019			2018			2019			2018			2020			2019
NET INCOME (LOSS)	$	91,003		$	(206,390	)	$	229,103		$	(46,952	)
NET INCOME													$	55,074		$	61,569
Other comprehensive income (loss):
Foreign currency translation adjustment	43,933			(14,012		)	3,761			(82,032		)	34,171			(9,964		)
Changes in defined benefit pension plan	(1,174		)	354			73			1,447			(111		)	545
Total other comprehensive income (loss)	42,759			(13,658		)	3,834			(80,585		)	34,060			(9,419		)
COMPREHENSIVE INCOME (LOSS)	133,762			(220,048		)	232,937			(127,537		)
COMPREHENSIVE INCOME													89,134			52,150
Less: Comprehensive income attributable to noncontrolling interests	(16,224		)	11,425			(42,728		)	36,052			5,388			17,057
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.	$	149,986		$	(231,473	)	$	275,665		$	(163,589	)
COMPREHENSIVE INCOME ATTRIBUTABLE TO LEGG MASON, INC.													$	83,746		$	35,093

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended June 30,
	2019			2018			2019			2018			2020			2019
STOCKHOLDERS' EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
COMMON STOCK
Beginning balance	$	8,678		$	8,550		$	8,556		$	8,461		$	8,778		$	8,556
Stock options exercised	1			3			37			19			152			30
Deferred compensation employee stock trust	—			1			1			1
Stock-based compensation	3			—			129			112			196			118
Employee tax withholdings by settlement of net share transactions	—			(1		)	(41		)	(40		)	(73		)	(38		)
Ending balance	8,682			8,553			8,682			8,553			9,053			8,666
ADDITIONAL PAID-IN CAPITAL
Beginning balance	2,103,791			2,013,541			2,039,671			1,976,364			2,158,755			2,039,671
Stock options exercised	309			583			11,612			5,814			53,105			9,406
Deferred compensation employee stock trust	181			166			525			468			180			163
Stock-based compensation	15,359			14,380			55,866			49,195			7,213			21,893
Tax benefit on issuance of performance-based restricted share units related to the fiscal 2017 acquisition of Clarion Partners													4,980			—
Employee tax withholdings by settlement of net share transactions	(459		)	(84		)	(13,862		)	(15,506		)	(37,079		)	(12,543		)
Redeemable noncontrolling interest reclassification for affiliate management equity plans and affiliate noncontrolling interest	—			—			25,369			12,251			23			26,076
Ending balance	2,119,181			2,028,586			2,119,181			2,028,586			2,187,177			2,084,666
EMPLOYEE STOCK TRUST
Beginning balance	(20,003		)	(22,117		)	(21,416		)	(21,996		)	(19,778		)	(21,416		)
Shares issued to plans	(181		)	(167		)	(526		)	(469		)	(180		)	(163		)
Distributions	76			901			1,834			1,082			832			1,340
Ending balance	(20,108		)	(21,383		)	(20,108		)	(21,383		)	(19,126		)	(20,239		)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
Beginning balance	20,003			22,117			21,416			21,996			19,778			21,416
Shares issued to plans	181			167			526			469			180			163
Distributions	(76		)	(901		)	(1,834		)	(1,082		)	(832		)	(1,340		)
Ending balance	20,108			21,383			20,108			21,383			19,126			20,239
RETAINED EARNINGS
Beginning balance	1,777,014			1,981,939			1,742,764			1,894,762			1,820,412			1,742,764
Net income (loss) attributable to Legg Mason, Inc.	74,775			(216,888		)	187,208			(77,995		)
Dividends declared ($0.40, $0.34, $1.20, and $1.02 per share, respectively)	(36,179		)	(28,904		)	(109,968		)	(90,345		)
Net income attributable to Legg Mason, Inc.													49,422			45,350
Dividends declared ($0.40 per share in each period)													(36,628		)	(37,627		)
Reclassification to noncontrolling interest for net increase in estimated redemption value of affiliate management equity plan and affiliate noncontrolling interests	(11,359		)	(12,330		)	(15,753		)	(14,868		)	(1,842		)	(2,381		)
Adoption of revenue recognition guidance	—			—			—			12,263
Ending balance	1,804,251			1,723,817			1,804,251			1,723,817			1,831,364			1,748,106
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
Beginning balance	(170,161		)	(122,109		)	(131,236		)	(55,182		)	(195,306		)	(131,236		)
Foreign currency translation adjustment	43,933			(14,012		)	3,761			(82,032		)	34,171			(9,964		)
Changes in defined benefit pension plan	(1,174		)	354			73			1,447			(111		)	545
Ending balance	(127,402		)	(135,767		)	(127,402		)	(135,767		)	(161,246		)	(140,655		)
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO LEGG MASON, INC.	3,804,712			3,625,189			3,804,712			3,625,189			3,866,348			3,700,783
NONREDEEMABLE NONCONTROLLING INTEREST
Beginning balance	29,803			28,074			29,784			27,731			29,042			29,784
Net income attributable to noncontrolling interests	1,962			1,646			5,300			6,583			787			2,863
Distributions	(1,200		)	(2,226		)	(4,519		)	(6,820		)	(855		)	(2,167		)
Ending balance	30,565			27,494			30,565			27,494			28,974			30,480
TOTAL STOCKHOLDERS’ EQUITY	$	3,835,277		$	3,652,683		$	3,835,277		$	3,652,683		$	3,895,322		$	3,731,263

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended December 31,						Three Months Ended June 30,
	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	229,103		$	(46,952	)
Adjustments to reconcile Net Income (Loss) to net cash provided by operations:
Net Income							$	55,074		$	61,569
Adjustments to reconcile Net Income to net cash provided by operations:
Depreciation and amortization	51,000			54,031			19,448			16,496
Accretion and amortization of securities discounts and premiums, net	921			1,591			427			108
Stock-based compensation	57,949			49,975			7,421			23,834
Net unrealized (gains) losses on investments	(20,816		)	40,446			(40,022		)	(4,684		)
Net gains and earnings on investments	(9,739		)	(36,495		)
Net (gains) losses and earnings on investments							11,830			(6,748		)
Net (gains) losses of consolidated investment vehicles	(14,904		)	(1,954		)	2,158			(9,561		)
Deferred income taxes	71,648			(19,634		)	9,026			22,294
Impairment of intangible assets	—			365,200
Tax expense for new Tax Law	—			2,164
Contingent consideration fair value adjustments	(1,165		)	571			—			(1,165		)
Other	629			286			(21		)	345
Decrease (increase) in assets:
Investment advisory and related fees receivable	(35,807		)	38,170			2,639			235
Net (purchases) sales of trading and other investments	(12,316		)	20,375			(42,790		)	(4,817		)
Other receivables	(13,744		)	(16,555		)	(1,638		)	10,661
Other assets	229			(6,282		)	(15,379		)	(5,294		)
Assets of consolidated investment vehicles	54,869			(751		)	102,120			11,400
Increase (decrease) in liabilities:
Accrued compensation	20,084			51,796			(314,376		)	(300,250		)
Deferred compensation	19,271			(10,464		)	9,061			12,084
Accounts payable and accrued expenses	(25,259		)	31,130			8,558			(10,298		)
Other liabilities	9,510			(83,376		)	(24,260		)	(5,398		)
Other liabilities of consolidated investment vehicles	(4,379		)	10,717			(768		)	1,612
CASH PROVIDED BY OPERATING ACTIVITIES	$	377,084		$	443,989
CASH USED IN OPERATING ACTIVITIES							$	(211,492	)	$	(187,577	)

(Continued)

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Dollars in thousands)

(Unaudited)


	Nine Months Ended December 31,						Three Months Ended June 30,
	2019			2018			2020			2019
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for fixed assets							$	(5,762	)	$	(9,190	)
Returns of capital and proceeds from sales and maturities of investments							65			488
Business investment							(250		)	—
Business acquisition, net of cash acquired of $992	$	(10,247	)	$	—		—			(10,247		)
Payments for fixed assets	(23,209		)	(38,062		)
Contingent payment from prior sale of business	—			923
Business investment	(12,793		)	—
Returns of capital and proceeds from sales and maturities of investments	7,170			10,211
CASH USED IN INVESTING ACTIVITIES	(39,079		)	(26,928		)	(5,947		)	(18,949		)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt	(250,000		)	—
Increase in short-term borrowings							250,000			—
Dividends paid	(102,044		)	(84,630		)	(36,266		)	(30,131		)
Distributions to affiliate noncontrolling interests	(27,906		)	(32,358		)	(13,676		)	(16,230		)
Payment of contingent consideration	(250		)	(4,319		)
Net (redemptions) subscriptions attributable to noncontrolling interests							(95,228		)	(8,232		)
Purchase of affiliate noncontrolling interests	(10,547		)	(16,528		)	—			(10,548		)
Net (redemptions) subscriptions attributable to noncontrolling interests	(32,635		)	(36,328		)
Employee tax withholdings by settlement of net share transactions	(13,903		)	(15,547		)	(37,152		)	(12,581		)
Issuances of common stock for stock-based compensation	12,175			6,029			53,437			9,599
Decrease in short-term borrowings	—			(125,500		)
CASH USED IN FINANCING ACTIVITIES	(425,110		)	(309,181		)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES							121,115			(68,123		)
EFFECT OF EXCHANGE RATES	(12,871		)	(16,470		)	(945		)	(2,697		)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(99,975		)	91,410
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH							(97,269		)	(277,346		)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
BEGINNING OF PERIOD	950,795			773,765			1,049,677			950,795
END OF PERIOD	$	850,820		$	865,175		$	952,408		$	673,449
Supplemental Disclosures
Cash paid for:
Income taxes, net of refunds of $3,736 and $251, respectively	$	14,664		$	30,542
Income taxes							$	4,587		$	4,776
Interest	67,718			69,748			10,947			11,081
	As of December 31,						As of June 30,
Reconciliation of cash, cash equivalents and restricted cash	2019			2018			2020			2019
Cash and cash equivalents	$	823,665		$	835,168		$	931,605		$	643,574
Restricted cash:
Corporate restricted cash	17,666			22,336			20,496			22,201
Cash and cash equivalents of consolidated investment vehicles	7,320			3,528			235			4,786
Affiliate employee benefit trust cash included in Other non-current assets	2,169			4,143			72			2,888
Total cash, cash equivalents and restricted cash per consolidated statements of cash flows	$	850,820		$	865,175		$	952,408		$	673,449

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts or unless otherwise noted)

~~December 31, 2019~~June 30, 2020

(Unaudited)

1. Interim Basis of Reporting

The accompanying unaudited interim consolidated financial statements of Legg Mason, Inc. and its subsidiaries (collectively “Legg Mason”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (the "SEC"). The interim consolidated financial statements have been prepared using the interim basis of reporting and, as such, reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of interim consolidated financial statements requires management to make assumptions and estimates that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and the differences could have a material impact on the interim consolidated financial statements. Terms such as “we,” “us,” “our,” and “Company” refer to Legg Mason.

The nature of Legg Mason's business is such that the results of any interim period are not necessarily indicative of the results of a full year. Certain disclosures included in the Company's annual report are not required to be included on an interim basis in the Company's Quarterly Reports on Form 10-Q. The Company has condensed or omitted these disclosures. Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation.

The information contained in the interim consolidated financial statements should be read in conjunction with the consolidated financial statements contained within Legg Mason's latest Annual Report on Form 10-K filed with the SEC.

2. Significant Accounting Policies

~~Leases~~Plan of Merger with Franklin Resources, Inc.

~~Effective April 1, 2019~~On February 17, 2020, Legg Mason ~~adopted updated accounting guidance on leases~~entered into an Agreement and Plan of Merger (the "Merger Agreement") with Franklin Resources, Inc. ("Franklin Templeton") and Alpha Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of Franklin Templeton, pursuant to which ~~requires right-of-use ("ROU"~~the Company will be merged into Merger Sub (the "Merger") ~~assets~~, with the Company continuing as the surviving corporation and ~~lease liabilities~~a wholly owned subsidiary of Franklin Templeton.

Pursuant to the Merger Agreement, each outstanding share of common stock of the Company will be recorded on the balance sheet for leases. The guidance specifies that at the inception of a contract, an entity must determine whether the contract is or contains a lease. The contract is or contains a lease if the contract conveysconverted into the right to ~~control~~receive from Franklin Templeton $50.00 in cash. All conditions to the ~~use~~closing of the property, plant, or equipment for a designated term in exchange for consideration. Legg Mason’s evaluation of its contracts to determine whether they are or contain a lease involves assessing whether there is a right to obtain substantially allMerger have been satisfied and the closing will take effect at the end of the ~~economic benefits from~~day on July 31, 2020, the ~~use~~date this Report is being filed.

Risks and Uncertainties

In March 2020, the ~~right to direct~~World Health Organization declared the ~~use of the identified asset in the contract.~~

Legg Mason adopted the guidance on a modified retrospective basis as of April 1, 2019, such that related amounts in prior periods have not been restated. Legg Mason has operating leases that primarily relate to real property and financing leases that relate to equipment. As a practical expedient, Legg Mason has elected to not capitalize leases with a term of 12 months or less without a purchase option that it is likely to exercise. Also as a practical expedient for disclosure, Legg Mason has elected to not separate lease and non-lease components on operating and financing leases. Lease components are payment items directly attributable to the use of the underlying asset, while non-lease components are explicit elementsoutbreak of a ~~contract not directly related to the use of the underlying asset, including pass through operating expenses such as common area maintenance, real estate taxes~~novel coronavirus ("COVID-19") a global pandemic, and ~~utilities.~~

~~ROU assets~~recommended containment and lease liabilities are recognized on the consolidated balance sheet at the present value of the future lease payments over the life of the lease term. As implicit rates for leases are not determinable, the Company uses discount rates based on incremental borrowing rates, on a collateralized basis, for the respective underlying assets, for terms similar to the respective leases. Lease costs are included as Occupancy expense in the Consolidated Statements of Income (Loss). Fixed base payments on operating leases paid directly to the lessor are recorded as lease expense on a straight-line basis. Related variable payments based on usage, changes in an index or market rate are expensed as incurred. Payments on financing leases are recorded as lease expense on a level-yield basis.

~~Upon adoption on April 1, 2019, Legg Mason recorded ROU assets of $342,418~~mitigation measures worldwide. This contagious disease outbreak has adversely affected workforces, customers and ~~lease liabilities of $411,115 related to its real property operating leases and equipment financing leases. As further discussed in Note~~ 8~~, Legg Mason has subleased~~

or has vacated and is pursuing subleases for certain office space. As of March 31, 2019, the lease reserve liability for subleased space and vacated space for which subleases were being pursued of $24,063 was included in other current and non-current liabilities on the Consolidated Balance Sheet under prior accounting guidance. Upon adoption of the updated guidance, the existing lease reserve liability was reclassified as a reduction of the ROU assets. ROU assets are tested for impairment when circumstances indicate that the carrying values may not be recoverable.

~~The adoption of this guidance did not require a cumulative effect adjustment or have a material impact on the Consolidated Statements of Income (Loss) or Consolidated Statements of Cash Flows.~~

~~See Note~~ 8 ~~for additional information.~~

~~Income Taxes~~

economies. During the three months ended ~~December 31, 2018, discrete tax expenses~~June 30, 2020, global financial markets began to improve due to government intervention and the gradual reopening of ~~approximately $14,100~~impacted businesses. Despite the market improvements, uncertainty remains regarding the extent and duration of business disruptions related to ~~uncertain federal, state and local tax positions (including those related~~COVID-19 as well as its impact on the global economy. In addition, the United States has seen a resurgence of COVID-19 infections after the initial growth rate was reduced, thus putting into question the ability of impacted businesses to reopen within the Tax Cuts and Jobs Act of 2017), along with approximately $700 of other discrete tax expenses, reduced the effective income tax rate by 5.5 percentage points for the three months ended December 31, 2018. Also, during the three months ended September 30, 2018 and June 30, 2018, tax benefits totaling $2,800 related to the completion of a prior year tax audit along with $1,100 related to other discrete expenses were recognized. Together, the net impact of these discrete tax items reduced the effective income tax rate by 27.4 percentage points for the nine months ended December 31, 2018.

~~Recent Accounting Developments~~

In January 2017, the Financial Accounting Standards Board ("FASB") updated guidance to simplify the test for goodwill impairment. The updated guidance still requires entities to perform annual goodwill impairment tests by comparing the fair value of a reporting unit with its related carrying amount, but it eliminates the requirement to potentially calculate the implied fair value of goodwillUnited States. Therefore, management is currently unable to determine the ~~amount~~extent of ~~impairment, if any. Under~~ the ~~new guidance, an entity should recognize an impairment charge if the reporting unit's carrying amount exceeds the reporting unit’s fair value, in the amount~~potential impacts to its financial condition or results of ~~such excess. The guidance will be effective in fiscal 2021, unless adopted earlier. Legg Mason is evaluating its adoption.~~

In August 2018, the FASB updated the guidance to clarify accounting for implementation costs incurred for a cloud computing arrangement that is a service contract. The update conforms the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting guidance that provides for capitalization of costs incurred to develop or obtain internal-use-software. The updated guidance is effective for Legg Mason in fiscal 2021, unless adopted earlier. Legg Mason is evaluating its adoption.

In August 2018, the FASB also updated the guidance for fair value measurements. The updated guidance modifies disclosure requirements based on the revised FASB Conceptual Framework for Financial Reporting finalized in August 2018 to improve effectiveness of financial statement disclosures. The updated guidance will be effective in fiscal 2021, unless adopted earlier. Legg Mason is evaluating its adoption.

In December 2019, the FASB updated guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles of income tax accounting guidance to reduce the costs and complexity of application. These exceptions relate to intraperiod allocations, deferred tax liabilities with respect to foreign subsidiaries and foreign equity method investments, and income tax benefits recognized on interim period losses. The updated guidance also amends and clarifies other areas of income tax accounting guidance to improve consistency and simplify application. The updated guidance will be effective in fiscal 2022, unless adopted earlier. Legg Mason is evaluating its adoption.operations.

3. Investments and Fair Value of Assets and Liabilities

The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair value and net asset value ("NAV"), excluding the financial assets and financial liabilities of consolidated investment vehicles ("CIVs"). See Note 16, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value or NAV.

The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:


	As of December 31, 2019													As of June 30, 2020
	Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Investments measured at NAV		Total			Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)			Investments measured at NAV				Total
Assets:
Cash equivalents⁽¹⁾	$	429,557		$	13,098	$	—		$	—	$	442,655		$	326,224		$	259,387			$	—		$	—			$	585,611
Equity investments:⁽²⁾
Seed capital investments	73,738			29,352		21,546			1,650		126,286			64,863			27,711				41,626			1,072				135,272
Investments related to long-term incentive plans	258,040			—		—			—		258,040			260,028			—				—			—				260,028
Other investments	14,965			2,027		—			—		16,992			7,936			1,518				—			—				9,454
Equity method investments:⁽³⁾
Seed capital investments⁽⁴⁾	—			—		43,340			12,035		55,375			—			5,000				41,716			12,695				59,411
Investments related to long-term incentive plans⁽²⁾	—			—		—			7,625		7,625
Investments related to long-term incentive plans														—			2,500		⁽⁴	⁾	—			8,556		⁽²	⁾	11,056
Other investments⁽⁴⁾	—			—		53			9,533		9,586			—							141			8,333				8,474
Adjusted cost investments⁽⁴⁾	—			73		26,366			—		26,439
Derivative assets⁽⁵⁾	3,074			—		—			—		3,074			4,173			—				—			—				4,173
Total	$	779,374		$	44,550	$	91,305		$	30,843	$	946,072
Total⁽⁶⁾														$	663,224		$	296,116			$	83,483		$	30,656			$	1,073,479
Liabilities:
Contingent consideration liabilities⁽⁶⁾	$	—		$	—	$	(3,376	)	$	—	$	(3,376	)
Contingent consideration liabilities⁽⁷⁾														$	—		$	—			$	(3,380	)	$	—			$	(3,380	)
Derivative liabilities⁽⁵⁾	(1,362		)	—		—			—		(1,362		)	(1,557		)	—				—			—				(1,557		)
Total	$	(1,362	)	$	—	$	(3,376	)	$	—	$	(4,738	)	$	(1,557	)	$	—			$	(3,380	)	$	—			$	(4,937	)


	As of March 31, 2019													As of March 31, 2020
	Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Investments measured at NAV		Total			Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Investments measured at NAV		Total
Assets:
Cash equivalents⁽¹⁾	$	556,231		$	20,160	$	—		$	—	$	576,391		$	594,514		$	12,521	$	—		$	—	$	607,035
Equity investments:⁽²⁾
Seed capital investments	98,276			30,601		1,455			2,183		132,515			48,940			19,538		38,895			1,360		108,733
Investments related to long-term incentive plans	211,802			—		—			—		211,802			210,891			—		—					210,891
Other investments	19,486			2,142		—			—		21,628			12,406			1,577		—			—		13,983
Equity method investments:⁽³⁾
Seed capital investments⁽⁴⁾	—			—		40,854			10,675		51,529			—			—		43,059			12,571		55,630
Investments related to long-term incentive plans⁽²⁾	—			—		—			11,184		11,184			—			—		—			5,287		5,287
Other investments⁽⁴⁾	—			—		1,218			10,251		11,469			—			—		48			8,371		8,419
Adjusted cost investments⁽⁴⁾	—			74		12,171			—		12,245
Derivative assets⁽⁵⁾	4,183			—		—			—		4,183			4,716			—		—			—		4,716
Total	$	889,978		$	52,977	$	55,698		$	34,293	$	1,032,946
Total⁽⁶⁾														$	871,467		$	33,636	$	82,002		$	27,589	$	1,014,694
Liabilities:
Contingent consideration liabilities⁽⁶⁾	$	—		$	—	$	(1,415	)	$	—	$	(1,415	)
Contingent consideration liabilities⁽⁷⁾														$	—		$	—	$	(3,308	)	$	—	$	(3,308	)
Derivative liabilities⁽⁵⁾	(7,579		)	—		—			—		(7,579		)	(13,872		)	—		—			—		(13,872		)
Total	$	(7,579	)	$	—	$	(1,415	)	$	—	$	(8,994	)	$	(13,872	)	$	—	$	(3,308	)	$	—	$	(17,180	)


(1)	Cash investments in actively traded money market funds are classified as Level 1. Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization and are classified as Level 2.


(2)	Included in Investment securities on the Consolidated Balance Sheets.

(3)

Primarily investments in private equity and real estate funds. These equity method investments are investment companies that primarily record underlying investments at fair value. Therefore, the fair value of these investments is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee. Other equity method investments not measured at fair value on a recurring basis of ~~$27,051~~$28,694 and ~~$28,160~~$28,373 as of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, respectively, are excluded from the tables above.


(4)	Included in Other noncurrent assets in the Consolidated Balance Sheets.


(5)	See Note 14.


(6)	The tables above exclude adjusted cost investments not measured at fair value on a recurring basis of $25,099 and $19,729 as of June 30, 2020 and March 31, 2020, respectively.


(7)	See Note 9.

The net realized and unrealized gains ~~(losses)~~ for investment securities classified as equity investments were ~~$25,698~~$45,250 and ~~$(34,793)~~$10,153 for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and 2018, respectively, and $30,938 and $(25,246) for the nine months ended December 31, 2019 and 2018,~~ respectively.

The net unrealized gains ~~(losses)~~ relating to equity investments still held as of the reporting date were ~~$21,441~~$44,554 and ~~$(38,741)~~$1,572 for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and 2018, respectively, and $13,765 and $(51,313) for the nine months ended December 31, 2019 and 2018,~~ respectively.

Seed capital investments represent investments made by Legg Mason to fund new and existing investment products and strategies. As of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, seed capital investments totaled ~~$220,077~~$210,980 and ~~$227,756,~~$192,760, respectively, with investments in excess of $1,000 in 4541 funds ~~and 52 funds, respectively,~~in each period comprising over ~~90%~~85% of the total at each period end. Seed capital investments presented in the tables above exclude ~~$38,416~~$16,297 and ~~$43,712,~~$28,397, as of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, respectively, which is related to Legg Mason's investments in CIVs. See Note 16 for additional information regarding Legg Mason's investments in CIVs.

The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) are presented in the tables below:

Balance
as of September 30, 2019
Purchases Sales Redemptions/ Settlements/ Other Transfers Realized and unrealized gains/(losses), net
Balance
as of
December 31,
2019
Assets:
Equity investments - seed capital $ 20,200
$ 1,000
—
—
—
346
21,546
Equity method investments:

Seed capital investments 43,252
283
—
(2,073 ) —
1,878
43,340
Other 1,297
—
—
(1,209 ) —
(35 ) 53
Adjusted cost investments 22,869
3,497
—
—
—
—
26,366
$ 87,618
$ 3,780
$ —
$ (3,282 ) $ —
$ 1,843
$ 91,305
Liabilities:
Contingent consideration liabilities $ (3,625 ) $ —
n/a
$ 250
n/a
$ (1 ) $ (3,376 )

Balance
as of September 30, 2018
Purchases Sales Redemptions/ Settlements/ Other Transfers Realized and unrealized gains/(losses), net
Balance
as of
December 31,
2018
Assets:
Equity investments - seed capital $ 1,394
$ —
$ —
$ —
$ —
$ (128 ) $ 1,266
Equity method investments:
Seed capital investments 37,020
5,516
—
(1,880 ) —
398
41,054
Other 1,840
—
—
(19 ) —
—
1,821
Adjusted cost investments 10,906
1,063
—
—
—
3
11,972
$ 51,160
$ 6,579
$ —
$ (1,899 ) $ —
$ 273
$ 56,113
Liabilities:
Contingent consideration liabilities $ (1,900 ) $ —
n/a
$ —
n/a
$ —
$ (1,900 )


		Balance as of March 31, 2019			Purchases			Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net		Balance as of December 31, 2019				Balance as of March 31, 2020			Purchases		Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of June 30, 2020
Assets:
Equity Investments - seed capital		$	1,455		$	21,200		$	—	$	(1,457	)	$	—	$	348	$	21,546
Equity investments - seed capital																					$	38,895		$	2,655	$	—	$	—		$	—	$	76		$	41,626
Equity method investments:	Equity method investments:																			Equity method investments:
Seed capital investments		40,854			2,621			—		(3,045		)	—		2,910		43,340				43,059			93		—		(232		)	—		(1,204		)	41,716
Other		1,218			—			—		(1,222		)	—		57		53				48			—		—		(4		)	—		97			141
Adjusted cost investments		12,171			14,318			—		(125		)	—		2		26,366
		$	55,698		$	38,139		$	—	$	(5,849	)	$	—	$	3,317	$	91,305			$	82,002		$	2,748	$	—	$	(236	)	$	—	$	(1,031	)	$	83,483
Liabilities:
Contingent consideration liabilities		$	(1,415	)	(3,389		)	n/a		$	250		n/a		$	1,178	$	(3,376	)		$	(3,308	)	$	—	n/a		$	—		n/a		$	(72	)	$	(3,380	)


		Balance as of March 31, 2018			Purchases		Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2018				Balance as of March 31, 2019			Purchases			Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net		Balance as of June 30, 2019
Assets:
Equity Investments - seed capital		$	1,242		$	—	$	—	$	—		$	—	$	24		$	1,266
Equity investments - seed capital																					$	1,455		$	—		$	—	$	(1,457	)	$	—	$	2	$	—
Equity method investments:	Equity method investments:																			Equity method investments:
Seed capital investments		33,725			9,483		—		(4,280		)	—		2,126			41,054				40,854			1,913			—		(678		)	—		427		42,516
Other		—			1,650		—		(19		)	—		190			1,821				1,218			—			—		(13		)	—		17		1,222
Adjusted cost investments		6,951			5,063		—		(2		)	—		(40		)	11,972
		$	41,918		$	16,196	$	—	$	(4,301	)	$	—	$	2,300		$	56,113			$	43,527		$	1,913		$	—	$	(2,148	)	$	—	$	446	$	43,738
Liabilities:
Contingent consideration liabilities		$	(5,607	)	$	—	n/a		$	4,319		n/a		$	(612	)	$	(1,900	)		$	(1,415	)	$	(3,389	)	n/a		$	—		n/a		$	1,179	$	(3,625	)

Realized and unrealized gains and losses recorded for Level 3 investments are included in Other non-operating income (expense), net, in the Consolidated Statements of ~~Income (Loss).~~Income. The change in unrealized gains for Level 3 investments and liabilities still held at the reporting date was ~~$1,776~~$1,104 and ~~$275~~$1,626, and for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and 2018, respectively, and $4,089 and $2,336 for the nine months ended December 31, 2019 and 2018,~~ respectively.

Level 3 purchases for the nine months ended December 31, 2019 reflect a seed capital investment in a real estate-focused fund designed for individual investors and an adjusted cost minority investment in a U.K. retirement solutions provider. There were no significant transfers between Level 1 and Level 2 during the three or nine months ended December 31, 2019 and 2018.

As of April 1, 2020, Legg Mason adopted updated accounting guidance which modified the disclosure requirements for fair value measurements. Under the updated guidance companies are required to disclose the range and weighted average used to develop significant unobservable inputs used in Level 3 fair value measurements, which for Legg Mason were as follows:



As of June 30, 2020	Fair Value		Valuation Techniques	Significant Unobservable Inputs	Range (Weighted-Average)
Equity method investments - seed capital:
Real estate fund investments	$	22,007	Discounted cash flows	Discount rate	5.5%-11.8% (6.7%)
				Exit capitalization rate	4.3%-8.9% (5.3%)
Real estate fund investments	19,709		Discounted cash flows	Discount rate	5.3%-8.8% (6.6%)
	$	41,716		Exit capitalization rate	4.3%-9.4% (5.6%)
				Credit spreads	1.4%-8.3% (2.0%)
				Loan to value ratio	14.8%-76.8% (46.7%)
Equity investments - seed capital:
Real estate fund investments and loans	$	41,626	Discounted cash flows	Discount rate	6.5%-6.5% (6.5%)
				Exit capitalization rate	6.0%-6.0% (6.0%)
				Credit spreads	9.3%-9.3% (9.3%)
				Loan to value ratio	82.9%-82.9% (82.9%)

As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized:


		Fair Value Determined Using NAV					As of December 31, 2019				Fair Value Determined Using NAV					As of June 30, 2020
Category of Investment	Investment Strategy	December 31, 2019			March 31, 2019		Unfunded Commitments		Remaining Term	Investment Strategy	June 30, 2020			March 31, 2020		Unfunded Commitments		Remaining Term
Funds-of-hedge funds	Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge	$	11,905	(1)	$	9,910	n/a		n/a	Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge	$	11,638	(1)	$	11,966	n/a		n/a
Hedge funds	Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge	1,049			1,515		n/a		n/a	Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge	1,383			1,212		n/a		n/a
Private equity funds	Long/short equity	10,244		(2)	11,636		$	5,698	Up to 10 years	Long/short equity	9,057		(2)	9,101		$	5,622	Up to 9 years
Equity method investments related to long-term incentive plans	Alternatives, structured securities, short-dated fixed income	7,625		(2)	11,185		n/a		n/a	Alternatives, structured securities, short-dated fixed income	8,556		(2)	5,287		n/a		n/a
Other	Various	20			47		n/a		Various	Various	22			23		n/a		Various
Total		$	30,843		$	34,293	$	5,698			$	30,656		$	27,589	$	5,622

n/a - not applicable


(1)	Liquidation restrictions: ~~14%~~6% monthly redemption, ~~1% quarterly redemption,~~ and ~~85%~~94% are not subject to redemption or are not currently redeemable.


(2)	Liquidations are expected over the remaining term.

There are no current plans to sell any of these investments held as of ~~December 31, 2019.~~June 30, 2020.

4. Acquisition

On April 10, 2019, Clarion Partners acquired a majority stake in Gramercy Europe (Jersey) Limited ("Gramercy"), a European real estate investment business specializing in pan-European logistics and industrial assets. The transaction required an initial cash payment of $10,247 (net of cash acquired), which was paid by Clarion Partners using existing cash resources, and a potential contingent consideration payment of up to approximately $3,735 (using the foreign exchange rate as of April 10, 2019, for the €3,315 potential payment), due on the fifth anniversary of closing upon the achievement of certain financial metrics.

In connection with the acquisition, Clarion Partners recognized an amortizable intangible asset management contracts asset of $5,876, with a useful life of eight years at acquisition, goodwill of $20,196, and noncontrolling interest of $11,715. The fair value of the contingent consideration at acquisition was $3,389.

5. Fixed Assets

The following table reflects the components of fixed assets as of:


	December 31, 2019			March 31, 2019			June 30, 2020			March 31, 2020
Software	$	276,096		$	269,944		$	283,216		$	279,038
Leasehold improvements	213,439			212,742			196,301			210,419
Equipment	162,795			159,421			161,932			162,372
Total cost	652,330			642,107			641,449			651,829
Less: accumulated depreciation and amortization	(513,495		)	(492,118		)	(515,336		)	(517,406		)
Fixed assets, net	$	138,835		$	149,989		$	126,113		$	134,423

Depreciation and amortization expense related to fixed assets was ~~$12,252~~$13,945 and ~~$11,799~~$11,040, for the three months ended ~~December 31, 2019~~June 30, 2020 and ~~2018, respectively, and $34,098 and $35,659 for the nine months ended December 31,~~ 2019, ~~and 2018,~~ respectively.

6. Intangible Assets and Goodwill

The following table reflects the components of intangible assets as of:


	December 31, 2019			March 31, 2019			June 30, 2020			March 31, 2020
Amortizable intangible asset management contracts and other
Cost	$	372,808		$	366,930		$	370,537		$	369,193
Accumulated amortization	(257,410		)	(240,488		)	(266,736		)	(259,982		)
Net⁽¹⁾	115,398			126,442			103,801			109,211
Indefinite–life intangible assets
U.S. domestic mutual fund management contracts	2,106,351			2,106,351			2,106,351			2,106,351
Clarion Partners fund management contracts	505,200			505,200			505,200			505,200
EnTrust Global fund management contracts	126,804			126,804			126,804			126,804
Other fund management contracts	475,069			473,360			466,036			460,033
Trade names	48,695			48,602			48,278			48,091
	3,262,119			3,260,317			3,252,669			3,246,479
Intangible assets, net	$	3,377,517		$	3,386,759		$	3,356,470		$	3,355,690

~~(1) As of December 31, 2019, includes $5,305 related to the acquisition of Gramercy by Clarion Partners. See Note~~ 4 ~~for additional information.~~

Certain of Legg Mason's intangible assets are denominated in currencies other than the U.S. dollar and balances related to these assets will fluctuate with changes in the related foreign currency exchange rates.

Indefinite-life Intangible Assets and Goodwill

Legg Mason performed its annual impairment testing of goodwill and indefinite-life intangible assets as of October 31, 2019, and determined that there was no impairment in the value of these assets.

Given the level of market disruption associated with COVID-19 during the three months ended March 31, 2020, Legg Mason assessed whether a triggering event had occurred for each of its identifiable indefinite-life intangible assets and goodwill as of March 31, 2020. Certain indefinite-life intangible assets were determined to have had triggering events due to a combination of significant market volatility and uncertainty and limited excess fair value over the related carrying values in our most recent annual impairment testing as of October 31, 2019. Legg Mason updated the quantitative analyses for these indefinite-life intangible assets as of March 31, 2020 and determined that there was no impairment in the value of these assets.

Legg Mason also determined that no triggering events occurred during the three months ended June 30, 2020 that would require further impairment testing.

As a result of uncertainty regarding future market conditions and economic results, assessing the fair value of the reporting unit and intangible assets requires management to exercise significant judgment.

~~Legg Mason's goodwill impairment testing noted the assessed fair value of the Global Asset Management business reporting unit exceeded its related carrying value by 22%.~~

The assessed fair values of the EnTrust Global indefinite-life fund management contracts and trade name assets exceeded their respective carrying values of $126,804 and $10,300 by 10% and 6%, ~~respectively.~~respectively, as of October 31, 2019. Given uncertain markets and the relatively limited excess fair value as of the most recent impairment test, the EnTrust Global fund management contracts asset was deemed to have had a triggering event as of March 31, 2020 and was tested for impairment. The related fair value exceeded its carrying value by approximately 1% as of March 31, 2020.

The EnTrust Global trade name asset was also deemed to have had a triggering event and was tested for impairment as of March 31, 2020. The resulting fair value of the EnTrust Global trade name asset exceeded the carrying value by approximately 3%.

Should market performance, flows, and/or related ~~assets under management ("AUM")~~AUM levels decrease in the near term, or other factors change, such that cash flow projections deviate from current projections, it is reasonably possible that ~~these~~our indefinite-life intangible assets or goodwill could become impaired, and the impairment could be a material amount.

~~Legg Mason also determined that no triggering events occurred as of December 31, 2019 that would require further impairment testing.~~

Legg Mason's annual impairment testing process in the prior fiscal year determined that the carrying values of the EnTrust Global indefinite-life fund management contracts and trade name assets, and the RARE Infrastructure indefinite-life fund management contracts and trade name assets, exceeded their respective fair values, which resulted in impairment charges totaling $358,800 in the quarter ended December 31, 2018.

The impairment charges at EnTrust Global in the prior year were primarily the result of continued net client outflows from legacy high net worth fund-of-fund products leading to reduced growth expectations in both management fees and performance fees, a declining margin, and a higher discount rate. These changes resulted in a reduction of the projected cash flows and Legg Mason’s overall assessment of fair value of the assets, such that the carrying values of the EnTrust Global fund management contracts intangible asset of $401,404 and trade name asset of $28,500 were impaired by $274,600 and $18,200, respectively. Management estimated the fair values of these assets based upon discounted cash flow analyses, as well as a relief from royalty method for the trade name asset, using unobservable market inputs, which are Level 3 measurements. The significant assumptions used in the cash flow analyses included projected revenue growth rates, discount rates, and royalty rates. Base revenues related to the EnTrust Global fund management contracts were assumed to have annual growth (contraction) rates ranging from (19.4)% to 3.9% (average: 3.0%), and the projected cash flows from the EnTrust Global fund management contracts were discounted at 17%. Base revenues related to the EnTrust Global trade name asset were assumed to have annual growth rates ranging from 0.0% to 4.6% (average: 3.9%), a royalty rate of 1.0%, and a discount rate of 16.5%.

The impairment charges at RARE Infrastructure in the prior year were primarily the result of lower than expected net client inflows and performance fees, leading to a lower margin, and a higher discount rate. These changes resulted in a reduction of the related projected cash flows and Legg Mason’s overall assessment of fair value of the assets, such that the RARE Infrastructure fund management contracts asset carrying value of approximately $120,800 and trade name asset carrying value of $2,800 were impaired by $65,000 and $1,000, respectively. Management estimated the fair values of these assets based upon discounted cash flow analyses, as well as a relief from royalty method for the trade name asset, using unobservable market inputs, which are Level 3 measurements. The significant assumptions used in the cash flow analyses included projected revenue growth rates, discount rates, and royalty rates. Base revenues related to the RARE Infrastructure fund management contracts were assumed to have annual growth rates ranging from 4.4% to 4.9% (average: 4.8%), and the projected cash flows from the RARE Infrastructure fund management contracts were discounted at 16.5%. Base revenues related to the RARE Infrastructure trade name asset were assumed to have annual growth rates ranging from 0.9% to 4.6% (average: 4.2%), a royalty rate of 1.0%, and a discount rate of 16.5%.

The change in carrying value of goodwill is summarized below:

Gross Book Value Accumulated Impairment Net Book Value
Balance as of March 31, 2019 $ 3,045,454
$ (1,161,900 ) $ 1,883,554
Impact of excess tax basis amortization (8,256 ) —
(8,256 )
Changes in foreign exchange rates 603
—
603
Business acquisition⁽¹⁾
20,196
—
20,196
Balance as of December 31, 2019 $ 3,057,997
$ (1,161,900 ) $ 1,896,097



	Gross Book Value			Accumulated Impairment			Net Book Value
Balance as of March 31, 2020	$	3,009,666		$	(1,161,900	)	$	1,847,766
Impact of excess tax basis amortization	(2,856		)	—			(2,856		)
Changes in foreign exchange rates	17,763			—			17,763
Balance as of June 30, 2020	$	3,024,573		$	(1,161,900	)	$	1,862,673

~~(1) See Note~~ 4 ~~for additional information.~~

Amortizable Intangible Asset Management Contracts and Other

There were no impairments to amortizable management contract intangible assets during the three ~~or nine~~ months ended ~~December 31,~~June 30, 2020 or 2019.

During the three months ended December 31, 2018, projected revenues related to the RARE Infrastructure separate account contracts asset declined due to losses of separate account clients and AUM. Based on revised attrition estimates, the remaining useful life was decreased from three and one-half to two years at December 31, 2018. As a result of the decline in projected

revenues and the revised estimate of useful life, the amortized carrying value of approximately $6,900 as of December 31, 2018 was determined to exceed its fair value and an impairment charge of $6,400 was recorded during the three months ended December 31, 2018. Management estimated the fair value of this asset as of December 31, 2018, based on a discounted cash flow analysis using unobservable market inputs, which are Level 3 measurements. In addition to the useful life, other significant assumptions used in the cash flow analysis included projected revenue growth rates of 7% and a discount rate of 16.5%.

As of ~~December 31, 2019~~June 30, 2020, amortizable intangible asset management contracts and other are being amortized over a weighted-average remaining life of ~~5.6~~5.2 years.

Estimated amortization expense for each of the next five fiscal years and thereafter is as follows:


Remaining fiscal 2020	$	5,640
2021	21,834
Remaining fiscal 2021			$	16,265
2022	21,485		21,415
2023	20,725		20,655
2024	19,896		19,825
2025			12,050
Thereafter	25,818		13,591
Total	$	115,398	$	103,801

7. Short-Term Borrowings and Long-Term Debt

Short-term borrowings

Legg Mason maintains an unsecured credit agreement (as amended from time to time the "Credit Agreement") which provides for a $500,000 multi-currency revolving credit facility. Under the terms of the Merger Agreement, Legg Mason may not borrow more than $30,000 under the revolving credit facility, without the prior consent of Franklin Templeton.

On April 3, 2020, Legg Mason borrowed $250,000 under the Credit Agreement, with Franklin Templeton's consent, as a precautionary measure to provide additional liquidity for general corporate purposes amid heightened uncertainty due to the COVID-19 pandemic. These borrowings were repaid in full on July 21, 2020 using existing cash resources. There were no borrowings outstanding under the Credit Agreement as of March 31, 2020. As of June 30, 2020, the effective interest rate on the outstanding borrowings was 2.6%.

Long-term debt

Long-term debt, net, consists of the following:


	December 31, 2019									March 31, 2019			June 30, 2020									March 31, 2020
	Carrying Value		Unamortized Discount (Premium)			Unamortized Debt Issuance Costs		Maturity Amount		Carrying Value			Carrying Value		Unamortized Discount (Premium)			Unamortized Debt Issuance Costs		Maturity Amount		Carrying Value
3.95% Senior Notes due July 2024	$	248,917	$	206		$	877	$	250,000	$	248,738		$	249,035	$	184		$	781	$	250,000	$	248,976
4.75% Senior Notes due March 2026	447,786		—			2,214		450,000		447,521			447,963		—			2,037		450,000		447,875
5.625% Senior Notes due January 2044	548,079		(2,938		)	4,859		550,000		548,020			548,119		(2,877		)	4,758		550,000		548,099
6.375% Junior Notes due March 2056	242,614		—			7,386		250,000		242,461			242,716		—			7,284		250,000		242,665
5.45% Junior Notes due September 2056	485,017		—			14,983		500,000		484,711			485,221		—			14,779		500,000		485,118
2.7% Senior Notes due July 2019	—		—			—		—		250,301
Subtotal	1,972,413		(2,732		)	30,319		2,000,000		2,221,752
Less: Current portion	—		—			—		—		(250,301		)
Total	$	1,972,413	$	(2,732	)	$	30,319	$	2,000,000	$	1,971,451		$	1,973,054	$	(2,693	)	$	29,639	$	2,000,000	$	1,972,733

~~On July 15, 2019, Legg Mason repaid the~~As of June 30, 2020, $250,000 of ~~2.7% Senior Notes due July 2019, using existing cash resources. The remaining $2,000,000 of~~Legg Mason's long-term debt ~~outstanding as of December 31, 2019~~matures in fiscal 2025 and $1,750,000 matures after fiscal ~~2024.~~2025.

As of ~~December 31, 2019~~,June 30, 2020, the estimated fair value of long-term debt was ~~$2,170,660.~~$2,203,929. The fair value of debt was estimated using publicly quoted market prices and was classified as Level 2 in the fair value hierarchy.

8. Leases

Legg Mason leases over ~~1,500~~1,357 square feet of office space with approximately one-third currently subleased to various firms, the majority of which are within the U.S. Office facilities and equipment are leased under various non-cancelable operating leases and certain equipment is also leased under financing leases. Legg Mason's current leases have remaining terms that vary up to 1918 years. Certain leases provide for options to extend for periods of up to 1512 years and/or options to terminate within seven years.

~~As previously disclosed in Note~~ 2, the lease reserve liability related to our subleased space and vacated space for which subleases are being pursued was $24,063 as of March 31, 2019. Upon adoption of the updated lease accounting guidance on April 1, 2019, the existing Other current and non-current liabilities were reclassified as a reduction of the ROU asset recorded in accordance with the updated guidance.

~~Leases~~The following table reflects leases included in the Consolidated Balance Sheets ~~were~~ as ~~follows:~~of:


	Classification	As of December 31, 2019			Classification	June 30, 2020			March 31, 2020
Operating leases:
Operating lease ROU assets	Right-of-use assets	$	294,174		Right-of-use assets	$	279,580		$	290,167
Operating lease liabilities	Lease liabilities	361,921			Lease liabilities	345,384			355,483
Finance leases:
Property and equipment, gross	Right-of-use assets	$	2,134		Right-of-use assets	$	2,011		$	2,011
Less: accumulated depreciation	Right-of-use assets	(643		)	Right-of-use assets	(1,063		)	(836		)
Property and equipment, net		$	1,491			$	948		$	1,175
Finance lease liabilities	Lease liabilities	$	1,367		Lease liabilities	$	848		$	1,068

ROU assets that involve subleased or vacant space aggregate $72,942 and $71,257 as of June 30, 2020 and March 31, 2020, respectively. These assets may become impaired if tenants are unable to service their obligations under the sublease, and/or if the estimates as to occupancy are not realized, either of which may be more likely as COVID-19 impacts evolve.

The components of lease expense included in the Consolidated ~~Statement~~Statements of Income ~~(Loss)~~ were as follows:


									Three Months Ended June 30,
	Classification	Three Months Ended December 31, 2019			Nine Months Ended December 31, 2019			Classification	2020			2019
Operating lease cost	Occupancy expense	$	25,361		$	67,172		Occupancy expense	$	24,622		$	20,921
Financing lease cost:
Amortization of right-of-use asset	Occupancy expense	251			737			Occupancy expense	237			241
Interest on lease liabilities	Interest expense	11			36			Interest expense	8			13
Total finance lease cost		262			773				245			254
Short-term lease cost	Occupancy expense	1,190			4,885			Occupancy expense	281			1,845
Variable lease cost⁽¹⁾	Occupancy expense	6,599			17,788			Occupancy expense	6,232			5,003
Less: sublease billings	Occupancy expense	(6,091		)	(18,624		)	Occupancy expense	(5,769		)	(6,234		)
Net lease cost⁽²⁾		$	27,321		$	71,994			$	25,611		$	21,789

(1) Variable lease cost includes operating expenses, real estate and other ~~taxes. Variable lease costs~~taxes and other amounts that fluctuate in amount and are ~~determined by whether they are to be included in~~therefore excluded from fixed base ~~rent and if amounts are based on a consumer price index.~~rent.


(2)	Excludes other occupancy expense of ~~$5,292~~$6,406 and ~~$13,123~~$3,917 for the three ~~and nine~~ months ended ~~December 31,~~June 30, 2020 and 2019, respectively, related to leasehold amortization.

During the quarter ended ~~December 31, 2019,~~June 30, 2020, in connection with Legg Mason's strategic restructuring, as further discussed in Note 15, it was determined that the carrying ~~values~~value of ~~certain~~a right-of-use ~~assets~~asset would not be recoverable. ~~Related~~A related impairment ~~charges~~charge of ~~$4,328~~$3,681 (exclusive of accelerated depreciation of ~~$1,603) were~~$2,740) was recognized in the ~~three months~~quarter ended ~~December 31, 2019,~~June 30, 2020, and ~~are~~is included in operating lease cost in the table above and in Occupancy expense in the Consolidated Statement of ~~Income (Loss).~~Income. The fair value of the right-of-use asset ~~related to a substantial portion of the charge~~ was estimated based on various Level 3 assumptions, ~~including~~that consider the prevailing rental rates in the applicable market and the amount of time it will take to secure a sublease agreement.

~~Lease expense incurred in the three and nine months ended December 31, 2018 was $20,445 and $64,649, respectively, excluding leasehold amortization of $3,632 and $11,684, respectively.~~

Sublease amounts billed are recorded as a reduction of Occupancy expense in the Consolidated Statement of Income (Loss). The amounts billed are primarily fixed base rental payments combined with variable lease cost reimbursements. Sublease amounts related to base rent are recorded on a straight-line basis.

~~As of December 31, 2019, undiscounted~~Undiscounted future cash flows for each of the next five fiscal years and thereafter related to operating and ~~finance~~financing leases as of June 30, 2020 were as follows:


	Operating Leases			Finance Leases			Total			Operating Leases			Finance Leases			Total
Remaining fiscal 2020	$	23,181		$	263		$	23,444
2021	88,048			714			88,762
Remaining fiscal 2021										$	66,931		$	447		$	67,378
2022	86,385			271			86,656			89,182			267			89,449
2023	84,530			131			84,661			88,240			128			88,368
2024	70,210			35			70,245			74,126			35			74,161
2025										30,495			4			30,499
Thereafter	46,472			5			46,477			30,975			—			30,975
Totallease payments	398,826			1,419			400,245			379,949			881			380,830
Less: Imputed interest	(36,905		)	(52		)	(36,957		)	(34,565		)	(33		)	(34,598		)
Present value of lease liabilities	$	361,921		$	1,367		$	363,288		$	345,384		$	848		$	346,232

~~As of December 31, 2019, the~~The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases were as follows:


					June 30, 2020				March 31, 2020
	Operating Leases		Finance Leases		Operating Leases		Finance Leases		Operating Leases		Finance Leases
Weighted-average remaining lease term (in years)	4.8		2.0		4.7		1.9		4.8		1.9
Weighted-average discount rates	4.0	%	3.1	%	4.0	%	3.3	%	3.9	%	3.2	%

Supplemental cash flow information related to leases was as follows:


			Three Months Ended June 30,
	Nine Months Ended December 31, 2019		2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	64,470	$	20,619	$	22,871
Financing cash flows from finance leases	727		192		248

~~There was no significant non-cash lease activity for the nine months ended December 31, 2019.~~

~~As of March 31, 2019, minimum aggregate rentals under operating leases were as follows:~~

Operating Leases⁽¹⁾
2020 $ 90,667
2021 86,095
2022 84,485
2023 83,425
2024 72,192
Thereafter 47,240
Total $ 464,104

~~(1) The minimum rental commitments have not been reduced by $105,193 for minimum sublease rentals to be received under non-cancelable subleases.~~

9. Commitments and Contingencies

As of ~~December 31, 2019~~June 30, 2020, Legg Mason had commitments to invest ~~$17,588~~$16,723 in limited partnerships that make private investments. These commitments are expected to be outstanding, or funded as required, through the end of their respective investment periods ranging through fiscal 2030. Also, in connection with the acquisition of Clarion Partners in April 2016, Legg Mason committed to ultimately provide up to $100,000 of seed capital to Clarion Partners products.

As of ~~December 31, 2019,~~June 30, 2020, Legg Mason also had future commitments totaling ~~$102,794~~$89,606 related to multi-year agreements for certain services, of which ~~$20,087, $39,348~~$34,980 and ~~$21,534~~$25,461 will be due during the remainder of fiscal ~~2020,~~2021 and in ~~fiscal 2021 and~~ fiscal 2022, respectively. The remaining ~~$21,825~~$29,165 is due through fiscal ~~2027.~~2028.

In the normal course of business, Legg Mason enters into contracts that contain a variety of representations and warranties and that provide general indemnifications, which are not considered financial guarantees by relevant accounting guidance. Legg Mason’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against Legg Mason that have not yet occurred.

Legg Mason has been the subject of customer complaints and has also been named as a defendant in various legal actions arising primarily from asset management, securities brokerage, and investment banking activities, including certain class actions, which primarily allege violations of securities laws and seek unspecified damages, which could be substantial. In the normal course of its business, Legg Mason has also received subpoenas and is currently involved in other governmental and industry self-regulatory agency inquiries, investigations and, from time to time, proceedings involving asset management activities. In accordance with guidance for accounting for contingencies, Legg Mason has established provisions for estimated losses from pending complaints, legal actions, investigations and proceedings when it is probable that a loss has been incurred and a reasonable estimate of loss can be made.

There are matters of litigation and other proceedings, including those described above as customer complaints, legal actions, inquiries, proceedings and investigations, where Legg Mason cannot estimate the reasonably possible loss or range of loss. The inability to provide a reasonably possible amount or range of losses is not because there is uncertainty as to the ultimate outcome of a matter, but because liability and damage issues have not developed to the point where Legg Mason can conclude that there is both a reasonable possibility of a loss and a meaningful amount or range of possible losses. There are numerous aspects to customer complaints, legal actions, inquiries, proceedings and investigations that prevent Legg Mason from estimating a related amount or range of reasonably possible losses. These aspects include, among other things, the nature of the matters; that significant relevant facts are not known, are uncertain or are in dispute; and that damages sought are not specified, are uncertain, unsupportable or unexplained. In addition, for legal actions, discovery may not yet have started, may not be complete or may not be conclusive, and meaningful settlement discussions may not have occurred. Further, for regulatory matters, investigations may run their course without any clear indication of wrongdoing or fault until their conclusion.

In management's opinion, an adequate accrual has been made as of ~~December 31, 2019~~June 30, 2020, to provide for any probable losses that may arise from matters for which the Company could reasonably estimate an amount. Legg Mason's financial condition, results of operations and cash flows could be materially affected during a period in which probable losses become apparent or a matter is ultimately resolved. In addition, the ultimate costs of litigation-related charges can vary significantly from period-to-period, depending on factors such as market conditions, the size and volume of customer complaints and claims, including class action suits, and recoveries from indemnification, contribution, insurance reimbursement, or reductions in compensation under revenue share arrangements.

Merger Agreement

The Company has made customary representations and warranties in the Merger Agreement. The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to the conduct of the Company’s business between the date of the signing of the Merger Agreement and the closing of the transactions contemplated under the Merger Agreement.

In connection with, and subject to, the Merger closing, Legg Mason has committed certain severance and retention payments to its employees aggregating up to approximately $125,000, subject to continuing employment through the closing of the Merger. There is also an affiliate deferred compensation arrangement that accelerates the vesting of approximately $48,000 upon closing of the Merger, substantially all of which will be settled by delivering fund shares held within a related trust.

Noncontrolling Interests

Legg Mason may be obligated to settle redeemable noncontrolling interests related to certain affiliates. As of ~~December 31, 2019~~June 30, 2020, affiliate redeemable noncontrolling interests, excluding amounts related to management equity plans, aggregated ~~$524,889.~~$518,642. In addition, as of ~~December 31, 2019~~June 30, 2020, the estimated redemption fair value for units under affiliate management equity plans (redeemable and nonredeemable) aggregated ~~$82,495.~~$83,895.

See Notes 10 and 13 for additional information regarding affiliate management equity plans and noncontrolling interests, respectively.

Contingent Consideration

As further discussed in Note 4, on April 10, 2019, Clarion Partners acquired a majority interest in Gramercy. The transaction included a potential contingent consideration payment of up to ~~$3,721~~$3,726 (using the foreign exchange rate as of ~~December 31, 2019,~~June 30, 2020, for the €3,315 potential payment), due on the fifth anniversary of closing upon the achievement of certain financial metrics. As of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, contingent consideration liabilities totaling ~~$3,376~~$3,380 and ~~$1,415,~~$3,308, respectively, were included in Other non-current liabilities in the Consolidated Balance Sheets.

10. Stock-Based Compensation

Legg Mason's stock-based compensation includes restricted stock units, stock options, an employee stock purchase plan, market and performance-based performance shares payable in common stock, affiliate management equity plans and deferred compensation payable in stock. Shares available for issuance under the equity incentive stock plan as of ~~December 31, 2019~~June 30, 2020, were ~~6,292.~~6,354. Options under Legg Mason’s equity incentive stock plans have been granted at prices not less than 100% of the fair market value on the date of grant. Options are generally exercisable in equal increments over four years and expire within eight years ~~to 10 years~~ from the date of grant.

The components of Legg Mason's total stock-based compensation expense were as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,				Three Months Ended June 30,
	2019		2018		2019		2018		2020		2019
Restricted stock and restricted stock units	$	12,025	$	11,668	$	43,507	$	38,707	$	7,054	$	17,634
Stock options	728		1,057		2,643		3,513		166		1,154
Employee stock purchase plan	77		96		415		480
Non-employee director awards	—		—		1,000		1,025
Affiliate management equity plans	23		719		1,670		2,213		23		1,623
Performance share units	2,564		1,202		8,688		4,014		169		3,011
Employee stock trust	9		8		26		23		9		8
Employee stock purchase plan									—		254
Non-employee director awards									—		150
Total stock-based compensation expense	$	15,426	$	14,750	$	57,949	$	49,975	$	7,421	$	23,834

The Merger Agreement provides for the settlement of all outstanding share-based equity awards (vested and unvested), upon the Merger closing. The settlement of unvested awards accommodates Franklin Templeton's acquisition of Legg Mason, therefore, Legg Mason does not incur any related accelerated compensation expense. For fiscal 2020 incentive awards, the Merger Agreement prohibited Legg Mason from issuing equity awards to employees. Instead, employees received the same portion of their incentive awards that would have been paid as equity in the form of deferred cash units, which vest ratably

over four years, beginning April 30, 2021. The deferred cash units will be accelerated and paid out in cash upon the completion of the Merger, consistent with the treatment of outstanding equity awards.

Restricted Stock

Restricted stock and restricted stock unit transactions are summarized below:


	Nine Months Ended December 31,								Three Months Ended June 30,
	2019				2018				2020				2019
	Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value		Number of Shares		Weighted-Average Grant Date Value
Unvested shares at March 31	3,045		$	37.76	3,299		$	38.09	2,760		$	36.43	3,045		$	37.76
Granted	1,205		35.50		1,179		39.05		—		—		1,196		35.50
Vested	(1,288	)	38.70		(1,286	)	39.73		(1,159	)	35.70		(1,199	)	38.86
Canceled/forfeited	(59	)	36.88		(108	)	37.62		(13	)	36.83		(30	)	35.79
Unvested shares at December 31	2,903		$	36.43	3,084		$	37.80
Unvested shares at June 30									1,588		$	36.96	3,012		$	36.45

Unamortized compensation cost related to unvested restricted stock awards at ~~December 31, 2019,~~June 30, 2020, of ~~$63,186~~$42,985 is expected to be recognized over a weighted-average period of ~~1.6~~1.5 years.

Stock Options

Stock option transactions under Legg Mason's equity incentive plans are summarized below:


	Nine Months Ended December 31,								Three Months Ended June 30,
	2019				2018				2020				2019
	Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share		Number of Shares		Weighted-Average Exercise Price Per Share
Options outstanding at March 31	4,115		$	39.05	4,437		$	38.78
Options outstanding at March 31, 2020									2,518		$	41.41	4,115		$	39.05
Exercised	(369	)	31.55		(189	)	31.62		(1,285	)	35.26		(311	)	31.83
Canceled/forfeited	(80	)	46.18		(95	)	43.92		(12	)	39.65		(37	)	40.63
Options outstanding at December 31	3,666		$	39.65	4,153		$	38.99
Options outstanding at June 30									1,221		$	47.90	3,767		$	39.63

At ~~December 31, 2019,~~June 30, 2020, options were exercisable for ~~3,262~~1,106 shares, with a weighted-average exercise price of ~~$40.23~~$48.93 and a weighted average remaining contractual life of ~~3.0~~2.9 years. Unamortized compensation cost related to unvested options for ~~404~~115 shares at ~~December 31, 2019,~~June 30, 2020, was ~~$920,~~$383, which is expected to be recognized over a weighted-average period of ~~0.9 years.~~1.0 year.

Other

As of June 30, 2020 and 2019, non-employee directors held 35 and 100 restricted stock units, respectively, which vest on the grant date and are, therefore, not included in unvested shares of restricted stock units in the table above,

Affiliate Management Equity Plans

In connection with the acquisition of Clarion Partners in April 2016, Legg Mason implemented a management equity plan for Clarion Partners that entitles certain of its key employees to participate in 15% of the future growth, if any, of the Clarion Partners enterprise value (subject to appropriate discounts) subsequent to the date of the grant. As of ~~December 31, 2019~~June 30, 2020, the estimated aggregate redemption fair value of units under the plan, as if they were currently redeemable, was ~~$12,100.~~$14,300.

Effective March 1, 2016, Legg Mason implemented a management equity plan for Royce Investment Partners ("Royce") key employees. Under the management equity plan, minority equity interests equivalent to a 24.5% interest in the Royce entity have been issued to certain key employees. Equity holders receive quarterly distributions of a portion of Royce's pre-tax income in amounts equal to the percentage of ownership represented by the equity they hold, subject to payment of Legg Mason's revenue share and reasonable ~~expenses.~~expenses and subordination provisions in certain cases. As of ~~December 31, 2019~~June 30, 2020, the estimated aggregate redemption fair value of units under the plan, as if they were currently redeemable, was ~~$10,800.~~$10,000.

On March 31, 2014, Legg Mason implemented a management equity plan and granted units to key employees of its subsidiary ClearBridge Investments, LLC ("ClearBridge") that entitle them to participate in 15% of the future growth, if any, of the ClearBridge enterprise value (subject to appropriate discounts) subsequent to the grant date. Independent valuation determined the aggregate cost of the award to be approximately $16,000, which was recognized as Compensation and benefits expense in the Consolidated Statements of Income (Loss) over the related vesting periods through March 2019. Total compensation expense related to the ClearBridge affiliate management equity plan was $23 and ~~$719~~$1,623 for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and 2018, respectively, and $1,670 and $2,213 for the nine months ended December 31, 2019 and 2018,~~ respectively. The compensation expense for the ~~nine~~three months ended ~~December 31,~~June 30, 2019, ~~includes~~included $1,600 related to the modification of the plan settlement features, which resulted in an increase in the fair value of the awards. This arrangement provides for one-half of the cost to be absorbed by the ClearBridge incentive pool. As of ~~December 31, 2019~~June 30, 2020, the estimated aggregate redemption fair value of vested units under the ClearBridge plan, as if they were currently redeemable, was approximately $59,595.

~~Other~~

~~As of~~ ~~December 31, 2019~~ and 2018, non-employee directors held 34 and 98 restricted stock units, respectively, which vest on the grant date and are, therefore, not included in the unvested shares of restricted stock units in the table above.

Upon the acquisition of Clarion Partners in April 2016, Legg Mason granted certain key employees of Clarion Partners a total of 716 performance-based Legg Mason restricted share units, which are not included in the unvested shares of restricted stock units in the table above, with an aggregate fair value of $11,121, which was included in the purchase price. These restricted share units vest upon Clarion Partners achieving a certain level of EBITDA, as defined in the purchase agreement, within a designated period after the closing of the acquisition.

In May 2019 and 2018, Legg Mason granted certain executive officers a total of 168 and 163 performance share units, respectively, as part of their fiscal 2019 and 2018 incentive awards with an aggregate value of $6,334 and $5,820, respectively.

The vesting of performance share units granted in May 2019 and 2018 and the number of shares payable at vesting are determined based on Legg Mason’s relative total stockholder return and relative organic growth rate of long-term AUM over three-year periods ending March 31, 2022 and 2021, respectively. The recorded grant date fair values per performance share unit of $37.63 and $35.67, respectively, were estimated based on multiple fair value Monte Carlo pricing models. Expense associated with these grants are adjusted for the level of relative organic growth expected to be ultimately achieved. The estimated fair values for the May 2019 grant range from $21.63 to $45.63 per performance share unit and for the May 2018 grant range from $18.08 to $44.46 per performance share unit. The following assumptions were used in the Monte Carlo pricing models for the May 2019 and 2018 grants:

May 2019 May 2018
Expected dividend yield 4.41 % 3.49 %
Risk-free interest rate 2.11 % 2.71 %
Average expected volatility 23.96 % 26.14 %

11. Revenue

The following table presents Total Operating Revenues disaggregated by asset class:


	Three Months Ended December 31,				Nine Months Ended December 31				Three Months Ended June 30,
	2019		2018		2019		2018		2020		2019
Equity	$	293,130	$	296,738	$	875,965	$	931,350	$	249,583	$	291,341
Fixed Income	299,121		275,559		873,687		855,343		277,380		282,911
Alternative	139,061		110,390		384,068		361,239		111,616		107,542
Liquidity	22,602		21,635		68,818		62,722		27,607		23,566
Total Operating Revenues	$	753,914	$	704,322	$	2,202,538	$	2,210,654	$	666,186	$	705,360

Revenues by geographic location are primarily based on the location of the advisor or domicile of fund families managed by Legg Mason and do not necessarily reflect where the customer resides or the currency in which the revenues are denominated. The following table presents Total Operating Revenues disaggregated by geographic location:


	Three Months Ended December 31,				Nine Months Ended December 31,				Three Months Ended June 30,
	2019		2018		2019		2018		2020		2019
United States	$	583,080	$	547,696	$	1,730,546	$	1,711,426	$	533,616	$	553,760
United Kingdom	56,264		35,142		121,303		111,739		31,391		32,010
Other International	114,570		121,484		350,689		387,489		101,179		119,590
Total Operating Revenues	$	753,914	$	704,322	$	2,202,538	$	2,210,654	$	666,186	$	705,360

Certain sales commissions paid in connection with obtaining assets managed in retail separately managed accounts are capitalized as deferred costs. As of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, capitalized sales commissions of ~~$8,565~~$9,115 and ~~$8,126,~~$8,954, respectively, were included in Other current assets and ~~$10,234~~$11,990 and ~~$10,147,~~$11,396, respectively, were included in Other non-current assets in the Consolidated Balance Sheets. Amortization related to capitalized sales commissions included in Compensation and benefits in the Consolidated Statements of Income ~~(Loss)~~ was ~~$2,417~~$2,606 and ~~$2,305~~$2,284 for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and 2018, respectively, and $7,050 and $6,964 for the nine months ended December 31, 2019 and 2018,~~ respectively. There were no impairment losses in relation to the capitalized costs during the three ~~or nine~~ months ended ~~December 31, 2019 or 2018.~~June 30, 2020 and 2019.

12. Earnings Per Share

The following table presents the computations of basic and diluted ~~earnings per share attributable to Legg Mason, Inc. shareholders ("EPS"):~~EPS:


	Three Months Ended December 31,					Nine Months Ended December 31,					Three Months Ended June 30,
	2019		2018			2019		2018			2020		2019
Basic weighted-average shares outstanding for EPS	86,878		85,537			86,666		85,381			89,823		86,297
Potential common shares:
Dilutive employee stock options	287		—			266		—			376		197
Diluted weighted-average shares outstanding for EPS	87,165		85,537			86,932		85,381			90,199		86,494

Net Income (Loss) Attributable to Legg Mason, Inc.	$	74,775	$	(216,888	)	$	187,208	$	(77,995	)
Net Income Attributable to Legg Mason, Inc.											$	49,422	$	45,350
Less: Earnings (distributed and undistributed) allocated to participating securities	2,428		1,049			6,138		3,190			904		1,510
Net Income (Loss) (Distributed and Undistributed) Allocated to Shareholders (Excluding Participating Securities)	$	72,347	$	(217,937	)	$	181,070	$	(81,185	)

Net Income (Loss) per share Attributable to Legg Mason, Inc. Shareholders
Net Income (Distributed and Undistributed) Allocated to Shareholders (Excluding Participating Securities)											$	48,518	$	43,840
Net Income per share Attributable to Legg Mason, Inc. Shareholders
Basic	$	0.83	$	(2.55	)	$	2.09	$	(0.95	)	$	0.54	$	0.51
Diluted	0.83		(2.55		)	2.08		(0.95		)	0.54		0.51

The weighted-average shares exclude weighted-average unvested restricted shares deemed to be participating securities of ~~2,935~~1,971 and ~~3,104~~ 2,852for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and~~ ~~2018, respectively, and 2,919 and 3,104 for the nine months ended December 31, 2019 and 2018,~~ respectively.

Options to purchase ~~1,860~~735 and ~~1,995~~2,464 shares for the three ~~and nine~~ months ended ~~December 31,~~June 30, 2020 and 2019, respectively, were not included in the computation of diluted EPS because the presumed proceeds from exercising such options, including the related unamortized expense, exceed the average price of the common shares for the period and, therefore, the options are deemed antidilutive.

The diluted EPS calculation for the three and nine months ended December 31, 2018, excludes 56 and 143 potential common shares from employee stock options, respectively, that are anti-dilutive due to the net loss in each period.

Further, market- and performance-based awards, such as those issued to Legg Mason executive officers, ~~or those issued in the acquisition of Clarion Partners,~~ are excluded from potential dilution until the designated market or performance condition is met.

13. Noncontrolling Interests

Net income attributable to noncontrolling interests included the following amounts:


	Three Months Ended December 31,				Nine Months Ended December 31,				Three months ended June 30,
	2019		2018		2019		2018		2020		2019
Net income attributable to redeemable noncontrolling interests	$	14,266	$	8,852	$	36,595	$	24,460	$	4,865	$	13,356
Net income attributable to nonredeemable noncontrolling interests	1,962		1,646		5,300		6,583		787		2,863
Total	$	16,228	$	10,498	$	41,895	$	31,043	$	5,652	$	16,219

The following tables present the changes in redeemable and nonredeemable noncontrolling interests:

Redeemable noncontrolling interests

Consolidated investment vehicles⁽¹⁾ and other
Affiliate
Noncontrolling interests Management equity plans Total
Nonredeemable noncontrolling interests⁽³⁾
Balance as of March 31, 2019 $ 103,630
$ 540,595
$ 48,151
$ 692,376
$ 29,784
Net income attributable to noncontrolling interests 9,006
27,589
—
36,595
5,300
Business acquisition 11,715
—
11,715
—
Net subscriptions (redemptions) (31,307 ) —
—
(31,307 ) —
Purchase of affiliate noncontrolling interest:

Payment (fair value portion) —
(8,789 ) —
(8,789 ) —
Change in redemption value —
(25,708 ) —
(25,708 ) —
Distributions —
(22,775 ) —
(22,775 ) (4,519 )
Foreign exchange —
(833 ) —
(833 ) —
Vesting/change in estimated redemption value —
3,095
13,984
17,079
—
Balance as of December 31, 2019 $ 81,329
$ 524,889
$ 62,135
$ 668,353

$ 30,565



	Redeemable noncontrolling interests
	Consolidated investment vehicles⁽¹⁾ and other			Affiliate
	Consolidated investment vehicles⁽¹⁾ and other			Noncontrolling interests			Management equity plans		Total			Nonredeemable noncontrolling interests⁽²⁾
Balance as of March 31, 2020	$	117,140		$	525,422		$	71,852	$	714,414		$	29,042
Net income attributable to noncontrolling interests	898			3,967			—		4,865			787
Subscriptions (redemptions), net	(95,233		)	5			—		(95,228		)	—
Distributions	—			(12,821		)	—		(12,821		)	(855		)
Foreign exchange	—			264			—		264			—
Vesting/change in estimated redemption value	—			1,805			37		1,842			—
Balance as of June 30, 2020	$	22,805		$	518,642		$	71,889	$	613,336		$	28,974


	Redeemable noncontrolling interests																			Redeemable noncontrolling interests
	Consolidated investment vehicles⁽¹⁾ and other				Affiliate															Consolidated investment vehicles⁽¹⁾ and other				Affiliate
				Noncontrolling interests				Management equity plans				Total				Nonredeemable noncontrolling interests⁽²⁾							Noncontrolling interests				Management equity plans			Total				Nonredeemable noncontrolling interests⁽²⁾
Balance as of March 31, 2018		$	125,047			$	573,950			$	33,298			$	732,295			$	27,731
Balance as of March 31, 2019																				$	103,630			$	540,595			$	48,151		$	692,376			$	29,784
Net income attributable to noncontrolling interests	1,036				23,424				—				24,460				6,583			6,477				6,879				—			13,356				2,863
Net subscriptions (redemptions)	(36,328		)		—				—				(36,328		)		—
Settlement of affiliate noncontrolling interest put:
Payment	—				(15,547		)		—				(15,547		)		—
Subscriptions (redemptions), net																				(6,906		)		—				—			(6,906		)		—
Business acquisition																				—				11,715				—			11,715				—
Purchase of affiliate noncontrolling interest put:																															—
Payment (fair value portion)																				—				(8,789		)		—			(8,789		)		—
Change in redemption value	—				(12,345		)		—				(12,345		)		—			—				(25,708		)		—			(25,708		)		—
Distributions	—				(25,538		)		—				(25,538		)		(6,820		)	—				(14,063		)		—			(14,063		)		(2,167		)
Foreign exchange	—				(5,009		)		—				(5,009		)		—			—				(837		)		—			(837		)		—
Vesting/change in estimated redemption value	—				1,037				13,925				14,962				—			—				801				2,812			3,613				—
Balance as of December 31, 2018	$	89,755			$	539,972			$	47,223			$	676,950			$	27,494
Balance as of June 30, 2019																				$	103,201			$	510,593			$	50,963		$	664,757			$	30,480

(1) Related to ~~variable interest entities ("VIEs")~~VIEs and seeded investment products.

(2) Related to Royce management equity plan.

The following tables present the changes in redeemable noncontrolling interests by affiliate (exclusive of management equity plans):

Redeemable noncontrolling interests
EnTrust Global Clarion Partners RARE Infrastructure Other Total
Balance as of March 31, 2019 $ 380,684

$ 123,502

$ 35,181

$ 1,228
$ 540,595
Net income (loss) attributable to noncontrolling interests 12,694
14,904
106
(115 ) 27,589
Business acquisition —
—
—
11,715
11,715
Purchase of affiliate noncontrolling interest:

Payment (fair value portion) —
—
(8,789 ) —
(8,789 )
Change in redemption value —
—
(25,708 ) —
(25,708 )
Distributions (9,892 ) (12,880 ) —
(3 ) (22,775 )
Foreign exchange —
—
(790 ) (43 ) (833 )
Change in estimated redemption value —
3,095
—
—
3,095
Balance as of December 31, 2019 $ 383,486
$ 128,621

$ —
$ 12,782
$ 524,889



	Redeemable noncontrolling interests
	EnTrust Global			Clarion Partners			Other		Total
Balance as of March 31, 2020	$	379,090		$	133,610		$	12,722	$	525,422
Net income (loss) attributable to noncontrolling interests	(1,177		)	5,086			58		3,967
Subscriptions (redemptions), net	—			—			5		5
Distributions	(1,966		)	(10,855		)	—		(12,821		)
Foreign exchange	—			—			264		264
Change in estimated redemption value	—			1,805			—		1,805
Balance as of June 30, 2020	$	375,947		$	129,646		$	13,049	$	518,642

Redeemable noncontrolling interests
EnTrust Global Clarion Partners RARE Infrastructure Other Total
Balance as of March 31, 2018 $ 386,884
$ 117,272
$ 68,285
$ 1,509
$ 573,950
Net income (loss) attributable to noncontrolling interests 9,752
12,460
1,417
(205 ) 23,424
Distributions (13,475 ) (10,359 ) (1,693 ) (11 ) (25,538 )
Settlement of affiliate noncontrolling interest put:

Payment —
—
(15,547 ) (15,547 )
Change in redemption value —
—
(12,345 ) (12,345 )
Foreign exchange —
—
(5,009 ) —
(5,009 )
Change in estimated redemption value —
1,037
—
—
1,037
Balance as of December 31, 2018 $ 383,161
$ 120,410
$ 35,108
$ 1,293
$ 539,972



	Redeemable noncontrolling interests
	EnTrust Global			Clarion Partners			RARE Infrastructure			Other			Total
Balance as of March 31, 2019	$	380,684		$	123,502		$	35,181		$	1,228		$	540,595
Net income (loss) attributable to noncontrolling interests	2,884			4,118			106			(229		)	6,879
Business acquisition	—			—			—			11,715			11,715
Distributions	(3,407		)	(10,656		)	—			—			(14,063		)
Purchase of affiliate noncontrolling interest:
Payment (fair value portion)	—			—			(8,789		)	—			(8,789		)
Change in redemption value	—			—			(25,708		)	—			(25,708		)
Foreign exchange	—			—			(790		)	(47		)	(837		)
Change in estimated redemption value	—			801			—			—			801
Balance as of June 30, 2019	$	380,161		$	117,765		$	—		$	12,667		$	510,593

Redeemable noncontrolling interests of 35% of the outstanding equity of EnTrust Global and 18% of the outstanding equity of Clarion Partners can be put by the holders or called by Legg Mason for settlement at fair value subject to various conditions, including the passage of time. The amounts for noncontrolling interests, if reported at fair value in the Consolidated Balance Sheets, reflect the total business enterprise value of the combined entity, after appropriate discounts for lack of marketability and control.

On May 10, 2019, Legg Mason purchased the 15% equity interest in RARE Infrastructure held by the firm's management team for total consideration of $21,988. The initial cash payment of $11,967, which included related dividends in arrears of $1,759, was paid on May 10, 2019. ~~The~~One-half of the remaining balance was paid in May 2020 and the remaining one-half will be due ~~50% one year after closing and 50% two years after closing,~~in May 2021, subject to certain conditions. The $11,440 difference between the fair value of the noncontrolling interest on the settlement date and the total consideration due (excluding dividends in arrears) was recorded as Compensation and benefits in the ~~three months~~year ended ~~June 30, 2019.~~March 31, 2020. The $25,708 difference between the fair value and the carrying value of the noncontrolling interest of $34,497 on the settlement date was recorded as an increase to additional paid in capital. This purchase was part of Legg Mason's strategic restructuring, as further discussed in Note 15, to pursue operational efficiencies between RARE Infrastructure and ClearBridge intended to reduce costs and enhance growth opportunities for both of the businesses.

On July 2, 2018, the corporate minority owner of RARE Infrastructure exercised the put option for its 10% ownership interest. The settlement value of $15,547 was based on the midpoint of the valuations determined by the independent valuation experts appointed by Legg Mason and the corporate minority owner and was paid on October 10, 2018, along with $981 of dividends in arrears. The $12,345 difference between the settlement value and the carrying value of the noncontrolling interest of $27,892 on the settlement date was recorded as an increase to additional paid in capital.

14. Derivatives and Hedging

Legg Mason uses currency forwards to economically hedge the risk of movements in exchange rates, primarily between the U.S. dollar, British pound, Australian dollar, Singapore dollar, Japanese yen, and euro. All derivative transactions for which Legg Mason has certain legally enforceable rights of setoff are governed by International Swaps and Derivative Association ("ISDA") Master Agreements. For these derivative transactions, Legg Mason has one ISDA Master Agreement with each of the significant counterparties, which covers transactions with that counterparty. Each of the respective ISDA agreements provides for legally enforceable settlement netting and close-out netting between Legg Mason and that counterparty. Other assets recorded in the Consolidated Balance Sheets as of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, were ~~$3,074~~$4,173 and ~~$4,183,~~$4,716, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, were ~~$1,362~~$1,557 and ~~$7,579,~~$13,872, respectively.

Legg Mason also uses market hedges on certain seed capital investments by entering into futures contracts to sell index funds and treasuries that benchmark the hedged seed capital investments and has entered into total return swap arrangements with respect to certain Legg Mason sponsored ETFs, as further discussed below.

Legg Mason has not designated any derivatives as hedging instruments for accounting purposes during the periods ended ~~December 31, 2019,~~June 30, 2020, March 31, ~~2019,~~2020 or ~~December 31, 2018.~~June 30, 2019. As of ~~December 31, 2019,~~June 30, 2020, Legg Mason had open currency forward contracts with aggregate notional amounts totaling ~~$323,654,~~$309,365, and open futures contracts relating to seed capital investments with aggregate notional amounts totaling ~~$95,910.~~$85,122. With the exception of the total return swap arrangement discussed below, these amounts are representative of the level of non-hedge designation derivative activity throughout the three months ended June 30, 2020 and 2019. As of ~~December 31, 2019,~~June 30, 2020, the weighted-average remaining contract terms for currency forward contracts was seven months and for futures contracts relating to seed capital investments was three months.

Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to certain Legg Mason sponsored ETFs, which resulted in investments by each of the financial intermediaries in the respective ETF. Under the terms of each of the total return swap arrangements, Legg Mason receives the related investment gains and losses on the underlying shares of the ETF and pays a floating rate on the value of the underlying shares. Each of the total return swap arrangements allows either party to terminate all or part of the arrangement and provides for automatic termination upon occurrence of certain events. Each financial intermediary counterparty may hedge its total return swap position through an investment in the ETF and the financial intermediaries purchased interests in the related Legg Mason ETF on the date of the transactions. The aggregate notional amount for the ~~two~~ total return ~~swaps~~swap outstanding as of ~~December 31, 2019~~June 30, 2020 was ~~$34,907,~~$1,505, with a weighted-average remaining contract term of ~~five~~seven months. The floating rate paid on the value of the underlying securities for ~~all~~the total return swap ~~arrangements~~arrangement outstanding as of ~~December 31, 2019~~June 30, 2020 was three-month LIBOR plus 1.6%.

In connection with the total return swap arrangements, Legg Mason executed futures contracts with notional amounts totaling $7,916 as of December 31, 2019 to partially hedge the gains and losses recognized on the total return swaps. These contracts had a weighted-average remaining contract term of three months.

~~The amounts above are representative of the level of non-hedge designation derivative activity throughout the three and nine months ended December 31, 2019 and 2018.~~

As further discussed in Note 16, the total return swap arrangements create variable interests in the underlying funds for Legg Mason, and, if significant, Legg Mason is deemed to be the primary beneficiary. Accordingly, Legg Mason may consolidate ETF products with significant open total return swap arrangements.

The following table presents the derivative assets and related offsets, if any:


									Gross Amounts Not Offset in the Balance Sheet
		Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet			Net Amount of Derivative Assets Presented in the Balance Sheet		Financial Instruments		Cash Collateral		Net Amount as of December 31, 2019										Gross Amounts Not Offset in the Balance Sheet
																Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet			Net Amount of Derivative Assets Presented in the Balance Sheet		Financial Instruments		Cash Collateral		Net Amount as of June 30, 2020
Derivative instruments not designated as hedging instruments	Derivative instruments not designated as hedging instruments														Derivative instruments not designated as hedging instruments
Currency forward contracts		$	4,092	$	(1,310	)	$	2,782	$	—	$	—	$	2,782		$	6,282	$	(2,607	)	$	3,675	$	—	$	—	$	3,675
Futures contracts relating to seed capital investments																—		—			—		338		2,632		2,970
Total return swaps		—		—			—		292		961		1,253			—		—			—		160		120		280
Total derivative instruments not designated as hedging instruments		$	4,092	$	(1,310	)	$	2,782	$	292	$	961	$	4,035		$	6,282	$	(2,607	)	$	3,675	$	498	$	2,752	$	6,925

The following table presents the derivative liabilities and related offsets, if any:

Gross Amounts Not Offset in the Balance Sheet
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Balance Sheet Net Amount of Derivative Liabilities Presented in the Balance Sheet Financial Instruments Cash Collateral
Net Amount
as of
December 31, 2019

Derivative instruments not designated as hedging instruments
Currency forward contracts $ (1,426 ) $ 986
$ (440 ) $ —
$ —
$ (440 )
Futures contracts relating to:
Seed capital investments —
—
—
(801 ) 4,809
4,008
Total return swaps —
—
—
(49 ) 366
317
Total future contracts —
—
—
(850 )
5,175
4,325
Total return swaps (72 ) 890
818
Total derivative instruments not designated as hedging instruments $ (1,426 ) $ 986
$ (440 ) $ (922 ) $ 6,065
$ 4,703



									Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet			Net Amount of Derivative Liabilities Presented in the Balance Sheet			Financial Instruments			Cash Collateral		Net Amount as of June 30, 2020
Derivative instruments not designated as hedging instruments
Currency forward contracts	$	497	$	(1,574	)	$	(1,077	)	$	—		$	—	$	(1,077	)
Futures contracts relating to seed capital investments	—		—			—			(480		)	4,944		4,464
Total derivative instruments not designated as hedging instruments	$	497	$	(1,574	)	$	(1,077	)	$	(480	)	$	4,944	$	3,387

The following table presents the derivative assets and related offsets, if any:


									Gross Amounts Not Offset in the Balance Sheet
		Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet			Net Amount of Derivative Assets Presented in the Balance Sheet		Financial Instruments		Cash Collateral		Net amount as of March 31, 2019										Gross Amounts Not Offset in the Balance Sheet
																Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet			Net Amount of Derivative Assets Presented in the Balance Sheet		Financial Instruments		Cash Collateral		Net amount as of March 31, 2020
Derivative instruments not designated as hedging instruments	Derivative instruments not designated as hedging instruments														Derivative instruments not designated as hedging instruments
Currency forward contracts		$	3,997	$	(1,874	)	$	2,123	$	—	$	—	$	2,123		$	4,493	$	(1,709	)	$	2,784	$	—	$	—	$	2,784
Futures contracts relating to:															Futures contracts relating to:
Seed capital investments																—		—			—		1,802		2,206		4,008
Total return swaps		—		—			—		2,060		2,310		4,370			—		—			—		130		158		288
Total futures contracts																—		—			—		1,932		2,364		4,296
Total derivative instruments not designated as hedging instruments		$	3,997	$	(1,874	)	$	2,123	$	2,060	$	2,310	$	6,493		$	4,493	$	(1,709	)	$	2,784	$	1,932	$	2,364	$	7,080

The following table presents the derivative liabilities and related offsets, if any:


										Gross Amounts Not Offset in the Balance Sheet																	Gross Amounts Not Offset in the Balance Sheet
		Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Balance Sheet		Net Amount of Derivative Liabilities Presented in the Balance Sheet			Financial Instruments			Cash Collateral		Net amount as of March 31, 2019				Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Balance Sheet		Net Amount of Derivative Liabilities Presented in the Balance Sheet			Financial Instruments			Cash Collateral		Net amount as of March 31, 2020

Derivative instruments not designated as hedging instruments	Derivative instruments not designated as hedging instruments																	Derivative instruments not designated as hedging instruments
Currency forward contracts		$	(7,465	)	$	2,094	$	(5,371	)	$	—		$	—	$	(5,371	)		$	(11,482	)	$	4,368	$	(7,114	)	$	—		$	—	$	(7,114	)
Futures contracts relating to:
Seed capital investments		—			—		—			(1,798		)	7,640		5,842				—			—		—			(3,203		)	7,326		4,123
Total return swaps		—			—		—			(410		)	1,104		694				—			—		—			(360		)	754		394
Total futures contracts		—			—		—			(2,208		)	8,744		6,536				—			—		—			(3,563		)	8,080		4,517
Total return swaps																			—			—		—			(3,195		)	4,125		930
Total derivative instruments not designated as hedging instruments		$	(7,465	)	$	2,094	$	(5,371	)	$	(2,208	)	$	8,744	$	1,165			$	(11,482	)	$	4,368	$	(7,114	)	$	(6,758	)	$	12,205	$	(1,667	)

The following table presents gains (losses) recognized in the Consolidated Statements of Income ~~(Loss)~~ on derivative instruments. As described above, the currency forward contracts and futures and forward contracts for seed capital investments included below are economic hedges of interest rate and market risk of certain operating and investing activities of Legg Mason.

Three Months Ended December 31,
2019 2018
Income Statement Classification Gains Losses Gains Losses
Derivatives not designated as hedging instruments
Currency forward contracts relating to:
Operating activities Other expense $ 10,325
$ (4,293 ) $ 3,110
$ (5,587 )
Seed capital investments Other non-operating income (expense) 651
(2,219 ) 1,503
(1,116 )
Futures contracts relating to:
Seed capital investments Other non-operating income (expense) —
(7,351 ) 16,520
(1 )
Total return swaps Other non-operating income (expense) 31
(563 ) 3,121
(467 )
Total return swaps Other non-operating income (expense) 384
(73 ) 203
(832 )
Total gain (loss) from derivatives not designated as hedging instruments $ 11,391
$ (14,499 ) $ 24,457
$ (8,003 )


			Nine Months Ended December 31,												Three months ended June 30,
			2019					2018							2020					2019
		Income Statement Classification	Gains		Losses			Gains		Losses				Income Statement Classification	Gains		Losses			Gains		Losses
Derivatives not designated as hedging instruments	Derivatives not designated as hedging instruments												Derivatives not designated as hedging instruments
Currency forward contracts relating to:	Currency forward contracts relating to:												Currency forward contracts relating to:
Operating activities		Other expense	$	7,813	$	(8,257	)	$	9,369	$	(19,366	)		Other expense	$	9,260	$	(2,278	)	$	3,639	$	(5,484	)
Seed capital investments		Other non-operating income (expense)	2,356		(1,233		)	5,523		(788		)		Other non-operating income (expense)	1,570		(2,909		)	725		(564		)
Futures contracts relating to:	Futures contracts relating to:												Futures contracts relating to:
Seed capital investments		Other non-operating income (expense)	398		(11,223		)	19,224		(7,066		)		Other non-operating income (expense)	337		(13,789		)	311		(3,966		)
Total return swaps		Other non-operating income (expense)	84		(1,441		)	3,425		(3,418		)		Other non-operating income (expense)	—		(1,962		)	1		(803		)
Total return swaps		Other non-operating income (expense)	1,885		—			1,869		(938		)		Other non-operating income (expense)	1,672		—			1,249		—
Total gain (loss) from derivatives not designated as hedging instruments	Total gain (loss) from derivatives not designated as hedging instruments		$	12,536	$	(22,154	)	$	39,410	$	(31,576	)	Total gain (loss) from derivatives not designated as hedging instruments		$	12,839	$	(20,938	)	$	5,925	$	(10,817	)

15. Strategic Restructuring

In fiscal 2019, Legg Mason initiated a strategic restructuring to reduce costs, which ~~includes~~included corporate and distribution functions, as well as efficiency initiatives at certain smaller affiliates that operate outside of revenue-sharing arrangements. The strategic restructuring ~~is expected to be~~was substantially complete ~~by the end~~as of ~~fiscal 2021.~~June 30, 2020.

This plan ~~involves~~involved restructuring costs beginning January 1, 2019, which ~~are~~were primarily comprised of employee termination benefits and retention incentives expensed over identified transition periods. The restructuring costs also ~~include~~included charges for consolidating leased office space and other costs, including professional fees. Legg Mason ~~expects to incur total~~incurred cumulative strategic restructuring costs ~~in the range~~through June 30, 2020 of ~~$125,000 to $135,000 through March 2021 that are expected to result in future cost savings. Cumulative strategic restructuring costs incurred through December 31, 2019 were $76,649,~~$88,408, including ~~$18,474 and $67,297~~$8,022 incurred during the three ~~and nine~~ months ended ~~December 31, 2019.~~June 30, 2020. Any additional charges related to the strategic restructuring are not expected to be material.

The table below presents a summary of changes in the strategic restructuring liability from January 1, 2019 through ~~December 31, 2019,~~June 30, 2020, and cumulative charges incurred to date:


	Compensation and benefits			Occupancy			Other			Total			Compensation and benefits			Occupancy			Other			Total
Balance as of January 1, 2019	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Accrued charges	—			2,090			6,504			8,594			—			2,090			6,504			8,594
Balance as of March 31, 2019	—			2,090			6,504			8,594			—			2,090			6,504			8,594
Accrued charges	40,860			4,427			8,059			53,346			44,919			4,426			7,887			57,232
Payments	(7,992		)	(289		)	(9,886		)	(18,167		)	(28,955		)	(622		)	(13,506		)	(43,083		)
Balance as of December 31, 2019	$	32,868		$	6,228		$	4,677		$	43,773
Balance as of March 31, 2020													15,964			5,894			885			22,743
Accrued charges													858			3,681			474			5,013
Payments													(11,470		)	(334		)	(1,140		)	(12,944		)
Balance as of June 30, 2020													$	5,352		$	9,241		$	219		$	14,812
Non-cash charges⁽¹⁾
Three months ended March 31, 2019	$	—		$	758		$	—		$	758		$	—		$	758		$	—		$	758
Nine months ended December 31, 2019	12,448			1,503			—			13,951
Year ended March 31, 2020													12,325			1,477			—			13,802
Three months ended June 30, 2020													269			2,740			—			3,009
Total	$	12,448		$	2,261		$	—		$	14,709		$	12,594		$	4,975		$	—		$	17,569
Cumulative charges incurred through December 31, 2019	$	53,308		$	8,778		$	14,563		$	76,649
Cumulative charges incurred through June 30, 2020													$	58,371		$	15,172		$	14,865		$	88,408

(1) Includes stock-based compensation expense and accelerated fixed asset depreciation.

~~The estimates for the remaining~~In addition to strategic restructuring charges of $8,022, during the three months ended June 30, 2020, Legg Mason also incurred merger related costs ~~expected to be incurred through fiscal 2021 are as follows:~~

Minimum Maximum
Compensation and benefits $ 12,000
$ 17,000
Occupancy 16,000
18,000
Other costs 20,000
23,000
Total $ 48,000
$ 58,000
of $22,910, primarily for proxy solicitation and professional fees.

~~While management expects the total estimated costs to be within the range disclosed, the ultimate nature and timing of the costs may differ from those presented above.~~

16. Variable Interest Entities and Consolidated Investment Vehicles

In accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment products, some of which are designated as CIVs. As presented in the table below, Legg Mason concluded it was the primary beneficiary of certain VIEs because it held significant financial interests in the funds. In addition, Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to certain Legg Mason sponsored ETFs. Under the terms of the total return swaps, Legg Mason absorbs all of the related gains and losses on the underlying ETF investments of these financial intermediaries, and therefore has variable interests in ETFs with open total return swap arrangements and, if significant, Legg Mason is deemed to be the primary beneficiary of such ETFs. Because it was determined to be the primary beneficiary of these VIEs, Legg Mason consolidated and designated the following funds as CIVs in the Consolidated Balance Sheets as of:


	December 31, 2019			March 31, 2019			December 31, 2018			June 30, 2020			March 31, 2020			June 30, 2019
	Number of Consolidated Funds	Legg Mason Investment in Funds⁽¹⁾		Number of Consolidated Funds	Legg Mason Investment in Funds⁽¹⁾		Number of Consolidated Funds	Legg Mason Investment in Funds⁽¹⁾		Number of Consolidated Funds	Legg Mason Investment in Funds⁽¹⁾		Number of Consolidated Funds	Legg Mason Investment in Funds⁽¹⁾		Number of Consolidated Funds	Legg Mason Investment in Funds⁽¹⁾
Sponsored investment partnerships	2	$	9,419	2	$	11,671	2	$	12,863	—	$	—	2	$	1,690	2	$	11,224
Trust structure foreign mutual funds	6	21,669		7	23,005		8	49,251		5	15,806		5	19,303		7	25,966
Employee trust structure funds	1	4,564		2	6,215		2	6,963		—	—		1	5,188		1	4,544
ETFs⁽²⁾	2	2,764		3	2,821		2	2,487		1	491		2	2,216		3	2,874
Total	11	$	38,416	14	$	43,712	14	$	71,564	6	$	16,297	10	$	28,397	13	$	44,608

(1) Represents Legg Mason's maximum risk of loss, excluding uncollected advisory fees.


(2)	Under the total return swap arrangements, Legg Mason receives the related investment gains and losses on investments in ~~two~~one of Legg Mason's ETFs with notional amounts totaling ~~$34,907~~$1,505 as of ~~December 31, 2019.~~June 30, 2020. See Note 14 for additional information regarding total return swaps.

The assets of these CIVs are primarily comprised of investment ~~securities and as of March 31, 2019, the liabilities of these CIVs were primarily comprised of payables for purchased~~ securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its investment in these funds.

Legg Mason also consolidates certain ~~voting rights entities ("VRE")~~VRE products with seed capital investments where Legg Mason maintains a controlling financial interest in the product. As of ~~December 31, 2019,~~June 30, 2020, March 31, ~~2019~~2020, and ~~December 31, 2018,~~June 30, 2019, Legg Mason consolidated ~~four, five,~~3, 4, and ~~seven~~4 VRE products with seed capital investments totaling ~~$39,130, $24,924,~~$49,791, $41,774, and ~~$29,355,~~$20,548, respectively.

The financial information of certain consolidated investment products is included in Legg Mason's consolidated financial statements on a lag basis of up to three months based on the availability of the investment products' financial information. As of June 30, 2020, Legg Mason was the primary beneficiary of a sponsored collateralized loan obligation entity ("CLO") VIE which, based upon the availability of the related financial information, will be included in Legg Mason's consolidated financial statements beginning in the second quarter of fiscal 2021. Legg Mason invested $5,000 in the CLO’s $37,300 equity tranche on June 23, 2020, and as of June 30, 2020, the CLO’s assets (cash and cash equivalents and corporate loans) and liabilities (payables and notes payable) each aggregated $563,600.

The following tables reflect the impact of CIVs and other consolidated sponsored investment products in the Consolidated Balance Sheets and the Consolidated Statements of ~~Income (Loss):~~Income:

Consolidating Balance Sheets


	December 31, 2019									March 31, 2019									June 30, 2020									March 31, 2020
	Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Reclassifications & Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Reclassifications & Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Reclassifications & Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾		Reclassifications & Eliminations			Consolidated Totals
Current Assets	$	1,896,010	$	117,167	$	(37,245	)	$	1,975,932	$	1,916,485	$	144,091	$	(40,720	)	$	2,019,856	$	1,940,093	$	38,396	$	(16,297	)	$	1,962,192	$	1,942,583	$	131,869	$	(34,828	)	$	2,039,624
Non-current assets	6,061,015		3,942		(1,171		)	6,063,786		5,768,265		8,993		(2,992		)	5,774,266		5,954,266		979		—			5,955,245		5,945,353		22,313		(1,170		)	5,966,496
Total Assets	$	7,957,025	$	121,109	$	(38,416	)	$	8,039,718	$	7,684,750	$	153,084	$	(43,712	)	$	7,794,122	$	7,894,359	$	39,375	$	(16,297	)	$	7,917,437	$	7,887,936	$	154,182	$	(35,998	)	$	8,006,120
Current Liabilities	$	929,495	$	1,364	$	—		$	930,859	$	1,104,002	$	5,742	$	—		$	1,109,744	$	865,237	$	273	$	—		$	865,510	$	925,013	$	1,044	$	—		$	926,057
Non-current liabilities	2,605,229		—		—			2,605,229		2,302,463		—		—			2,302,463		2,543,269		—		—			2,543,269		2,543,968		—		—			2,543,968
Total Liabilities	3,534,724		1,364		—			3,536,088		3,406,465		5,742		—			3,412,207		3,408,506		273		—			3,408,779		3,468,981		1,044		—			3,470,025
Redeemable Non-controlling interests	587,024		—		81,329			668,353		588,746		—		103,630			692,376		590,531		—		22,805			613,336		597,274		—		117,140			714,414
Total Stockholders’ Equity	3,835,277		119,745		(119,745		)	3,835,277		3,689,539		147,342		(147,342		)	3,689,539
Total Stock-holders’ Equity																			3,895,322		39,102		(39,102		)	3,895,322		3,821,681		153,138		(153,138		)	3,821,681
Total Liabilities and Equity	$	7,957,025	$	121,109	$	(38,416	)	$	8,039,718	$	7,684,750	$	153,084	$	(43,712	)	$	7,794,122	$	7,894,359	$	39,375	$	(16,297	)	$	7,917,437	$	7,887,936	$	154,182	$	(35,998	)	$	8,006,120


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

Consolidating Statements of Income ~~(Loss)~~



$	51,439



	June 30, 2020										June 30, 2019
	Balance Before Consolidation of CIVs and Other⁽¹⁾		CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs and Other⁽¹⁾			CIVs and Other⁽¹⁾			Eliminations			Consolidated Totals
Total Operating Revenues	$	666,232	$	—		$	(46	)	$	666,186	$	705,485		$	—		$	(125	)	$	705,360
Total Operating Expenses	598,565		(6		)	(81		)	598,478		621,291			350			(216		)	621,425
Operating Income (Loss)	67,667		6			35			67,708		84,194			(350		)	91			83,935
Total Non-Operating Income (Expense)	439		(1,687		)	2,544			1,296		(11,054		)	10,085			(3,349		)	(4,318		)
Income (Loss) Before Income Tax Provision	68,106		(1,681		)	2,579			69,004		73,140			9,735			(3,258		)	79,617
Income tax provision	13,930		—			—			13,930		18,048			—			—			18,048
Net Income	54,176		(1,681		)	2,579			55,074		55,092			9,735			(3,258		)	61,569
Less: Net income attributable to noncontrolling interests	4,754		472			426			5,652		9,742			524			5,953			16,219
Net Income Attributable to Legg Mason, Inc.	$	49,422	$	(2,153	)	$	2,153		$	49,422	$	45,350		$	9,211		$	(9,211	)	$	45,350

Three Months Ended
December 31, 2019 December 31, 2018

Balance Before
Consolidation of CIVs and Other⁽¹⁾

CIVs and Other⁽¹⁾
Eliminations Consolidated Totals
Balance Before
Consolidation of CIVs and Other⁽¹⁾

CIVs and Other⁽¹⁾
Eliminations Consolidated Totals
Total Operating Revenues $ 753,983
$ —
$ (69 ) $ 753,914
$ 704,477
$ —
$ (155 ) $ 704,322
Total Operating Expenses 623,817
166
(63 ) 623,920
940,561
308
(120 ) 940,749
Operating Income (Loss) 130,166

(166 )
(6 ) 129,994
(236,084 ) (308 ) (35 ) (236,427 )
Total Non-Operating Income (Expense) (7,300 ) 569
1,404
(5,327 ) (32,158 ) 2,612
(771 ) (30,317 )
Income (Loss) Before Income Tax Provision (Benefit) 122,866

403

1,398
124,667
(268,242 ) 2,304
(806 ) (266,744 )
Income tax provision (benefit) 33,664
—
—
33,664
(60,354 ) —
—
(60,354 )
Net Income (Loss) 89,202

403

1,398
91,003
(207,888 ) 2,304
(806 ) (206,390 )
Less: Net income (loss) attributable to noncontrolling interests 14,427
(245 ) 2,046
16,228
9,000
242
1,256
10,498
Net Income (Loss) Attributable to Legg Mason, Inc. $ 74,775

$ 648

$ (648 ) $ 74,775
$ (216,888 ) $ 2,062
$ (2,062 ) $ (216,888 )

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

Nine Months Ended
December 31, 2019 December 31, 2018

Balance Before
Consolidation of CIVs and Other⁽¹⁾

CIVs and Other⁽¹⁾
Eliminations Consolidated Totals
Balance Before
Consolidation of CIVs and Other⁽¹⁾

CIVs and Other⁽¹⁾
Eliminations Consolidated Totals
Total Operating Revenues $ 2,202,888
$ —
$ (350 ) $ 2,202,538
$ 2,211,115
$ —
$ (461 ) $ 2,210,654
Total Operating Expenses 1,862,253
1,292
87
1,863,632
2,184,807
1,386
(516 ) 2,185,677
Operating Income (Loss) 340,635
(1,292 ) (437 ) 338,906
26,308
(1,386 ) 55
24,977
Total Non-Operating Income (Expense) (40,072 ) 15,625
(4,890 ) (29,337 ) (74,131 ) 2,070
297
(71,764 )
Income (Loss) Before Income Tax Provision 300,563
14,333
(5,327 ) 309,569
(47,823 ) 684
352
(46,787 )
Income tax provision 80,466
—
—
80,466
165
—
—
165
Net Income (Loss) 220,097
14,333
(5,327 ) 229,103
(47,988 ) 684
352
(46,952 )
Less: Net income (loss) attributable to noncontrolling interests 32,889
721
8,285
41,895
30,007
115
921
31,043
Net Income (Loss) Attributable to Legg Mason, Inc. $ 187,208
$ 13,612
$ (13,612 ) $ 187,208
$ (77,995 ) $ 569
$ (569 ) $ (77,995 )

Non-Operating Income (Expense) of CIVs and Other includes interest income, interest expense, and net gains (losses) on investments.

The consolidation of CIVs has no impact on Net Income (Loss) Attributable to Legg Mason, Inc.

As of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, financial assets of CIVs carried at fair value totaling ~~$78,957~~$26,337 and ~~$70,197,~~$93,648, respectively, were valued using Level 1 inputs, ~~$25,536~~$7,474 and ~~$55,182,~~$23,118, respectively, were valued using Level 2 inputs, and ~~$3,619 and $12,547, respectively,~~as of March 31, 2020, $2,029 were valued using NAV as a practical expedient. ~~As of March 31, 2019, financial liabilities of CIVs carried at fair value of $4,217 were valued using Level 2 inputs.~~

~~There were no transfers between Level 1 and Level 2 assets or liabilities during the three and nine months ended~~ ~~December 31, 2019~~ ~~and~~ ~~2018~~.

The NAVs used as a practical expedient by CIVs have been provided by the investees and have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes the nature of these investments and any related liquidation restrictions or other factors, which may impact the ultimate value realized:

Fair Value Determined Using NAV As of December 31, 2019
Category of Investment Investment Strategy December 31, 2019 March 31, 2019 Unfunded Commitments Remaining Term
Hedge funds Global macro, fixed income, long/short equity, systematic, emerging market, U.S. and European hedge $ 3,619
⁽¹⁾
$ 12,547
n/a n/a

~~n/a - not applicable~~


~~(1)~~	~~Redemption restrictions: 22% monthly redemption; 77% quarterly redemption; and 1% are subject to three to five-year lock-up or side pocket provisions.~~

Legg Mason's carrying value and maximum risk of loss for VIEs in which Legg Mason holds a variable interest, but for which it was not the primary beneficiary, were as follows:


	As of December 31, 2019				As of March 31, 2019				As of June 30, 2020				As of March 31, 2020
	Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾		Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾		Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾		Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾
Real Estate Investment Trusts	$	12,312	$	14,052	$	10,812	$	15,241	$	2,922	$	5,442	$	2,922	$	5,442
Other investment funds	31,090		49,646		25,155		45,897		39,102		40,886		33,365		52,230
Total	$	43,402	$	63,698	$	35,967	$	61,138	$	42,024	$	46,328	$	36,287	$	57,672


(1)	Amounts are related to investments in proprietary and other fund products.


(2)	Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.

The Company's total AUM of unconsolidated VIEs was ~~$29,677,965~~$26,304,649 and ~~$29,025,764~~$31,325,927 as of ~~December 31, 2019~~June 30, 2020 and March 31, ~~2019,~~2020, respectively.

The assets of these VIEs are primarily comprised of cash and cash equivalents and investment securities, and the liabilities are primarily comprised of various expense accruals. These VIEs were not consolidated because Legg Mason does not have both the power to direct significant economic activities of the entity and rights/obligations associated with benefits/losses that could be significant to the entity.

17. Subsequent Events

On July 17, 2020, Franklin Templeton and Legg Mason announced that all conditions to the closing of the Merger were satisfied. The closing will take effect at the end of the day on July 31, 2020, the date this Report is being filed.

On July 21, 2020, Legg Mason used existing cash resources to repay the total $250,000 of borrowings outstanding under the Credit Agreement.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that involve substantial risks or uncertainties. Forward-looking statements are typically identified by words or phrases such as “achieve,” “anticipate,” “assume,” “believe,” “continue,” “current,” “estimate,” “expect,” “intention,” “maintain,” “opportunity,” “position,” “potential,” “projection,” “remain,” “seek,” “sustain,” “trend” and similar expressions, or future or conditional verbs such as “could,” “may,” “should,” "will," "would" and similar expressions. Forward-looking statements are based on our current expectations and beliefs, and involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance and achievements and the timing of certain events to differ materially from the results, performance, achievements or timing discussed, projected, anticipated or indicated in any forward-looking statement. Such risks, uncertainties and other factors include, among others, information or anticipated information relating to: our expectations regarding financial market conditions, including interest rate volatility, future investment performance of our affiliates, and future net client cash flows; the performance of our business, including revenues, net income, earnings per share, dividends, investments, capital expenditures, and other conditions; our expense levels; changes in our business or in the amount or composition of our client assets under management ("AUM"); the expected effects of acquisitions and other transactions, including the proposed merger between Legg Mason and Franklin Resources, Inc. ("Franklin Templeton"), and their effect on our business; changes in tax regulations and rates, including the effect on our estimated effective income tax rate; the expected costs and benefits of our ongoing strategic restructuring; and other regulatory or legislative changes.

Actual results may differ materially from those expressed in forward-looking information as a result of various factors, some of which are beyond our control, including, but not limited to, the foregoing factors as well as those discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended March 31, ~~2019.~~2020. Due to such risks, uncertainties and other factors, we caution each person receiving such forward-looking information not to place undue reliance on such statements. Further, forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date of any such statement or to reflect the occurrence of unanticipated events.

Executive Overview

Legg Mason, Inc. is a global asset management firm that operates through nine independent asset management subsidiaries (collectively with its subsidiaries, “Legg Mason”). We help investors globally to achieve better financial outcomes by expanding choice across investment strategies, vehicles and investor access through independent asset managers with diverse expertise in equity, fixed income, alternative and liquidity investments. Acting through our independent investment managers, which we often refer to as our affiliates, we deliver our investment capabilities through varied products and vehicles and via multiple points of access, including directly and through various financial intermediaries. Our investment advisory services include discretionary and non-discretionary management of separate investment accounts in numerous investment styles for institutional and individual investors. Our investment products include proprietary mutual funds ranging from money market and other liquidity products to fixed income, equity and alternative funds managed in a wide variety of investment styles. We also offer other domestic and offshore funds to both retail and institutional investors, privately placed real estate funds, hedge funds and funds-of-hedge funds. Our centralized global distribution group, Legg Mason Global Distribution, markets, distributes and supports our investment products.

Our operations are principally in the U.S. and the U.K. and we also have offices in Australia, Brazil, Canada, Chile, China, Dubai, France, Germany, Ireland, Italy, Japan, Singapore, Spain, Switzerland and Taiwan. Terms such as "we," "us," "our," and "Company" refer to Legg Mason.

Merger Agreement for Acquisition by Franklin Resources, Inc.

On February 17, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Franklin Resources, Inc. ("Franklin Templeton") and Alpha Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of Franklin Templeton, pursuant to which Legg Mason, Inc. will be merged into Merger Sub (the "Merger"), with the Company continuing as the surviving corporation and a wholly owned subsidiary of Franklin Templeton.

Pursuant to the Merger Agreement, each outstanding share of common stock of the Company will be converted into the right to receive from Franklin Templeton $50.00 in cash. All conditions to the closing of the Merger have been satisfied and the closing will take effect at the end of the day on July 31, 2020, the date this Report is being filed.

Refer to the definitive proxy statement of the Company and Franklin Templeton, as filed by the Company with the U.S. Securities and Exchange Commission on April 16, 2020, for additional information on the Merger.

Business Overview

The financial services business in which we are engaged is extremely competitive. Our competition includes numerous global, national, regional and local asset management firms, commercial banks, insurance companies, and other financial services companies. The industry continues to experience disruption and challenges, including a shift to lower-fee passively managed products, which contributes to increasing fee pressure, the increased role of technology in asset management services, the introduction of new financial products and services by our competitors, and the consolidation of financial services firms through mergers and ~~acquisitions.~~acquisitions, such as our pending acquisition by Franklin Templeton, as discussed above. The asset management industry is also subject to extensive and evolving regulation under federal, state, and foreign laws. Like most firms, we have been and will continue to be impacted by regulatory and legislative changes. Responding to these changes and keeping abreast of regulatory developments has required, and will continue to require, us to incur costs that impact our profitability.

Our revenues and net income are derived primarily from AUM and fees associated with our investment products. Accordingly, changes in global financial markets, the composition and level of AUM, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our results of operations. Our most significant operating expenses are employee compensation and benefits, a majority of which is variable and includes incentive compensation, and distribution and servicing expenses, which consist primarily of fees paid to third-party distributors for selling our asset management products and services. Our profitability is sensitive to a variety of factors, including the amount and composition of our AUM, and the volatility and general level of securities prices, interest rates, and changes in currency exchange rates, among other things. Periods of unfavorable market conditions are likely to have an adverse effect on our profitability. In addition, the diversification of services, vehicles, and products offered, investment performance, access to distribution channels, reputation in the market, attraction and retention of key employees and client relations are significant factors in determining whether we are successful in attracting and retaining clients. In the last few years, the industry has seen flows into products for which we do not currently garner significant market share, including, in particular, passive products, and corresponding flows out of products in which we do have market share. For a further discussion of factors that may affect our results of operations, refer to the discussion under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, ~~2019~~2020.

Global markets experienced extreme volatility beginning in the second half of February 2020 in reaction to the novel coronavirus ("COVID-19") pandemic. While global financial markets improved during the three months ended June 30, 2020, uncertainty remains about the extent and ~~in Item 1A. herein.~~duration of business disruptions related to COVID-19 as well as its impacts on the global economy. This market uncertainty may have an impact on our business.

Our Strategy

Our strategy is to expand client choice through the diversification of our business across investment strategies, vehicles and access. We focus our strategic priorities on the four primary areas listed below. Management considers these strategic priorities when evaluating our operating performance and financial condition. Consistent with this approach, we have also presented in the table below initiatives on which management currently focuses in evaluating our performance and financial condition. This strategy was developed based on the assumption that we continue as an independent company. Upon effectiveness of the Merger, we will be a subsidiary of Franklin Templeton.



	Strategic Priorities		Initiatives
-	Products	-	Create an innovative portfolio of investment products and promote revenue growth by developing new products and leveraging the capabilities of our affiliates
		-	Identify and execute strategic acquisitions to strengthen our affiliates and increase product offerings

-	Performance	-	Identify and implement opportunities to improve growth through collaboration with and across affiliates, and work with affiliates to improve efficiency across Legg Mason by combining efforts, outsourcing or working differently

-	Distribution	-	Continue to maintain and enhance our top tier distribution function with the capability to offer solutions to relevant investment challenges and grow market share worldwide
		-	Develop alternative and innovative distribution approaches for expanded client access

-	Productivity	-	Implement our strategic restructuring plan
		-	Continue to develop and execute upon our diversity and inclusion strategy; develop business unit strategies to support the future state of work; drive digital transformation and continue to develop the enterprise data management program

When evaluating our progress on these strategic priorities, and considering initiatives to support them, we prioritize four key drivers of value creation:

leveraging our centralized retail distribution to drive growth;

capitalizing on our investments to provide investors with greater choice;

more effectively controlling our costs to improve profitability; and

thoughtfully managing our balance sheet and capital allocation.

The strategic priorities and key drivers discussed above are designed to ~~drive~~increase shareholder value through improvements in our net flows, earnings, cash flows, AUM and other key metrics, including operating margin, which are discussed in our quarterly results discussion below.

~~Strategic~~ Restructuring

During the fourth quarter of fiscal 2019, we initiated a strategic restructuring to reduce costs, which ~~includes~~included corporate and distribution functions, as well as efficiency initiatives at certain smaller affiliates that operate outside of revenue-sharing arrangements. ~~We expect to incur aggregate~~As of June 30, 2020, our strategic restructuring costs in the range of $125 million to $135 million through March 2021. We expect the strategic restructuring will result in future annual cost savings of $100 million or more, achieved on an annual run rate basis by the end of fiscal 2021.was substantially complete. During the three ~~and nine~~ months ended ~~December 31, 2019,~~June 30, 2020, we incurred ~~$18.5~~$8.0 million, or ~~$0.15~~$0.06 per diluted share, ~~and $67.3 million, or $0.55 per diluted share, respectively,~~ of costs related to the strategic ~~restructuring.~~restructuring, for cumulative costs of $88.4 million since January 1, 2019. These aggregate costs were significantly lower than our initial forecasted range of $120 million to $140 million. See Note 15 of Notes to Consolidated Financial Statements for additional information.

During the quarter ended June 30, 2020, we achieved annual run rate cost savings of $104 million. We ~~achieved $20~~realized an additional $12 million of savings related to the strategic restructuring during the three months ended ~~December 31, 2019,~~June 30, 2020, for cumulative ~~achieved~~realized savings of ~~$49~~$84 million since January 1, 2019.

In addition, during the ~~three and~~ ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020, we incurred ~~$2.4~~$22.9 million, or ~~$0.02~~$0.18 per diluted share, of merger related costs, primarily for proxy solicitation and ~~$6.2 million, or $0.05 per diluted share, respectively, of restructuring costs for other corporate matters, and during the three and~~ ~~nine~~ months ended December 31, 2018, we incurred $5.9 million, or $0.05 per diluted share, and $14.3 million, or $0.12 per diluted share, respectively, of costs associated with our previous corporate restructuring plans. We do not attribute or include these other corporate restructuring costs in our strategic restructuring.

~~Net Income (Loss) Attributable to Legg Mason, Inc.~~

~~Net Income Attributable to Legg Mason, Inc. for the three months ended~~ ~~December 31, 2019, was $74.8 million, or $0.83 per diluted share, as compared to Net Loss Attributable to Legg Mason, Inc. of $216.9 million, or $2.55 per diluted share for the three months ended~~ ~~December 31, 2018~~. As further discussed below, the increase in Net Income (Loss) Attributable to Legg Mason, Inc. was primarily driven by non-cash impairment charges totaling $365.2 million, or $3.17 per diluted share, related to intangible assets at EnTrust Global and RARE infrastructure, recognized in the prior year period. The increase was also driven by the impact of higher operating revenues in the current year period, reflecting an increase in investment advisory fees from separate accounts and funds and performance fees that were not passed through as compensation expense, and the impact of savings from the strategic restructuring.

~~Average AUM increased 7% for the three months ended~~ ~~December 31, 2019, as compared to the three months ended~~ ~~December 31, 2018~~.professional fees.

The following discussion and analysis provides additional information regarding our financial condition and results of operations.

Business Environment

~~U.S. equity markets delivered strong results for the three months~~The quarter ended ~~December 31, 2019, driven by optimism about a trade deal between the U.S. and China and~~June 30, 2020 showed signs of ~~improvement~~recovery following an extreme downturn in the ~~manufacturing sector. The~~previous quarter due to the rapid spread of COVID-19. Almost all U.S. ~~Federal Reserves' target federal funds rate remained at 2.0%~~asset classes posted gains in the quarter ended June 30, 2020 in response to government stimulus spending, other government support actions, and gradual easing of shutdown measures. U.S. equities rebounded during the quarter ~~which helped ease uncertainties after three rate changes during calendar year 2019. From a sector standpoint, information technology, communication services,~~ and ~~healthcare performed strongest during the quarter. Equity markets in the U.S. achieved their strongest performance in years.~~outperformed most major global equity markets. Developed international equity markets also ~~delivered strong results,~~rose as ~~volatility decreased due~~global economies began to reopen, although they were outperformed by U.S. equities. Emerging markets recorded their strongest quarter in a decade as consumer sentiment improved and drove demand for riskier assets.

As governments worldwide began to ease shutdown restrictions mid-quarter, riskier assets showed signs of ~~global growth stabilization, an anticipated resolution to Brexit uncertainty,~~recovery. Corporate and ~~optimism regarding a trade deal between~~high-yield bonds performed the ~~U.S.~~strongest during the quarter, and ~~China. Emerging equity~~emerging markets also ~~rallied during~~produced gains. Government bonds remained relatively stagnant throughout the quarter. The U.S. treasury yield remained at record lows throughout the quarter in response to ~~interest rate cuts~~quantitative easing by the government. U.S. stocks recorded their best quarterly performance in ~~several countries and an interim trade deal between the U.S. and China.~~

Global bond markets were mixed during the quarter. The broad U.S. bond market posted positive returns for the quarter. Long-term treasury yields rose throughout the quarter, especially for longer maturities, due to low global interest rates and expectations of economic growth in the U.S. Short-term treasuries declined during the quarter. International government bond yields also declined20 years. All sectors performed well during the quarter, ~~compared to higher risk credit categories, in response to easing political tensions~~led by information technology. Energy and positive economic outlook. Many major central banks reduced interest rates during the quarter. Investment-grade and high yield corporate bonds recorded strong returns, driven by momentum in the stock market.industrial sectors also posted gains.

The following table summarizes the returns for various major market indices:


	% Change for the Three Months Ended December 31,				% Change for the Nine Months Ended December 31,				% Change for the Three Months Ended June 30,
Indices⁽¹⁾	2019		2018		2019		2018		2020		2019
Dow Jones Industrial Average⁽²⁾	6.0	%	(11.8	)%	10.1	%	(3.2	)%	17.8	%	2.6	%
S&P 500⁽²⁾	8.5	%	(14.0	)%	14.0	%	(5.1	)%	20.0	%	3.8	%
Nasdaq Composite Index⁽²⁾	12.2	%	(17.5	)%	16.1	%	(6.1	)%	30.6	%	3.6	%
Barclays Capital U.S. Aggregate Bond Index	0.2	%	1.6	%	5.6	%	1.5	%	2.9	%	3.1	%
Barclays Capital Global Aggregate Bond Index	0.5	%	1.2	%	4.5	%	(2.5	)%	3.3	%	3.3	%


(1)	Indices are trademarks of Dow Jones & Company, McGraw-Hill Companies, Inc., Nasdaq Stock Market, Inc., and Barclays Capital, respectively, which are not affiliated with Legg Mason.


(2)	Excludes the impact of the reinvestment of dividends and stock splits.

The impact of the COVID-19 pandemic on U.S. and international financial markets may have a significantly negative impact on our AUM and results of operations during fiscal 2021, particularly in the near term. Given continued uncertainty and volatility, we cannot reasonably estimate the impact market conditions will have on our future results of operations, cash flows, or financial condition.

In addition, ~~to these factors,~~ our industry continues to be impacted by ~~the generally low growth and mixed return environment, with continued~~ migration from active to passive strategies. Together with continuing regulatory changes, these factors continue to put pressure on fees, contributing to the consolidation of products and managers on distribution platforms. These factors also continue to create significant flow challenges for active managers like ourselves.

While the economic outlook for the U.S. has remained positive in recent years, it has been impacted by increased uncertainty. This uncertainty over time has led to increased volatility in the U.S. and international equity and bond markets. The volatility of the markets highlights the importance of a strong investment strategy. The financial environment in which we operate continues to reflect a heightened level of sensitivity and continued pressure on our fees, as discussed above.

Three Months Ended ~~December 31, 2019~~June 30, 2020, Compared to Three Months Ended ~~December 31, 2018~~June 30, 2019

Assets Under Management

Our AUM is primarily managed across the following asset classes:



Equity		Fixed Income		Alternative		Liquidity
-	Large Cap Growth	-	U.S. Intermediate Investment Grade	-	Real Estate	-	U.S. Managed Cash
-	Equity Income	-	U.S. Long Duration	-	Hedge Funds	-	U.S. Municipal Cash
-	All Cap Growth	-	U.S. Credit Aggregate	-	Listed ~~Infrastructure~~
-	~~Large Cap Value~~International Equity	-	Global Opportunistic Fixed Income		Infrastructure
-	~~International Equity~~Large Cap Value	-	Global Fixed Income
-	~~Small~~Large Cap Core	-	U.S. Municipal
-	~~Large~~Small Cap Core	-	Global Sovereign
-	All Cap Value	-	~~Non-Traditional Bond~~Macro Opportunities
-	Small Cap Growth	-	Intermediate
-	Small Cap Value	-	~~Short Duration~~
-	~~Small Cap Growth~~	-	Global Government
-	Emerging Markets Equity	-	~~Intermediate~~Short Duration
-	Small/Mid Cap ~~Core~~	-	High Yield
-	~~Small/~~Mid Cap Core	-	Liability Driven
-	Small Cap International
-	~~Mid Cap Growth~~		Enhanced Liquidity
-	Global Equity	-	TIPS
-	All Cap Core

The components of the changes in our AUM (in billions) were as follows:


	Three Months Ended
	December 31,						Three Months Ended June 30,
	2019			2018			2020			2019
Beginning of period	$	781.8		$	755.4		$	730.8		$	758.0
Net client cash flows:
Investment funds, excluding liquidity products⁽¹⁾:
Subscriptions	16.6			14.4			16.7			17.9
Redemptions	(12.9		)	(19.7		)	(16.2		)	(16.1		)
Long-term separate account flows, net	(5.3		)	(3.2		)	(5.1		)	(0.7		)
Total long-term flows	(1.6		)	(8.5		)
Total liquidity flows	—			10.5
Total long-term flows, net							(4.6		)	1.1
Total liquidity flows, net							(5.2		)	(1.6		)
Total net client cash flows	(1.6		)	2.0			(9.8		)	(0.5		)
Realizations⁽²⁾	(0.6		)	(0.2		)	(0.2		)	(0.4		)
Market performance and other⁽³⁾	20.9			(30.0		)	59.7			21.9
Impact of foreign exchange	3.0			—			2.9			0.6
Acquisition							—			0.6
End of period	$	803.5		$	727.2		$	783.4		$	780.2


(1)	Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.


(2)	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g., client requested redemptions, liquidations or asset transfers).


(3)	Other primarily includes the reinvestment of dividends.

AUM at ~~December 31, 2019~~June 30, 2020 was ~~$803.5~~$783.4 billion, an increase of ~~$21.7~~$52.6 billion, or 3%7%, from ~~September 30, 2019.~~March 31, 2020. Total net long-term client outflows were ~~$1.6~~$4.6 billion, comprised of fixed income net outflows of $3.1 billion and equity net outflows of ~~$4.8~~$2.0 billion, partially offset by ~~fixed income net inflows of $1.7 billion and~~ alternative net inflows of ~~$1.5~~$0.5 billion. ~~Liquidity~~There were $5.2 billion of net outflows in the liquidity asset ~~class flows~~

class. Fixed income net outflows were ~~flat.~~primarily in products managed by Brandywine Global Investment Management ("Brandywine") and Western Asset Management Company ("Western Asset"). Equity net outflows were primarily from products managed by ClearBridge Investments (“ClearBridge”), ~~Brandywine Global Investment~~

~~Management ("Brandywine"), Royce Investment Partners (“Royce”),~~Martin Currie, and QS Investors, partially offset by net inflows in products managed by Martin Currie. Fixed income net inflows were primarily in products managed by Western Asset Management Company ("Western Asset"), partially offset by net outflows from products managed by Brandywine.Investors. Alternative net inflows were in products managed by Clarion Partners and ~~RARE Infrastructure,~~EnTrust Global, partially offset by net outflows from products managed by ~~EnTrust Global.~~RARE Infrastructure. In general, we earn higher fees and profits per dollar of alternative and equity AUM, and outflows in those asset classes more negatively impact our revenues and Net Income (Loss) Attributable to Legg Mason, Inc. than do outflows in the fixed income and liquidity asset classes. The positive impact of market performance and other was ~~$20.9~~$59.7 billion. The positive impact of foreign exchange fluctuations was ~~$3.0~~$2.9 billion.

Our net client cash flows also reflect the significant industry-wide flow pressure for active managers of equity and fixed income assets discussed above under the heading "Business Environment".

AUM by Asset Class

AUM by asset class (in billions) was as follows:


As of December 31,	2019		% of Total		2018		% of Total		% Change
As of June 30,											2020		% of Total		2019		% of Total		% Change
Equity	$	214.0	27	%	$	181.0	25	%	18	%	$	192.4	25	%	$	205.6	26	%	(6	)%
Fixed income	451.8		56		406.6		56		11		447.0		57		438.0		56		2
Alternative	74.3		9		66.3		9		12		73.7		9		70.1		9		5
Total long-term assets	740.1		92		653.9		90		13		713.1		91		713.7		91		—
Liquidity	63.4		8		73.3		10		(14	)	70.3		9		66.5		9		6
Total	$	803.5	100	%	$	727.2	100	%	10	%	$	783.4	100	%	$	780.2	100	%	—	%

Average AUM by asset class (in billions) was as follows:


Three months ended December 31,	2019		% of Total		2018		% of Total		% Change
Three months ended June 30,											2020		% of Total		2019		% of Total		% Change
Equity	$	209.3	27	%	$	198.2	27	%	6	%	$	181.3	24	%	$	202.7	26	%	(11	)%
Fixed income	447.3		56		407.4		55		10		435.0		57		427.0		56		2
Alternative	73.1		9		66.8		9		9		73.8		9		69.3		9		6
Total long-term assets	729.7		92		672.4		91		9		690.1		90		699.0		91		(1	)
Liquidity	62.0		8		66.9		9		(7	)	74.3		10		66.9		9		11
Total	$	791.7	100	%	$	739.3	100	%	7	%	$	764.4	100	%	$	765.9	100	%	—	%

The component changes in our AUM by asset class (in billions) were as follows:


	Equity			Fixed Income			Alternative			Total Long-Term			Liquidity		Total			Equity			Fixed Income			Alternative			Total Long-Term			Liquidity			Total
September 30, 2019	$	203.3		$	442.7		$	72.6		$	718.6		$	63.2	$	781.8
March 31, 2020																		$	161.2		$	420.2		$	74.3		$	655.7		$	75.1		$	730.8
Investment funds, excluding liquidity funds⁽¹⁾:
Subscriptions	4.6			9.6			2.4			16.6			—		16.6			5.4			10.1			1.2			16.7			—			16.7
Redemptions	(5.8		)	(5.9		)	(1.2		)	(12.9		)	—		(12.9		)	(6.1		)	(9.4		)	(0.7		)	(16.2		)	—			(16.2		)
Long-term separate account flows, net	(3.6		)	(2.0		)	0.3			(5.3		)	—		(5.3		)	(1.3		)	(3.8		)	—			(5.1		)	—			(5.1		)
Liquidity flows, net	—			—			—			—			—		—			—			—			—			—			(5.2		)	(5.2		)
Net client cash flows	(4.8		)	1.7			1.5			(1.6		)	—		(1.6		)	(2.0		)	(3.1		)	0.5			(4.6		)	(5.2		)	(9.8		)
Realizations⁽²⁾	—			—			(0.6		)	(0.6		)	—		(0.6		)	—			—			(0.2		)	(0.2		)	—			(0.2		)
Market performance and other⁽³⁾	14.9			5.2			0.6			20.7			0.2		20.9			33.1			27.3			(1.1		)	59.3			0.4			59.7
Impact of foreign exchange	0.6			2.2			0.2			3.0			—		3.0			0.1			2.6			0.2			2.9			—			2.9
December 31, 2019	$	214.0		$	451.8		$	74.3		$	740.1		$	63.4	$	803.5
June 30, 2020																		$	192.4		$	447.0		$	73.7		$	713.1		$	70.3		$	783.4


(1)	Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.


(2)	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g., client requested redemptions, liquidations or asset transfers).


(3)	Other primarily includes the reinvestment of dividends.


	Equity			Fixed Income			Alternative			Total Long-Term			Liquidity		Total			Equity			Fixed Income			Alternative			Total Long-Term			Liquidity			Total
September 30, 2018	$	214.5		$	411.0		$	67.4		$	692.9		$	62.5	$	755.4
March 31, 2019																		$	202.0		$	419.6		$	68.6		$	690.2		$	67.8		$	758.0
Investment funds, excluding liquidity funds⁽¹⁾:
Subscriptions	5.4			7.8			1.2			14.4			—		14.4			7.1			9.4			1.4			17.9			—			17.9
Redemptions	(7.6		)	(10.8		)	(1.3		)	(19.7		)	—		(19.7		)	(8.9		)	(6.4		)	(0.8		)	(16.1		)	—			(16.1		)
Long-term separate account flows, net	(1.1		)	(2.1		)	—			(3.2		)	—		(3.2		)	(1.8		)	0.9			0.2			(0.7		)	—			(0.7		)
Liquidity flows, net	—			—			—			—			10.5		10.5			—			—			—			—			(1.6		)	(1.6		)
Net client cash flows	(3.3		)	(5.1		)	(0.1		)	(8.5		)	10.5		2.0			(3.6		)	3.9			0.8			1.1			(1.6		)	(0.5		)
Realizations⁽²⁾	—			—			(0.2		)	(0.2		)	—		(0.2		)	—			—			(0.4		)	(0.4		)	—			(0.4		)
Market performance and other⁽³⁾	(30.2		)	0.7			(0.8		)	(30.3		)	0.3		(30.0		)	7.2			13.9			0.5			21.6			0.3			21.9
December 31, 2018	$	181.0		$	406.6		$	66.3		$	653.9		$	73.3	$	727.2
Impact of foreign exchange																		—			0.6			—			0.6			—			0.6
Acquisition																		—			—			0.6			0.6			—			0.6
June 30, 2019																		$	205.6		$	438.0		$	70.1		$	713.7		$	66.5		$	780.2


(1)	Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.


(2)	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g., client requested redemptions, liquidations or asset transfers).


(3)	Other primarily includes the reinvestment of dividends.

AUM by Distribution Channel

Broadly, we have two principal distribution channels, Global Distribution and Affiliate/Other, through which we sell a variety of investment products and services. Global Distribution, which consists of our centralized global distribution operations, principally sells U.S. and international mutual funds and other commingled vehicles, retail separately managed account programs, and sub-advisory accounts for insurance companies and similar clients. Affiliate/Other consists of the distribution operations within our asset managers, which principally sell institutional separate account management, liquidity (money market) funds, real estate and other privately placed investment funds, and funds-of-hedge funds.

The component changes in our AUM by distribution channel (in billions):


	Global Distribution		Affiliate/Other			Total			Global Distribution		Affiliate/Other			Total
September 30, 2019	$	358.2	$	423.6		$	781.8
March 31, 2020									$	317.9	$	412.9		$	730.8
Net client cash flows, excluding liquidity	1.5		(3.1		)	(1.6		)	2.2		(6.8		)	(4.6		)
Liquidity flows, net	—		—			—			—		(5.2		)	(5.2		)
Net client cash flows	1.5		(3.1		)	(1.6		)	2.2		(12.0		)	(9.8		)
Realizations⁽¹⁾	—		(0.6		)	(0.6		)	—		(0.2		)	(0.2		)
Market performance and other⁽²⁾	15.6		5.3			20.9			39.4		20.3			59.7
Impact of foreign exchange	1.3		1.7			3.0			2.0		0.9			2.9
December 31, 2019	$	376.6	$	426.9		$	803.5
June 30, 2020									$	361.5	$	421.9		$	783.4


(1)	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g., client requested redemptions, liquidations or asset transfers).


(2)	Other primarily includes the reinvestment of dividends.


	Global Distribution			Affiliate/Other			Total			Global Distribution		Affiliate/Other			Total
September 30, 2018	$	341.6		$	413.8		$	755.4
March 31, 2019										$	339.3	$	418.7		$	758.0
Net client cash flows, excluding liquidity	(6.5		)	(2.0		)	(8.5		)	4.0		(2.9		)	1.1
Liquidity flows, net	—			10.5			10.5			—		(1.6		)	(1.6		)
Net client cash flows	(6.5		)	8.5			2.0			4.0		(4.5		)	(0.5		)
Realizations⁽¹⁾	—			(0.2		)	(0.2		)	—		(0.4		)	(0.4		)
Market performance and other⁽²⁾	(23.2		)	(6.8		)	(30.0		)	11.1		10.8			21.9
Impact of foreign exchange	0.1			(0.1		)	—			0.3		0.3			0.6
December 31, 2018	$	312.0		$	415.2		$	727.2
Acquisition										—		0.6			0.6
June 30, 2019										$	354.7	$	425.5		$	780.2


(1)	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g., client requested redemptions, liquidations or asset transfers).


(2)	Other primarily includes the reinvestment of dividends.

Operating Revenue Yield

We calculate operating revenue yields as the ratio of annualized total operating revenues, less performance fees, to average AUM. Our overall operating revenue yield, less performance fees, across all asset classes and distribution channels was 3634 basis points ("bps") and 37 bps, for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. Our operating revenue yields by asset class and distribution channel were as follows:

Three Months Ended December 31,

Three Months Ended June 30,

2019

2018

2020

2019

Asset Class:

Equity

56 bps

59 bps

55 bps

58 bps

Fixed Income

26 bps

27 bps

25 bps

26 bps

Alternative

58 bps

59 bps

56 bps

60 bps

Liquidity

14 bps

13 bps

15 bps

14 bps

Total

36 bps

37 bps

34 bps

37 bps

Distribution Channel:

Global Distribution

40 bps

41 bps

37 bps

41 bps

Affiliate/Other

32 bps

34 bps

32 bps

33 bps

Our total operating revenue yield decreased over the last year primarily due to ~~asset~~product mix, the shift to lower fee vehicles and share classes and specific fee reductions. The operating revenue yields for managing equity and alternative assets declined over the last year primarily due to a shift in the mix of assets from higher fee to lower fee vehicles and share classes and from higher fee to lower fee earning affiliates, and specific fee reductions.

Equity assets are primarily managed by ClearBridge, Royce, Brandywine, QS Investors and Martin Currie; alternative assets are managed by Clarion Partners, EnTrust Global and RARE Infrastructure; fixed income assets are primarily managed by Western Asset and Brandywine; and liquidity assets are managed by Western Asset. Assets distributed through Legg Mason Global Distribution are predominately retail in nature.

Investment Performance

For a discussion of market conditions during the three ~~and nine months~~ ended ~~December 31, 2019,~~June 30, 2020, see "Business Environment."

The following table presents a summary of the percentages of our AUM by strategy⁽¹⁾that outpaced their respective benchmarks for the trailing 1-year, 3-year, 5-year, and 10-year periods:


	As of December 31, 2019								As of December 31, 2018								As of June 30, 2020								As of June 30, 2019
	1-year		3-year		5-year		10-year		1-year		3-year		5-year		10-year		1-year		3-year		5-year		10-year		1-year		3-year		5-year		10-year
Total (includes liquidity)	78	%	79	%	83	%	84	%	41	%	85	%	78	%	83	%	57	%	68	%	67	%	85	%	75	%	83	%	84	%	87	%
Equity:
Large cap	18	%	21	%	52	%	45	%	57	%	57	%	33	%	51	%	17	%	24	%	13	%	51	%	60	%	49	%	65	%	50	%
Small cap	54	%	68	%	64	%	41	%	65	%	79	%	37	%	45	%	67	%	73	%	80	%	50	%	74	%	68	%	40	%	42	%
Total equity (includes other equity)	61	%	56	%	60	%	50	%	56	%	57	%	36	%	51	%	62	%	62	%	70	%	56	%	61	%	56	%	48	%	52	%
Fixed income:
U.S. taxable	97	%	100	%	99	%	99	%	24	%	99	%	88	%	94	%	74	%	99	%	95	%	98	%	97	%	99	%	95	%	99	%
U.S. tax-exempt (includes only one strategy)	100	%	100	%	100	%	100	%	0	%	100	%	100	%	100	%	0	%	0	%	0	%	100	%	0	%	100	%	100	%	100	%
Global taxable	98	%	99	%	84	%	97	%	12	%	90	%	91	%	99	%	45	%	35	%	50	%	98	%	45	%	92	%	86	%	98	%
Total fixed income	97	%	99	%	94	%	98	%	19	%	96	%	90	%	95	%	62	%	76	%	78	%	98	%	77	%	97	%	92	%	99	%
Alternative	99	%	95	%	98	%	99	%	75	%	73	%	93	%	56	%	78	%	90	%	79	%	99	%	98	%	84	%	98	%	99	%

The following table presents a summary of the percentages of our U.S. mutual fund assets⁽²⁾ that outpaced their Lipper category averages⁽²⁾ for the trailing 1-year, 3-year, 5-year, and 10-year periods:


	As of December 31, 2019								As of December 31, 2018								As of June 30, 2020								As of June 30, 2019
	1-year		3-year		5-year		10-year		1-year		3-year		5-year		10-year		1-year		3-year		5-year		10-year		1-year		3-year		5-year		10-year
Total (excludes liquidity)	62	%	65	%	76	%	68	%	43	%	69	%	71	%	65	%	59	%	63	%	74	%	69	%	72	%	66	%	72	%	68	%
Equity:
Large cap	39	%	40	%	72	%	54	%	61	%	61	%	63	%	42	%	27	%	39	%	70	%	58	%	70	%	42	%	70	%	53	%
Small cap	52	%	62	%	72	%	36	%	73	%	93	%	55	%	46	%	79	%	73	%	80	%	46	%	75	%	76	%	76	%	50	%
Total equity (includes other equity)	45	%	49	%	72	%	49	%	62	%	63	%	59	%	44	%	41	%	48	%	72	%	55	%	72	%	51	%	72	%	50	%
Fixed income:
U.S. taxable	92	%	95	%	95	%	91	%	28	%	91	%	90	%	92	%	88	%	92	%	92	%	92	%	93	%	95	%	91	%	93	%
U.S. tax-exempt	13	%	12	%	30	%	55	%	19	%	25	%	56	%	56	%	16	%	8	%	6	%	17	%	10	%	28	%	24	%	54	%
Global taxable	80	%	85	%	45	%	83	%	23	%	62	%	81	%	83	%	53	%	48	%	43	%	77	%	41	%	76	%	32	%	82	%
Total fixed income	78	%	80	%	79	%	84	%	26	%	75	%	83	%	84	%	75	%	76	%	76	%	80	%	73	%	81	%	73	%	84	%
Alternative (includes only three funds)	0	%	100	%	n/a		n/a		30	%	0	%	0	%	n/a		77	%	77	%	n/a		n/a		18	%	24	%	0	%	87	%

n/a - not applicable

(1)

For purposes of investment performance comparisons, strategies are an aggregation of portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account.

As of ~~December 31,~~June 30, ~~2019~~2020 and ~~2018~~2019, approximately ~~87%~~88% and 89%, respectively, of total AUM is included in strategy AUM, although not all strategies have 3-, 5-, and 10-year histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates.

Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have specified benchmarks. For purposes of this comparison, performance of those products is net of fees, and is compared to the relevant HFRX Index. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ.

Effective July 1, 2019, comparative benchmarks for certain strategies were added to measure relative performance where a stated benchmark was not previously provided. For comparative purposes, prior periods have been updated to reflect the relative returns using these comparative benchmarks, where applicable.


(2)	Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of ~~December 31,~~June 30, ~~2019~~2020 and ~~2018~~2019, the U.S. long-term mutual fund assets represented in the data accounted for 19% and ~~17%~~18%, respectively, of our total AUM. The performance of our U.S. long-term mutual fund assets is included in the strategies.

Results of Operations

In accordance with financial accounting standards on consolidation, we consolidate and separately identify amounts relating to certain sponsored investment products. The consolidation of these investment products has no impact on Net Income (Loss) Attributable to Legg Mason, Inc. and does not have a material impact on our consolidated operating results. To the extent we have an investment in a consolidated investment product, the related gains and losses will impact Net Income (Loss) Attributable to Legg Mason, Inc. See Note 16 of Notes to Consolidated Financial Statements for additional information regarding the consolidation of investment products.

Operating Revenues

The components of Total Operating Revenues (in millions), and the dollar and percentage changes between periods were as follows:


	Three Months Ended December 31,									Three Months Ended June 30,
	2019		2018		$ Change			% Change		2020		2019		$ Change			% Change
Investment advisory fees:
Separate accounts	$	266.6	$	256.7	$	9.9		4	%	$	245.4	$	260.5	$	(15.1	)	(6	)%
Funds	379.0		361.2		17.8			5		347.9		366.8		(18.9		)	(5	)
Performance fees	39.4		12.6		26.8			n/m		11.4		6.9		4.5			65
Distribution and service fees	67.6		72.2		(4.6		)	(6	)	59.9		69.9		(10.0		)	(14	)
Other	1.3		1.6		(0.3		)	(19	)	1.6		1.3		0.3			23
Total Operating Revenues	$	753.9	$	704.3	$	49.6		7	%	$	666.2	$	705.4	$	(39.2	)	(6	)%

Total Operating Revenues for the three months ended ~~December 31, 2019~~June 30, 2020, ~~increased $49.6~~decreased $39.2 million, or 7%6%, to ~~$753.9~~$666.2 million, as compared to ~~$704.3~~$705.4 million for the three months ended ~~December 31, 2018~~June 30, 2019, driven by a ~~$27.7~~$34.0 million ~~increase~~decrease in investment advisory fees from funds and separate accounts and a $10.0 million decrease in distribution and service fees, reflecting ~~higher~~a 1% decrease in average long-term AUM ~~offset~~and a decrease in ~~part by a reduction in~~ our ~~total~~ operating revenue yield from 37 basis points to 3634 basis points, as previously discussed. ~~A $26.8 million~~These decreases were offset in part by an increase in performance fees ~~$23.5~~of $4.5 million, including an increase of ~~which were not~~$5.8 million in performance fees passed through as compensation expense, ~~also contributed to the increase.~~partially offset by a $1.2 million decrease in non-pass through performance fees.

Investment advisory fees from separate accounts ~~increased $9.9~~decreased $15.1 million, or 4%6%, to ~~$266.6~~$245.4 million, as compared to ~~$256.7~~$260.5 million for the three months ended ~~December 31, 2018~~June 30, 2019. Fees earned on equity assets decreased $7.8 million, reflecting a decrease in average equity AUM. Fees earned on alternative and fixed income assets decreased $3.5 million and $3.4 million, respectively, reflecting a decrease in the average fee rates earned on alternative and fixed income AUM and a decrease in average alternative and fixed income AUM.

Investment advisory fees from funds decreased $18.9 million, or 5%, to $347.9 million, as compared to $366.8 million for the three months ended June 30, 2019. Fees earned on equity assets ~~increased $9.0~~decreased $26.2 million, reflecting a reduction in average equity AUM and a reduction in the average fee rate earned on equity AUM. This decrease was partially offset by increases of $5.4 million and $2.1 million in fees earned on liquidity and alternative assets, respectively, ~~reflecting an increase~~driven by higher average AUM in ~~average fixed income and equity AUM,~~each asset class, offset in part by a reduction in the average fee rates earned on ~~fixed income~~liquidity and equity assets. These increases were offset in part by a $1.2 million decrease in fees earned on alternative assets, reflecting a reduction in the average fees rates earned on alternative assets, offset in part by an increase in average alternative AUM.

~~Investment advisory fees from funds increased $17.8 million, or 5%, to $379.0 million, as compared to $361.2 million for the three months ended~~ ~~December 31, 2018~~. Fees earned on fixed income assets ~~increased $9.0 million, driven by higher~~remained relatively flat, as an increase in average fixed income AUM was substantially offset ~~in part~~ by a reduction in the average fee rates earned on fixed income ~~assets. Fees earned on alternative assets increased $8.2 million, reflecting higher average alternative AUM and an increase in the average fee rates earned on alternative assets.~~AUM.

As of ~~December 31,~~June 30, 2020 and 2019, ~~and 2018,~~ approximately ~~11%~~10% and 12%, respectively, of our long-term average AUM was in accounts that were eligible to earn performance fees at some point during the respective fiscal year. Performance fees earned by Clarion Partners on assets invested with them prior to the acquisition closing in April 2016 are fully passed through to the Clarion Partners management team, per the terms of the acquisition agreement, and recorded as compensation expense, and therefore have no impact on Net Income (Loss) Attributable to Legg Mason, Inc. We expect the majority of pass through performance fees at Clarion Partners to phase out by fiscal 2022. Excluding AUM eligible to earn pass through performance fees, approximately 7% ~~and 8%~~ of our long-term average AUM was in accounts that were performance fee eligible as of ~~December 31, 2019~~June 30, 2020 and ~~2018.~~2019.

Investment advisory performance fees increased ~~$26.8~~$4.5 million to ~~$39.4~~$11.4 million, as compared to ~~$12.6~~$6.9 million for the three months ended ~~December 31, 2018~~June 30, 2019, driven by a ~~$17.8~~$7.0 million increase in performance fees at ~~EnTrust Global, a $5.0~~Clarion Partners, including an increase of $5.8 million ~~increase at Western Asset, and a $3.3 million increase~~ in pass through performance fees, offset in part by a $1.8 million decrease in performance fees at ~~Clarion Partners.~~RARE Infrastructure and a $1.8 million decrease in performance fees at Western Asset.

Distribution and service fees decreased ~~$4.6~~$10.0 million, or 6%14%, to ~~$67.6~~$59.9 million, as compared to ~~$72.2~~$69.9 million for the three months ended ~~December 31, 2018~~June 30, 2019, primarily due to a reduction in the average fee rate earned on mutual fund AUM subject to distribution and service fees, reflecting a shift to lower fee share ~~classes.~~classes, and a decrease in average mutual fund AUM subject to distribution and service fees.

Operating Expenses

The components of Total Operating Expenses (in millions), and the dollar and percentage changes between periods were as follows:


	Three Months Ended December 31,									Three Months Ended June 30,
	2019		2018		$ Change			% Change		2020		2019			$ Change			% Change
Compensation and benefits	$	375.0	$	316.9	$	58.1		18	%	$	353.2	$	379.8		$	(26.6	)	(7	)%
Distribution and servicing	104.4		108.8		(4.4		)	(4	)	91.3		103.9			(12.6		)	(12	)
Communications and technology	57.1		56.6		0.5			1		62.4		55.3			7.1			13
Occupancy	32.5		24.1		8.4			35		32.0		25.6			6.4			25
Amortization of intangible assets	6.0		6.1		(0.1		)	(2	)	5.5		5.5			—			—
Impairment of intangible assets	—		365.2		(365.2		)	n/m
Contingent consideration fair value adjustments										—		(1.2		)	1.2			n/m
Other	48.9		63.0		(14.1		)	(22	)	54.1		52.5			1.6			3
Total Operating Expenses	$	623.9	$	940.7	$	(316.8	)	(34	)%	$	598.5	$	621.4		$	(22.9	)	(4	)%

n/m - not meaningful

Operating expenses for the three months ended ~~December 31, 2019~~June 30, 2020 and ~~2018~~2019, incurred at the investment management affiliate level represented approximately 70% of total operating expenses in each ~~period (excluding intangible asset impairment charges in the prior year period).~~period. The remaining operating expenses are corporate costs, including costs of our global distribution operations.

The components of Compensation and benefits (in millions), and the dollar and percentage changes between periods were as follows:

Three Months Ended December 31,
2019 2018
$
Change

%
Change
Salaries, incentives and benefits $ 341.9
$ 320.3
$ 21.6
7 %
Strategic restructuring 10.2
—
10.2
n/m
Affiliate charges 0.2
—
0.2
n/m
Performance fee pass through 10.7
7.4
3.3
45
Gains (losses)on deferred compensation and seed capital investments 12.0
(10.8 ) 22.8
n/m
Compensation and benefits $ 375.0
$ 316.9
$ 58.1
18 %



	Three Months Ended June 30,
	2020		2019		$ Change			% Change
Salaries, incentives and benefits	$	324.5	$	341.9	$	(17.4	)	(5	)%
Restructuring costs	1.9		29.9		(28.0		)	n/m
Performance fee pass through	6.8		1.0		5.8			n/m
Gains on deferred compensation and seed capital investments	20.0		7.0		13.0			n/m
	$	353.2	$	379.8	$	(26.6	)	(7	)%

n/m - not meaningful

Compensation and benefits ~~increased 18%~~decreased 7% to ~~$375.0~~$353.2 million for the three months ended ~~December 31, 2019~~June 30, 2020, as compared to ~~$316.9~~$379.8 million for the three months ended ~~December 31, 2018~~June 30, 2019.

•

Salaries, incentives and benefits ~~increased $21.6~~decreased $17.4 million, to ~~$341.9~~$324.5 million, as compared to ~~$320.3~~$341.9 million for the three months ended ~~December 31, 2018~~June 30, 2019. The ~~increase~~decrease was ~~primarily due to~~driven by a ~~$23.0~~$14.6 million ~~increase~~decrease in net compensation at investment affiliates, ~~driven by an increase~~primarily due to a decrease in operating ~~revenues~~revenue at certain ~~affiliates. Increases~~affiliates, and $8.4 million in ~~operating revenues at revenue-share based affiliates typically create~~incremental savings from the strategic restructuring. These decreases were offset in part by a ~~corresponding increase in compensation per the applicable revenue share agreements. A $6.6~~$2.7 million increase in ~~salary and incentive compensation related to corporate and distribution personnel, including increased~~ sales commissions ~~also contributed to the increase. These increases were partially offset by $11.1 million in savings from our strategic restructuring.~~for distribution personnel.

•

~~Strategic restructuring costs of $10.2 million for the three months ended December 31,~~

Restructuring costs of $1.9 million for the three months ended June 30, 2020 were comprised of strategic restructuring costs of $1.1 million, affiliate charges of $0.7 million, and merger related costs of $0.1 million. Restructuring costs

of $29.9 million for the three months ended June 30, 2019, were comprised of strategic restructuring costs of $28.7 million and affiliate charges of $1.2 million. The strategic restructuring costs in each period were primarily comprised of employee termination benefit costs, including severance and the acceleration of deferred compensation awards. See Note 15 of Notes to Consolidated Financial Statements for additional information. The affiliate charges in each period were comprised of severance costs associated with restructuring plans at certain affiliates.

Compensation as a percentage of operating revenues ~~increased~~decreased to ~~49.7%,~~53.0% for the three months ended June 30, 2020, as compared to ~~45.0%~~53.8% for the three months ended ~~December 31, 2018~~June 30, 2019, primarily due to the impact of the decrease in strategic restructuring costs, offset in part by the impact of an increase in market gains on deferred compensation and seed capital investments recognized in the current year period, as compared to losses on such assets in the prior year period, and costs incurred in connection with our strategic restructuring in the current year period.investments.

Distribution and servicing expense decreased ~~$4.4~~$12.6 million, or 4%12%, to ~~$104.4~~$91.3 million, as compared to ~~$108.8~~$103.9 million for the three months ended ~~December 31, 2018~~June 30, 2019, reflecting a shift in average AUM subject to distribution and service fees to lower fee share classes, as previously ~~discussed.~~discussed, and a decrease in average mutual fund AUM subject to distribution and service fees.

~~Occupancy~~Communications and technology expense increased ~~$8.4~~$7.1 million, or ~~35%~~13%, to ~~$32.5~~$62.4 million, as compared to ~~$24.1~~$55.3 million for the three months ended ~~December 31, 2018,~~June 30, 2019, primarily due to $3.3 million of merger related costs recognized in the current year period, primarily related to the printing, filing and mailing costs for the proxy voting related to the Merger, and a $2.3 million increase in technology consulting costs, primarily at revenue-share based affiliates.

Occupancy expense increased $6.4 million, or 25%, to $32.0 million, as compared to $25.6 million for the three months ended June 30, 2019, primarily due to strategic restructuring costs of ~~$5.9~~$6.4 million, largely related to office space vacated and subleased in ~~our corporate headquarters.~~the current year period.

Impairment of intangible assets was $365.2 million for the three months ended December 31, 2018. The impairment charges recognized during the three months ended December 31, 2018, were comprised of $274.6 million and $18.2 million related to the EnTrustPermal indefinite-life fund managements contracts asset and trade name asset, respectively, and $65.0 million, $6.4 million, and $1.0 million related to the RARE Infrastructure indefinite-life fund management contracts asset, amortizable fund management contracts asset, and trade name asset, respectively. The impairments to the EnTrustPermal assets were primarily the result of continued net client outflows from legacy high net worth fund products leading to reduced growth expectations in both management fees and performance fees, a declining margin, and a higher discount rate. The impairments to the RARE Infrastructure indefinite-life fund management contracts and trade name assets were primarily the result of lower than expected net client inflows and performance fees, leading to a lower margin, and a higher discount rate. The impairment to the RARE Infrastructure amortizable asset resulted from losses of separate account AUM and the related decline in projected revenues. A revised estimate of the remaining useful life of the RARE Infrastructure separate account contracts intangible asset also contributed to the impairment of that asset. See Note 6 ~~of Notes to Consolidated Financial Statements for further discussion of these impairment charges.~~

Other expense ~~decreased $14.1~~increased $1.6 million, or ~~22%~~3%, to ~~$48.9~~$54.1 million, as compared to ~~$63.0~~$52.5 million for the three months ended ~~December 31, 2018~~June 30, 2019, primarily due to ~~$7.4~~$19.6 million of merger related costs in the current period, which were substantially offset by reductions in travel and entertainment, conference, and advertising expenses, and savings ~~associated with~~from our strategic ~~restructuring, as well as a decrease in advertising expense and professional fees.~~restructuring.

Non-Operating Income (Expense)

The components of Total Non-Operating Income (Expense) (in millions), and the dollar and percentage changes between periods were as follows:


	Three Months Ended December 31,											Three Months Ended June 30,
	2019			2018			$ Change			% Change		2020			2019			$ Change			% Change
Interest income	$	2.9		$	3.1		$	(0.2	)	(6	)%	$	0.9		$	4.0		$	(3.1	)	(78	)%
Interest expense	(27.0		)	(28.8		)	1.8			(6	)	(28.6		)	(28.5		)	(0.1		)	—
Other income (expense), net	18.0			(7.0		)	25.0			n/m		31.1			10.6			20.5			n/m
Non-operating income (expense) of consolidated investment vehicles, net	0.8			2.4			(1.6		)	(67	)	(2.1		)	9.6			(11.7		)	n/m
Total Non-Operating Income (Expense)	$	(5.3	)	$	(30.3	)	$	25.0		(83	)%	$	1.3		$	(4.3	)	$	5.6		n/m

n/m -not meaningful

Interest ~~expense~~income decreased ~~$1.8~~$3.1 million, or 6%78%, to ~~$27.0~~$0.9 million, as compared to ~~$28.8~~$4.0 million for the three months ended ~~December 31,~~June 30, 2019, primarily due to ~~the repayment of our $250 million 2.7% Senior Notes in July 2019.~~lower yields earned on interest-bearing investment balances, largely due to interest rate reductions associated with COVID-19.

Other income (expense), net, totaled income of ~~$18.0~~$31.1 million for the three months ended ~~December 31, 2019,~~June 30, 2020, as compared to ~~expense~~income of ~~$7.0~~$10.6 million for the three months ended ~~December 31, 2018~~June 30, 2019. The three months ended ~~December 31, 2019~~June 30, 2020 included net market gains of ~~$12.0~~$20.0 million on seed capital investments and assets invested for deferred compensation plans, which were offset by a corresponding increase in compensation expense, and ~~$6.2 million of~~ net market gains on corporate investments not offset in compensation ~~expense.~~of $10.6 million. The three months ended ~~December 31, 2018~~June 30, 2019 included net market ~~losses~~gains of ~~$10.8~~$7.0 million on seed capital investments and assets invested for deferred compensation plans, which were offset by a corresponding ~~decrease~~increase in compensation expense, and net market ~~losses~~gains on corporate investments ~~of $4.9 million. These losses were~~not offset in ~~part by an $8.4 million distribution from an investment holding.~~compensation of $3.1 million.

Non-operating income (expense) of CIVs, net, totaled ~~income~~expense of ~~$0.8~~$2.1 million for the three months ended ~~December 31, 2019,~~June 30, 2020, as compared to income of ~~$2.4~~$9.6 million for the three months ended ~~December 31, 2018~~June 30, 2019. The change was due to activity of the CIVs during the respective periods. See Note 16 of Notes to Consolidated Financial Statements for additional information regarding the consolidation of sponsored investment vehicles and net market gains on investments of certain CIVs.

Income Tax Provision ~~(Benefit)~~

The income tax provision was ~~$33.7~~$13.9 million for the three months ended ~~December 31, 2019,~~June 30, 2020, as compared to ~~an income tax benefit of $60.4~~$18.0 million for the three months ended ~~December 31, 2018.~~June 30, 2019. The effective tax rate was ~~27.0%~~20.2% for the three months ended ~~December 31, 2019,~~June 30, 2020, as compared to ~~22.6%~~22.7% for the three months ended ~~December 31, 2018.~~June 30, 2019. The effective tax rate for the three months ended ~~December 31, 2019~~June 30, 2020 reflects ~~discrete tax expense of $3.3 million relating to state law changes, offset in part by~~ a discrete tax benefit of ~~$2.7 million. The net impact of all discrete tax items on~~$5.2 million recognized for vested stock awards with a vesting date stock price higher than the effective income tax rate was not material for the three months ended December 31, 2019. The three months ended December 31, 2018, reflects discrete tax expense of $14.1 million related to uncertain tax positions for federal, state and local taxes (including those relating to legislative changes) and $0.7 million of other discrete tax expenses,grant date exercise price, which ~~together reduced~~decreased the effective tax rate by ~~5.5~~7.5 percentage points. The three months ended June 30, 2019, reflects a benefit of $4.1 million resulting from the settlement of a prior year audit, discrete tax expense of $1.8 million recognized for vested stock awards with a grant date exercise price higher than the vesting date stock prices, and an increase in valuation allowances with respect to deferred tax assets of $0.6 million, which together decreased the effective tax rate by 2.1 percentage points.

CIVs and other consolidated sponsored investment products ~~did not have a material impact on~~reduced the effective tax rate by 0.3 percentage points and 2.0 percentage points for the three months ended ~~December 31,~~June 30, 2020 and 2019, ~~or 2018.~~respectively.

Net Income ~~(Loss)~~ Attributable to Legg Mason, Inc. and Operating Margin

Net Income Attributable to Legg Mason, Inc. for the three months ended ~~December 31, 2019~~June 30, 2020 was ~~$74.8~~$49.4 million, or ~~$0.83~~$0.54 per diluted share, as compared to ~~Net Loss Attributable to Legg Mason, Inc. of $216.9~~$45.4 million, or ~~$2.55~~$0.51 per diluted share, for the three months ended ~~December 31, 2018~~June 30, 2019. The increase in Net Income ~~(Loss)~~ Attributable to Legg Mason, Inc. was

primarily driven by ~~non-cash intangible impairment charges of $365.2 million, or $3.17 per diluted share, recognized in~~savings from the ~~prior year period. The increase was also driven~~strategic restructuring, lower travel and entertainment, conference, and advertising expenses, and net market gains on corporate investments. These increases were substantially offset by ~~higher operating revenues in~~ the current year period, reflecting an increase in investment advisory fees from funds and separate accounts, driven by higher average long-term AUM, an increase in performance fees which were not passed through as compensation expense, and thenet impact of ~~savings from our strategic restructuring.~~lower operating revenues.

Operating margin was ~~17.2%~~10.2% for the three months ended ~~December 31, 2019~~June 30, 2020, as compared to ~~(33.6)%~~11.9% for the three months ended ~~December 31, 2018, reflecting the impact of the non-cash impairment charges recognized in the three months ended December 31, 2018.~~June 30, 2019.

~~Nine~~Three Months Ended ~~December 31, 2019~~,June 30, 2020, Compared to ~~Nine~~Three Months Ended ~~December 31, 2018~~

~~Assets Under Management~~

~~The components of the changes in our AUM (in billions) were as follows:~~

Nine Months Ended
December 31,
2019 2018
Beginning of period $ 758.0
$ 754.1
Net client cash flows:
Investment funds, excluding liquidity funds⁽¹⁾

Subscriptions 51.8
41.2
Redemptions (43.5 ) (50.6 )
Long-term separate account flows, net (9.0 ) (0.9 )
Total long-term flows (0.7 ) (10.3 )
Total liquidity flows (5.1 ) 10.4
Total net client cash flows (5.8 ) 0.1
Realizations⁽²⁾
(1.2 ) (0.7 )
Market performance and other⁽³⁾
51.4
(17.8 )
Impact of foreign exchange 0.5
(8.5 )
Acquisition 0.6
—
End of period $ 803.5
$ 727.2


~~(1)~~	~~Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.~~


~~(2)~~	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (~~e.g.,~~ ~~client requested redemptions, liquidations or asset transfers).~~


~~(3)~~	~~Other primarily includes the reinvestment of dividends.~~

~~AUM at December 31, 2019, was $803.5 billion, an increase of $45.5 billion, or 6%, from~~ March 31, 2019. Total net client outflows were $5.8 billion, comprised of $5.1 billion of net client outflows from the liquidity asset class and $0.7 billion of net client outflows from long-term asset classes. Long-term asset net outflows were comprised of equity net outflows of $10.5 billion, partially offset by fixed income net inflows of $5.1 billion and alternative net inflows of $4.7 billion. Equity net outflows were primarily from products managed by ClearBridge, Brandywine, Royce, and QS Investors. Fixed income net inflows were primarily in products managed by Western Asset, offset in part by net outflows from products managed by Brandywine. Alternative net inflows were in products managed by Clarion Partners, EnTrust Global and RARE Infrastructure. The positive impact of market performance and other was $51.4 billion and the positive impact of foreign currency exchange rate fluctuations was $0.5 billion.

~~Average AUM by asset class (in billions) were as follows:~~

Nine Months Ended December 31, 2019
% of
Total
2018
% of
Total
% Change
Equity $ 205.6
26 % $ 204.1
27 % 1 %
Fixed Income 438.0
56
411.9
55
6
Alternative 71.3
9
66.3
9
8
Total long-term assets 714.9
91
682.3
91
5
Liquidity 63.9
9
63.3
9
1
Total $ 778.8
100 % $ 745.6
100 % 4 %

~~The component changes in our AUM by asset class (in billions) were as follows:~~

Equity
Fixed
Income
Alternative Total Long-Term Liquidity Total
March 31, 2019 $ 202.0
$ 419.6
$ 68.6
$ 690.2
$ 67.8
$ 758.0
Investment funds, excluding liquidity funds⁽¹⁾:

Subscriptions 17.6
28.2
6.0
51.8
—
51.8
Redemptions (21.2 ) (19.6 ) (2.7 ) (43.5 ) —
(43.5 )
Long-term separate account flows, net (6.9 ) (3.5 ) 1.4
(9.0 ) —
(9.0 )
Liquidity flows, net —
—
—
—
(5.1 ) (5.1 )
Net client cash flows (10.5 ) 5.1
4.7
(0.7 ) (5.1 ) (5.8 )
Realizations⁽²⁾
—
—
(1.2 ) (1.2 ) —
(1.2 )
Market performance and other⁽³⁾
22.4
26.7
1.6
50.7
0.7
51.4
Impact of foreign exchange 0.1
0.4
—
0.5
—
0.5
Acquisition —
—
0.6
0.6
—
0.6
December 31, 2019 $ 214.0
$ 451.8
$ 74.3
$ 740.1
$ 63.4
$ 803.5


~~(1)~~	~~Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.~~


~~(2)~~	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (~~e.g.,~~ ~~client requested redemptions, liquidations or asset transfers).~~


~~(3)~~	~~Other primarily includes the reinvestment of dividends.~~

Equity
Fixed
Income
Alternative Total Long-Term Liquidity Total
March 31, 2018 $ 203.0
$ 422.3
$ 66.1
$ 691.4
$ 62.7
$ 754.1
Investment funds, excluding liquidity funds⁽¹⁾:

Subscriptions 15.5
21.9
3.8
41.2
—
41.2
Redemptions (20.2 ) (26.6 ) (3.8 ) (50.6 ) —
(50.6 )
Long-term separate account flows, net (1.9 ) 0.4
0.6
(0.9 ) —
(0.9 )
Liquidity flows, net —
—
—
—
10.4
10.4
Net client cash flows (6.6 ) (4.3 ) 0.6
(10.3 ) 10.4
0.1
Realizations⁽²⁾
—
—
(0.7 ) (0.7 ) —
(0.7 )
Market performance and other ⁽³⁾
(14.0 ) (5.3 ) 0.7
(18.6 ) 0.8
(17.8 )
Impact of foreign exchange (1.4 ) (6.1 ) (0.4 ) (7.9 ) (0.6 ) (8.5 )
December 31, 2018 $ 181.0
$ 406.6
$ 66.3
$ 653.9
$ 73.3
$ 727.2


~~(1)~~	~~Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.~~


~~(2)~~	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (~~e.g.,~~ ~~client requested redemptions, liquidations or asset transfers).~~


~~(3)~~	~~Other primarily includes the reinvestment of dividends.~~

~~AUM by Distribution Channel~~

~~The component changes in our AUM by distribution channel (in billions) were as follows:~~

Global Distribution Affiliate/Other Total
March 31, 2019 $ 339.3
$ 418.7
$ 758.0
Net client cash flows, excluding liquidity 8.2
(8.9 ) (0.7 )
Liquidity flows, net —
(5.1 ) (5.1 )
Net client cash flows 8.2
(14.0 ) (5.8 )
Realizations⁽¹⁾
—
(1.2 ) (1.2 )
Market performance and other⁽²⁾
28.7
22.7
51.4
Impact of foreign exchange 0.4
0.1
0.5
Acquisition —
0.6
0.6
December 31, 2019 $ 376.6
$ 426.9
$ 803.5


~~(1)~~	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (~~e.g., client requested redemptions, liquidations or asset transfers).~~


~~(2)~~	~~Other primarily includes the reinvestment of dividends.~~

Global Distribution Affiliate/Other Total
March 31, 2018 $ 333.5
$ 420.6
$ 754.1
Net client cash flows, excluding liquidity (7.7 ) (2.6 ) (10.3 )
Liquidity flows, net —
10.4
10.4
Net client cash flows (7.7 ) 7.8
0.1
Realizations⁽¹⁾
—
(0.7 ) (0.7 )
Market performance and other ⁽²⁾
(10.5 ) (7.3 ) (17.8 )
Impact of foreign exchange (3.2 ) (5.3 ) (8.5 )
December 31, 2018 $ 312.1
$ 415.1
$ 727.2


~~(1)~~	Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (~~e.g.,~~ ~~client requested redemptions, liquidations or asset transfers).~~


~~(2)~~	~~Other primarily includes the reinvestment of dividends.~~

~~Results of Operations~~

~~Operating Revenues~~

~~The components of Total Operating Revenues (in millions), and the dollar and percentage changes between periods were as follows:~~

Nine Months Ended December 31,
2019 2018
$
Change

%
Change
Investment advisory fees:
Separate accounts $ 791.5
$ 778.1
$ 13.4
2 %
Funds 1,121.6
1,128.7
(7.1 ) (1 )
Performance fees 81.1
68.5
12.6
18
Distribution and service fees 204.6
230.5
(25.9 ) (11 )
Other 3.7
4.9
(1.2 ) (24 )
Total Operating Revenues $ 2,202.5
$ 2,210.7
$ (8.2 ) — %

2020

~~Total Operating Revenues~~Net Income Attributable to Legg Mason, Inc. for the ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020, ~~were $2.20 billion, a slight decrease from $2.21 billion~~was $49.4 million, or $0.54 per diluted share, as compared to $64.2 million, or $0.70 per diluted share, for the ~~nine~~three months ended ~~December~~March 31, ~~2018~~.2020. The decrease in Net Income Attributable to Legg Mason, Inc. was ~~primarily due to~~driven by a ~~$25.9 million~~ decrease in ~~distribution and service fees,~~operating revenues, reflecting ~~a shift to lower fee earning mutual fund share classes and~~ lower average ~~fund~~ AUM ~~earning distribution fee revenue,~~ and a ~~$10.4 million~~ decrease in performance ~~fees that were passed through as compensation expense.~~fees. A $13.9 million increase in strategic restructuring and merger related costs, also contributed to the decrease. These decreases were offset in part by ~~an increase~~a $13.1 million decrease in travel and entertainment, advertising and conference expenses.

Operating revenues decreased 7%, to $666.2 million for the three months ended June 30, 2020, as compared to $719.6 million for the three months ended March 31, 2020. The decrease in operating revenues was primarily due to a decrease in separate account and fund advisory fee revenues of ~~$23.0~~$40.6 million, reflecting lower average AUM, as well as a $5.0 million decrease in performance fees that were not passed through as compensation ~~expense.~~expense, and a $1.5 million decrease in pass through performance fees.

~~Investment advisory fees from separate accounts~~Total operating expenses increased ~~$13.4 million, or 2%~~8%, to ~~$791.5~~$598.5 million for the three months ended June 30, 2020, as compared to ~~$778.1~~$553.3 million for the ~~nine~~three months ended ~~December~~March 31, ~~2018. Fees earned on fixed income~~2020. Compensation and ~~equity assets~~benefits expense increased ~~$12.3~~$48.9 million, ~~and $4.4 million, respectively, reflecting an increase in average fixed income and equity AUM, offset in part~~driven by a ~~reduction~~gain of $20.0 million in the ~~average fee rates earned on fixed~~market value of deferred compensation and seed investments, as compared to a loss of $32.5 million in the prior quarter. These gains and losses were offset by corresponding gains and losses in non-operating income (expense). Occupancy expense increased $6.5 million, primarily due to $6.4 million of strategic restructuring costs recognized in the current period, largely related to office space vacated and ~~equity assets.~~subleased during the period. Communications and technology expense increased $3.3 million, reflecting printing, filing and mailing costs for the proxy voting related to the Merger. These increases in operating expenses were offset in part by a ~~$3.8~~decrease in other operating expense of $4.7 million, reflecting a $13.1 million decrease in ~~fees earned on alternative assets, driven by lower average fee rates earned on alternative assets,~~travel and entertainment, advertising and conference expenses, which more than offset ~~in part by~~ an increase in ~~average alternative AUM.~~

~~Investment advisory fees from funds decreased $7.1 million, or 1%, to $1,121.6 million, as compared to $1,128.7 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018~~. Fees earned on equity assets decreased $26.2 million, driven by lower average equity AUM. This decrease was offset in part by a $15.6 million increase in fees earned on alternative assets, driven by higher average alternative AUM and higher average fee rates earned on alternative assets, and a $5.6 million increase in fees earned on fixed income assets due to higher average fixed income AUM, offset in part by lower average fee rates earned on fixed income assets.

~~Investment advisory performance fees increased $12.6 million, to $81.1 million, as compared to $68.5 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018~~, driven by a $15.7 million increase at EnTrust Global, a $5.3 million increase at Western Asset, and a $4.6 million increase in performance fees earned at Clarion Partners that were not passed through as compensation expense. These increases were offset in party by a $10.4 million decrease in pass through performance fees at Clarion Partners and a $2.2 million decrease in performance fees at Brandywine.

~~Distribution and service fees decreased $25.9 million, or 11%, to $204.6 million, as compared to $230.5 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018~~, primarily due to a reduction in the average fee rate earned on mutual fund AUM subject to distribution and service fees, reflecting a shift to lower fee share classes and lower average mutual fund AUM earning distribution fee revenue.

~~Operating Expenses~~

~~The components of Total Operating Expenses (in millions), and the dollar and percentage changes between periods were as follows:~~

Nine Months Ended December 31,
2019 2018
$
Change

%
Change
Compensation and benefits $ 1,132.6
$ 1,043.3
$ 89.3
9 %
Distribution and servicing 313.4
340.0
(26.6 ) (8 )
Communications and technology 166.3
170.9
(4.6 ) (3 )
Occupancy 84.9
76.3
8.6
11
Amortization of intangible assets 16.9
18.4
(1.5 ) (8 )
Impairment of intangible assets —
365.2
(365.2 ) n/m
Contingent consideration fair value adjustments (1.2 ) 0.6
(1.8 ) n/m
Other 150.7
171.0
(20.3 ) (12 )
Total Operating Expenses $ 1,863.6
$ 2,185.7
$ (322.1 ) (15 )%

~~n/m - not meaningful~~

~~Operating expenses for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2019~~ and 2018, incurred at the investment management affiliate level represented approximately 70% of total operating expenses in each period (excluding intangible asset impairment charges in the prior year period). The remaining operating expenses are corporate costs, includingmerger related costs of ~~our global distribution operations.~~

~~The components of Compensation and benefits (in millions), and the dollar and percentage changes between periods were as follows:~~

Nine Months Ended December 31,
2019 2018
$
Change

%
Change
Salaries, incentives and benefits $ 1,022.0
$ 1,003.9
$ 18.1
2 %
Acquisition and transition-related costs —
0.9
(0.9 ) n/m
Strategic restructuring 53.3
—
53.3
n/m
Affiliate charges 1.7
—
1.7
n/m
Performance fee pass through 33.7
44.1
(10.4 ) (24 )
Gains (losses) on deferred compensation and seed capital investments 21.9
(5.6 ) 27.5
n/m
Compensation and benefits $ 1,132.6
$ 1,043.3
$ 89.3
9 %

~~n/m - not meaningful~~

~~Compensation and benefits increased 9%~~$6.3 million primarily related to ~~$1,132.6 million for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2019, as compared to $1,043.3 million for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2018~~.

•

~~Salaries, incentives and benefits increased $18.1 million, to $1,022.0 million, as compared to $1,003.9 million for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2018~~, driven by a $19.0 million increase in net compensation and benefits at investment affiliates, primarily due to an increase in operating revenues at certain revenue share-based affiliates, which typically creates a corresponding increase in compensation per the applicable revenue share agreements, and a $15.7 million increase in salary and incentive compensation expense related to corporate and distribution personnel, including higher sales commissions. A $5.4 million increase in deferred compensation expense due to higher annual acceleration of awards for retirement eligible employees also contributed to the increase. These increases were offset in part by $21.5 million in savings from our strategic restructuring.


•	~~Strategic restructuring~~proxy solicitation costs ~~of $53.3 million for the~~ ~~nine~~ ~~months ended December 31, 2019, were primarily comprised of employee termination benefit costs, including severance and the acceleration of deferred compensation awards. See Note~~ 15 ~~of Notes to Consolidated Financial Statements for additional information.~~


•	~~Affiliate charges of $1.7 million for the~~ ~~nine~~ ~~months ended December 31, 2019, were comprised of severance costs associated with restructuring plans at certain affiliates.~~

~~Compensation as a percentage of operating revenues increased to 51.4%, as compared to 47.2% for the~~ ~~nine~~ months ended December 31, 2018, primarily due to costs incurred in connection with our strategic restructuring and the impact of market gains on deferred compensation and seed capital investments recognized in the current year period, as compared to market losses on such assets recognized in the prior year period.

~~Distribution and servicing expenses decreased 8% to $313.4 million, as compared to $340.0 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018, reflecting a shift in the mix of AUM subject to distribution and service fees to lower fee share classes.~~

~~Communications and technology expense decreased 3% to $166.3 million, as compared to $170.9 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018, primarily due to savings~~ associated with ~~our strategic restructuring.~~

~~Occupancy expense increased 11% to $84.9 million, as compared to $76.3 million for~~ the ~~nine months ended December 31, 2018, primarily due to strategic restructuring costs of $5.9 million, largely related to space vacated in our corporate headquarters.~~

~~Impairment of intangible assets was $365.2 million for the~~ ~~nine~~ ~~months ended December 31, 2018. The impairment charges recognized during the~~ ~~nine~~ months ended December 31, 2018 were comprised of $274.6 million and $18.2 million related to the EnTrustPermal indefinite-life fund managements contracts asset and trade name asset, respectively, and $65.0 million, $6.4 million, and $1.0 million related to the RARE Infrastructure indefinite-life fund management contracts asset, amortizable fund management contracts asset, and trade name asset, respectively. These impairments are further discussed above.

~~Contingent consideration fair value adjustments for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2019, included a credit of $1.2 million, which reduced the contingent consideration liability associated with a small acquisition completed in December 2017, and for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2018, included an expense of $0.6 million which increased the contingent consideration liability related to the acquisition of QS Investors.~~

~~Other expense decreased $20.3~~ ~~million to~~ ~~$150.7 million, as compared to $171.0 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018, primarily due to $18.6 million of savings associated with our strategic restructuring, $11.8 million of corporate restructuring costs recognized in the prior year period, and a $4.2 million charge~~ ~~recognized in the prior year period for a regulatory matter~~. These decreases were offset in part by $6.2 million of strategic restructuring costs and $6.2 million of corporate restructuring costs recognized in the current year period, and $3.4 million of foreign exchange losses.Merger.

~~Non-Operating Income (Expense)~~

~~The components of Total Non-Operating Income (Expense) (in millions), and the dollar and percentage changes between periods were as follows:~~

Nine Months Ended December 31,
2019 2018
$
Change

%
Change
Interest income $ 9.5
$ 8.0
$ 1.5
19 %
Interest expense (82.8 ) (88.6 ) 5.8
(7 )
Other income (expense), net 29.1
6.8
22.3
n/m
Non-operating income (expense) of consolidated investment vehicles, net 14.9
2.0
12.9
n/m
Total Non-Operating Income (Expense) $ (29.3 ) $ (71.8 ) $ 42.5
(59 )%

~~Interest expense decreased $5.8 million, or 7%, to $82.8 million, as compared to $88.6 million for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2019, primarily due to the repayment of $125.5 million of outstanding borrowings under our Credit Agreement in September 2018 and the repayment of our $250 million 2.7% Senior Notes in July 2019.~~

~~Other~~Non-operating income (expense), net, totaled income of ~~$29.1~~$1.3 million for the ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020, as compared to ~~income~~expense of ~~$6.8~~$65.3 million for the ~~nine months~~ ~~ended~~ ~~December 31, 2018. The nine~~three months ended ~~December~~March 31, ~~2019~~2020. The three months ended June 30, 2020, included net market gains of ~~$21.9~~$20.0 million on seed capital investments and assets invested for deferred compensation plans, which were offset by a corresponding increase in compensation expense, and ~~$6.4~~$10.6 million of net market gains on corporate investments not offset in compensation expense. The ~~nine~~three months ended ~~December~~March 31, ~~2018~~2020, included ~~an $8.4 million distribution from an investment holding and $3.9 million of gains on corporate investments, offset in part by $5.6~~$32.5 million of net market losses on seed capital investments and assets invested for deferred compensation plans, which were offset by a corresponding decrease in compensation ~~expense.~~

~~Non-operating income (expense) of consolidated investment vehicles, net, totaled income of $14.9 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2019, as compared to income of $2.0 million for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018~~. ~~The change was primarily due to activity of the CIVs during the respective periods. See Note~~ 16 ~~of Notes to Consolidated Financial Statements for additional information regarding the consolidation of sponsored investment vehicles and net market gains on investments of certain CIVs.~~

~~Income Tax Provision~~

The income tax provision was $80.5 million for the nine months ended December 31, 2019, as compared to $0.2 million for the nine months ended December 31, 2018. The effective tax rate was 26.0% for the nine months ended December 31, 2019, as compared to 0.4% for the nine months ended December 31, 2018.

The effective tax rate for the nine months ended December 31, 2019 reflects discrete tax benefits of $4.1 million resulting from the settlement of a prior year audit and $2.7 million related to other items. These benefits were substantially offset by discrete tax expense of $3.3 million relating to state law changes and $2.1 million for vested stock awards with a grant date exercise price higher than the vesting date stock prices. The net impact of all discrete tax items on the effective income tax rate was not material for the nine months ended December 31, 2019.

During the nine months ended December 31, 2018, a discrete tax expense of $14.1 million related to uncertain tax positions for federal, state and local taxes (including those related to legislative changes) was recognized. In addition, discrete tax benefits of $2.8 million related to the completion of a prior year tax audit and $1.8 million related to other discrete items were recognized. Together, the net impact of all discrete tax items reduced the effective income tax rate by 27.4 percentage points for the nine months ended December 31, 2018.

~~CIVs and other consolidated sponsored investment products reduced the effective tax rate by 0.8 percentage points percentage points for the~~ ~~nine months~~ ~~ended December 31, 2019. CIVs and other consolidated sponsored investment products did not have a material impact on the effective tax rate for the nine months ended December 31, 2018.~~

~~Net Income (Loss) Attributable to Legg Mason, Inc. and Operating Margin~~

~~Net Income Attributable to Legg Mason, Inc. for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2019, totaled $187.2 million, or $2.08 per diluted share, as compared to Net Loss Attributable to Legg Mason, Inc. of $78.0 million, or $0.95 per diluted share, for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018~~. The increase in Net Income (Loss) Attributable to Legg Mason, Inc. was primarily driven by non-cash impairment charges totaling $365.2 million, or $3.15 per diluted share, recognized in the prior year period, as well as higher operating revenues in the current year period, reflecting an increase in performance fees that were not passed through as compensation expense, and an increase in investment advisory fees from funds and separate accounts, driven by higher average long-term AUM. These increases were offset in part by the previously discussed increase in compensation expense for corporate and distribution personnel, including increased sales commissions.

~~Operating margin was 15.4% for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2019, as compared to 1.1% for the~~ ~~nine months~~ ~~ended~~ ~~December 31, 2018~~, reflecting the strategic and corporate restructuring costs discussed above for the nine months ended December 31, 2019, and the non-cash impairment charges recognized in the nine months ended December 31, 2018.

~~Three Months Ended December 31, 2019, Compared to Three Months Ended September 30, 2019~~

~~Net Income Attributable to Legg Mason, Inc. for the three months ended~~ ~~December 31, 2019~~, was $74.8 million, or $0.83 per diluted share, as compared to $67.1 million, or $0.74 per diluted share, for the three months ended September 30, 2019. The increase in Net Income Attributable to Legg Mason, Inc. was driven by an increase in performance fees that were not passed through as compensation expense, higher investment advisory fees from funds and separate accounts, reflecting higher average AUM, and savings from the strategic restructuring.

~~Operating revenues increased to $753.9 million for the three months ended~~ ~~December 31, 2019~~, as compared to $743.3 million for the three months ended September 30, 2019. The increase in operating revenues was primarily due to a $15.7 million increase in performance fees that were not passed through as compensation expense, and an increase in fund and separate account advisory fee revenues of $5.4 million, or 1%, reflecting higher average long-term AUM. These increases were offset in part by an $11.2 million decrease in pass through performance fees.

~~Total operating expenses were $623.9 million for the three months ended~~ ~~December 31, 2019, as compared to $618.3 million for the three months ended September 30, 2019. The increase in operating expenses was primarily due to $5.9~~$12.6 million in occupancy-related strategic restructuring costs recognized in the current period, and a $3.1 million increase in communications and technology expense, reflecting higher consulting costs. These increases were offset in part by a decrease of $2.7 million in compensation expense, driven by an $11.2 million decrease in pass through performance fees and a $4.2 million decrease in strategic restructuring costs, offset in part by a higher gain in the market value of deferred compensation and seed capital investments.

~~Non-operating income (expense), net, was expense of $5.3 million for the three months ended~~ ~~December 31, 2019~~, as compared to expense of $19.7 million for the three months ended September 30, 2019. The three months ended December 31, 2019, included net market gains of $12.0 million on seed capital investments and assets invested for deferred compensation plans, which were offset by a corresponding increase in compensation expense, and $6.2 million of net market gainslosses on corporate investments not offset in compensation expense. The three months ended September 30, 2019, included net market gains of $2.9 million on seed capital investments and assets invested for deferred compensation plans, which were substantially offset by net market losses of $2.9 million on corporate investments not offset in compensation expense.investments. Non-operating income (expense), net, of CIVs was ~~income~~expense of ~~$0.8~~$2.2 million for the three months ended ~~December 31, 2019,~~June 30, 2020, compared to income of ~~$4.5~~$1.4 million for the three months ended ~~September 30, 2019.~~March 31, 2020.

Operating margin was ~~17.2%~~10.2% for the three months ended ~~December 31, 2019~~June 30, 2020, as compared to ~~16.8%~~23.1% for the three months ended ~~September~~March 31, 2020, reflecting lower revenues and higher strategic restructuring and merger related costs for the three months ended June 30, ~~2019, with both periods reflecting the impact of the strategic and corporate restructuring costs.~~2020.

Supplemental Non-GAAP Financial Information

As supplemental information, we are providing performance measures for "Adjusted Net Income", "Adjusted Earnings Per Diluted Share" ("Adjusted EPS") and “Adjusted Operating Margin”, along with a liquidity measure for "Adjusted EBITDA", each of which ~~are~~is based on methodologies other than generally accepted accounting principles ("non-GAAP"). Effective with the quarter ended June 30, 2019, we began disclosing Adjusted Operating Margin, which revises our prior disclosure of Operating Margin, as Adjusted, to include adjustments for restructuring costs and acquisition expenses and transition-related costs for integration activities, each of which is further described below.

Our management uses the performance measures as benchmarks to evaluate and compare our period-to-period operating performance. We believe that these performance measures provide useful information about the operating results of our core asset management business and facilitate comparison of our results to other asset management firms and period-to-period results. We are also providing a non-GAAP liquidity measure for Adjusted EBITDA, which our management uses as a benchmark in evaluating and comparing our period-to-period liquidity. We believe that this measure is useful to investors as it provides additional information with regard to our ability to meet working capital requirements, service our debt, and return capital to our stockholders.

Adjusted Net Income and Adjusted Earnings per Diluted Share

Adjusted Net Income and Adjusted EPS only include adjustments for certain items that relate to operating performance, and therefore, are most readily reconcilable to Net Income (Loss) Attributable to Legg Mason, Inc. and Net Income (Loss) per Diluted Share Attributable to Legg Mason, Inc. Shareholders, determined under generally accepted accounting principles ("GAAP"), respectively.

We define Adjusted Net Income as Net Income (Loss) Attributable to Legg Mason, Inc. adjusted to exclude the following:

Restructuring costs, including:


◦	Corporate charges related to the ongoing strategic restructuring and merger related costs and other cost saving and business initiatives, including severance, lease and other costs; and


◦	Affiliate charges, including affiliate restructuring and severance costs, and certain one-time charges arising from the issuance of management equity plan awards

Amortization of intangible assets

Gains and losses on seed and other investments that are not offset by compensation or hedges

Acquisition expenses and transition-related costs for integration activities, including certain related professional fees and costs associated with the transition and acquisition of acquired businesses

Impairments of intangible assets

Contingent consideration fair value adjustments

Charges ~~(credits)~~ related to significant litigation or regulatory matters

Income tax expense (benefit) adjustments to provide an effective non-GAAP tax rate commensurate with our expected annual pre-tax Adjusted Net Income, including:


◦	The impact on income tax expense (benefit) of the above non-GAAP adjustments; and


◦	Other tax items, including deferred tax asset and liability adjustments associated with statutory rate changes, the impact of other aspects of recent U.S. tax reform, and shortfalls (and windfalls) associated with stock-based compensation

Adjustments for restructuring costs, gains and losses on seed and other investments that are not offset by compensation or hedges, and the income tax expense (benefit) items described above are included in the calculation because these items are not reflective of our core asset management business of providing investment management and related products and services.

We adjust for acquisition-related items, including amortization of intangible assets, impairments of intangible assets, and contingent consideration fair value adjustments, to make it easier to identify trends affecting our underlying business that are not related to acquisitions to facilitate comparison of our operating results with the results of other asset management firms that have not engaged in significant acquisitions. We adjust for charges (credits) related to significant litigation or regulatory matters, net of any insurance proceeds and revenue share adjustments, because these matters do not reflect the underlying operations and performance of our business.

In calculating Adjusted EPS, we adjust Net Income (Loss) per Diluted Share Attributable to Legg Mason, Inc. Shareholders determined under GAAP for the per share impact of each adjustment (net of taxes) included in the calculation of Adjusted Net Income.

These measures are provided in addition to Net Income (Loss) Attributable to Legg Mason, Inc., and Net Income (Loss) per Diluted Share Attributable to Legg Mason, Inc. Shareholders, and are not substitutes for these measures. These non-GAAP measures should not be considered in isolation and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or adjusted income, and adjusted earnings per share, of other companies, respectively. Further, Adjusted Net Income and Adjusted EPS are not liquidity measures and should not be used in place of cash flow measures determined under GAAP.

The calculations of Adjusted Net Income and Adjusted EPS are as follows (dollars in thousands, except per share amounts):


	Three Months Ended									Nine Months Ended						Three Months Ended
	December 31, 2019			September 30, 2019			December 31, 2018			December 31, 2019			December 31, 2018			June 30, 2020			March 31, 2020			June 30, 2019
Net Income (Loss) Attributable to Legg Mason, Inc.	$	74,775		$	67,083		$	(216,888	)	$	187,208		$	(77,995	)
Net Income Attributable to Legg Mason, Inc.																$	49,422		$	64,159		$	45,350
Plus (less):
Restructuring costs:
Strategic restructuring and other corporate initiatives⁽¹⁾	20,920			19,666			5,881			73,484			14,303
Strategic restructuring and merger related⁽¹⁾																30,932			17,035			32,898
Affiliate charges⁽²⁾	237			237			—			1,677			—			494			737			1,203
Amortization of intangible assets	6,004			5,442			6,089			16,903			18,371			5,505			5,636			5,457
Gains and losses on seed and other investments not offset by compensation or hedges	(4,827		)	(51		)	(4,314		)	(11,289		)	(12,014		)	(8,077		)	12,545			(6,411		)
Acquisition and transition-related costs	—			—			—			—			1,468			557			—			—
Impairments of intangible assets							365,200						365,200
Contingent consideration fair value adjustments	—			—			—			(1,165		)	571			—			250			(1,165		)
Charges related to significant regulatory matters	—			—			—			—			4,151
Income tax adjustments:⁽³⁾
Impacts of non-GAAP adjustments	(6,030		)	(6,954		)	(94,568		)	(21,619		)	(98,331		)	(8,274		)	(9,666		)	(8,635		)
Other tax items	2,100			220			14,856			620			13,095			(5,173		)	2,477			(1,700		)
Adjusted Net Income	$	93,179		$	85,643		$	76,256		$	245,819		$	228,819		$	65,386		$	93,173		$	66,997

Net Income (Loss) Per Diluted Share Attributable to Legg Mason, Inc. Shareholders	$	0.83		$	0.74		$	(2.55	)	$	2.08		$	(0.95	)
Net Income Per Diluted Share Attributable to Legg Mason, Inc. Shareholders																$	0.54		$	0.70		$	0.51
Plus (less), net of tax impacts:
Restructuring costs:
Strategic restructuring and other corporate initiatives	0.17			0.16			0.05			0.60			0.12
Strategic restructuring and merger related																0.24			0.14			0.27
Affiliate charges	—			—			—			0.01			—			—			—			0.01
Amortization of intangible assets	0.05			0.05			0.05			0.14			0.15			0.04			0.05			0.04
Gains and losses on seed and other investments not offset by compensation or hedges	(0.04		)	—			(0.04		)	(0.09		)	(0.10		)	(0.06		)	0.10			(0.05		)
Acquisition and transition-related costs	—			—			—			—			0.01			0.01			—			—
Impairments of intangible assets	—			—			3.17			—			3.15
Contingent consideration fair value adjustments	—			—			—			(0.01		)	—			—			—			(0.01		)
Charges related to significant regulatory matters	—			—			—			—			0.05
Other tax items	0.02			—			0.18			0.01			0.16			(0.06		)	0.03			(0.02		)
Adjusted Earnings per Diluted Share	$	1.03		$	0.95		$	0.86		$	2.74		$	2.59		$	0.71		$	1.02		$	0.75


(1)	See Note 15 of Notes to Consolidated Financial Statements for additional information regarding our strategic restructuring initiatives.


(2)	See "Results of Operations" above for additional information regarding affiliate charges.


(3)	The non-GAAP effective tax rates for the three months ended ~~December~~June 30, 2020, March 31, ~~2019, September~~2020, and June 30, 2019, were 28.0%, 24.6% and ~~December 30, 2018 were 25.9%, 27.3% and 18.5%, respectively, and for the nine months ended December 31, 2019 and 2018, were 26.7% and 24.8%~~27.0%, respectively.

Adjusted Net Income was ~~$93.2~~$65.4 million, or ~~$1.03~~$0.71 per diluted share, for the three months ended ~~December 31, 2019, $85.6~~June 30, 2020, $93.2 million, or ~~$0.95~~$1.02 per diluted share, for the three months ended ~~September 30, 2019,~~March 31, 2020, and ~~$76.3~~$67.0 million, or ~~$0.86~~$0.75 per diluted share, for the three months ended ~~December 31, 2018.~~ June 30, 2019.

The ~~increase~~decrease for the three months ended ~~December 31, 2019,~~June 30, 2020, as compared to the three months ended ~~December 31, 2018,~~June 30, 2019, was driven by a decrease in operating revenues, reflecting a decrease in investment advisory fees due to lower average long-term AUM and changes in the product mix, partially offset by the impact of savings from the strategic restructuring and ~~higher operating revenues, reflecting an increase in~~lower travel and entertainment, advertising and conference expenses.

The decrease for the three months ended June 30, 2020, as compared to the three months ended March 31, 2020, was driven by lower investment advisory fees ~~from funds~~reflecting lower average AUM and ~~separate accounts and~~changes in the product mix, as well as a $5.0 million decrease in performance fees that were not passed through as compensation expense. The increase in Adjusted Net Income for the three months ended December 31, 2019, as compared to the three months ended September 30, 2019, was driven by an increase in performance fees that were not passed through as compensation expense, higher investment advisory fees from funds and separate accounts, reflecting higher average AUM, and savings from the strategic restructuring.

Adjusted Net Income was $245.8 million, or $2.74 per diluted share, for the nine months ended December 31, 2019, as compared to $228.8 million, or $2.59 per diluted share, for the nine months ended December 31, 2018. Adjusted Net Income increased primarily due to savings from the strategic restructuring, as well as higher operating revenues in the current year period, reflecting an increase in performance fees that were not passed through as compensation expense and an increase in investment advisory fees from funds and separate accounts, driven by higher average long-term AUM. These increases were offset in part by the previously discussed increase in compensation expense for corporate and distribution personnel, including increased sales commissions.

Adjusted Operating Margin

We calculate Adjusted Operating Margin, by dividing “Adjusted Operating Income”, by “Adjusted Operating Revenues”, each of which is further discussed below. These measures only include adjustments for certain items that relate to operating performance, and therefore, are most readily reconcilable to Operating Margin, Operating Income ~~(Loss)~~ and Total Operating Revenues determined under GAAP, respectively.

We define Adjusted Operating Revenues as Operating Revenues, adjusted to:

Include:


◦	Net investment advisory fees eliminated upon consolidation of investment vehicles

Exclude:

◦

Distribution and servicing ~~expenses, which we use~~fees and a portion of Investment advisory fees used to pay distribution and servicing costs to third party intermediaries based on contractual relationships the third-party intermediaries have with the ultimate clients. The amount of Distribution and servicing fees and the portion of Investment advisory fees excluded approximate the direct costs of selling and servicing our ~~distribution revenues~~products that are ~~passed through~~paid to ~~third parties as a direct cost~~third-party intermediaries, based on contractual percentages of ~~selling our products~~the value of the related AUM


◦	Performance fees that are passed through as compensation expense or net income (loss) attributable to noncontrolling interests

These adjustments do not relate to items that impact Net income (Loss) Attributable to Legg Mason, Inc. and they are included in one of the ways our management views and evaluates our business results.

We define Adjusted Operating Income, as Operating Income (Loss), adjusted to exclude the following:

Restructuring costs, including:


◦	Corporate charges related to the ongoing strategic restructuring and merger related costs and other cost saving and business initiatives, including severance, lease and other costs; and


◦	Affiliate charges, including affiliate restructuring and severance costs, and certain one-time charges arising from the issuance of management equity plan awards

Amortization of intangible assets

The impact on compensation expense of:


◦	Gains and losses on investments made to fund deferred compensation plans


◦	Gains and losses on seed capital investments by our affiliates under revenue sharing arrangements

Impairments of intangible assets

Contingent consideration fair value adjustments

Charges ~~(credits)~~ related to significant regulatory matters

Income (loss) of consolidated investment vehicles

In calculating Adjusted Operating Income, we adjust for restructuring costs because these items are not reflective of our core asset management business of providing investment management and related products and services. We adjust for the impact on compensation expense of gains and losses on investments made to fund deferred compensation plans and on seed capital investments by our affiliates under revenue sharing arrangements because they are offset by an equal amount in Non-operating income (expense), net, and thus have no impact on Net Income Attributable to Legg Mason, Inc. We adjust for

acquisition-related items, including amortization of intangible assets, impairments of intangible assets, and contingent consideration fair value adjustments, to make it easier to identify trends affecting our underlying business that are not related to acquisitions to facilitate comparison of our operating results with the results of other asset management firms that have not engaged in significant acquisitions. We adjust for charges (credits) related to significant litigation or regulatory matters, net of any insurance proceeds and revenue share adjustments, because these matters do not reflect the underlying operations and performance of our business. We adjust for income (loss) of consolidated investment vehicles because the consolidation of these investment vehicles does not have an impact on Net Income (Loss) Attributable to Legg Mason, Inc.

These measures are provided in addition to and are not substitutes for our Operating Margin, Operating Revenues, and Operating Income (Loss) calculated under GAAP. These non-GAAP measures should not be considered in isolation and may not be comparable to non-GAAP performance measures, including measures of adjusted margins, adjusted operating revenues, and adjusted operating income, of other companies. Further, Adjusted Operating Margin, Adjusted Operating Revenues and Adjusted Operating Income are not liquidity measures and should not be used in place of cash flow measures determined under GAAP.

The calculations of Operating Margin and Adjusted Operating Margin, are as follows (dollars in thousands):


	Three Months Ended									Nine Months Ended						Three Months Ended
	December 31, 2019			September 30, 2019			December 31, 2018			December 31, 2019			December 31, 2018			June 30, 2020			March 31, 2020			June 30, 2019
Operating Revenues, GAAP basis	$	753,914		$	743,264		$	704,322		$	2,202,538		$	2,210,654		$	666,186		$	719,587		$	705,360
Plus (less):
Pass through performance fees	(10,733		)	(21,914		)	(7,436		)	(33,677		)	(44,062		)	(6,809		)	(8,306		)	(1,030		)
Operating revenues eliminated upon consolidation of investment vehicles	69			156			155			350			461			46			52			125
Distribution and servicing expense, excluding consolidated investment vehicles	(104,349		)	(104,199		)	(108,771		)	(312,435		)	(339,845		)
Distribution and servicing fees																(59,859		)	(65,763		)	(69,937		)
Investment advisory fees																(31,612		)	(34,038		)	(33,950		)
Adjusted Operating Revenues	$	638,901		$	617,307		$	588,270		$	1,856,776		$	1,827,208		$	567,952		$	611,532		$	600,568
Operating Income (Loss), GAAP basis	$	129,994		$	124,977		$	(236,427	)	$	338,906		$	24,977
Operating Income, GAAP basis																$	67,708		$	166,254		$	83,935
Plus (less):
Restructuring costs:
Strategic restructuring and other corporate initiatives	20,920			19,666			5,881			73,484			14,303
Strategic restructuring and merger related																30,932			17,035			32,898
Affiliate charges	237			237			—			1,677			—			633			737			1,203
Impairment of intangible assets	—			—			365,200			—			365,200
Amortization of intangible assets	6,004			5,442			6,089			16,903			18,371			5,505			5,636			5,457
Gains (losses) on deferred compensation and seed investments, net	12,022			2,910			(10,826		)	21,946			(5,590		)	20,029			(32,540		)	7,014
Acquisition and transition-related costs	—			—			—			—			1,468			557			—			—
Contingent consideration fair value adjustments	—			—			—			(1,165		)	571			—			250			(1,165		)
Charges related to significant regulatory matters	—			—			—			—			4,151
Operating loss of consolidated investment vehicles, net	172			1,298			343			1,729			1,331			(41		)	165			259
Adjusted Operating Income	$	169,349		$	154,530		$	130,260		$	453,480		$	424,782		$	125,323		$	157,537		$	129,601

Operating Margin, GAAP basis	17.2		%	16.8		%	(33.6		)%	15.4		%	1.1		%	10.2		%	23.1		%	11.9		%
Adjusted Operating Margin	26.5			25.0			22.1			24.4			23.2			22.1			25.8			21.6

Adjusted EBITDA

We define Adjusted EBITDA as cash provided by (used in) operating activities plus (minus):

Interest expense, net of accretion and amortization of debt discounts and premiums

Current income tax expense (benefit)

Net change in assets and liabilities, which aligns with the Consolidated Statements of Cash Flows

Net (income) loss attributable to noncontrolling interests

Net gains (losses) and earnings on investments

Net gains (losses) on consolidated investment vehicles

Other

Adjusted EBITDA is not reduced by equity-based compensation expense, including management equity plan non-cash issuance-related charges. Most management equity plan units may be put to or called by Legg Mason for cash payment, although their terms do not require this to occur.

This liquidity measure is provided in addition to Cash provided by operating activities and may not be comparable to non-GAAP performance measures or liquidity measures of other companies, including their measures of EBITDA or Adjusted EBITDA. Further, this measure is not to be confused with Net Income (Loss), Cash provided by operating activities, or other measures of earnings or cash flows under GAAP, and is provided as a supplement to, and not in replacement of, GAAP measures.

The calculations of Adjusted EBITDA are as follows (dollars in thousands):

Three Months Ended Nine Months Ended
December 31, 2019 September 30, 2019 December 31, 2018 December 31, 2019 December 31, 2018
Cash provided by operating activities, GAAP basis $ 335,358
$ 229,303
$ 256,591
$ 377,084
$ 443,989
Plus (less):
Interest expense, net of accretion and amortization of debt discounts and premiums 26,676
26,874
28,259
81,925
86,956
Current tax expense (benefit) 6,137
6,927
(1,218 ) 8,818
17,635
Net change in assets and liabilities (153,838 ) (111,207 ) (170,384 ) 38,032
(24,794 )
Net change in assets and liabilities of consolidated investment vehicles (45,539 ) 8,061
60,158
(50,490 ) (9,966 )
Net income attributable to noncontrolling interests (16,228 ) (9,448 ) (10,498 ) (41,895 ) (31,043 )
Net gains (losses) and earnings on investments 662
2,329
21,367
9,739
36,495
Net gains (losses) on consolidated investment vehicles 814
4,529
2,369
14,904
1,954
Other (193 ) (101 ) (68 ) (637 ) (289 )
Adjusted EBITDA $ 153,849
$ 157,267
$ 186,576

$ 437,480

$ 520,937



	Three Months Ended
	June 30, 2020			March 31, 2020			June 30, 2019
Cash provided by (used in) operating activities, GAAP basis	$	(211,492	)	$	183,472		$	(187,577	)
Plus (less):
Interest expense, net of accretion and amortization of debt discounts and premiums	28,154			26,601			28,375
Current tax expense	4,904			179			(4,246		)
Net change in assets and liabilities	378,185			(43,414		)	303,077
Net change in assets and liabilities of consolidated investment vehicles	(101,352		)	31,095			(13,012		)
Net income attributable to noncontrolling interests	(5,652		)	(11,224		)	(16,219		)
Net gains (losses) and earnings on investments	(11,830		)	19,551			6,748
Net gains (losses) on consolidated investment vehicles	(2,158		)	1,358			9,561
Other	24			(95		)	(343		)
Adjusted EBITDA	$	78,783		$	207,523		$	126,364

Adjusted EBITDA for the three months ended ~~December~~June 30, 2020, March 31, ~~2019, September~~2020, and June 30, 2019, ~~and December 31, 2018,~~ was ~~$153.8~~$78.8 million, ~~$157.3~~$207.5 million, and ~~$186.6~~$126.4 million, respectively. ~~The decrease for the three months ended December 31, 2019, as compared to the three months ended September 30, 2018 was primarily due to strategic restructuring costs in the current period.~~

~~Adjusted EBITDA for the~~ ~~nine months~~ ~~ended December 31, 2019 and 2018, was $437.5 million and $520.9 million, respectively. The decrease for the~~ ~~nine months~~ ~~ended December 31, 2019, as compared to the~~ ~~nine months~~ ~~ended December 31, 2018 was primarily due to strategic restructuring costs in the current period.~~

Liquidity and Capital Resources

As of ~~December 31, 2019,~~June 30, 2020, we had approximately ~~$550~~$650 million in cash and cash equivalents in excess of our working capital and regulatory requirements. On July 21, 2020, we used $250 million of cash to repay the outstanding borrowings on our unsecured revolving credit agreement (as amended from time to time the "Credit Agreement"), as further discussed below. The primary objective of our capital structure is to provide needed liquidity at all times, including maintaining required capital in certain subsidiaries. We review our overall funding needs and capital base on an ongoing basis to determine if the capital base meets the expected needs of our businesses.

As previously discussed, on February 17, 2020, we entered into a Merger Agreement with Franklin Templeton. The Merger Agreement limits our ability to take certain actions including, among other things, acquiring businesses, incurring capital expenditures above specified thresholds, and incurring additional debt.

The consolidation of variable interest entities discussed above does not impact our liquidity and capital resources. However, we have executed total return swap arrangements with investors in certain exchange traded funds ("ETFs"), and as a result we receive the investors' related investment gains and losses on the ETFs and consolidate ETFs with significant open total return swap arrangements. At December 31, 2019, the total return swap notional values aggregate $34.9 million. If the total return swap counterparties were to terminate their positions, we may be required to invest in the ETFs an amount up to the notional value of the swaps terminated to support the products. Otherwise, weWe have no rights to the benefits from, nor do we bear the risks associated with, the assets and liabilities of the CIVs and other consolidated sponsored investment products beyond our investments in and investment advisory fees generated from these products, which are eliminated in consolidation. Additionally, creditors of the CIVs and other consolidated sponsored investment products have no recourse to our general credit beyond the level of our investment, if any, so we do not consider these liabilities to be our obligations.

Our assets consist primarily of intangible assets, goodwill, cash and cash equivalents, investment securities, and investment advisory and related fee receivables. Our operations have been principally funded by equity capital, long-term debt and retained earnings. At ~~December 31, 2019~~June 30, 2020, cash and cash equivalents, total assets, long-term debt, net, and stockholders' equity were ~~$0.8~~$0.9 billion, ~~$8.0~~$7.9 billion, $2.0 billion and ~~$3.8~~$3.9 billion, respectively. Total assets include amounts related to CIVs and other consolidated sponsored investment products of ~~$0.1 billion.~~$35 million.

Cash and cash equivalents are primarily invested in liquid domestic and non-domestic money market funds that hold principally domestic and non-domestic government and agency securities, bank deposits, ~~and~~ corporate commercial ~~paper.~~paper, and short-term treasury bills. We have not recognized any losses on these investments. Our monitoring of cash and cash equivalents partially mitigates the potential that material risks may be associated with these balances.

The following table summarizes our Consolidated Statements of Cash Flows:

Nine Months Ended December 31,
2019 2018
Cash flows provided by operating activities $ 377.1
$ 444.0
Cash flows used in investing activities (39.1 ) (26.9 )
Cash flows used in financing activities (425.1 ) (309.2 )
Effect of exchange rate changes (12.9 ) (16.5 )
Net change in cash, cash equivalents, and restricted cash (100.0 ) 91.4
Cash, cash equivalents and restricted cash, beginning of period 950.8
773.8
Cash, cash equivalents and restricted cash⁽¹⁾, end of period
$ 850.8
$ 865.2

~~(1) Restricted cash was $27.2 million and $30.0 million as of December 31, 2019 and 2018, respectively.~~



	Three Months Ended June 30,
	2020			2019
Cash flows used in operating activities	$	(211.5	)	$	(187.6	)
Cash flows used in investing activities	(6.0		)	(18.9		)
Cash flows provided by (used in) financing activities	121.1			(68.1		)
Effect of exchange rate changes	(0.9		)	(2.7		)
Net change in cash, cash equivalents, and restricted cash	(97.3		)	(277.3		)
Cash, cash equivalents and restricted cash, beginning of period	1,049.7			950.8
Cash, cash equivalents and restricted cash, end of period	$	952.4		$	673.5

Cash ~~inflows provided by~~outflows used in operating activities during the ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020 and ~~2018,~~2019, were ~~$377.1~~$211.5 million and ~~$444.0~~$187.6 million, respectively, primarily related to annual payments for accrued compensation, offset in part by Net Income, ~~(Loss),~~ adjusted for non-cash items, ~~including impairment charges totaling $365.2 million~~ in ~~the prior year~~each period.

Cash outflows used in investing activities during the ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020, were ~~$39.1~~$6.0 million, primarily related to payments made for fixed ~~assets, a minority investment~~assets. Cash outflows used in ~~a U.K. retirement solutions provider, and~~investing activities during the three months ended June 30, 2019, were $18.9 million, primarily related to the acquisition of Gramercy Europe (Jersey) Limited ("Gramercy"), further discussed below. Cash outflows used in investing activities during the nine months ended December 31, 2018, were $26.9 million, primarily related to payments made for fixed assets, offset in part by returns of capital received on certain investments in partnerships and limited liability companies..

Cash ~~outflows used in~~inflows provided by financing activities during the ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020, were ~~$425.1~~$121.1 million, primarily related to ~~the repayment of our~~ $250 million ~~2.7% Senior Notes~~of borrowings under the Credit Agreement, as further discussed below, and issuances of common stock for stock-based compensation of $53.4 million, offset in ~~July 2019, dividends paid of $102.0 million,~~part by net redemptions attributable to noncontrolling interests in CIVs and other consolidated investment products of ~~$32.6~~$95.2 million, funding of employee tax withholdings by settlement of net share transactions of $37.2 million, dividends paid of $36.3 million, and distributions to affiliate noncontrolling interest holders of ~~$27.9~~$13.7 million. Cash outflows used in financing activities during the ~~nine~~three months ended ~~December 31, 2018,~~June 30, 2019, were ~~$309.2~~$68.1 million, primarily related to ~~the repayment of $125.5 million of outstanding borrowings under our Credit Agreement,~~ dividends paid of ~~$84.6~~$30.1 million, ~~net redemptions attributable~~distributions to ~~noncontrolling interests in CIVs and other consolidated investment products of $36.3 million, and distributions to~~affiliate noncontrolling interest holders of ~~$32.4~~$16.2 million and funding of employee tax withholdings by settlement of net share transactions of $12.6 million.

On April 3, 2020, we borrowed $250 million under the Credit Agreement to provide additional liquidity amid heightened uncertainty due to the COVID-19 pandemic. These borrowings were repaid in full on July 21, 2020 using existing cash resources. Based on our current level of operations, ~~and anticipated growth,~~ we expect that cash generated from our operating activities, together with available cash on hand, will be adequate to support our working capital needs for at least the next 12 months. ~~We currently~~Subject to the limitations contained in the Merger Agreement and if the closing of the Merger were not occurring, we would intend to utilize our available resources for activities including, but not limited to, ~~strategic restructuring costs,~~ acquisitions and seed capital investments in new and existing ~~products, and payment of dividends.~~products. In addition to our ordinary operating cash needs, we anticipate other cash needs during the next 12 months, ~~as discussed below.~~

~~Acquisition and Contingent Consideration~~

On April 10, 2019, Clarion Partners acquired a majority interest in Gramercy, a European real estate asset management business specializing in pan-European logistics and industrial assets. The transaction required an initial cash payment of $10.2 million, net of cash received,including various merger related payments, which ~~was paid using existing cash resources. The transaction also provided for a potential~~are contingent ~~consideration payment of up to $3.6 million (using the exchange rate as of December 31, 2019 for the €3.3 million potential payment), due on the fifth anniversary of closing~~ upon the ~~achievement of certain financial metrics. As of December 31, 2019, the related contingent consideration liability was $3.4 million.~~Merger closing, and will be made post-closing.

Noncontrolling Interests

As further described below, we may be obligated to settle noncontrolling interests related to certain affiliates. The following table presents a summary of the carrying values of our affiliate redeemable noncontrolling interests (in millions), excluding amounts related to management equity plans. These carrying values reflect the estimated settlement values, except when such estimated settlement values are less than the issuance price, the carrying value reflects the issuance price. The ultimate timing and amounts of noncontrolling interest settlements are generally too uncertain to project with any accuracy.

EnTrust Global Clarion Partners Other Total
Affiliate noncontrolling interests as of December 31, 2019 $ 383.5
$ 128.6
$ 12.8
$ 524.9



	EnTrust Global		Clarion Partners		Other		Total
Affiliate noncontrolling interests as of June 30, 2020	$	375.9	$	129.7	$	13.0	$	518.6

Noncontrolling interests of 35% of the outstanding equity of EnTrust Permal and 18% of the outstanding equity of Clarion Partners are subject to put and call provisions that may result in future cash outlays, generally starting in fiscal 2022, but subject to earlier effectiveness in certain circumstances.

On May 10, 2019, we purchased the 15% equity interest in RARE Infrastructure held by the firm's management team for total consideration of $22.0 million. The initial cash payment of $12.0 million, including $1.8 million of dividends in arrears, was made on May 10, 2019, using existing cash resources. The remaining consideration will be due, subject to certain conditions, 50% one year after closing and 50% two years after closing.

See Notes 9 and 13 of Notes to Consolidated Financial Statements for additional information.

Affiliate Management Equity Plans

In conjunction with the acquisition of Clarion Partners in April 2016, we implemented an affiliate management equity plan that entitles certain key employees of Clarion Partners to participate in 15% of the future growth, if any, of the enterprise value (subject to appropriate discounts) subsequent to the date of the grant. In March 2016, we implemented an affiliate management equity plan with Royce. Under this management equity plan, as of ~~December 31, 2019,~~June 30, 2020, noncontrolling interests equivalent to 24.5% in the Royce entity have been issued to its management team. In addition, we implemented an affiliate management equity plan in March 2014, that entitles certain key employees of ClearBridge to participate in 15% of the future growth, if any, of the enterprise value (subject to appropriate discounts). As of ~~December 31, 2019,~~June 30, 2020, the estimated redemption fair value for units under management equity plans aggregated ~~$82~~$84 million. Repurchases of units granted under the plans may impact future liquidity requirements, however, the amounts and timing of repurchases are too uncertain to

project with any accuracy. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding affiliate management equity plans.

Future Outlook

Strategic Restructuring

As previously discussed, ~~we have initiated a~~our strategic restructuring ~~to reduce costs.~~was substantially complete as of June 30, 2020. We ~~expect to incur aggregate restructuring costs in the range of $125 million to $135 million in connection with the strategic restructuring, which will be~~ incurred ~~through March 2021. The majority of the restructuring costs will be paid in cash. We have incurred $76.6 million of~~cumulative strategic restructuring costs of $88 million through ~~December 31, 2019, and~~June 30, 2020, approximately ~~$18~~20% of which were non-cash charges. These aggregate costs were significantly lower than our initial forecasted range of $130 million to $150 million. Approximately $55 million of these costs have been paid to ~~date. We expect to incur~~date and approximately ~~$13 million to $18~~$10 million of the remaining costs ~~during~~represent lease obligations to be paid over the ~~remainder of fiscal 2020 and $35 million~~lease term. Any additional charges related to ~~$40 million of costs in fiscal 2021.~~the strategic restructuring are not expected to be material. See Note 15 of Notes to Consolidated Financial Statements for additional information. ~~We expect that~~During the ~~strategic restructuring will result in future~~quarter ended June 30, 2020, we achieved annual run rate cost savings of ~~$100 million or more, substantially all of which will be cash savings. We expect to achieve these savings on a run rate basis by the end of fiscal 2021.~~$104 million. As of ~~December 31, 2019,~~June 30, 2020, we have realized cumulative savings of approximately ~~$49~~$84 million.

Short-term Debt and Long-term Borrowings

~~On July 15, 2019,~~As previously discussed, on April 3, 2020, we ~~repaid the~~borrowed $250 million ~~of 2.7% Senior Notes due July 2019, using existing cash resources. We do not currently expect to raise incremental debt or equity financing over~~under the next 12 months. Going forward, there can be no assurances of these expectations as our projections could prove to be incorrect, events may occur that require additional liquidity in excess of amounts available under our Credit Agreement, ~~such as an opportunity~~which was repaid in full on July 21, 2020. Upon the closing of the Merger, we intend to refinance indebtedness or complete an acquisition, or market conditions might significantly worsen, affecting our results of operations and generation of available cash. If these events result in our operations and available cash being insufficient to fund liquidity needs, we may seek to manage our available resources by taking actions such as reducing operating expenses, reducing our expected expenditures on investments, selling assets (such as investment securities), repatriating earnings from foreign subsidiaries, reducing our dividend, or modifying arrangements with our affiliates and/or employees. Should these types of actions prove insufficient, or should an acquisition or refinancing opportunity arise, we would likely utilize borrowing capacity under ourterminate the Credit ~~Agreement or seek to raise additional equity or debt.~~Agreement.

Liquid Assets

Our liquid assets include cash, cash equivalents, and certain current investment securities. As of ~~December 31, 2019,~~June 30, 2020, our total liquid assets of approximately ~~$967 million,~~$1.1 billion, included ~~$324~~$292 million of cash, cash equivalents, and investments held by foreign subsidiaries. Other net working capital amounts of foreign subsidiaries were not significant. In order to supplement cash available in the U.S. for general corporate purposes, we plan to utilize up to approximately $57 million of foreign cash over the next several years and anticipate that $36 million will be in the form of intercompany debt service payments by foreign affiliates, with the remainder provided from distribution of forecasted future offshore earnings. No further repatriation of foreign earnings is currently planned, and no additional tax expense is anticipated.

Other

In connection with the acquisition of Clarion Partners in April 2016, we committed to ultimately provide up to $100 million of seed capital to Clarion Partners products.

In January 2016, we acquired a minority equity position in Precidian Investments, LLC ("Precidian"). Under the terms of the transaction, we acquired series B preferred units of Precidian that entitle us to approximately 20% of the voting and economic interests of Precidian, along with customary preferred equity protections. Precidian has executed license arrangements with various financial institutions to use the ActiveShares® product. On January 22, 2020, we provided notice of our intent to convert our preferred units to 75% of the common equity of Precidian on a fully diluted basis, subject to satisfaction of certain closing conditions within the nine months following our notice. We ~~plan~~planned to use cash on hand for the related $25 million ~~payment.~~payment, however that event is after the closing of the Merger.

Our Consolidated Balance Sheet as of ~~December 31, 2019~~June 30, 2020, includes approximately 1% of total assets ~~(9%~~(8% of financial assets at fair value) and less than 1% of total liabilities ~~(71%~~(68% of financial liabilities measured at fair value) that meet the definition of Level 3.

~~On February 4, 2020, the Board of Directors approved a regular quarterly cash dividend in the amount of $0.40 per share, payable on April 20, 2020.~~

Contractual and Contingent Obligations

We have contractual obligations to make future payments, principally in connection with our long-term debt, non-cancelable lease agreements, acquisition agreements and service agreements. On ~~July 15, 2019,~~April 3, 2020, we ~~repaid~~borrowed $250 million ~~of our outstanding long-term debt.~~under the

Credit Agreement to provide additional liquidity amid heightened uncertainty due to the COVID-19 pandemic. These borrowings were repaid in full on July 21, 2020. There were no other material changes to our contractual obligations during the ~~nine~~three months ended ~~December 31, 2019.~~June 30, 2020. See Notes 7, 8 and 9 of Notes to Consolidated Financial Statements for additional disclosures related to our commitments.

~~Critical Accounting Policies~~

~~The following Critical Accounting Policies have been updated from our Annual Report on Form 10-K for the year ended March 31, 2019.~~

~~Intangible Assets and Goodwill~~

~~Balances as of~~ ~~December 31, 2019, were as follows (in thousands):~~

Amortizable asset management contracts $ 115,398
Indefinite-life intangible assets 3,213,424
Trade names 48,695
Goodwill 1,896,097
$ 5,273,614

Our identifiable intangible assets consist primarily of asset management contracts, contracts to manage proprietary mutual funds, hedge funds or funds-of-hedge funds, and trade names resulting from acquisitions. Asset management contracts are amortizable intangible assets that are capitalized at acquisition and amortized over the expected life of the contract. Contracts to manage proprietary mutual funds, hedge funds or funds-of-hedge funds are indefinite-life intangible assets because we assume that there is no foreseeable limit on the contract period due to the likelihood of continued renewal at little or no cost. Similarly, trade names are considered indefinite-life intangible assets because they are expected to generate cash flows indefinitely.

In allocating the purchase price of an acquisition to intangible assets, we must determine the fair value of the assets acquired. We determine fair values of intangible assets acquired based upon projected future cash flows, which take into consideration estimates and assumptions including profit margins, growth and/or attrition rates for acquired contracts based upon historical experience and other factors, estimated contract lives, discount rates, projected net client flows and market performance. The determination of estimated contract lives requires judgment based upon historical client turnover and attrition rates and the probability that contracts with termination provisions will be renewed. The discount rate employed is a weighted-average cost of capital that takes into consideration a premium representing the degree of risk inherent in the asset, as more fully described below.

~~Goodwill represents the residual amount of acquisition cost in excess of identified tangible and intangible assets and assumed liabilities.~~

Given the relative significance of our intangible assets and goodwill to our consolidated financial statements, on a quarterly basis we consider if triggering events have occurred that may indicate a significant change in fair values. Triggering events may include significant adverse changes in our business or the legal or regulatory environment, loss of key personnel, significant business dispositions, or other events, including changes in economic arrangements with our affiliates that will impact future operating results. If a triggering event has occurred, we perform quantitative tests, which include critical reviews of all significant assumptions, to determine if any intangible assets or goodwill are impaired. If we have not qualitatively concluded that it is more likely than not that the respective fair values exceed the related carrying values, we perform these tests for indefinite-life intangible assets and goodwill annually.

~~Details of our intangible assets and goodwill and the related impairment tests follow.~~

We performed our annual impairment testing of goodwill and indefinite-life intangible assets as of October 31, 2019, and determined that there was no impairment in the value of these assets. We also performed our periodic impairment review of amortizable intangible assets as of October 31, 2019, and determined that there was no impairment in the value of these assets. We also reviewed more critical valuation inputs as of December 31, 2019 to determine that no further quantitative analyses were warranted.

~~Amortizable Intangible Assets~~

Intangible assets subject to amortization are considered for impairment at each reporting period using an undiscounted cash flow analysis. Significant assumptions used in assessing the recoverability of management contract intangible assets include projected cash flows generated by the contracts and the remaining lives of the contracts. Projected cash flows are based on fees generated by current AUM for the applicable contracts. Contracts are generally assumed to turnover evenly throughout the life of the intangible asset. The remaining life of the asset is based upon factors such as average client retention and client turnover rates. If the amortization periods are no longer appropriate, the expected lives are adjusted and the impact on the fair value is assessed. Actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash flows.

As of October 31, 2019, the fair value of the EnTrust Capital separate account contracts amortizable asset exceeded the carrying value of $37 million by 7%. Despite the excess of fair value over the related carrying value, future decreases in our cash flow projections, resulting from actual results, or changes in assumptions due to client attrition and the related reduction in revenues, investment performance, market conditions, or other factors, may result in impairment of this asset. There can be no assurance that continued client attrition, asset outflows, market uncertainty, or other factors, will not produce an additional impairment in this asset.

As of October 31, 2019, the Clarion Partners separate account contracts amortizable asset net carrying values of $65 million comprised approximately 55% of our total amortizable intangible asset management contracts and other aggregate carrying value. As of December 31, 2019, the cumulative undiscounted cash flows related to this separate account contracts amortizable asset exceeded the carrying value by a material amount.

~~The estimated remaining useful lives of amortizable intangible assets currently range from one to eight years with a weighted-average life of approximately 5.6 years.~~

~~Indefinite-Life Intangible Assets~~

For intangible assets with lives that are indeterminable or indefinite, fair value is determined from a market participant's perspective based on projected discounted cash flows, taking into account the values market participants would pay in a taxable transaction to acquire the respective assets. We have two primary types of indefinite-life intangible assets: proprietary fund contracts and, to a lesser extent, trade names.

We determine the fair value of our intangible assets based upon discounted projected cash flows, which take into consideration estimates of future fees, profit margins, growth rates, taxes, and discount rates. The determination of the fair values of our indefinite-life intangible assets is highly dependent on these estimates and changes in these inputs could result in a material impairment of the related carrying values. An asset is determined to be impaired if the current implied fair value is less than the recorded carrying value of the asset. If an asset is impaired, the difference between the current implied fair value and the carrying value of the asset reflected on the financial statements is recognized as an operating expense in the period in which the impairment is determined to exist.

Contracts that are managed and operated as a single unit, such as contracts within the same family of funds, are reviewed in aggregate and are considered interchangeable if investors can transfer between funds with limited restrictions. Similarly, cash flows generated by new funds added to the fund group are included when determining the fair value of the intangible asset.

Projected cash flows are based on annualized cash flows for the applicable contracts projected forward 40 years, assuming annual cash flow growth from estimated net client flows and projected market performance. To estimate the projected cash flows, projected growth rates by affiliate are used to project their AUM. Cash flow growth rates consider estimates of both AUM flows and market expectations by asset class (equity, fixed income, alternative, and liquidity) and by investment manager based upon, among other things, historical experience and expectations of future market and investment performance

from internal and external sources. Currently, our market growth assumptions are 4.5% for equity, 2% for fixed income, 3% for alternative, and 0% for liquidity products, with a general assumption of 2% organic growth for all products, subject to exceptions for organic growth (contraction), generally in years one through five.

The starting point for these assumptions is our corporate planning process that includes three-year AUM projections from the management of each operating affiliate that consider the specific business circumstances of each affiliate, with assumptions for certain affiliates adjusted, as appropriate, to reflect a market participant view. Beyond year three, the estimates move towards our general organic growth assumption of 2%, as appropriate for each affiliate and asset class, through year 20. The resulting cash flow growth rate for year 20 is held constant and used to further project cash flows through year 40. Based on projected AUM by affiliate and asset class, affiliate advisory fee rates are applied to determine projected revenues. The domestic mutual fund contracts projected revenues are applied to a weighted-average margin for the applicable affiliates that manage the AUM. Margins are based on arrangements currently in place at each affiliate. Projected operating income is further reduced by an appropriate tax rate to calculate the projected cash flows.

We believe our growth assumptions are reasonable given our consideration of multiple inputs, including internal and external sources, although our assumptions are subject to change based on fluctuations in our actual results and market conditions. Our assumptions are also subject to change due to, among other factors, poor investment performance by one or more of our operating affiliates, the withdrawal of AUM by clients, changes in business climate, adverse regulatory actions, or loss of key personnel. We consider these risks in the development of our growth assumptions and discount rates, discussed further below. Further, actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash flows.

Our process includes comparison of actual results to prior growth projections. However, differences between actual results and our prior projections are not necessarily indicative of a need to reassess our estimates given that our discounted projected cash flow analyses include projections well beyond three years and variances in the near-years may be offset in subsequent years; fair value assessments are point-in-time, and the consistency of a fair value assessment with other indicators of value that reflect expectations of market participants at that point-in-time is critical evidence of the soundness of the estimate of value. In subsequent periods, we consider the differences in actual results from our prior projections in considering the reasonableness of the growth assumptions used in our current impairment testing.

Discount rates are based on appropriately weighted estimated costs of debt and equity capital using a market participant perspective. We estimate the cost of debt based on published debt rates. We estimate the cost of equity capital based on the Capital Asset Pricing Model, which considers the risk-free interest rate, peer-group betas, and company and equity risk premiums. The equity risk is further adjusted to consider the relative risk associated with each of our indefinite-life intangible asset and our reporting unit. The discount rates are also calibrated based on an assessment of relevant market values.

Consistent with standard valuation practices for taxable transactions, the projected discounted cash flow analysis also factors in a tax benefit value, as appropriate. This tax benefit represents the discounted tax savings a third party that purchased an asset on a given valuation date would receive from future tax deductions for the amortization of the purchase price over 15 years.

The domestic mutual fund contracts acquired in the Citigroup Asset Management (“CAM”) transaction of $2.1 billion, account for approximately 65% of our indefinite-life intangible assets. As of October 31, 2019, approximately $163 billion of AUM, primarily managed by Western Asset and ClearBridge, was associated with this asset, with approximately 38% in equity AUM, 48% in fixed income AUM and 14% in liquidity AUM. Although our domestic mutual funds overall have maintained strong recent market performance, previously disclosed uncertainties regarding market conditions and asset flows and risks related to potential regulatory changes in the liquidity business, are reflected in our projected discounted cash flow analyses. Based on our projected discounted cash flow analyses, the related fair value exceeded its carrying value by a material amount. For our impairment test, cash flows from the domestic mutual fund contracts were assumed to have annual growth rates averaging approximately 6% and reflect moderate AUM inflows. Projected cash flows of the domestic mutual fund contracts were discounted at 14.0%.

As of October 31, 2019, the Clarion Partners fund management contracts asset of $505 million accounted for approximately 16% of our indefinite-life intangible assets. Based on our projected discounted cash flow analyses, the related fair value exceeded its carrying value by a material amount. For our impairment test, cash flows from the Clarion Partners fund

management contracts were assumed to have long-term annual growth rates averaging 6% and reflect moderate AUM inflows throughout the projection period. Projected cash flows of the Clarion Partners fund management contracts were discounted at 13.0%.

As of October 31, 2019, the combined EnTrust Global fund management contracts asset of $127 million accounted for approximately 4% of our indefinite-life intangible assets and is supported by the combined EnTrust Global fund management business. Based on our projected discounted cash flow analyses, the related fair value exceeded its carrying value by 10%. For our impairment test, base revenues related to EnTrust Global fund management contracts were assumed to have long-term annual growth rates averaging 6%. Given current experience, projected near-year cash flows reflect AUM outflows in years one and two, and trend to modest AUM inflows of 2% by year five. The projected cash flows from the EnTrust Global fund management contracts were discounted at 15.5%.

As of October 31, 2019, the RARE Infrastructure fund management contracts asset of $55 million accounted for approximately 2% of our indefinite-life intangible assets. Based on our projected discounted cash flow analyses, the related fair value exceeded its carrying value by a material amount. For our impairment test, cash flows from the RARE Infrastructure fund management contracts were assumed to have long-term annual growth rates averaging 10%. Given current experience, projected near-year cash flows reflect reduced AUM inflows throughout the projection period and modest performance fees. The projected cash flows from the RARE Infrastructure fund management contracts were discounted at 15.0%.

Future decreases in our cash flow projections or increases in the discount rate, resulting from actual results, or changes in assumptions resulting from flow and AUM levels, investment performance, market conditions, or other factors, may result in impairment of this asset. There can be no assurance that asset flows, market uncertainty, or other factors will not produce an impairment in this asset, which could be significant.

Trade names account for 1% of indefinite-life intangible assets and are primarily related to Clarion Partners and EnTrust Global, which had carrying values of $23 million and $10 million, respectively. We tested these intangible assets using a relief from royalty approach and discounted cash flow methods similar to those described above for indefinite-life contracts. The resulting fair value of the EnTrust Global trade name exceeded the carrying value by 6%. As of October 31, 2019, the resulting fair values of our other trade name assets significantly exceeded the related carrying amounts.

~~Goodwill~~

Goodwill is evaluated at the reporting unit level and is considered for impairment when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the implied fair value of the reporting unit, we use valuation techniques based on discounted projected cash flows and EBITDA multiples, similar to techniques employed in analyzing the purchase price of an acquisition. We continue to be managed as one Global Asset Management operating segment. Internal management reporting of discrete financial information regularly received by the chief operating decision maker, our Chief Executive Officer, is at the consolidated Global Asset Management business level. As a result, goodwill is recorded and evaluated at one Global Asset Management reporting unit level. Our Global Asset Management reporting unit consists of the operating businesses of our asset management affiliates and our centralized global distribution operations. In our impairment testing process, all consolidated assets (except for certain tax benefits) and liabilities are allocated to our single Global Asset Management reporting unit. Similarly, the projected operating results of the reporting unit include our holding company corporate costs and overhead, including interest expense and costs associated with executive management, finance, human resources, legal and compliance, internal audit and other central corporate functions.

Goodwill principally originated from the acquisitions of CAM, Permal, Royce, Martin Currie, RARE Infrastructure, Clarion Partners, and EnTrust. The value of the reporting unit is based in part, on projected consolidated net cash flows, including all cash flows of assets managed in our mutual funds, closed-end funds and other proprietary funds, in addition to separate account assets of our managers.

Significant assumptions used in assessing the implied fair value of the reporting unit under the discounted cash flow method are consistent with the methodology discussed above for indefinite-life intangible assets. Also, at the reporting unit level, future corporate costs are estimated and consolidated with the projected operating results of all our affiliates.

Actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash flows.

Discount rates are based on appropriately weighted estimated costs of debt using a market participant perspective, also consistent with the methodology discussed above for indefinite-life intangible assets.

We also perform a market-based valuation of our reporting unit value, which applies an average of EBITDA multiples paid in change of control transactions for peer companies to our EBITDA. The results of our two estimates of value for the reporting unit (the discounted cash flow and EBITDA multiple analyses) are compared and significant differences, if any, are assessed to determine the reasonableness of each value and whether any adjustment to either result is warranted. Once the values are accepted, the appropriately weighted average of the two reporting unit valuations (the discounted cash flow and EBITDA multiple analyses) is used as the implied fair value of our Global Asset Management reporting unit, which at October 31, 2019, exceeded the carrying value by 22%. Considering the relative merits of the details involved in each valuation process, we used an equal weighting of the two values for the 2019 testing. The significant assumptions used in the cash flow analysis included projected average annual cash flow growth rates of 7% and the projected cash flows were discounted at 16.0%. Changes in the assumptions underlying projected cash flows from the reporting unit or its EBITDA multiple, resulting from market conditions, reduced AUM or other factors, could result in an impairment of goodwill, and such an impairment could potentially have a material impact on our results of operations and financial condition.

We further assess the accuracy of the reporting unit value determined from these valuation methods by comparing their results to our market capitalization to determine an implied control premium. The reasonableness of this implied control premium is considered by comparing it to control premiums that have been paid in relevant actual change of control transactions. This assessment provides evidence that our underlying assumptions in our analyses of our reporting unit fair value are reasonable.

In calculating our market capitalization for these purposes, market volatility can have a significant impact on our capitalization, and if appropriate, we may consider the average market prices of our stock for a period of one or two months before the test date to determine market capitalization. A control premium arises from the fact that in an acquisition, there is typically a premium paid over current market prices of publicly traded companies that relates to the ability to control the operations of an acquired company. Further, assessments of control premiums in the asset management industry are difficult because many acquisitions involve privately held companies, or involve only portions of a public company, such that no control premium can be calculated.

Recent market evidence regarding control premiums suggest values of up to 173%, with an average of 24%. Based on our analysis and consideration, we believe the implied control premium of 37% determined by our reporting unit value estimation at October 31, 2019, is reasonable in relation to the observed relevant market control premium values.

~~Recent Accounting Developments~~

~~See discussion of Recent Accounting Developments in Note~~ 2 ~~of Notes to Consolidated Financial Statements.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the ~~nine~~three months ended ~~December 31, 2019~~June 30, 2020, there were no material changes to the information contained in Part II, Item 7A of Legg Mason’s Annual Report on Form 10-K for the fiscal year ended March 31, ~~2019.~~2020.

Item 4. Controls and Procedures

As of ~~December 31, 2019~~June 30, 2020, Legg Mason's management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of Legg Mason's disclosure controls and procedures. In evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Legg Mason's management, including its Chief Executive Officer and its Chief Financial Officer, concluded that Legg Mason's disclosure controls and procedures were effective on a reasonable assurances basis. ~~Other than noted below, there~~There have been no changes in Legg Mason's internal controls over financial reporting that occurred during the quarter ended ~~December 31, 2019~~June 30, 2020, that have materially affected, or are reasonably likely to materially affect, Legg Mason's internal control over financial reporting.

In November 2019, Legg Mason extended its use of an existing general ledger system to additional subsidiaries and provided enhancements to the existing system installation. Expansion of the system to additional subsidiaries and the related enhancements are intended to further improve the overall system of internal controls over financial reporting and ultimately provide efficiencies from one common general ledger system. The system expansion and enhancements are significant and complex, resulting in the modification of certain internal controls.

PART II. OTHER INFORMATION

~~Item 1A. Risk Factors~~

The following is an update to the risk factors set forth in our Report on Form 10-K for the fiscal year ended March 31, 2019. The risk factors below have been updated to include activity for the nine months ended December 31, 2019.

~~We May Incur Charges Related to Leased Facilities~~

We continue to be exposed to the risk of incurring charges related to subleases or vacant space for several of our leased offices. As of December 31, 2019, our right-of-use (“ROU”) assets with commitments from third parties under non-cancellable subleases were approximately $74 million. As of December 31, 2019, our total ROU assets for office space that we vacated and are seeking to sublease were approximately $2 million, after impairment charges of approximately $4.3 million recognized in the quarter ended December 31, 2019. Under generally accepted accounting principles, when the carrying value of a ROU asset is deemed to not be fully recoverable, (i.e., at the time a sublease is entered into or space is deemed abandoned), we must incur a charge equal to the present value of the amounts by which the fixed rental commitments under the lease exceed the amounts expected to be received under a sublease, if any. As a result, in a period of declining commercial lease markets, we are exposed to the risk of incurring charges relating to any premises we are seeking to sublease resulting from longer periods to identify sub-tenants and reduced market rent rates leading to new sub-tenants paying less in rent than we are paying under our lease. Also, if a sub-tenant defaults on its sublease, we would likely incur a charge for the rent that we will incur during the period that we expect would be required to sublease the premises and any reduction in rent that current market rent rates lead us to expect a new sub-tenant will pay. There can be no assurance that we will not recognize additional lease-related charges, which may be material to our results of operations.

~~Potential Impairment of Goodwill and Intangible Assets Could Increase our Expenses and Reduce our Assets~~

Determining goodwill and intangible assets, and evaluating them for impairment, requires significant management estimates and judgment, including estimating value and assessing life in connection with the allocation of purchase price in the acquisition creating them. Our goodwill and intangible assets may become impaired as a result of any number of factors, including losses of investment management contracts or declines in the value of managed assets. Any impairment of goodwill or intangibles could have a material adverse effect on our results of operations. For example, during the quarter ended December 31, 2018, we incurred $365.2 million of aggregate impairment charges. These impairment charges were comprised of $274.6 million and $18.2 million associated with our combined EnTrust Global indefinite-life fund management contracts asset and trade name asset, respectively, and $65.0 million, $6.4 million, and $1.0 million, associated with our RARE Infrastructure indefinite-life fund management contracts asset, amortizable fund management contracts asset, and trade name asset, respectively. Subsequent to December 31, 2018, no additional intangible asset impairment charges have been recognized. Further, as of October 31, 2019, the date of our most recent impairment testing, the assessed fair values of the EnTrust Global indefinite-life fund management contracts and trade name assets exceeded their respective carrying values of $126.8 million and $10.3 million by 10% and 6%, respectively, and the implied fair value of our Global Asset Management reporting unit exceeded its carry value of $1.9 billion by 22%. Changes in the assumptions underlying projected cash flows from the assets or reporting unit, resulting from market conditions, reduced AUM or other factors, could result in an impairment of any of these assets.

There can be no assurances that continued market uncertainty or asset outflows, or other factors, will not produce additional impairments. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Intangible Assets and Goodwill" and "Note 6 ~~of Notes to Consolidated Financial Statements."~~

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets out information regarding our purchases of Legg Mason common stock in each month during the three months ended ~~December 31, 2019~~June 30, 2020:

Period
Total number
of shares
purchased ⁽¹⁾

Average price
paid per share ⁽¹⁾⁽²⁾

Total number of
shares purchased
as part of
publicly announced
plans or programs

Approximate dollar value that may
yet be purchased
under the plans
or programs
October 1, 2019 through October 31, 2019 11,684
$ 37.74
—
$ —
November 1, 2019 through November 30, 2019 476
38.03
—
—
December 1, 2019 through December 31, 2019 127
39.27
—
—
Total 12,287
37.76
—
$ —



Period	Total number of shares purchased ⁽¹⁾	Average price paid per share ⁽¹⁾⁽²⁾		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value that may yet be purchased under the plans or programs
April 1, 2020 through April 30, 2020	59,458	$	49.10	—	$	—
May 1, 2020 through May 31, 2020	357,122	52.28		—	—
June 1, 2020 through June 30, 2020	311,226	50.00		—	—
Total	727,806	$	51.05	—	$	—


(1)	Includes shares of vesting restricted stock, and shares received on vesting of restricted stock units, surrendered to Legg Mason to satisfy related income tax withholding obligations of employees via net share transactions.


(2)	Amounts exclude fees.

Item 6. Exhibits



3.1	Articles of Incorporation of Legg Mason, as amended (incorporated by reference to Legg Mason's Current Report on Form 8-K filed July 28, 2011)
3.2	ByLaws of Legg Mason, as amended and restated June 12, 2018 (incorporated by reference to Legg Mason's Current Report on Form 8-K filed June 15, 2018)
31.1	Certification of Chief Executive Officer
31.2	Certification of Principal Financial Officer
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Financial statements from the quarterly report on Form 10-Q of Legg Mason, Inc. for the quarter ended ~~December 31, 2019,~~June 30, 2020, filed on ~~February 5,~~July 31, 2020, formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, ~~(Loss),~~ (iii) the Consolidated Statements of Comprehensive Income, ~~(Loss),~~ (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements tagged in detail. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LEGG MASON, INC.



DATE:	~~February 5,~~July 31, 2020	/s/ Joseph A. Sullivan
		Joseph A. Sullivan
		President, Chief Executive Officer, and
		Chairman of the Board


DATE:	~~February 5,~~July 31, 2020	/s/ Peter H. Nachtwey
		Peter H. Nachtwey
		Senior Executive Vice President
		and Chief Financial Officer

7657



	Balance as of September 30, 2019			Purchases		Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2019
Assets:
Equity investments - seed capital	$	20,200		$	1,000	—		—			—		346			21,546
Equity method investments:
Seed capital investments	43,252			283		—		(2,073		)	—		1,878			43,340
Other	1,297			—		—		(1,209		)	—		(35		)	53
Adjusted cost investments	22,869			3,497		—		—			—		—			26,366
	$	87,618		$	3,780	$	—	$	(3,282	)	$	—	$	1,843		$	91,305
Liabilities:
Contingent consideration liabilities	$	(3,625	)	$	—	n/a		$	250		n/a		$	(1	)	$	(3,376	)



	Balance as of September 30, 2018			Purchases		Sales		Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Balance as of December 31, 2018
Assets:
Equity investments - seed capital	$	1,394		$	—	$	—	$	—		$	—	$	(128	)	$	1,266
Equity method investments:
Seed capital investments	37,020			5,516		—		(1,880		)	—		398			41,054
Other	1,840			—		—		(19		)	—		—			1,821
Adjusted cost investments	10,906			1,063		—		—			—		3			11,972
	$	51,160		$	6,579	$	—	$	(1,899	)	$	—	$	273		$	56,113
Liabilities:
Contingent consideration liabilities	$	(1,900	)	$	—	n/a		$	—		n/a		$	—		$	(1,900	)



	Operating Leases⁽¹⁾
2020	$	90,667
2021	86,095
2022	84,485
2023	83,425
2024	72,192
Thereafter	47,240
Total	$	464,104



	May 2019		May 2018
Expected dividend yield	4.41	%	3.49	%
Risk-free interest rate	2.11	%	2.71	%
Average expected volatility	23.96	%	26.14	%



	Minimum		Maximum
Compensation and benefits	$	12,000	$	17,000
Occupancy	16,000		18,000
Other costs	20,000		23,000
Total	$	48,000	$	58,000



	Nine Months Ended December 31,
	2019			2018
Beginning of period	$	758.0		$	754.1
Net client cash flows:
Investment funds, excluding liquidity funds⁽¹⁾
Subscriptions	51.8			41.2
Redemptions	(43.5		)	(50.6		)
Long-term separate account flows, net	(9.0		)	(0.9		)
Total long-term flows	(0.7		)	(10.3		)
Total liquidity flows	(5.1		)	10.4
Total net client cash flows	(5.8		)	0.1
Realizations⁽²⁾	(1.2		)	(0.7		)
Market performance and other⁽³⁾	51.4			(17.8		)
Impact of foreign exchange	0.5			(8.5		)
Acquisition	0.6			—
End of period	$	803.5		$	727.2



	Equity			Fixed Income			Alternative			Total Long-Term			Liquidity			Total
March 31, 2019	$	202.0		$	419.6		$	68.6		$	690.2		$	67.8		$	758.0
Investment funds, excluding liquidity funds⁽¹⁾:
Subscriptions	17.6			28.2			6.0			51.8			—			51.8
Redemptions	(21.2		)	(19.6		)	(2.7		)	(43.5		)	—			(43.5		)
Long-term separate account flows, net	(6.9		)	(3.5		)	1.4			(9.0		)	—			(9.0		)
Liquidity flows, net	—			—			—			—			(5.1		)	(5.1		)
Net client cash flows	(10.5		)	5.1			4.7			(0.7		)	(5.1		)	(5.8		)
Realizations⁽²⁾	—			—			(1.2		)	(1.2		)	—			(1.2		)
Market performance and other⁽³⁾	22.4			26.7			1.6			50.7			0.7			51.4
Impact of foreign exchange	0.1			0.4			—			0.5			—			0.5
Acquisition	—			—			0.6			0.6			—			0.6
December 31, 2019	$	214.0		$	451.8		$	74.3		$	740.1		$	63.4		$	803.5



Amortizable asset management contracts	$	115,398
Indefinite-life intangible assets	3,213,424
Trade names	48,695
Goodwill	1,896,097
	$	5,273,614