EDGAR 10-K Filing

Company CIK: 1466538
Filing Year: 2021
Filename: 1466538_10-K_2021_0001466538-21-000029.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
Cowen Inc., a Delaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment banking, research, sales and trading, prime brokerage, global clearing, securities financing, commission management services and investment management through its two business segments: the Operating Company ("Op Co") and the Asset Company ("Asset Co").
Operating Company
The Op Co segment consists of four divisions: the Cowen Investment Management ("CIM") division, the Investment Banking division, the Markets division (which includes sales and trading, prime brokerage, global clearing, securities financing and commission management services) and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division collectively as its investment banking businesses. Op Co's CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment banking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination, domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing, commission management services and also a comprehensive suite of prime brokerage services.
The CIM division is the Company's investment management business, which operates primarily under the Cowen Investment Management name. CIM offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been registered with the United States ("U.S.") Securities and Exchange Commission (the "SEC") as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") since 1997. The Company's investment management business offers investors access to a number of strategies to meet their specific needs including private healthcare investing, private sustainable investing, healthcare royalties, activism and merger arbitrage. A portion of the Company’s capital is invested alongside the Company's investment management clients. The Company has also invested some of its capital in its reinsurance businesses.
Op Co's investment banking businesses include investment banking, research, sales and trading, prime brokerage, global clearing and commission management services provided primarily to companies and institutional investor clients. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, information and technology services, and energy. We provide research and brokerage services to over 6,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our sectors. The investment banking businesses also offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time, the Company invests in private capital raising transactions of its investment banking clients.
Asset Company
The Asset Co segment consists of the Company's private investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
Principal Business Lines
Investment Banking
Our investment banking department provides strategic advisory and capital raising services to U.S. and international public and private companies in our sectors. Our strategic advisory services include, among other things, acquisitions, divestitures, fairness opinions, spin-offs, and partnerships. Our capital markets group consists of two groups: (i) equity capital markets (including convertible securities), which focuses on raising equity capital in the public markets, and (ii) private capital solutions, which focuses on providing alternative sources of capital and balance sheet solutions, including private equity, family offices, alternative lenders and liability management. A significant amount of our investment banking revenue has been earned from high-growth small and mid-capitalization companies. From time to time, the Company invests in private capital raising transactions of its clients.
Brokerage
Our team of brokerage professionals serves institutional investor clients in the U.S. and internationally. We trade common stocks, listed options, equity-linked securities and other financial instruments on behalf of our clients and offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. We provide our clients with an electronic execution suite. We provide global, multi-asset class algorithmic execution trading models to both buy side and sell side clients and also offer execution capabilities relating to these trading models through ATM Execution LLC ("ATM Execution"). We also provide our clients with commentary on political, economic and market conditions. We have relationships with over 6,000 institutional investor clients. Our brokerage team is comprised of experienced professionals dedicated to our sectors, which allows us to develop a level of knowledge and focus that we believe differentiates our brokerage capabilities from those of many of our competitors. We tailor our account coverage to the unique needs of our clients. We believe that our sector traders are able to provide superior execution because of their knowledge of the interests of our institutional investor clients in specific companies in our sectors.
In connection with the brokerage services we provide, our sales professionals also provide our institutional investor clients with corporate access to our investment banking clients outside the context of financing transactions. These meetings are commonly referred to as non-deal road shows. Non-deal road shows allow our investment banking clients to increase their visibility within the institutional investor community while providing our institutional investor clients with the opportunity to further educate themselves on companies and industries through meetings with management. We believe our deep relationships with company management teams and our sector-focused approach provide us with broad access to management for the benefit of our institutional investor and investment banking clients.
Research
As of December 31, 2020, we had a research team of 54 senior analysts covering over 800 stocks. Within our equity coverage universe, approximately 34% are healthcare companies, 25% are TMT (technology, media and telecom) companies, 12% are energy companies, 11% are capital goods, industrial and basic materials companies, and 14% are consumer companies. Our approach to research, underpinned by our marquee Ahead Of The Curve® Series reports, focuses our analysts' efforts toward delivering differentiated investment ideas and de-emphasizes maintenance research. We place significant emphasis on analyst collaboration, both within and between sectors. We sponsor a number of conferences every year that are focused on our sectors and sub-sectors. During these conferences we highlight our investment research and provide significant investor access to corporate management teams. We provide research solely through our broker-dealers in connection with our provision of brokerage services.
Investment Management Strategies
The Company's investment management business, within the Op Co segment, focuses on addressing the needs of institutional investors and high net worth individuals to preserve and grow allocated capital. The Company and its affiliated investment advisors offer a variety of investment management products that provide access to a number of strategies, including private healthcare investing, private sustainable investing, merger arbitrage and activism.
The Company's investment management business, within the Asset Co segment, consists of the Company's private investments, private real estate investments and other legacy investment strategies. Certain multi-strategy hedge funds managed by the Company are currently in wind-down. The majority of assets remaining in these hedge funds include investments in private companies, real estate investments and special situations.
Information About Geographic Areas
We are principally engaged in providing investment management services to global institutional investors and investment banking sales and trading and research services to corporations and institutional investor clients primarily in the United States and Europe. We provide brokerage services to companies and institutional investor clients in Europe through our broker-dealers located in the United Kingdom ("U.K.") Cowen International Limited ("Cowen International Ltd") and Cowen Execution Services Limited ("Cowen Execution Ltd"). Cowen and Company (Asia) Limited ("Cowen Asia") is registered with and subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong.
Human Capital
We believe a strong connected culture is what empowers our team members to help each other and our clients outperform. We do this by viewing what we do through the lens of our core values of vision, empathy, sustainability, and tenacious teamwork.
When the COVID-19 crisis hit in the first quarter of 2020, we moved rapidly to protect the health and safety of our team as we transitioned to operating remotely while continuing to serve our clients. We are approaching the structure of our future workplace with flexibility and considering individual challenges our team members face.
During our history we have built and maintained long term relationships with our clients and continue to do so for our colleagues as evidenced by our 2020 voluntary turnover rate of 6.3%.
Collaboration and teamwork are standard operating procedures for our employees across the globe. As of December 31, 2020, we employed 1,364 employees: 1,143 in the US, 211 in Europe, and 10 in Asia (or Hong Kong). We strive to attract individuals who are smart, ambitious, work collaboratively and most importantly share our core values.
Our client facing professionals create annual business plans at the beginning of each year and are given feedback and developmental support to help deliver on those plans. Employees who show high potential work with performance coaches to develop leadership skills. Our Investment Banking Summer Analyst program is highly competitive and consists of two of weeks of formal training followed by eight weeks working within an Investment Banking group. This program is the main feeder to our Full-Time Investment Banking Analyst Program where the individual receives five weeks of formal training: the Investment Banking Class of 2021 (Full-time Analyst Program) is expected to have approximately 80% of those analysts who participated in our 2020 Investment Banking Summer Program.
We reward and recognize our employees with competitive health, wellness and compensation programs and recently issued COWN shares to every employee in appreciation for their efforts during 2020 to live our values and to provide all our colleagues with an ownership stake in the firm.
Our CEO has signed the CEO Action for Diversity & Inclusion in support of creating a more inclusive workplace for our employees, our communities and society at large. We partner with organizations to recruit and develop underserved students and established a program to attract women who outperform. We measure our Diversity and Inclusion efforts by listening and acting on feedback received from employees, engaging senior management in D&I efforts and creating commitment on the divisional and firm-wide level.
Through our Cowen Cares platform, we have created a culture of charitable giving through our Matching Gift Program and encourage service through the Volunteer Committee at local, national and global levels.
Competition
We compete with many other firms in all aspects of our business, including raising funds, seeking investment opportunities and hiring and retaining professionals, and we expect our business will continue to be highly competitive. The investment management and investment banking industries are currently undergoing contraction and consolidation, reducing the number of industry participants and generally resulting in the larger firms being better positioned to retain and gain market share. We compete in the United States and globally for investment opportunities, investor capital, client relationships, reputation and talent. We face competitors that are larger than we are and have greater financial, technical and marketing resources. Certain of these competitors continue to raise additional amounts of capital to pursue investment strategies that may be similar to ours. Some of these competitors may also have access to liquidity sources that are not available to us, which may pose challenges for us with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make different risk assessments than we do, allowing them to consider a wider variety of investments and establish broader networks of business relationships. Our competitive position depends on our reputation, our investment performance and processes, the breadth of our business platform and our ability to continue to attract and retain qualified employees while managing compensation and other costs. For additional information regarding the competitive risks that we face, see "Item 1A Risk Factors".
Regulation and Compliance
Our businesses, as well as the financial services industry generally, are subject to extensive regulation, including periodic examinations by governmental and self-regulatory organizations, in the United States and the jurisdictions in which we operate around the world. As a publicly traded company in the United States, we are subject to the U.S. federal securities laws and regulation by the SEC. Through our investment management and/or investment bank businesses we are subject to regulation by the SEC, the U.S. Commodity Futures Trading Commission ("CFTC"), the Financial Industry Regulatory Authority, Inc. ("FINRA") the National Futures Association ("NFA"), other self-regulatory organizations and exchanges related to the financial services industry and the fifty state securities commissions in the U.S. and by the U.K. Financial Conduct Authority ("FCA") and the Securities and Finance Commission ("SFC") of Hong Kong.
Virtually all aspects of our business are subject to various laws and regulations both inside and outside the U.S., some of which are summarized below. Regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and protecting the interests of customers participating in those markets. Governmental authorities in the United States and in the other countries in which we operate from time to time propose additional disclosure requirements and regulations covering our broker-dealers and investment management businesses. The rules governing the regulation of the various aspects of our business are very detailed and technical. Accordingly, the discussion below is general in nature, does not purport to be complete and is current only as of the date of this report.
Our businesses have operated for many years within a legal framework that requires us to be able to monitor and comply with a broad range of legal and regulatory developments that affect our activities both in the United States and abroad. As noted above, certain of our businesses are subject to compliance with laws and regulations of United States federal and state governments, foreign governments, their respective agencies and/or various self-regulatory organizations or exchanges, and any failure to comply with these regulations could expose us to liability and/or reputational damage. Additional legislation, changes in rules promulgated by the SEC, our other regulators and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of our operation and profitability. The United States and non-United States government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion or deregulation of a broker-dealer, an investment advisor or its directors, officers or employees.
Rigorous legal and compliance analysis of our businesses and investments is important to our culture and risk management. We conduct regular training of our personnel regarding the laws and regulations governing our business and applicable to our clients as well as with our company's policies and procedures. In addition, we have adopted and implemented disclosure controls and procedures and internal controls over financial reporting, which have been documented, tested and assessed for design and operating effectiveness in compliance with the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"). We strive to maintain a culture of compliance through the use of policies and procedures such as oversight compliance, codes of conduct, compliance systems, communication of compliance guidance, conduct of annual compliance reviews and on-going employee education and training. Our corporate risk management function further analyzes our business, investment and other key risks, reinforcing their importance in our environment. We have a compliance group that monitors our compliance with all of the regulatory requirements to which we are subject and manages our compliance policies and procedures. Our General Counsel supervises our compliance group, which is responsible for addressing all regulatory and compliance matters that affect our activities. Our compliance policies and procedures address a variety of regulatory and compliance risks such as the handling of material non-public information, position reporting, personal securities trading, valuation of investments, document retention, potential conflicts of interest and the allocation of investment opportunities. Our compliance group also monitors the information barriers that we maintain between those of our different businesses that we are required to conduct separately or which present conflicts of interest, which we address through the use of physical and systematic information barriers. We believe that our various businesses' access to the intellectual capital, contacts and relationships benefit all of our businesses. However, in order to maximize that access without compromising our legal and contractual obligations, our compliance group oversees and monitors the communications between or among our different businesses to ensure that we maintain material non-public information, client information and other confidential information in strict confidence. All parts of our business from time to time are subject to regulatory exams, investigations and proceedings, and our broker-dealers have received fines and penalties for infractions of various regulations relating to our activities. For additional information regarding the regulatory and compliance risks that we face, see "Item 1A Risk Factors".
The investment advisers responsible for the Company's investment management businesses are all registered as investment advisers with the SEC or rely upon the registration of an affiliated adviser, and all are currently exempt from registration as Commodity Pool Operators and Commodity Trading Advisors.
Registered investment advisers are subject to the requirements of the Advisers Act and the regulations promulgated thereunder. Such requirements relate to, among other things, fiduciary duties to clients, maintaining an effective compliance program, operational and marketing requirements, disclosure obligations, conflicts of interest, fees and prohibitions on fraudulent activities.
The investment activities of our investment management businesses are also subject to regulation under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended ("the Investment Company Act") and various other statutes, as well as the laws of the fifty states and the rules of various United States and non-United States securities exchanges and self-regulatory organizations, including laws governing trading on inside information, market manipulation and a broad number of technical requirements (e.g., options and futures position limits, execution requirements and reporting obligations) and market regulation policies in the United States and globally. Congress, regulators, tax authorities and others continue to explore and implement regulations governing all aspects of the financial services industry. Pursuant to systemic risk reporting requirements adopted by the SEC, the Company's affiliated registered investment advisers with private investment fund clients are required to report certain information about their investment funds to the SEC.
In addition, certain of our investment advisers may act as a "fiduciaries" under the Employee Retirement Income Security Act of 1974 ("ERISA") and similar state laws with respect to private and public benefit plan clients. As such, the advisers, and certain of the investment funds they advise, may be subject to ERISA and similar state law requirements and to regulations promulgated thereunder. ERISA, similar state laws and applicable provisions of the Internal Revenue Code of 1986 (the "IRC"),
which regulate services provided to individual retirement accounts, impose duties on persons who are fiduciaries and other types of service providers to benefit plans and individual retirement accounts under ERISA, such state laws and the IRC, prohibit specified transactions involving IRA and benefit plan clients subject to ERISA or similar state laws (absent the availability of specified exemptions) and provide monetary penalties for violations of these prohibitions.
Enacted on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was expansive in scope and led to the adoption of extensive regulations by the CFTC, the prudential regulators, the SEC and other governmental agencies. Since its adoption, the Dodd-Frank Act has had an impact on the costs associated with derivatives trading by the Company and its clients, including as a result of requirements that transactions be margined, trade reported and, in some cases, centrally cleared.
The Dodd-Frank Act established the Financial Services Oversight Council (the "FSOC") to identify threats to the financial stability of the United States, promote market discipline, and respond to emerging risks to the stability of the United States financial system. The FSOC is empowered to determine whether the material financial distress or failure of a non-bank financial company would threaten the stability of the United States financial system, and such a determination can subject a non-banking finance company to supervision by the Board of Governors of the Federal Reserve and the imposition of standards and supervision including stress tests, liquidity requirements and enhanced public disclosures including the authority to require the supervision and regulation of systemically significant non-bank financial companies. We do not believe we are at risk of being considered a systemically significant non-bank financial company.
The regulation of swaps and derivatives under the Dodd-Frank Act directly affects the manner by which our investment management businesses utilizes and trades swaps and other derivatives, and has generally increased the costs of derivatives trading conducted on behalf of our clients. The European Union ("EU") (and some other countries) are now in the process of implementing similar requirements that will affect derivatives transactions with a counterparty organized in that country or otherwise subject to that country's derivatives regulation. The mandatory minimum margin requirements for bilateral derivatives adopted by the U.S. government and the EU came into effect in March 2017 with respect to variation margin and will be implemented through a phase-in compliance in respect to initial margin with the next compliance date set for October 6, 2021. Required margining of derivatives has affected our investment management businesses as these requirements generally increase costs associated with derivatives transactions and makes derivatives transactions more expensive.
Given our investment and insurance activities are carried out around the globe, we are subject to a variety of regulatory regimes that vary country by country. Our captive insurance and reinsurance companies are regulated by both the New York State Department of Finance and the Luxembourg Commissariat aux Assurances, respectively. EU financial reforms included a number of initiatives to be reflected in new or updated directives and regulations, the most significant of which is the amendment to the pan-European regulatory regime, the Markets in Financial Instruments Directive ("MiFID II"), which went into effect in January 2018. MiFID II regulates the provision of investment services and activities throughout the European Economic Area. MiFID II requires that investment managers and investment advisers located in the EU "unbundle" research costs from commissions. As a result, investment firms subject to MiFID II may no longer pay for research using client commissions or "soft dollars." Going forward, such costs must be paid directly by the investment firm or through a research payment account funded by clients and governed by a budget that is agreed by the client. In the U.S., our investment management businesses expect to continue to pay for research using soft dollars consistent with applicable law. The change in regulations has also impacted the provisions of research by our U.S. broker-dealers. Because the acceptance of hard dollar payments would, under U.S. law, require registration as an investment adviser, our broker-dealers are requiring clients to continue to pay for research on a soft dollar basis unless the client is subject to MiFID II and we can rely on SEC relief so as not to have to register as an investment adviser.
Cowen and Company, LLC ("Cowen and Company"), ATM Execution LLC ("ATM Execution"), Cowen Prime Services LLC ("Cowen Prime"), and Westminster Research Associates LLC ("Westminster") are registered as broker-dealers with the SEC and are members in good standing with FINRA. All broker-dealers are registered with various U.S. states and territories except for ATM Execution. In addition to FINRA, some of these Cowen broker-dealers are also members of other self-regulatory organizations, including various registered securities exchanges. Self-regulatory organizations adopt and enforce rules governing the conduct and activities of their member firms. On May 1, 2020, Cowen and Company completed its merger with Cowen Execution Services LLC. Cowen and Company is the surviving entity. The merger had no impact to the Company’s financial results. On July 3rd, 2020, Cowen Execution’s registration was formally terminated with FINRA. Accordingly, Cowen and Company, ATM Execution, Cowen Prime, and Westminster are subject to regulation and oversight by the SEC, the U.S. states and territories in which they are registered, and FINRA and the other self-regulatory organizations of which they are members. Cowen Prime is also registered with the CFTC and is a member of the NFA and, consequently, is subject to regulation and oversight by them. Additionally, Cowen International Ltd and Cowen Execution Ltd are primarily regulated in the U.K. by the FCA and Cowen and Company Asia is registered with and subject to the financial resources requirements of the SFC of Hong Kong.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds, conflicts of interest, securities and information, capital structure, research/banking interaction, record-keeping, the financing of customers' purchases and the conduct and qualifications of directors, officers and employees. In particular, as registered broker-dealers and members of various self-regulatory organizations, Cowen and Company, ATM Execution, Cowen Prime, and Westminster are subject to the SEC's uniform net capital rule 15c3-1 ("SEC Rule 15c3-1"). SEC Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part of a broker-dealer's assets be kept in relatively liquid form. The SEC and various self-regulatory organizations impose rules that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, SEC Rule 15c3-1 requires us to give prior notice to the SEC for certain withdrawals of capital. As a result, our ability to withdraw capital from our broker-dealer subsidiaries may be limited.
The effort to combat money laundering and terrorist financing is a priority in governmental policy with respect to financial institutions. The Bank Secrecy Act ("BSA"), as amended by Title III of the USA PATRIOT Act of 2001 and its implementing regulations ("Patriot Act"), requires broker-dealers and other financial services companies to maintain an anti-money laundering compliance program that includes written policies and procedures, designated compliance officer(s), appropriate training, independent review of the program, standards for verifying client identity at account opening and obligations to report suspicious activities and certain other financial transactions. Through these and other provisions, the BSA and Patriot Act seek to promote the identification of parties that may be involved in financing terrorism or money laundering. We must also comply with sanctions programs administered by the U.S. Department of Treasury's Office of Foreign Asset Control, which may include prohibitions on transactions with designated individuals and entities and with individuals and entities from certain countries.
Anti-money laundering laws of certain countries outside the United States contain similar diligence and verification provisions. The obligation of financial institutions, including ours, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls that have increased, and may continue to increase, our costs. Any failure with respect to our programs in this area could subject us to serious regulatory consequences, including substantial fines, and potentially other liabilities.
Certain of our businesses are subject to laws and regulations enacted by U.S. federal and state governments, the EU or other non-U.S. jurisdictions and/or enacted by various regulatory organizations or exchanges relating to the privacy of the information of clients, employees or others, including the European Union’s General Data Protection Regulation (the “GDPR”), the California Consumer Privacy Act (the “CCPA”), and the Gramm-Leach-Bliley Act (the “GLBA”). In the U.S. and elsewhere, additional privacy legislation has been proposed and may be passed, changes in existing regulations may be made or changes in the interpretation or enforcement of existing laws and rules may be made.
Available Information
We routinely file annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. Our SEC filings also are available to the public from the SEC's internet site at http://www.sec.gov.
We maintain a public internet site at http://www.cowen.com and make available free of charge through this site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We also post on our website the charters for our Board of Directors' Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines, our Code of Business Conduct and Ethics governing our directors, officers and employees and other related materials. The information on or accessible through our website is not incorporated by reference into this Annual Report.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
SUMMARY RISK FACTORS
Some of the factors that could materially and adversely affect our business, financial condition, results of operations or prospects include the following:
Market, Strategy and Industry Risk
a.Market volatility could have an adverse effect on our businesses, results of operations and financial condition.
b.The COVID-19 pandemic could adversely affect our business, financial condition and results of operations, including as a result of prolonged period of employees working remotely.
c.Our inability to successfully identify, manage and execute future acquisitions, investments and strategic alliances could adversely affect our results of operations.
d.Volatility in the value of our assets and liabilities could adversely affect our results of operations and statement of financial condition.
e.Our Linkem investment may not be successful and may adversely affect our results of operations or financial condition.
Human Capital Risk
a.The loss of key senior personnel would have a material adverse effect on our businesses.
b.Employee misconduct could harm investor retention and could cause legal liability, reputational harm and loss of revenue.
Business Risks
a.Deteriorations in the business environment in sectors focused on by our investment banking businesses could materially affect our business and cause substantial fluctuations in financial results from period-to-period.
b.We face strong competition from larger firms and competitive pressures may impair our revenues.
c.Our capital markets and strategic advisory engagements do not generally provide for subsequent engagements and can lead to payment risk.
d.Larger and more frequent capital commitments in our trading and underwriting businesses increase the potential for significant losses.
e.The market structure in which our market-making business operates may make sustained profitability difficult.
f.Electronic trading and new trading technology may adversely affect this business and may increase competition.
g.We are subject to potential losses and default risks as a result of our clearing and execution activities.
h.Our securities business and related global clearing operations expose us to material liquidity risk, including as a result of international market events, decreases in equity trading activity and declining securities prices.
i.Failures by our third-party clearing agents could materially impact our business and operating results.
j.Our revenues would be adversely affected if there are reversals to previously accrued incentive fees, if its investment funds fall beneath their "high-water marks" as a result of negative performance or if there is an acceleration of redemptions by investors in our hedge funds.
k.Our ability to increase revenues and improve profitability will depend on increasing assets under management in existing investment strategies and marketing new investment products and strategies.
l.Certain of our investment funds may invest in relatively high-risk, illiquid assets, and we may fail to realize any profits from these activities.
m.We may be unable cover our exposure if a counterparty defaults under one of our derivative or non-derivative contracts.
n.We may suffer losses in connection with the insolvency of agents whose services we use and who may hold our investment funds’ assets.
o.Risk management activities may materially adversely affect the return on our investment funds' investments.
p.Our third party reinsurance business could expose us to losses.
Operational Risks
a.As a result of the COVID-19 pandemic, virtually all of our employees are working remotely. Remote working environments may be less secure and more susceptible to cybersecurity attacks which could adversely affect our ability to securely process transactions and maintain confidential financial, personal and other information.
b.Operational risks relating to the failure of data processing systems and other information systems and technology or other infrastructure may disrupt our business and result in losses or limit our operations and growth.
c.Any cyber attack or other security breach of or vulnerability in our technology systems, or those of our clients or other third party vendors we rely on, could have operational impacts, subject us to significant liability and harm our reputation.
Liquidity Risks
a.Higher volumes and price volatility in the markets due to COVID-19 could lead to higher cash requirements in our clearing businesses, which could adversely affect our liquidity position. Limitations on access to capital could impair our liquidity and its ability to conduct its businesses.
b.We rely upon our subsidiaries for cash flows and servicing our debt and funding our necessary capital expenditures requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt or to fund our necessary capital expenditures.
c.The accounting method for convertible debt securities that may be settled in cash, such as the 2022 Convertible Notes, could have a material effect on our reported financial results.
d.Certain provisions in the indentures governing the 2022 Convertible Notes could delay or prevent an otherwise beneficial takeover or takeover attempt of us.
Litigation and Regulatory Risk
a.Our subsidiaries may become subject to additional regulations which could increase the costs and burdens of compliance or impose additional restrictions.
b.We are subject to third party litigation risk and regulatory risk which could result in significant liabilities and reputational harm.
c.A failure to appropriately identify and deal with conflicts of interest could adversely affect our businesses.
d.Increased regulatory focus could result in regulation that limits how we invest.
e.The U.K. exit from the EU could adversely impact our business, results of operations and financial condition.
Other Risks to Our Stockholders
a.We could change our existing dividend policy in the future.
b.The terms of our Series A Convertible Preferred Stock contain certain restrictions on our ability to pay dividends and repurchase our capital stock, and, under certain circumstances, provides the holders thereof the right to elect two additional directors to our Board of Directors.
c.Our failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business.
d.Certain provisions in our organizational documents could deter an acquisition by a third party.
Risks Related to the Company's Businesses and Industry
For purposes of the following risk factors, references made to the Company's investment funds include the various investment management products advised by the Company's investment management business and the investment funds through which the Company invests its own capital. The Company's investment banking businesses include the Investment Banking division, the Markets division and the Research division.
Market, Strategy and Industry Risk
Difficult market conditions, market disruptions and volatility have adversely affected, and may in the future adversely affect, the Company's businesses, results of operations and financial condition.
The Company's businesses, by their nature, do not produce predictable earnings, and all of the Company's businesses have in the past been, and may in the future be affected by conditions in the global financial markets and by global economic conditions, such as interest rates, the availability of credit, inflation rates, economic uncertainty, changes in laws, commodity prices, asset prices (including real estate), currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts, protests or security operations). Challenging market conditions have in the past affected and in the future could affect the level and volatility of securities prices and the liquidity and the value of investments in the Company's investment funds or other investments in which the Company has investments of its own capital, and the Company may not be able to effectively manage its investment management business's exposure to challenging market conditions. Challenging market conditions have in the past adversely affected and in the future could also adversely affect the Company's
investment banking business as increased volatility and lower stock prices can make companies less likely to conduct transactions.
In addition, global economic conditions and global financial markets remain vulnerable to the potential risks posed by certain events, which could include, among other things, political and financial uncertainty in the United States and the European Union, renewed concern about China's economy, complications involving terrorism and armed conflicts around the world, or other challenges to global trade or travel, such as have occurred or might occur in the event of a worldwide pandemic such as the COVID-19 pandemic. More generally, because our businesses are closely correlated to the general economic outlook, a significant deterioration in that outlook or realization of certain events would likely have an immediate and significant negative impact on our businesses and overall results of operations.
The effects of the outbreak of COVID-19 have negatively affected the global economy, the United States economy and the global financial markets, and have disrupted and may further disrupt our operations and our clients' operations. The effects of the COVID-19 pandemic could in future periods have an adverse effect on our business, financial condition and results of operations.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. Impacts to our businesses could include the following:
•Employees contracting COVID-19
•Reductions in our operating effectiveness as our employees work from home or disaster-recovery locations
•Unavailability of key personnel necessary to conduct our business activities
•Unprecedented volatility in global financial markets
•Reductions in revenue across our operating businesses
•Declines in collateral value
•Declines in demand for our products or services
•Unavailability of critical services provided to us by third parties
•Operational failures due to changes in our normal business practices
•Credit losses
We are taking precautions to protect the safety and well-being of our employees. However, no assurance can be given that the steps being taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employee's ability to service our clients and provide support for our businesses, particularly if the COVID-19 pandemic persists for a long period of time. Furthermore, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the COVID-19 pandemic could harm our ability to operate our businesses or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
In the event that the COVID-19 pandemic persists and leads to increased volatility and lower stock prices for many companies, our investment banking activity could be materiality disrupted.
In addition, a sustained and continuing market downturn could lead to or exacerbate declines in the number of security transactions executed for customers and, therefore, to a decline in the revenues we receive from commissions and spreads.
In addition, revenues from our investment management businesses could be negatively impacted by decreased securities prices, as well as widely fluctuating securities prices. Because our investment management businesses hold long and short positions in securities, changes in the prices of these securities, as well as any decrease in the liquidity of these securities, may adversely affect our revenues from investment management.
Any one or more of these developments could cause, contribute to or exacerbate the other risks and uncertainties discussed in this Annual Report. Furthermore, such developments may remain prevalent for a significant period of time and may in the future adversely affect our business, financial condition and results of operations even after the COVID-19 pandemic has subsided.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as COVID-19, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar
weather events or other natural disasters, could create, and in the case of COVID-19 have created, and may continue to create, economic and financial disruptions, and in the case of COVID-19 have led to, and other future events could lead to, operational difficulties (including travel limitations) that may impair our ability to manage our businesses.
Our businesses have traditionally relied on collaboration among our employees, particularly in our markets business. While our employees have been able to work remotely since March 2020, we do not know how a continuing and prolonged period of remote working by our employees will impact our ability to collaborate. Accordingly, our business could be adversely affected by a prolonged period of employees working remotely.
Our business has traditionally relied on collaboration among our employees. In particular, the trading floor environment in our markets business facilitates idea generation and is more conducive to active trading. While we have been able to continue to operate all of our businesses, including our markets business, with our employees working remotely, we have been doing so since March 2020 and we do not know how a continuing and prolonged period of remote working by our employees will impact our ability to collaborate. Accordingly, our businesses could be adversely affected by a continuing and prolonged period of employees working remotely.
The Company may be unable to successfully identify, manage and execute future acquisitions, investments and strategic alliances, which could adversely affect our results of operations.
We intend to continually evaluate potential acquisitions, investments and strategic alliances to expand our business. In the future, we may seek additional acquisitions, investments, strategic alliances or similar arrangements, which may expose us to risks such as:
•the difficulty of identifying appropriate acquisitions, investments, strategic allies or opportunities on terms acceptable to us;
•the possibility that senior management may be required to spend considerable time negotiating agreements and monitoring these arrangements;
•potential regulatory issues applicable to the financial services business;
•the loss or reduction in value of the capital investment;
•our inability to capitalize on the opportunities presented by these arrangements; and
•the possibility of insolvency of a strategic ally.
Furthermore, any future acquisitions of businesses could entail a number of risks, including:
•problems with the effective integration of operations;
•inability to maintain key pre-acquisition business relationships;
•increased operating costs;
•exposure to unanticipated liabilities; and
•difficulties in realizing projected efficiencies, synergies and cost savings.
There can be no assurance that we would successfully overcome these risks or any other problems encountered with these acquisitions, investments, strategic alliances or similar arrangements.
The Company's future results will suffer if the Company does not effectively manage its expanded operations.
The Company may continue to expand its operations through new product and service offerings and through additional strategic investments, acquisitions or joint ventures, some of which may involve complex technical and operational challenges. The Company's future success depends, in part, upon its ability to manage its expansion opportunities, which pose numerous risks and uncertainties, including the need to integrate new operations into its existing business in an efficient and timely manner, to combine accounting and data processing systems and management controls and to integrate relationships with customers and business partners. In addition, future acquisitions or joint ventures may involve the issuance of additional shares of common stock of the Company, which may dilute the ownership of the Company's stockholders.
Volatility in the value of the Company's investments and securities portfolios or other assets and liabilities, including investment funds, or negative returns from the investments made by the Company have in the past and could in the future adversely affect the Company's results of operations and statement of financial condition.
The Company invests a significant portion of its capital base to help drive results and facilitate growth of its investment management and investment bank businesses. As of December 31, 2020, the Company's invested capital amounted to a net value of $853.8 million (supporting a long market value of $993.8 million), representing approximately 88% of Cowen's stockholders' equity presented in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). In
accordance with US GAAP, we define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. US GAAP also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Changes in fair value are reflected in the statement of operations at each measurement period. Therefore, continued volatility in the value of the Company's investments and securities portfolios or other assets and liabilities, including investment funds, will result in volatility of the Company's results. We have experienced this type of volatility in prior periods. In addition, the investments made by the Company may not generate positive returns. As a result, changes in value or negative returns from investments made by the Company may have an adverse effect on the Company's financial condition or operations in the future.
Our investment in Linkem may not prove to be successful and may adversely affect our results of operations or financial condition.
As of December 31, 2020, we had an approximately $87.9 million investment in Linkem S.p.A. ("Linkem"), the largest fixed wireless broadband service provider in Italy. Many factors, most of which are outside of our control, can affect Linkem's business, including the state of the Italian economy and capital markets in general, competition in the Italian telecommunications markets and other factors that directly and indirectly affect the results of operations, including the sales and profitability of Linkem, and consequently may adversely affect our results of operations or financial condition.
The Company faces strong competition from larger firms.
The research, brokerage and investment banking industries are intensely competitive, and the Company expects them to remain so. The Company competes on the basis of a number of factors, including client relationships, reputation, the abilities of the Company's professionals, market focus and the relative quality and price of the Company's services and products. The Company has experienced intense price competition in some of its businesses, including trading commissions and spreads in its brokerage business. In addition, pricing and other competitive pressures in investment banking, including the trends toward multiple book runners, co-managers and financial advisors, and a larger share of the underwriting fees and discounts being allocated to the book-runners, could adversely affect the Company's revenues from its investment bank business.
The Company is a relatively small investment bank. Many of the Company's competitors in the research, brokerage and investment banking industries have a broader range of products and services, greater financial resources, larger customer bases, greater name recognition and marketing resources, a larger number of senior professionals to serve their clients' needs, greater global reach and more established relationships with clients than the Company has. These larger competitors may be better able to respond to changes in the research, brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally.
The scale of our competitors in the investment banking industry has increased in recent years as a result of substantial consolidation among companies in the research, brokerage and investment banking industries. In addition, a number of large commercial banks and other broad-based financial services firms have established or acquired underwriting or financial advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a wider range of products than the Company does which may enhance their competitive position. They also have the ability to support their investment banking and advisory groups with commercial banking and other financial services in an effort to gain market share, which has resulted, and could further result, in pricing pressure in the Company's businesses. If we are unable to compete effectively with our competitors in the investment banking industry, the Company's business and results of operations may be adversely affected.
Human Capital Risk
Our businesses are heavily dependent on our personnel so any adverse effects on their well-being or morale could adversely affect our business.
COVID-19 presents a significant threat to our employees’ well-being and morale and the longer the pandemic persists the more significant the challenges could be to our employees' morale. While we have implemented a business continuity plan to protect the health of our employees, our business continuity plan cannot anticipate all scenarios and we may experience potential loss of productivity or a delay in the roll out of certain strategic plans as a result of the COVID-19 pandemic.
The Company depends on its key senior personnel and the loss of their services would have a material adverse effect on the Company's businesses and results of operations, financial condition and prospects.
The Company depends on the efforts, skill, reputations and business contacts of its principals and other key senior personnel, the information and investment activity these individuals generate during the normal course of their activities and the synergies among the diverse fields of expertise and knowledge held by the Company's senior professionals. Accordingly, the Company's continued success will depend on the continued service of these individuals. Key senior personnel may leave the Company in the future, and we cannot predict the impact that the departure of any key senior personnel will have on our ability to
achieve our investment and business objectives. The loss of the services of any of them could have a material adverse effect on the Company's revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing investment funds or raise additional funds in the future. Our senior and other key personnel possess substantial experience and expertise and have strong business relationships with the investors in its investment funds, clients and other members of the business community. As a result, the loss of such personnel could have a material adverse effect on the Company's businesses and results of operations, financial condition and prospects.
The Company's ability to retain its senior professionals is critical to the success of its businesses, and its failure to do so may materially affect the Company's reputation, business and results of operations.
Our people are our most valuable resource. Our success depends upon the reputation, judgment, business generation capabilities and project execution skills of our senior professionals. Our employees' reputations and relationships with our clients are critical elements in obtaining and executing client engagements. The Company may encounter intense competition for qualified employees from other companies inside and outside of their industries. From time to time, the Company has experienced departures of professionals. Losses of key personnel have occurred and may occur in the future. Moreover, if any of our client-facing employees or executive officers were to join an existing competitor or form a competing company, some of our clients could choose to use the services of that competitor instead of the services of the Company.
The success of our businesses is based largely on the quality of our employees and we must continually monitor the market for their services and seek to offer competitive compensation. In challenging market conditions, which occurred in recent years, it may be difficult to pay competitive compensation without the ratio of our compensation and benefits expense to revenues becoming higher. In addition, for our investment professionals whose performance-based compensation represents substantially all of the compensation the professional is entitled to receive in any year, negative performance which results in the professional not being entitled to receive any performance-based compensation could incentivize the professional to join a competitor.
Employee misconduct could harm the Company by, among other things, impairing the Company's ability to attract and retain investors and subjecting the Company to significant legal liability, reputational harm and the loss of revenue from its own invested capital.
It is not always possible to detect and deter employee misconduct. The precautions that the Company takes to detect and prevent this activity may not be effective in all cases, and we may suffer significant reputational harm and financial loss for any misconduct by our employees. The potential harm to the Company's reputation and to our business caused by such misconduct is impossible to quantify.
There is a risk that the Company's employees or partners could engage in misconduct that materially adversely affects the Company's business, including a decrease in returns on its own invested capital. The Company is subject to a number of obligations and standards arising from its businesses. The violation of these obligations and standards by any of the Company's employees could materially adversely affect the Company and its investors. For instance, the Company's businesses require that the Company properly deal with confidential information. If the Company's employees were to improperly use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. If one of the Company's employees were to engage in misconduct or were to be accused of such misconduct, the business and reputation of the Company could be materially adversely affected.
Business Risks
The Company's investment banking businesses focus principally on specific sectors of the economy, and deterioration in the business environment in these sectors or a decline in the market for securities of companies within these sectors could materially affect our investment banking businesses.
Volatility in the business environment in the Company's sectors or in the market for securities of companies within these sectors could substantially affect the Company's financial results. The business environment for companies in these sectors has been subject to substantial volatility, and the Company's financial results have consequently been subject to significant variations from year to year. The market for securities in each of the Company's sectors may also be subject to industry-specific risks. For example, changes in policies of the United States Food and Drug Administration, along with changes to Medicare and government reimbursement policies, may affect the market for securities of healthcare companies, and changes to how the U.S. government reviews foreign acquisitions of U.S. based companies may make executing M&A transactions more difficult. In addition, revenue generated by the Company in its consumer sector could be adversely affected by changes in law or regulatory action with respect to companies that are in cannabis related businesses.
As an investment bank which focuses primarily on specific growth sectors of the economy, the Company also depends significantly on private company transactions for sources of revenues and potential business opportunities. To the extent the pace of these private company transactions slows or the average size declines due to a decrease in private equity financings, difficult
market conditions in the Company's sectors or other factors, the Company's business and results of operations may be adversely affected.
The financial results of the Company's investment banking businesses may fluctuate substantially from period to period.
The Company has experienced, and we expect the Company to experience in the future, significant periodic variations in its revenues and results of operations. These variations may be attributed in part to the fact that its investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond the Company's control. In most cases, the Company receives little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our investment bank business is highly dependent on market conditions as well as the decisions and actions of its clients and interested third parties. For example, a client's acquisition transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the client's or counterparty's business. If the parties fail to complete a transaction on which the Company is advising or an offering in which the Company is participating, we will earn little or no revenue from the transaction, and we may incur significant expenses that may not be recouped. This risk may be intensified by the Company's focus on growth companies in its sectors as the market for securities of these companies has experienced significant variations in the number and size of equity offerings. Many companies initiating the process of an IPO are simultaneously exploring other strategic alternatives, such as a merger and acquisition transaction. The Company's investment bank revenues would be adversely affected in the event that an IPO for which it is acting as an underwriter is preempted by the company's sale if the Company is not also engaged as a strategic advisor in such sale. As a result, our investment banking businesses are unlikely to achieve steady and predictable earnings on a quarterly basis.
Pricing and other competitive pressures may impair the revenues of the Company's brokerage business.
The Company's brokerage business accounted for approximately 35.3% of the Company's revenues during 2020. Along with other firms, the Company has experienced price competition in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has increased the pressure on trading commissions and spreads. We expect to continue to experience competitive pressures in these and other areas in the future as some of our competitors in the investment banking industry seek to obtain market share by competing on the basis of price or use their own capital to facilitate client trading activities. In addition, the Company faces pressure from larger competitors, who may be better able to offer a broader range of complementary products and services to clients in order to win their trading or prime brokerage business. We are committed to maintaining and improving the Company's comprehensive research coverage to support its brokerage business and the Company may be required to make additional investments in the Company's research capabilities.
The Company's capital markets and strategic advisory engagements are singular in nature, do not generally provide for subsequent engagements and can lead to payment risk.
The Company's investment banking clients generally retain the Company on a short-term, engagement-by-engagement basis in connection with specific capital markets or mergers and acquisitions transactions, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and the Company's engagements with these clients may not recur, the Company must seek out new engagements when its current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If the Company is unable to generate a substantial number of new engagements that generate fees from new or existing clients, the Company's investment bank business and results of operations would likely be adversely affected. In addition, investment banking clients may on occasion refuse to pay investment banking fees owed pursuant to the terms of our engagement and we may need to expend resources to enforce our contracts. Any failure to pay the investment banking fees owed to us could adversely affect our results of operations.
Larger and more frequent capital commitments in the Company's trading and underwriting businesses increase the potential for significant losses.
There has been a trend toward larger and more frequent commitments of capital by financial services firms in many of their activities. For example, in order to compete for certain transactions, investment banks may commit to purchase large blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting process in which marketing is completed before an investment bank commits to purchase securities for resale. To the extent the total net capital of the Company's broker-dealers allows it, the Company anticipates participating in this trend and, as a result, the Company will be subject to increased risk as it commits capital to facilitate business. Furthermore, the Company may suffer losses
as a result of the positions taken in these transactions even when economic and market conditions are generally favorable for others in the industry.
The Company may enter into large transactions in which it commits its own capital as part of its trading business to facilitate client trading activities. The number and size of these large transactions may materially affect the Company's results of operations in a given period. Market fluctuations may also cause the Company to incur significant losses from its trading activities. To the extent that the Company owns assets (i.e., has long positions), a downturn in the value of those assets or in the markets in which those assets are traded could result in losses. Conversely, to the extent that the Company has sold assets it does not own (i.e., has short positions), in any of those markets, an upturn in the value of those assets or in markets in which those assets are traded could expose the Company's investment banking businesses to potentially large losses as they attempt to cover short positions by acquiring assets in a rising market.
The market structure in which our market-making business operates may make it difficult for this business to maintain profitability.
Market structure changes have had an adverse effect on the results of operations of our market-making business. These changes may make it difficult for us to maintain and/or predict levels of profitability of, or may cause us to generate losses in, our market-making business.
The growth of electronic trading and the introduction of new technology in the markets in which our market-making business operates may adversely affect this business and may increase competition.
The continued growth of electronic trading and the introduction of new technologies is changing our market-making business and presenting new challenges. Securities, futures and options transactions are increasingly occurring electronically, through alternative trading systems. It appears that the trend toward alternative trading systems will continue to accelerate. This acceleration could further increase program trading, increase the speed of transactions and decrease our ability to participate in transactions as principal, which would reduce the profitability of our market-making business. Some of these alternative trading systems compete with our market-making business and with our algorithmic trading platform, and we may experience continued competitive pressures in these and other areas. Significant resources have been invested in the development of our electronic trading systems, which includes our ATM business, but there is no assurance that the revenues generated by these systems will yield an adequate return on the investment, particularly given the increased program trading and increased percentage of stocks trading off of the historically manual trading markets.
We are subject to potential losses and default risks as a result of our clearing and execution activities.
As a clearing member firm providing services to certain of our brokerage customers, we are ultimately responsible for their financial performance in connection with various securities transactions. Our clearing operations require a commitment of our capital and involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. We are required to finance customers' unsettled positions from time to time, and we could be held responsible for the defaults of those customers. If customers default on their obligations, we remain financially liable for such obligations, and while some of these obligations may be collateralized, we are still subject to market risk in the liquidation of customer collateral to satisfy those obligations. While we have risk management procedures designed to mitigate certain risks, there can be no assurance that our risk management procedures will be adequate. Although we regularly review our credit exposure to customers, default risk may arise from events or circumstances that may be difficult to detect or foresee. Default by our customers may also give rise to the Company incurring penalties imposed by execution venues, regulatory authorities and clearing and settlement organizations. Any liability arising from clearing operations could have a material adverse effect on our business, financial condition and results of operations.
We are also exposed to credit risk from third parties that owe us money, securities or other obligations, including our trading counterparties. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons, and we could be held responsible for such defaults. In addition, customer trading errors may cause us to incur financial losses, which customers may be unable or unwilling to cover. Volatile securities markets, credit markets and regulatory changes may increase our exposure to our customers' and counterparties' credit profiles, which could adversely affect our financial condition and operating results. Our review of the credit risk of customers and trading counterparties may not be adequate to provide sufficient protection from these risks.
Our securities business and related clearing operations expose us to material liquidity risk.
We may be required to provide considerable additional funds with clearing and settlement organizations of which we are members, such as the National Securities Clearing Corporation ("NSCC") or Depository Trust and Clearing Corporation in the U.S., especially during periods of high market volatility or when we are obligated to clear large notional amounts of securities that are not eligible for settlement through the NSCC's Continuous Net Settlement system and, consequently, may be subject to higher
margin requirements. In addition, regulatory agencies have recently required these clearing and settlement organizations to increase the level of margin deposit requirements, and they may continue to do so in the future. We rely on our excess cash, certain established credit facilities and the use of outsourced clearing arrangements to meet or reduce these demands. While we have historically met requests for additional margin deposits, there is no guarantee that our excess cash and our established credit facilities and clearing arrangements will be sufficient for future needs, particularly if there is an increase in requirements. There is also no guarantee that these established credit facilities will be extended beyond their expiration.
As a clearing member firm of securities clearing houses in the U.S., we are also exposed to clearing member credit risk. Securities clearing houses require member firms to deposit cash and/or government securities to a clearing fund. If a clearing member defaults in its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. The clearing houses of which we are members also have the authority to assess their members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost to us if we are required to pay such assessments.
In certain jurisdictions we are dependent on third-party clearing agents and any failures by such clearing agents could materially impact our business and operating results.
In certain jurisdictions we are dependent on agents for the clearing and settlement of securities transactions. If our agents fail to properly facilitate the clearing and settlement of our customer trades, we could be subject to financial, legal and regulatory risks and costs that may impact our business and operating results. In addition, it could cause our clients to reduce or cease their trading with us, which would adversely affect our revenues and financial results.
Moreover, certain of the clearing agreements provide our clearing agents with rights to increase our deposit requirements or to terminate the agreements upon short notice. There is no guarantee we will be able to satisfy any increased deposit requirements within the time frames demanded by our clearing agents, and if we fail to satisfy such demands on a timely basis, it could constitute a default under our clearing agreements. If our clearing agents terminate a clearing agreement on short notice, there is no guarantee that we could obtain alternative services in a timely manner and any interruption of the normal course of our trading and clearing operations could have a material impact on our business and results of operations.
Our clearing and execution operations are global and international market events could adversely impact our financial results.
Because we offer brokerage products and services on a global basis, our revenues derived from non-U.S. operations are subject to risk of loss from social or political instability, changes in government policies or policies of central banks, downgrades in the credit ratings of sovereign countries, expropriation, nationalization, confiscation of assets and unfavorable legislative and political developments in such non-U.S. jurisdictions. Revenues from the trading of non-U.S. securities may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations on our results could be magnified because generally non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.
Decreases in equity trading activity by active fund managers and declining securities prices could harm our business and profitability.
Declines in the trading activity of active fund managers generally result in lower revenues from our brokerage products and services. In addition, securities' price declines adversely affect our trading commissions outside North America, which are based on the value of transactions. The demand for our brokerage products and services is directly affected by factors such as economic, regulatory and political conditions that may lead to decreased trading activity and prices in the securities markets in the U.S. and in all of the foreign markets we serve. Significant flows of investments out of actively managed equity funds have curtailed their trading activity, which has weighed on our buy-side trading volumes and the use of some of our higher value services. Volatility levels also impact the amount of trading activity. Sustained periods of low volatility can result in lower levels of trading activity and trading activity tends to decline in periods following extreme levels of volatility. In addition, any substantial shift from active fund management to passive fund management could have an adverse effect on our trading commissions.
The Company's revenues and, in particular, its ability to earn incentive and investment income, would be adversely affected if there are reversals to previously accrued incentive fees or if its investment funds fall beneath their "high-water marks" as a result of negative performance.
For our private equity funds, the incentive fee crystallizes upon realization of the investment. In those circumstances, until the investment is realized, the accrued incentive fees are subject to reversal even if those accruals were made in prior years. The Company's incentive allocations are also subject, in some cases, to performance hurdles or benchmarks. To the extent the Company's investment funds experience negative investment performance, the investors in or beneficial owners of these investment funds would need to recover cumulative losses before the Company can earn investment income at the end of the performance period with respect to the investments of those who previously suffered losses. With respect to our hedge fund
products, incentive income, is, in most cases, subject to "high-water marks" whereby incentive income is earned by the Company only to the extent that the net asset value of an investment advisory product at the end of a measurement period exceeds the highest net asset value as of the end of a preceding measurement period for which the Company earned incentive income. The Company recognizes incentive income charged to the Company's hedge funds based on the net profits of the hedge funds. For a majority of the hedge funds, the incentive fee crystallizes annually when the high-water mark for such hedge funds is reset, which delays recognition of the incentive fee until year end. As a result, negative performance could adversely affect the Company’s incentive and investment income from both its private equity and hedge fund products.
The Company's ability to increase revenues and improve profitability will depend on increasing assets under management in existing investment strategies and developing and marketing new investment products and strategies, including identifying and hiring or affiliating with new investment teams.
The Company's investment management business generates management and incentive fee income based on its assets under management. If the Company is unable to increase its assets under management in its existing products it may be difficult to increase its revenues. The Company may launch new investment management products and hire or affiliate with new investment teams focusing on new investment strategies. If these products or strategies are not successful, or if the Company is unable to hire or affiliate with new investment teams, or successfully manage its relationships with its affiliated investment teams, the Company's profitability could be adversely affected.
Certain of the Company's investment funds may invest in relatively high-risk, illiquid assets, and the Company may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amounts of these investments.
Certain of the Company's investment funds invest a significant portion of their assets in securities that are not publicly traded. In many cases, they may be prohibited by contract or by applicable securities laws from selling such securities for a period of time or there may not be a public market for such securities. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the disposition period. Accordingly, under certain conditions, the Company's investment funds may be forced to either sell securities at lower prices than they had expected to realize or defer, potentially for a considerable period of time, sales that they had planned to make. Investing in these types of investments can involve a high degree of risk, and the Company's investment funds may lose some or all of the principal amount of such investments, including our own invested capital.
The due diligence process that the Company's investment management business undertakes in connection with investments by the Company's investment funds is inherently limited and may not reveal all facts that may be relevant in connection with making an investment.
Before making investments, particularly investments in securities that are not publicly traded, the Company endeavors to conduct a due diligence review of such investment that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, the Company is often required to evaluate critical and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants, investment bankers and financial analysts may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, the Company is limited to the resources available, including information provided by the target of the investment and, in some circumstances, third party investigations. The due diligence investigation that the Company conducts with respect to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful, which may adversely affect the performance of the Company's investment funds and the Company's ability to generate returns on its own invested capital from any such investment.
Investors and beneficial owners in the Company's hedge funds can generally redeem investments with prior notice. The rate of redemptions could accelerate at any time. Historically, redemptions have created difficulties in managing the liquidity of certain of the Company's hedge funds, reduced assets under management and adversely affected the Company's revenues, and may do so in the future.
Investors and beneficial owners in the Company's hedge funds may generally redeem their investments with prior notice, subject to certain initial holding periods. Investors may reduce the aggregate amount of their investments, or transfer their investments to other hedge funds or asset managers with different fee rate arrangements, for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. Furthermore, investors in the Company's hedge funds may be investors in products managed by other asset managers where redemptions have been restricted or suspended. Such investors may redeem capital from Company's hedge funds, even if the Company's hedge funds' performance is superior, due to an inability to redeem capital from other managers. Increased volatility in global markets could accelerate the
pace of redemptions. Redemptions of investments in the Company's hedge funds could also take place more quickly than assets may be sold by those hedge funds to meet the price of such redemptions, which could result in the relevant hedge funds and/or the Company being in breach of applicable legal, regulatory and contractual requirements in relation to such redemptions, resulting in possible regulatory and investor actions against the Company and/or the Company's hedge funds. If the Company's hedge funds underperform, existing investors may decide to reduce or redeem their investments or transfer asset management responsibility to other asset managers and the Company may be unable to obtain new investment management business. Any such action could potentially cause further redemptions and/or make it more difficult to attract new investors.
The redemption of investments in the Company's hedge funds could also adversely affect the revenues of the Company's investment management business, which are substantially dependent upon its assets under management. If redemptions of investments cause revenues to decline, they would likely have a material adverse effect on our business, results of operations or financial condition. If market conditions, negative performance or other factors cause an increased level of redemption activity returns, it could become more difficult to manage the liquidity requirements of the Company's hedge funds, making it more difficult or more costly for the Company's hedge funds to liquidate positions rapidly to meet redemption requests or otherwise. This in turn may negatively impact the Company's returns on its own invested capital.
In addition to the impact on the market value of assets under management, illiquidity and volatility of the global financial markets could negatively affect the ability of the Company's investment management business to manage inflows and outflows from the Company's hedge funds. A number of asset management firms, including the Company's investment management business, have in the past exercised, and may in the future exercise, their rights to limit, and in some cases, suspend, redemptions from the investment management products they advise. The Company's investment management business has also negotiated, and may in the future negotiate, with investors or exercise such rights in an attempt to limit redemptions or create a variety of other investor structures to bring assets and liquidity requirements into a more manageable balance. To the extent that the Company's investment management business has negotiated with investors to limit redemptions, it may be likely that such investors will continue to seek further redemptions in the future. Such actions may have an adverse effect on the ability of the Company's hedge funds to attract new capital or to develop new investment platforms. Poor performance relative to other asset management firms may result in reduced investments in the Company's hedge funds and increased redemptions. As a result, investment underperformance would likely have a material adverse effect on the Company's results of operations and financial condition.
Investments made by investment funds, including the investments of the Company's own capital in the Company's investment funds, are subject to other additional risks.
Investments by the Company's investment funds are subject to certain risks that may result in losses. Decreases to assets under management as a result of investment losses or client redemptions may have a material adverse effect on the Company's revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing investment funds or raise additional funds in the future. Additional risks include the following:
•Generally, there are few limitations on investment funds' strategies, which are often subject to the sole discretion of the management company or the general partner of such funds.
•Investment funds may engage in short selling, which is subject to a theoretically unlimited risk of loss because there is no limit on how much the price of a security sold short may appreciate before the short position is closed out. An investment fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the investment fund is otherwise unable to borrow securities that are necessary to hedge its positions. Furthermore, the SEC and other regulatory authorities outside the United States have imposed trading restrictions and reporting requirements on short selling, which in certain circumstances may impair an investment fund's ability to use short selling effectively.
•The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position through a combination of financial instruments. An investment fund's trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the investment fund might only be able to acquire some but not all of the components of the position, or if the overall position were in need of adjustment, the investment fund might not be able to make such an adjustment. As a result, an investment fund would not be able to achieve the market position selected by the management company or general partner of such fund, and might incur a loss in liquidating its position.
•Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their respective liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This "systemic risk" may adversely affect the financial intermediaries (such as clearing agencies, clearing houses, banks, securities firms, other counterparties and exchanges) with which the investment funds interact on a daily basis.
•Investment funds are subject to risks due to the potential illiquidity of assets. Investment funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. The timely sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which they may be a party, and changes in industry and government regulations. It may be impossible or highly costly for investment funds to liquidate positions rapidly to meet margin calls, redemption requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time, if the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limitations on the market. In addition, increased levels of redemptions may result in increased illiquidity as more liquid assets are sold to fund redemptions.
•Investment fund assets are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the commodities underlying them. In addition, investment funds' assets are subject to the risk of the failure of any of the exchanges on which their positions trade.
•Investment fund assets that are not denominated in the U.S. dollar are subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. Officials in foreign countries may, from time to time, take actions in respect of their currencies that could significantly affect the value of an investment fund's assets denominated in those currencies or the liquidity of such investments. For example, a foreign government may unilaterally devalue its currency against other currencies, which would typically have the effect of reducing the U.S. dollar value of investments denominated in that currency. A foreign government may also limit the convertibility or repatriation of its currency or assets denominated in that currency. While the Company generally expects to hedge its exposure to currencies other than the U.S. dollar, and may do so through foreign currency futures contracts and options thereon, forward foreign currency exchange contracts, swaps or any combination thereof, but there can be no assurance that such hedging strategies will be implemented, or if implemented, will be effective. While an investment fund may enter into currency hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance than if it had not engaged in such hedging transactions. For a variety of reasons, the Company may not seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Company from achieving the intended hedge or expose an investment fund to risk of loss.
•Investment funds are also subject to the risk that war, terrorism, and related geopolitical events may lead to increased short-term market volatility and have adverse long-term effects on the U.S. and world economies and markets generally, as well as adverse effects on issuers of securities and the value of investments. War, terrorism, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and non-U.S. economies and markets generally. Those events, as well as other changes in U.S. and non-U.S. economic and political conditions, also could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, credit ratings, inflation, investor sentiment and other factors affecting the value of the investment fund's assets.
If the Company's investment fund's counterparty for any of its derivative or non-derivative contracts defaults on the performance of those contracts, the Company may not be able to cover its exposure under the relevant contract.
The Company's investment funds enter into numerous types of financing arrangements with a wide array of counterparties around the world, including loans, hedge contracts, swaps, repurchase agreements and other derivative and non-derivative contracts. The terms of these contracts are generally complex and often customized and generally are not subject to regulatory oversight. The Company is subject to the risk that the counterparty to one or more of these contracts may default, either voluntarily or involuntarily, on its performance under the contract. Any such default may occur at any time without notice. Additionally, the Company may not be able to take action to cover its exposure if a counterparty defaults under such a contract, either because of a lack of the contractual ability or because market conditions make it difficult to take effective action. The impact of market stress or counterparty financial condition may not be accurately foreseen or evaluated and, as a result, the Company may not take sufficient action to reduce its risks effectively.
Counterparty risk is accentuated where the investment management product has concentrated its transactions with a single or small group of counterparties. Generally, investment funds are not restricted from concentrating any or all of their transactions
with one counterparty. Moreover, the Company's internal review of the creditworthiness of their counterparties may prove inaccurate. The absence of a regulated market to facilitate settlement and the evaluation of creditworthiness may increase the potential for losses.
In addition, these financing arrangements often contain provisions that give counterparties the ability to terminate the arrangements if any of a number of defaults occurs with respect to the Company's investment funds, including declines in performance or assets under management and losses of key management personnel, each of which may be beyond our control. In the event of any such termination, the Company's investment funds may not be able to enter into alternative arrangements with other counterparties and our business may be materially adversely affected.
The Company may suffer losses in connection with the insolvency of prime brokers, custodians, administrators and other agents whose services the Company uses and who may hold assets of the Company's investment funds.
Most of the Company's investment funds use the services of prime brokers, custodians, administrators or other agents to carry out certain securities transactions and to conduct certain business of the Company's investment funds. In the event of the insolvency of a prime broker and/or custodian, the Company's investment funds might not be able to recover equivalent assets in full as they may rank among the prime broker's and custodian's unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the Company's investment funds' cash held with a prime broker or custodian (if any) may not be segregated from the prime broker's or custodian's own cash, and the investment funds will therefore rank as unsecured creditors in relation thereto.
Risk management activities may materially adversely affect the return on the Company's investment funds' investments if such activities do not effectively limit exposure to decreases in investment values or if such exposure is overestimated.
When managing the Company's investment funds' exposure to market risks, the relevant investment management product may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative financial instruments to limit its exposure to changes in the relative values of investments that may result from market developments, including changes in interest rates, currency exchange rates and asset prices. The success of such derivative transactions generally will depend on the Company's ability to accurately predict market changes in a timely fashion, the degree of correlation between price movements of a derivative instrument, the position being hedged, the creditworthiness of the counterparty and other factors. As a result, these transactions may result in poorer overall investment performance than if they had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases. A perfect correlation between the instruments used in a hedging or other derivative transaction and the position being hedged may not be attained. An imperfect correlation could give rise to a loss. Also, it may not be possible to fully or perfectly limit exposure against all changes in the value of an investment because the value of an investment is likely to fluctuate as a result of a number of factors, many of which will be beyond the Company's control or ability to hedge.
The Company's real estate investments are subject to the risks inherent in the ownership and operation of real estate and the construction and development of real estate.
The Company's real estate investments are subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets. These risks include those associated with general and local economic conditions, changes in supply of and demand for competing properties in an area, changes in environmental regulations and other laws, various uninsured or uninsurable risks, natural disasters, changes in real property tax rates, changes in interest rates, the reduced availability of mortgage financing which may render the sale or refinancing of properties difficult or impracticable, environmental liabilities, contingent liabilities on disposition of assets, terrorist attacks, war and other factors that are beyond our control. Further, the U.S. Environmental Protection Agency has found that global climate change could increase the severity and perhaps the frequency of extreme weather events, which could subject real property to increased weather-related risks in the coming years. There are also presently a number of current and proposed regulatory initiatives, both domestically and globally, that are geared towards limiting and scaling back the emission of greenhouse gases, which certain scientists have linked to global climate change. Although not known with certainty at this time, such regulation could adversely affect the costs to construct and operate real estate in the coming years, such as through increased energy costs.
The commercial real estate markets in the United States generally have experienced major disruptions in the past due to the lack of available capital, in the form of either debt or equity, and declines in value as a result of overall economic decline. If these conditions were to occur again transaction volume may drop precipitously, negatively impacting the valuation and performance of the Company's real estate investments significantly. Additionally, if the Company acquires direct or indirect interests in undeveloped land or underdeveloped real property, which may often be non-income producing, they will be subject to the risks normally associated with such assets and development activities, including risks relating to the availability and timely receipt of zoning and other regulatory or environmental approvals, the cost, potential for cost overruns and timely completion of construction (including risks beyond the control of the investor, such as weather or labor conditions or material shortages) and the availability of both construction and permanent financing on favorable terms.
Our third party reinsurance business could expose us to losses.
We provide third party reinsurance coverage through our Luxembourg subsidiary, Hollenfels Re S.A ("Hollenfels"). We have written polices relating to property and casualty, workers' compensation, general liability and construction performance bonds and may issue reinsurance policies relating to other types of insurance. Because we write reinsurance, the success of our underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original underwriting decisions. We face the risk that these ceding companies may fail to accurately assess the risks that they assume initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate premium rates or the claims we receive exceed the premiums and retrocession recoverables we are able to collect, we will suffer losses.
We may be unable to purchase retrocession reinsurance and our retrocession agreements subject us to third-party credit risk.
We may enter into retrocession agreements with third parties in order to limit our exposure to losses from the reinsurance coverage provided by Hollenfels. Changes in the availability and cost of retrocession reinsurance, which are subject to market conditions that are outside of our control, may reduce to some extent our ability to use retrocession reinsurance to balance exposures across our reinsurance operations. Accordingly, we may not be able to obtain our desired amounts of retrocession reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to negotiate terms that we deem appropriate or acceptable or obtain such reinsurance from entities with satisfactory creditworthiness. While we seek to do business with creditworthy counterparties, if the parties who provide us with retrocession are not able to meet their obligations to us or fail to make timely payments under the terms of our retrocession agreements, we could be materially and adversely affected because we may remain liable under the terms.
The Company may incur losses in the future.
The Company may incur losses in any of its future periods. Future losses may have a significant effect on the Company's liquidity as well as our ability to operate. In addition, we may incur significant expenses in connection with any expansion, strategic acquisition or investment with respect to our businesses. Specifically, we have invested, and will continue to invest in, and hire senior professionals to expand our investment banking businesses. Accordingly, the Company will need to increase its revenues at a rate greater than its expenses to achieve and maintain profitability. If the Company's revenues do not increase sufficiently, or even if its revenues increase but it is unable to manage its expenses, the Company will not achieve and maintain profitability in future periods. As an alternative to increasing its revenues, the Company may seek additional capital through the sale of additional common stock or other forms of debt or equity financing. The Company cannot be certain that it would have access to such financing on acceptable terms.
Operational Risks
We have taken steps to protect our businesses from cybersecurity attacks while our employees have been working remotely, but remote working environments may be less secure and more susceptible to cybersecurity attaches which could adversely affect our ability to securely process transactions and maintain confidential financial, personal and other information.
The Company's businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions that the Company processes have become increasingly complex. As a result of the COVID-19 pandemic virtually all of our employees, including those who process our transactions, are working remotely. While we have implemented risk management and contingency plans and taken other precautions with respect to the COVID-19 pandemic, such measures may not adequately protect our businesses from the full impact of the COVID-19 pandemic as remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. Accordingly, if our systems are breached as a result of a cybersecurity attack that takes advantage of the COVID-19 pandemic, our ability to securely process transactions and maintain confidential financial, personal and other information could be adversely affected.
In addition, the effects of the COVID-19 pandemic, including remote working arrangements for employees, may also impact our financial reporting systems and internal control over financial reporting, disclosure controls and procedures, however, to date, these arrangements have not materially affected our ability to maintain our business operations.
Our information and technology systems are critical components of our business and operations, and a failure of those systems or other aspects of our business operations may disrupt our business, cause financial loss, increase our legal liability and constrain our growth.
Our operations rely extensively on the secure processing, storage and transmission of confidential financial, personal and other information in our computer systems and networks. Although we take protective measures and devote significant resources to maintaining and upgrading our systems and networks with measures such as intrusion and detection prevention systems, monitoring firewalls to safeguard critical business applications and supervising third party providers that have access to our systems, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other
malicious code, and other events that could have a security impact. Additionally, if a client's computer system, network or other technology is compromised by unauthorized access, we may face losses or other adverse consequences by unknowingly entering into unauthorized transactions. If one or more of such events occur, this potentially could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in and transmitted through our computer systems and networks. Furthermore, such events may cause interruptions or malfunctions in our, our clients', our counterparties' or third parties' operations, including the transmission and execution of unauthorized transactions. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not covered or not fully covered through our insurance. The increased use of smartphones, tablets and other mobile devices as well as cloud computing may also heighten these and other operational risks. Similar to other firms, we and our third party providers continue to be the subject of attempted unauthorized access, computer viruses and malware, and cyber attacks designed to disrupt or degrade service or cause other damage and denial of service. Additional challenges are posed by external parties, including foreign state actors. There can be no assurance that such unauthorized access or cyber incidents will not occur in the future, and they could occur more frequently and on a larger scale. We are also subject to laws and regulations relating to the privacy and security of the information of our clients, employees or others, and any failure to comply with these regulations could expose us to liability and/or reputational damage.
Operational risks relating to the failure of data processing systems and other information systems and technology or other infrastructure may disrupt the Company's business and result in losses or limit our operations and growth in the industry.
The Company's business is highly dependent on its ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions that the Company processes have become increasingly complex. The inability of the Company's systems to accommodate an increasing volume of transactions could also constrain the Company's ability to expand its business. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in the Company's internal processes, people or systems, the Company could suffer impairments, financial loss, a disruption of its business, liability to clients, regulatory intervention or reputational damage.
The Company has outsourced certain aspects of its technology infrastructure including data centers and wide area networks, as well as some trading applications. The Company is dependent on its technology providers to manage and monitor those functions. A disruption of any of the outsourced services would be out of the Company's control and could negatively impact our business. The Company has experienced disruptions on occasion, none of which has been material to the Company's operations and results. However, there can be no guarantee that future material disruptions with these providers will not occur.
The Company also faces the risk of operational failure of or termination of relations with any of the clearing agents, exchanges, clearing houses or other financial intermediaries that the Company uses to facilitate its securities transactions. Any such failure or termination could adversely affect the Company's ability to effect transactions and to manage its exposure to risk.
In addition, the Company's ability to conduct its business may be adversely impacted by a disruption in the infrastructure that supports Company and the communities in which we are located. This may affect, among other things, the Company's financial, accounting or other data processing systems. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which the Company conducts business, whether due to fire, other natural disaster, power or communications failure, act of terrorism or war or otherwise. Nearly all of our employees in our primary locations in New York, Boston, San Francisco and London work in close proximity to each other. Although the Company has a formal disaster recovery plan in place, if a disruption occurs in one location and our employees in that location are unable to communicate with or travel to other locations, the Company's ability to service and interact with its clients may suffer, and the Company may not be able to implement successfully contingency plans that depend on communication or travel.
Our business also relies on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. The Company's computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this could jeopardize our or our clients' or counterparties' confidential and other information processed and stored in, and transmitted through, the Company's computer systems and networks, or otherwise cause interruptions or malfunctions in our business', its clients', its counterparties' or third parties' operations. The Company may be required to expend significant additional resources to modify its protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications, and the Company may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by the Company.
Any cyber attack or other security breach of or vulnerability in our technology systems, or those of our clients or other third party vendors we rely on, could have operational impacts, subject us to significant liability and harm our reputation.
Our operations rely heavily on the secure processing, storage and transmission of sensitive and confidential financial, personal and other information in our computer systems and networks. There have been several highly publicized cases involving financial services companies reporting the unauthorized disclosure of client or other confidential information in recent years, as
well as cyber attacks involving theft, dissemination and destruction of corporate information or other assets, in some cases as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties. Like other financial services firms, we have been the target of attempted cyber attacks. Cyber attacks can originate from a variety of sources, including third parties affiliated with foreign governments, organized crime or terrorist organizations. Third parties may also attempt to place individuals within our firm or induce employees, clients or other users of our systems to disclose sensitive information or provide access to our data, and these types of risks may be difficult to detect or prevent. Although cybersecurity incidents among financial services firms are on the rise, we are not aware of any material losses relating to cyber attacks or other information security breaches. However, the techniques used in these attacks are increasingly sophisticated, change frequently and are often not recognized until launched. Although we seek to maintain a robust suite of authentication and layered information security controls, these controls could fail to detect, mitigate or remediate these risks in a timely manner. Despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code, and other events that could result in significant liability and damage to our reputation, and have an ongoing impact on the security and stability of our operations.
We also rely on numerous third-party service providers to conduct other aspects of our business operations, and we face similar risks relating to them. While we regularly conduct security assessments on these third-party vendors, we cannot be certain that their information security protocols are sufficient to withstand a cyber attack or other security breach. In addition, in order to access our products and services, our customers may use computers and other devices that are beyond our security control systems and processes.
Notwithstanding the precautions we take, if a cyber attack or other information security breach were to occur, this could jeopardize the information we confidentially maintain, or otherwise cause interruptions in our operations or those of our clients and counterparties, exposing us to liability. As attempted attacks continue to evolve in scope and sophistication, we may be required to expend substantial additional resources to modify or enhance our protective measures, to investigate and remediate vulnerabilities or other exposures or to communicate about cyber attacks to our customers. Though we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits or are not covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Additionally, the SEC issued guidance in February 2018 stating that, as a public company, we are expected to have controls and procedures that relate to cybersecurity disclosure, and are required to disclose information relating to certain cyber attacks or other information security breaches in disclosures required to be made under the federal securities laws. Further, successful cyber attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general, which could result in a loss of business.
Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, and the increasing sophistication of malicious actors, a cyber attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would take substantial amounts of time and resources, and that there may be extensive delays before we obtain full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered. All of which would further increase the costs and consequences of such an attack.
We may also be subject to liability under various data protection laws including, the GDPR and the CCPA. We are subject to numerous laws and regulations designed to protect personal information. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, vendors or other service providers, negligently disregards or intentionally breaches our established controls with respect to sensitive or confidential client, employee or other data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client, employee or other data, whether through system failure, vendor fault, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the event of a security breach of sensitive or confidential data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
Liquidity Risks
The soundness of other financial institutions may adversely affect Cowen.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Cowen has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and institutional clients. Many of these transactions expose Cowen to credit risk in the event of a default by a counterparty or client. In the past, defaults by, or even speculation about, one or more financial services institutions or the financial services industry generally during moments of
economic crisis have led to market-wide liquidity problems. The economic volatility resulting from the current COVID-19 pandemic could, as similar events in the past have, result in similar defaults and, as a result, impair the confidence of our counterparties and ultimately affect our ability to effect transactions. In addition, Cowen’s credit risk may be exacerbated when the collateral held by Cowen cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit exposure due to Cowen. Any such losses could have an adverse effect on Cowen’s financial condition and results of operations.
Higher volumes and price volatility in the markets due to COVID-19 could lead to higher cash requirements in our clearing businesses, which could adversely affect our liquidity position.
Since the COVID-19 pandemic began, the capital markets have experienced a higher level of stress due to the global COVID-19 pandemic. Higher volumes and price volatility have led to increased margin requirements at clearing corporations and exchanges, along with increased levels of fails due to operational friction in the financial system. Certain of these higher cash requirements have required us, and may continue to require us, to use more liquidity for our clearing businesses and our overall liquidity could, in the future, be adversely affected as a result.
Limitations on access to capital by the Company and its subsidiaries could impair its liquidity and its ability to conduct its businesses.
Liquidity, or ready access to funds, is essential to the operations of financial services firms. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our trading and clearing businesses and perceived liquidity issues may affect the willingness of the Company's clients and counterparties to engage in brokerage transactions with us. Our liquidity could be impaired due to circumstances that the Company may be unable to control, such as a general market disruption or an operational problem that affects the Company, its trading clients or third parties. Furthermore, the Company's ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.
The Company primarily depends on its subsidiaries to fund its operations. Cowen and Company, ATM Execution, Cowen Prime, and Westminster are subject to the net capital requirements of the SEC and various self-regulatory organizations of which they are members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Cowen International Ltd, and Cowen Execution Ltd. are also subject to capital requirements in the U.K. by the FCA. Any failure to comply with these capital requirements could impair the Company's ability to conduct its investment banking businesses.
We are a holding company and rely upon our subsidiaries for cash flow to make payments of principal and interest on our outstanding indebtedness.
We are a holding company with no business operations or assets other than the capital stock of our direct and indirect subsidiaries. Consequently, we are dependent on dividends, distributions, loans and other payments from these subsidiaries to make payments of principal and interest on all of our indebtedness including our senior notes due 2024 (the "2024 Notes"), our senior notes due 2027 (the "2027 Notes"), our senior notes due 2033 (the "2033 Notes") and our convertible notes due 2022 (the "2022 Convertible Notes"), and together with the 2024 Notes, the 2027 Notes and the 2033 Notes, the "Notes"). The ability of our subsidiaries to pay dividends and make other payments to us will depend on their cash flows and earnings, which, in turn, will be affected by all of the factors discussed in this annual report. The ability of our direct and indirect subsidiaries to pay dividends and make distributions to us may be restricted by, among other things, applicable laws and regulations and by the terms of any debt agreements or other agreements into which they enter. If we are unable to obtain funds from our direct and indirect subsidiaries as a result of restrictions under their debt or other agreements, applicable laws and regulations or otherwise, we may not be able to pay cash interest or principal on the Notes when due.
Servicing our debt and funding our necessary capital expenditures requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt or to fund our necessary capital expenditures.
Our ability to make scheduled payments of the principal and to pay interest on or to refinance our indebtedness, including our senior notes due 2024, our senior notes due 2027, our senior notes due 2033 and our convertible notes due 2022, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Furthermore, to the extent that businesses are unable to generate cash flows sufficient to fund necessary capital expenditures during the COVID-19 pandemic, we may be required to seek additional capital through issuances of debt or equity securities; however, we may be unable to complete any such transactions on favorable terms to us, or at all.
Despite our current consolidated debt levels, we may still incur substantially more debt or take other actions which would intensify the risks discussed above.
Despite our current consolidated debt levels, we may be able to incur substantially more debt in the future, including secured debt. While there are some provisions under the terms of the indentures governing the 2024 Notes that could restrict us from incurring additional debt, so long as we comply with the financial covenants in the 2024 Notes we are not restricted from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indentures governing the Notes but that could diminish our ability to make payments on the Notes.
The conditional conversion feature of the 2022 Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
As of December 31, 2020, the conditional conversion feature of the 2022 Convertible Notes had been triggered, allowing holders of the 2022 Convertible Notes to convert their 2022 Convertible Notes at any time during the period beginning on January 2, 2021 and ending at the close of business on March 31, 2021. The future conditional convertability of the 2022 Convertible Notes will be monitored at each quarterly reporting date and analyzed dependent upon market prices of our Class A common stock during the prescribed measurement periods, and as a result, it is possible that holders of the 2022 Convertible Notes will continue to be entitled to convert their 2022 Convertible Notes at any time during specified periods at their option. If one or more of the holders of the 2022 Convertible Notes elects to convert their 2022 Convertible Notes, unless we satisfy our conversion obligation by delivering only shares of our Class A common stock, we would be required settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
The accounting method for convertible debt securities that may be settled in cash, such as the 2022 Convertible Notes, could have a material effect on our reported financial results.
Accounting Standards Codification ("The Accounting Standards") 470-20, Debt with Conversion and Other Options, or ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as the 2022 Convertible Notes) in a manner that reflects the issuer's economic interest cost for non-convertible debt. The equity component of the 2022 Convertible Notes is included in the additional paid-in capital section of our stockholders' equity on our consolidated balance sheet, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component. This original issue discount will be amortized to non-cash interest expense over the term of the 2022 Convertible Notes, and we will record a greater amount of non-cash interest expense as a result of this amortization. Accordingly, we will report lower net income in our financial results because ASC 470-20 will require the interest expense associated with the 2022 Convertible Notes to include both amortization of the original issue discount and the 2022 Convertible Notes' coupon interest, which could adversely affect our reported or future financial results and the trading price of our securities.
In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as the 2022 Convertible Notes) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of the 2022 Convertible Notes are not included in the calculation of diluted earnings per share unless the conversion value of the 2022 Convertible Notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, the 2022 Convertible Notes are accounted for as if the number of shares of common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, are issued. The Accounting Standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares, if any, issuable upon conversion of the 2022 Convertible Notes, then our diluted earnings per share could be adversely affected.
As a result, we may experience related non-cash volatility to our net income (loss). In addition, as a result of the amortization of the debt discount, the interest expense associated with the 2022 Convertible Notes will be greater than the coupon rate on the 2022 Convertible Notes, which will result in lower reported net income.
Certain provisions in the indentures governing the 2022 Convertible Notes could delay or prevent an otherwise beneficial takeover or takeover attempt of us.
Certain provisions in the 2022 Convertible Notes and the indenture governing the 2022 Convertible Notes could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change, holders of the 2022 Convertible Notes will have the right to require us to repurchase their 2022 Convertible Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their 2022 Convertible Notes in connection with such takeover. In either case, and in other cases, our
obligations under the 2022 Convertible Notes and the indenture governing the 2022 Convertible Notes could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.
Any substantial and sustained downturn in our operations due to the COVID-19 pandemic or other factors may cause us to be in breach of our debt covenants which would limit our ability to incur additional indebtedness.
The instruments governing our existing indebtedness require us to comply with certain restrictive covenants and any substantial and sustained downturn in our operations due to the COVID-19 pandemic or other factors may cause us to be in breach of such covenants. If we breach these covenants our ability to incur additional indebtedness would be limited. In addition, to the extent we borrow under our $25 million revolving credit facility a breach of the maintenance covenants under that facility could constitute an event of default and cause our outstanding indebtedness under the revolving credit facility to be declared immediately due and payable. If applicable, such acceleration of our outstanding indebtedness could cause our secured lenders to foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. Any inability to obtain additional liquidity as and when needed, or to maintain compliance with the instruments governing our indebtedness, would have a material adverse effect on our financial condition and results of operations.
In addition, the current uncertain condition of the capital markets and their actual or perceived effects on our business, financial condition and results of operations, along with the current unfavorable economic environment in the United States and much of the world resulting from the COVID-19 pandemic, may increase the likelihood that one or more of the major independent credit agencies would downgrade our credit ratings, which could have a negative effect on our access to capital and the cost of any future debt financing. In addition, the terms of future debt agreements could include more restrictive covenants or require incremental collateral, which may further restrict our business operations.
Litigation and Regulatory Risk
The Company's subsidiaries may become subject to additional regulations which could increase the costs and burdens of compliance or impose additional restrictions which could have a material adverse effect on the Company's businesses and the performance of the Company's investment funds.
Market disruptions like those experienced in 2008 have led to an increase in governmental as well as regulatory scrutiny from a variety of regulators, including the SEC, CFTC, FINRA, NFA, U.S. Treasury, the NYSE and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. The Company may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. The Company also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. The Company could be fined, prohibited from engaging in some of its business activities or subjected to limitations or conditions on its business activities. In addition, the Company could incur significant expense associated with compliance with any such legislation or regulations or the regulatory and enforcement environment generally. Substantial legal liability or significant regulatory action against the Company could have a material adverse effect on the financial condition and results of operations of the Company or cause significant reputational harm to the Company, which could seriously affect its business prospects.
The activities of certain of the Company's subsidiaries and affiliates are regulated primarily within the U.S. by the SEC, FINRA, the NFA, the CFTC and other self-regulatory organizations, as well as various state agencies, and are also subject to regulation by other agencies in the various jurisdictions in which they operate and are offered, including the FCA, the European Securities and Markets Authority and the SFC of Hong Kong. Certain legislation proposing greater regulation of the industry is regularly considered by the U.S. Congress - as well as by the governing bodies of non-U.S. jurisdictions - and from time to time adopted as in the case of the Dodd-Frank Act in the U.S. and MiFID II in the EU.
The investment advisers responsible for the Company's investment management business are all registered as investment advisers with the SEC or rely upon the registration of an affiliated adviser. Certain investment advisors and/or the investment funds they advise are also subject to regulation by various regulatory authorities outside the U.S., including the U.K. FCA, the Swedish FCA and the European Securities and Markets Authority and may indirectly be subject to MiFID II regulations. Moreover, recent rulemaking by the SEC and certain non-U.S. regulatory bodies have imposed trading restrictions and reporting requirements on short selling, which have impacted certain of the investment strategies implemented on behalf of the investment funds it manages, and continued restrictions on or further regulations of short sales could also negatively impact their performance.
These and other regulators in these jurisdictions have broad regulatory powers dealing with all aspects of financial services including, among other things, the authority to make inquiries of companies regarding compliance with applicable regulations, to grant permits and to regulate marketing and sales practices and the maintenance of adequate financial resources as well as
significant reporting obligations to regulatory authorities. Under the EU Alternative Investment Fund Managers Directive, the Company will only be permitted to actively market its investment funds in the EU if certain disclosure and reporting obligations are met, and certain cooperation arrangements with the domicile of the investment vehicle are in place. As such, the Company may need to modify its strategies or operations, face increased constraints on its investment management business or incur additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment. It is difficult to predict the impact of such legislative initiatives on the Company and the markets in which it operates and/or invests.
It is difficult to predict what other changes may be instituted in the future in the regulation of the Company or the markets in which they invest, or the counterparties with which it does business, in addition to those changes already proposed or adopted in the U.S. or other countries. Any such regulation could have a material adverse effect on the profit potential of the Company's operations.
Financial services firms are subject to numerous perceived or actual conflicts of interest, which have drawn and which we expect will continue to draw scrutiny from the SEC, other federal and state regulators, and self-regulatory organizations. For example, the research areas of investment banks have been and remain the subject of heightened regulatory scrutiny, which has led to increased restrictions on the interaction between equity research analysts and investment banking personnel at securities firms. Regulations have also been focusing on potential conflicts of interest or issues relating to impermissible disclosure of material nonpublic information. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if it fails to do so. Such policies and procedures to address or limit actual or perceived conflicts may also result in increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation.
We are also subject to laws and regulations, such as the GDPR, the CCPA and the GLBA, relating to the privacy of the information of clients, employees or others, and any failure to comply with these laws and regulations could expose us to liability and/or reputational damage. As new privacy-related laws and regulations are implemented and as the interpretation and enforcement of existing requirements evolves, the time and resources needed for us to comply with such laws and regulations, as well as our potential liability for non-compliance and reporting obligations in the case of data breaches, may significantly increase.
The Company is subject to third party litigation risk and regulatory risk which could result in significant liabilities and reputational harm which, in turn, could materially adversely affect its business, results of operations and financial condition.
The Company depends to a large extent on its reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with the Company's services, it may be relatively more damaging to the Company than to other businesses. Moreover, the Company's role as advisor to clients on underwriting or merger and acquisition transactions involves complex analysis and the exercise of professional judgment, including rendering "fairness opinions" in connection with mergers and other transactions. Such activities may subject the Company to the risk of significant legal liabilities, not covered by insurance, to clients and aggrieved third parties, including stockholders of clients who could commence litigation against the Company. Moreover, many of the clients within the Company’s sectors tend to have higher risk profiles than more established companies, particularly healthcare and cannabis companies. Cowen currently is, and may in the future be, named as a defendant in securities-class action lawsuits alleging violations of the securities laws. Although the Company's investment banking engagements typically include broad indemnities from its clients and provisions to limit exposure to legal claims relating to such services, these provisions may not protect the Company, may not be enforceable, or may be with foreign companies requiring enforcement in foreign jurisdictions which may raise the costs and decrease the likelihood of enforcement. As a result, the Company may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and/or adverse judgments. In addition, in some instances Cowen Prime serves as a registered investment advisor providing advice to retail investors and retaining discretion over some retail investment accounts. The Company could be exposed to potential litigation and liability if any of these clients are not satisfied with the investment advisory services being provided. Substantial legal liability or significant regulatory action against the Company could have a material adverse effect on our results of operations or cause significant reputational harm, which could seriously harm our business and prospects.
In general, the Company is exposed to risk of litigation by investors in its investment management business if the management of any of its investment funds is alleged to have been grossly negligent or fraudulent. Investors or beneficial owners of investment funds could sue to recover amounts lost due to any alleged misconduct, up to the entire amount of the loss. In addition, the Company faces the risk of litigation from investors and beneficial owners of any of its investment funds if applicable restrictions are violated. In addition, the Company is exposed to risks of litigation or investigation relating to transactions that presented conflicts of interest that were not properly addressed. In the majority of such actions the Company would be obligated to bear legal, settlement and other costs, which may be in excess of any available insurance coverage. In addition, although the Company is contractually entitled to indemnification from its investment funds, our rights to indemnification may be challenged. If the Company is required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds, if any, or is not wholly indemnified, our business, results of operations and financial condition could be
materially adversely affected. In its investment management business, the Company is exposed to the risk of litigation if an investment fund suffers catastrophic losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated market rules or regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by circumstances which are materially damaging to the Company's reputation and businesses.
The potential for conflicts of interest within the Company, and a failure to appropriately identify and deal with conflicts of interest could adversely affect our businesses.
Due to the combination of our investment management and investment banking businesses, we face an increased potential for conflicts of interest, including situations where our services to a particular client or investor or our own interests in our investments conflict with the interests of another client. Such conflicts may also arise if our investment banking businesses have access to material non-public information that may not be shared with our investment management business or vice versa. Additionally, our regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed examinations of specific transactions.
Appropriately identifying and dealing with conflicts of interest is complex and difficult, and the willingness of clients to enter into transactions or engagements in which such a conflict might arise may be affected if we fail to identify and appropriately address potential conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or enforcement actions.
Increased regulatory focus could result in regulation that may limit the manner in which the Company and its investment management business invest, materially impacting the Company's business.
The Company's investment management business may be adversely affected if new or revised legislation or regulations are enacted, or by changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets and their participants. Such changes could place limitations on the type of investor that can invest in the Company's investment funds or on the conditions under which such investors may invest. Further, such changes may limit the scope of investing activities that may be undertaken by the Company's investment funds. It is impossible to determine the extent of the impact of any new or recently enacted laws or any other regulations or initiatives that may be proposed, or whether any proposed regulations or initiatives will become law. Compliance with any new laws or regulations could be difficult and expensive and affect the manner in which the Company's investment management business conducts itself, which may adversely impact its results of operations, financial condition and prospects.
Additionally, as a result of highly publicized financial scandals, investors, regulators and the general public have exhibited concerns over the integrity of both the U.S. financial markets and the regulatory oversight of these markets. As a result, the business environment in which Company's investment management business operates is subject to heightened regulation. With respect to the Company's investment funds, in recent years, there has been debate in both U.S. and foreign governments about new rules or regulations, including increased oversight or taxation, in addition to the recently enacted legislation described above. As calls for additional regulation have increased, there may be a related increase in regulatory investigations of the trading and other investment activities of investment funds, including the Company's investment funds. Such investigations may impose additional expenses on the Company, may require the attention of senior management and may result in fines if any of the Company's investment funds are deemed to have violated any regulations.
Our business could be adversely affected by the ongoing impact of MiFID II in Europe.
MiFID II, which went into effect in January 2018, regulates the provision of investment services and activities throughout the European Economic Area. MiFID II requires that investment managers and investment advisors located in the EU "unbundle" research costs from commissions. As a result, investment firms subject to MiFID II may no longer pay for research using client commissions or "soft dollars". Such costs must now be paid directly by the investment firm or through a research payment account funded by clients and governed by a budget that is agreed by the client. We cannot predict the long-term effects that this new regulation will have on our research and sales and trading businesses. If investment managers and investment advisors reduce their spending on research or decide to trade with other broker-dealers as a result of the MiFID II regulations our business could be adversely affected.
The U.K. exit from the EU could adversely impact our business, results of operations and financial condition.
The U.K. left the EU on January 31, 2020, with a transition period until December 31, 2020 during which time the U.K. followed EU rules and a U.K.-EU trade agreement was negotiated governing EU and U.K. relations from January 1, 2021 resulting in a Trade and Cooperation Agreement together with a Political Declaration covering a number of areas including financial services. The Trade and Cooperation Agreement does not include substantive provisions for financial services, in particular it does not allow U.K. investment firms to provide services into the EU under the Passporting regime.
We conduct business in Europe primarily through our U.K. subsidiaries. Under the Trade and Cooperation Agreement, our U.K. subsidiaries are currently not able to rely on a "Passporting" regime on which our U.K. Subsidiaries may rely, that allows immediate access to the single EU market. If the U.K. and EU do not agree to a Passporting regime, we may need to establish one or more new regulated subsidiaries in the EU in order to provide our trading platform and certain post-trade services to clients in the EU.
In general, the potential impacts related to Brexit or the terms of the new economic and security relationship between the U.K. and the EU on the movement of goods, services, people and capital between the U.K. and the EU, customer behavior, economic conditions, interest rates, currency exchange rates, availability of capital or other matters are unclear and could adversely affect our businesses, including our revenues from our trading activities, particularly in Europe, and our results of operations and financial condition.
If the Company were deemed an investment company under the U.S. Investment Company Act, applicable restrictions could make it impractical for the Company to continue its respective businesses as contemplated and could have a material adverse effect on the Company's businesses and prospects.
We are primarily engaged in a non-investment company business and believe the nature of our assets and the sources of our income exclude us from the definition of an investment company under the Investment Company Act.
The Investment Company Act and the rules thereunder contain detailed requirements for the organization and operation of investment companies. Among other things, the Investment Company Act and the rules thereunder limit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. The Company intends to conduct its operations so that the Company will not be deemed to be an investment company under the Investment Company Act. If anything were to happen which would cause the Company to be deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on its capital structure, ability to transact business with affiliates (including subsidiaries) and ability to compensate key employees, could make it impractical for the Company to continue its business as currently conducted, impair the agreements and arrangements between and among it, its subsidiaries and its senior personnel, or any combination thereof, and materially adversely affect its business, financial condition and results of operations. Accordingly, the Company may be required to limit the amount of investments that it makes as a principal or otherwise conduct its business in a manner that does not subject the Company to the registration and other requirements of the Investment Company Act.
Other Risks to Our Stockholders
We could change our existing dividend policy in the future and there can be no assurance that we will continue to declare cash dividends.
We began paying quarterly cash dividends to holders of record of our Class A common stock in March 2020. Although we expect to continue to pay dividends to our stockholders in accordance with our dividend policy, as described under the heading "Dividend Policy", we have no obligation to pay any dividend, and our dividend policy may change at any time without notice. The declaration and payment of dividends on our Class A common stock is at the discretion of our Board of Directors in accordance with applicable law after taking into account various factors, including general economic and business conditions; our financial condition and operating results; our available cash and current and anticipated cash needs; capital requirements; contractual restrictions (including under agreements related to indebtedness to which we are a party), legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us; and such other factors as our board of directors may deem relevant. For example, in the event that there is deterioration in our financial performance and/or our liquidity position, a downturn in global economic conditions or disruptions in the credit markets and our ability to obtain financing, our Board of Directors could decide to suspend dividend payments in the future. As a Delaware corporation, we are required to meet certain surplus thresholds for our Board of Directors to declare a dividend in accordance with the Delaware General Corporation Law. As a result, we may not pay dividends at all in the future.
The terms of our Series A Convertible Preferred Stock contains certain restrictions on our operations.
The certificate of designations governing our Series A Convertible Preferred Stock contains certain restrictions on our and our subsidiaries' ability to, among other things, pay dividends on, redeem or repurchase our Class A common stock and, under certain circumstances, our Series A Convertible Preferred Stock, and to issue additional preferred stock. Additionally, if dividends on our Series A Convertible Preferred Stock are in arrears and unpaid for at least six or more quarterly periods, the holders (voting as a single class) of our outstanding Series A Convertible Preferred Stock will be entitled to elect two additional directors to our Board of Directors until paid in full.
The Company's failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on the Company's financial condition, results of operations and business and the price of our Class A common stock.
The Sarbanes-Oxley Act and the related rules require our management to conduct an annual assessment of the effectiveness of our internal control over financial reporting and require a report by our independent registered public accounting firm addressing our internal control over financial reporting. To comply with Section 404 of the Sarbanes-Oxley Act, we are required to document formal policies, processes and practices related to financial reporting that are necessary to comply with Section 404. Such policies, processes and practices are important to ensure the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization.
If we fail for any reason to comply with the requirements of Section 404 in a timely manner, our independent registered public accounting firm may, at that time, issue an adverse report regarding the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Any such event could adversely affect our financial condition, results of operations and business, and result in a decline in the price of our Class A common stock.
Certain provisions of the Company's amended and restated certificate of incorporation and bylaws and Delaware law may have the effect of delaying or preventing an acquisition by a third party.
The Company's amended and restated certificate of incorporation and bylaws contain several provisions that may make it more difficult for a third party to acquire control of the Company, even if such acquisition would be financially beneficial to the Company's stockholders. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in the Company's stockholders receiving a premium over the then-current trading price of our common stock. For example, the Company's amended and restated certificate of incorporation authorizes its board of directors to issue up to 10,000,000 shares of "blank check" preferred stock. Without stockholder approval, the board of directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficult for a third party to acquire the Company. In addition, the Company's amended and restated bylaws provide for an advance notice procedure with regard to the nomination of candidates for election as directors and with regard to business to be brought before a meeting of stockholders. The Company is also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes an "interested stockholder," the Company may not enter into a "business combination" with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control. For the purposes of Section 203, "interested stockholder" means, generally, someone owning 15% or more of the Company's outstanding voting stock or an affiliate of the Company that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.
If securities analysts stop publishing research or reports about us or our business or if they downgrade our common stock, the market price of our common stock and, consequently, the trading price of our other securities could decline.
The market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. If any analyst who covers us downgrades our stock or lowers its future stock price targets or estimates of our operating results, our stock price could decline rapidly. Furthermore, if any analyst ceases to cover us, we could lose visibility in the market, which in turn could cause the market price of our securities to decline.
Future sales of our common stock in the public market could adversely impact the trading price of our securities.
In the future, we may sell additional shares of our common stock to raise capital. In addition, a substantial number of shares of our common stock are reserved for issuance upon vesting of restricted stock units and performance-linked restricted stock units and upon the conversion of the 2022 Convertible Notes. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect the trading price of our securities and impair our ability to raise capital through the sale of additional equity securities.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Our principal offices, all of which are leased, are located in New York City, Boston, San Francisco and London. Our other offices, all of which are leased, are located in Atlanta, Chicago, Cleveland, Dallas, Greenwich, Houston, Lake Mary, Stamford, Washington D.C., Luxembourg, Belfast, and other various locations. Our corporate headquarters are located in New York, New York and comprise approximately 124,000 square feet of leased space pursuant to a lease agreement through 2024. Our additional New York locations are comprised of approximately 46,000 square feet pursuant to lease agreements through
2025. We lease approximately 19,100 square feet of space in Boston pursuant to lease agreements expiring through 2023. In San Francisco, we lease approximately 26,000 square feet of space, pursuant to lease agreements expiring through 2025. Our London offices are subject to lease agreements expiring through 2022.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
In the ordinary course of business, the Company and its affiliates, subsidiaries and current and former officers, directors and employees (the "Company and Related Parties") are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief.
In the ordinary course of business, the Company and Related Parties are also subject to governmental and regulatory examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Certain of our affiliates and subsidiaries are registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal inquiries by these regulators, we receive requests and orders seeking documents and other information in connection with various aspects of our regulated activities.
Due to the global scope of our operations, and presence in countries around the world, the Company and Related Parties may be subject to litigation, governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially different risks, from those to which the Company and Related Parties are subject in the United States.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that are deemed remote.
The Company appropriately reserves for certain matters where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued expenses and other liabilities in the accompanying consolidated statements of financial condition. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Price Information and Stockholders
Our Class A common stock is listed and trades on the NASDAQ Global Market under the symbol "COWN." As of March 2, 2021, there were approximately 38 holders of record of our Class A common stock. This number does not include stockholders for whom shares were held in "nominee" or "street" name.
Dividend Policy
Though we currently expect that cash dividends comparable to cash dividends paid by us during our most recently completed fiscal year will continue to be paid in the future, the declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account: general economic and business conditions; our financial condition and operating results; our available cash and current and anticipated cash needs; capital requirements;
contractual restrictions (including under agreements related to indebtedness to which we are a party), legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us; and such other factors as our board of directors may deem relevant.
We credit dividend equivalents on all unvested Restricted Stock Units and Performance Share Awards concurrently with the payment of dividends to the holders of Class A common stock. The dividend equivalents have the same vesting and delivery terms as the underlying award agreements relating to the Restricted Stock Units and Performance Share Awards.
Issuer Purchases of Equity Securities: Sales of Unregistered Securities
As of December 31, 2020, the Company's Board of Directors has approved a share repurchase program that authorizes the Company to purchase up to $271.5 million of Cowen Class A common stock from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. The specific timing and amount of repurchases will vary depending on various factors, including, among others, market conditions and competing needs for the use of our capital. We may elect to conduct future share repurchases through open market purchases, private transactions or automatic share repurchase programs under SEC Rule 10b5-1. During the year ended December 31, 2020, through the share repurchase program, the Company repurchased 3,139,751 shares of Cowen Class A common stock at an average price of $15.07 per share.
The table below sets forth the information with respect to purchases made by or on the behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act, as amended), of our Class A common stock during the year ended December 31, 2020.
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month 1 (January 1, 2020 - January 31, 2020)
Common stock repurchases(1) - $ - - $ 12,934,590
Employee transactions(2) 4,052 $ 16.00 - -
Other (3) 3,051 $ 15.57 - -
Total 7,103 $ 15.81 -
Month 2 (February 1, 2020 - February 29, 2020)
Common stock repurchases(1) 299,545 $ 16.16 299,545 $ 20,158,853
Employee transactions(2) 5,489 $ 16.89 - -
Other (3) - - - -
Total 305,034 $ 16.17 299,545.00
Month 3 (March 1, 2020 - March 31, 2020)
Common stock repurchases(1) 1,084,112 $ 12.15 1,084,112 $ 6,981,750
Employee transactions(2) 219,016 $ 12.18 - -
Other (3) - - - -
Total 1,303,128 $ 12.16 1,084,112
Month 4 (April 1, 2020 - April 30, 2020)
Common stock repurchases(1) - $ - - $ 6,981,750
Employee transactions(2) 25,014 $ 9.66 - -
Other (3) - - - -
Total 25,014 $ 9.66 -
Month 5 (May 1, 2020 - May 31, 2020)
Common stock repurchases(1) - $ - - $ 6,981,750
Employee transactions(2) 105,347 $ 11.77 - -
Other (3) 2,138 $ 10.33 - -
Total 107,485 $ 11.74 -
Month 6 (June 1, 2020 - June 30, 2020)
Common stock repurchases(1) 446,800 $ 14.67 446,800 $ 24,165,575
Employee transactions(2) 131,799 $ 13.07 - -
Other (3) - $ - -
Total 578,599 $ 14.30 446,800
Month 7 (July 1, 2020 - July 31, 2020)
Common stock repurchases(1) - $ - - $ 24,165,575
Employee transactions(2) 3,450 $ 15.76 - -
Other (3) 1,837 $ 14.38 - -
Total 5,287 $ 15.28 -
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month 8 (August 1, 2020 - August 31, 2020)
Common stock repurchases(1) 236,790 $ 16.75 236,790 $ 20,199,771
Employee transactions(2) - $ - - -
Other (3) - $ - - -
Total 236,790 $ 16.75 236,790
Month 9 (September 1, 2020 - September 30, 2020)
Common stock repurchases(1) 907,464 $ 16.43 907,464 $ 5,294,360
Employee transactions(2) 11,535 $ 18.41 - -
Other (3) - $ - - -
Total 918,999 $ 16.45 907,464
Month 10 (October 1, 2020 - October 31, 2020)
Common stock repurchases(1) 8,690 $ 15.48 8,690 $ 24,865,439
Employee transactions(2) - - -
Other (3) 721 $ 16.81 - -
Total 9,411 $ 15.59 8,690
Month 11 (November 1, 2020 - November 30, 2020)
Common stock repurchases(1) 51,397 $ 22.55 51,397 $ 23,706,348
Employee transactions(2) - - -
Total 51,397 $ 22.55 51,397
Month 12 (December 1, 2020 - December 31, 2020)
Common stock repurchases(1) 104,953 $ 24.56 104,953 $ 21,128,277
Employee transactions(2) 361,082 $ 24.51 - -
Other (3) - - -
Total 466,035 $ 24.53 104,953
Total (January 1, 2020 - December 31, 2020)
Common stock repurchases(1) 3,139,751 $ 15.07 3,139,751 $ 21,128,277
Employee transactions(2) 866,784 $ 17.48 - -
Other (3) 7,747 $ 13.96 - -
Total 4,014,282 $ 15.59 3,139,751
(1) The Company's Board of Directors have authorized the repurchase, subject to market conditions, of up to $271.5 million of the Company's outstanding Class A common stock.
(2) Represents shares of common stock withheld in satisfaction of tax withholding obligations upon the vesting of equity awards or other similar transactions.
(3) Represents shares of common stock distributed to the Company from an escrow account established to satisfy the Company's indemnification claims arising under the terms of the purchase agreement entered into in connection with the Company's acquisition of Convergex Group, LLC.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial and other data for the years ended December 31, 2020, 2019, 2018, 2017, and 2016. The selected consolidated statements of financial condition data and consolidated statements of operations data as of and for the years ended December 31, 2020, 2019, 2018, 2017, and 2016 have been derived from our audited consolidated financial statements. Any presentation reclassifications made in filings subsequent to the associated Form 10-K filing for each year have been applied here retrospectively as well. Our selected consolidated financial data are only a summary and should be read in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
2020 2019 2018 2017 2016
(dollars in thousands except per share data)
Consolidated Statements of Operations Data:
Revenues
Investment banking $ 769,486 $ 375,025 $ 357,222 $ 223,614 $ 133,279
Brokerage 572,548 402,747 413,582 293,610 199,180
Management fees 47,515 32,608 29,658 33,245 40,612
Incentive income 592 1,547 3,117 5,383 8,334
Interest and dividends 187,459 174,913 108,009 49,440 14,732
Reimbursement from affiliates 1,048 1,026 1,038 2,860 10,504
Aircraft lease revenue - - 1,852 3,751 4,161
Reinsurance premiums 30,147 46,335 38,096 30,996 32,459
Other revenues 8,621 5,433 4,504 8,561 22,355
Consolidated Funds revenues 5,888 9,809 9,838 7,321 5,949
Total revenues 1,623,304 1,049,443 966,916 658,781 471,565
Interest and dividends expense 187,725 168,628 104,116 60,949 29,308
Total net revenues 1,435,579 880,815 862,800 597,832 442,257
Expenses
Employee compensation and benefits 860,531 535,772 512,627 404,087 310,038
Non-compensation expense 392,517 355,959 328,616 249,550 168,804
Reinsurance claims, commissions and amortization of deferred acquisition costs 33,905 44,070 41,086 30,486 29,904
Goodwill impairment - 4,100 - - -
Consolidated Funds expenses 5,409 8,963 8,615 12,526 9,064
Total expenses 1,292,362 948,864 890,944 696,649 517,810
Other income (loss)
Net gains (losses) on securities, derivatives and other investments 175,877 80,409 68,043 76,179 23,381
Bargain purchase gain - - - 6,914 -
Gain/(loss) on debt extinguishment 2,719 - (556) (16,039) -
Consolidated Funds net gains (losses) (24,376) 58,363 56,255 38,725 20,685
Total other income (loss) 154,220 138,772 123,742 105,779 44,066
Income (loss) before income taxes 297,437 70,723 95,598 6,962 (31,487)
Income tax expense (benefit) 90,373 14,853 15,719 44,053 (19,092)
Net income (loss) 207,064 55,870 79,879 (37,091) (12,395)
Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds (9,299) 31,239 37,060 23,791 6,882
Net income (loss) attributable to Cowen Inc. 216,363 24,631 42,819 (60,882) (19,277)
Preferred stock dividends 6,792 6,792 6,792 6,792 6,792
Net income (loss) attributable to Cowen Inc. common stockholders $ 209,571 $ 17,839 $ 36,027 $ (67,674) $ (26,069)
Weighted average common shares outstanding:
Basic 27,790 29,525 29,545 29,492 26,857
Diluted 29,519 31,286 30,735 29,492 26,857
Earnings (loss) per share:
Basic $ 7.54 $ 0.60 $ 1.22 $ (2.29) $ (0.97)
Diluted $ 7.10 $ 0.57 $ 1.17 $ (2.29) $ (0.97)
As of December 31,
2020 2019 2018 2017 2016
(dollars in thousands)
Consolidated Statements of Financial Condition Data:
Total assets $ 7,828,199 $ 5,162,025 $ 3,346,303 $ 3,296,252 $ 2,018,523
Total liabilities $ 6,659,078 $ 3,866,575 $ 2,270,093 $ 2,107,629 $ 866,668
Redeemable non-controlling interests $ - $ 391,275 $ 216,923 $ 335,017 $ 280,527
Nonredeemable non-controlling interests $ 199,624 $ 94,320 $ 64,880 $ 105,587 $ 98,678
Total Stockholders' Equity $ 969,497 $ 809,855 $ 794,407 $ 748,019 $ 772,650

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and the related notes that appear elsewhere in this Annual Report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management's expectations. See "Special Note Regarding Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K.
Overview
Cowen Inc., a Delaware corporation formed in 2009, is a diversified financial services firm that, together with its consolidated subsidiaries (collectively, "Cowen" or the "Company"), provides investment banking, research, sales and trading, prime brokerage, global clearing, securities financing, commission management services and investment management through its two business segments: the Operating Company ("Op Co") and the Asset Company ("Asset Co").
Operating Company
The Op Co segment consists of four divisions: the Cowen Investment Management ("CIM") division, the Investment Banking division, the Markets division (which includes sales and trading, prime brokerage, global clearing, securities financing and commission management services) and the Research division. The Company refers to the Investment Banking division, the Markets division and the Research division collectively as its investment banking businesses. Op Co's CIM division includes advisers to investment funds (including private equity structures and privately placed hedge funds), and registered funds. Op Co's investment banking businesses offer industry focused investment banking for growth-oriented companies including advisory and global capital markets origination, domain knowledge-driven research, sales and trading platforms for institutional investors, global clearing, commission management services and also a comprehensive suite of prime brokerage services.
The CIM division is the Company's investment management business, which operates primarily under the Cowen Investment Management name. CIM offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") since 1997. The Company's investment management business offers investors access to a number of strategies to meet their specific needs including private healthcare investing, private sustainable investing, healthcare royalties, activism and merger arbitrage. A portion of the Company’s capital is invested alongside the Company's investment management clients. The Company has also invested some of its capital in its reinsurance businesses.
Op Co's investment banking businesses include investment banking, research, sales and trading, prime brokerage, global clearing and commission management services provided primarily to companies and institutional investor clients. Sectors covered by Op Co's investment banking business include healthcare, technology, media and telecommunications, consumer, industrials, information and technology services, and energy. We provide research and brokerage services to over 6,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our sectors. The investment banking businesses also offer a full-service suite of introduced prime brokerage services targeting emerging private fund managers. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time, the Company invests in private capital raising transactions of its investment banking clients.
Asset Company
The Asset Co segment consists of the Company's private investments, private real estate investments and other legacy investment strategies. The focus of Asset Co is to drive future monetization of the invested capital of the segment.
Certain Factors Impacting Our Business
Our Company's businesses and results of operations are impacted by the following factors:
•Underwriting, private placement and strategic/financial advisory fees. Our revenues from investment banking are directly linked to the underwriting fees we earn in equity and debt securities offerings in which the Company acts as an underwriter, private placement fees earned in non-underwritten transactions, sales commissions earned in at-the-market offerings and success fees earned in connection with advising both buyers and sellers, principally in mergers and acquisitions. As a result, the future performance of our investment banking business will depend on, among other things, our ability to secure lead manager and co-manager roles in clients' capital raising transactions as well as our ability to secure mandates as a client's strategic financial advisor.
•Liquidity. As a clearing broker-dealer in the U.S., we are subject to cash deposit requirements with clearing organizations, brokers and banks that may be large in relation to our total liquid assets.
•Equity research fees. Equity research fees are paid to the Company for providing access to equity research. The Company also permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. Our ability to generate revenues relating to our equity research depends on the quality of our research and its relevance to our institutional customers and other clients.
•Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities and net trading gains and losses on inventory and other Company positions. Commissions associated with these transactions are also included herein. In certain cases, the Company provides liquidity to clients buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk.
•Commissions. Our commission revenues depend for the most part on our customers' trading volumes and on the notional value of the non-U.S. securities traded by our customers.
•Investment performance. Our revenues from incentive income are linked to the performance of the investment funds and accounts that we manage. Performance also affects assets under management because it influences investors' decisions to invest assets in, or withdraw assets from, the investment funds and accounts managed by us.
•Fee and allocation rates. Our management fee revenues are linked to the management fee rates we charge as a percentage of contributed and invested capital. Our incentive income revenues are linked to the incentive allocation rates we charge as a percentage of performance-driven asset growth. Our incentive allocations are generally subject to "high-water marks," whereby incentive income is generally earned by us only to the extent that the net asset value of an investment fund at the end of a measurement period exceeds the highest net asset value as of the end of the earlier measurement period for which we earned incentive income. Our incentive allocations, in some cases, are subject to performance hurdles. Additionally, our revenues from management fees are directly linked to assets under management. Positive performance in our legacy funds increases assets under management which results in higher management fees.
•Investment performance of our own capital. We invest our own capital and the performance of such invested capital affects our revenues. Investment income in the investment bank business includes gains and losses generated by the capital the Company invests in private capital raising transactions of its investment banking clients. Our revenues from investment income are linked to the performance of the underlying investments.
External Factors Impacting Our Business
Our financial performance is highly dependent on the environment in which our businesses operate. We believe a favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low interest rates, low unemployment, strong business profitability and high business and investor confidence. Unfavorable or uncertain economic or market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability (or increases in the cost of) credit and capital, increases in inflation or interest rates, exchange rate volatility, unfavorable global asset allocation trends, outbreaks of hostilities or other geopolitical instability, corporate, political or other scandals that reduce investor confidence in the capital markets, global health crisis, such as the ongoing COVID-19 pandemic, or a combination of these or other factors. Until the COVID-19 pandemic subsides, we could experience reduced levels in certain of our investment banking activities, reduced revenues from incentive income in our investment management business and reduced investment income. Our businesses and profitability have been and may continue to be adversely affected by market conditions in many ways, including the following:
•Our investment bank business has been, and may continue to be, adversely affected by market conditions. Increased competition continues to affect our investment banking and capital markets businesses. The same factors also affect trading volumes in secondary financial markets, which affect our brokerage business. Commission rates, market volatility, increased competition from larger financial firms and other factors also affect our brokerage revenues and may cause these revenues to vary from period to period.
•Our investment management business can be adversely affected by unanticipated levels of requested redemptions. We experienced significant levels of requested redemptions during the 2008 financial crisis and, while the environment for investing in investment management products has since improved, it is possible that we could intermittently experience redemptions above historical levels, regardless of investment fund performance.
•Our investment bank business focuses primarily on small to mid-capitalization and private companies in specific industry sectors. These sectors may experience growth or downturns independent of general economic and market conditions, or may face market conditions that are disproportionately better or worse than those impacting the economy and markets generally. In addition, increased government regulation has had, and may continue to have, a disproportionate effect on capital formation by smaller companies. Therefore, our investment bank business could be affected differently than overall market trends.
Our businesses, by their nature, do not produce predictable earnings. Our results in any period can be materially affected by conditions in global financial markets and economic conditions generally. We are also subject to various legal and regulatory actions that impact our business and financial results.
Basis of Presentation
The consolidated financial statements of the Company in this Form 10-K are prepared in accordance with Generally Accepted Accounting Principles in the United States ("US GAAP") as promulgated by the Financial Accounting Standards Board ("FASB") through Accounting Standards Codification (the "Accounting Standards") as the source of authoritative accounting principles in the preparation of financial statements and include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest or a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in the consolidated financial statements, are not subject to these consolidation provisions with respect to their own investments pursuant to their specialized accounting.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to US GAAP as described below (the “Consolidated Funds”). Consequently, the Company's consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as redeemable and nonredeemable non-controlling interests in consolidated subsidiaries in the consolidated financial statements appearing elsewhere in this Form 10-K. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.
Acquisition
On October 1, 2020 (the "Acquisition Date"), the Company, through its indirect wholly owned subsidiary, Cowen and Company LLC (“C&C”), completed its previously announced acquisition (the "Acquisition") of certain assets and liabilities of MHT Partners, LP (“MHT Partners”). MHT Partners is an investment bank, based primarily in Dallas and San Francisco, focused on representing innovative companies in growing markets.
Expenses
The Company's expenses consist of compensation and benefits, reinsurance costs, general, administrative and other, and Consolidated Funds expenses.
•Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on a combination of employees' performance, their contribution to their business segment, and the Company's performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual incentive compensation comprising a significant portion of total compensation and benefits expenses.
•Reinsurance claims, commissions and amortization of deferred acquisition costs. Reinsurance-related expenses reflect loss and claim reserves, acquisition costs and other expenses incurred with respect to our insurance and reinsurance operations.
•Operating, General and Administrative. General, administrative and other expenses are primarily related to professional services, occupancy and equipment, business development expenses, communications, expenses associated with our reinsurance business and other miscellaneous expenses. These expenses may also include certain one-time charges and non-cash expenses.
•Depreciation and Amortization. Depreciation and amortization is comprised of depreciation expense for tangible assets and the amortization of intangible assets. The depreciation of assets capitalized under finance leases is included in depreciation and amortization expenses as well.
•Consolidated Funds Expenses. The Company's consolidated financial statements reflect the expenses of the Consolidated Funds and the portion attributable to other investors is allocated to a non-controlling interest.
Income Taxes
The taxable results of the Company’s U.S. operations are subject to U.S. federal, state and local taxation as a corporation. The Company is also subject to foreign taxation on income it generates in certain countries.
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management’s view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. Deferred tax liabilities that cannot be realized in a similar future time period and thus that cannot offset the Company’s deferred tax assets are not taken into account when calculating the Company’s net deferred tax assets.
Non-Controlling Interests
Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities. When non-controlling interest holders have redemption features that can be exercised at the option of the holder currently or contingent upon the occurrence of future events, their ownership has been classified as temporary equity. Ownership which has been classified in permanent equity are non-controlling interests which are either not redeemable at the option of the holder or the holder does not have the unilateral right to redeem its ownership interests.
Investment Fund Performance and Assets Under Management
For the three months ended December 31, 2020, the performance of the Company's activist and merger arbitrage investment strategies (including the merger arbitrage-focused UCITS Fund) had positive results. The Company's healthcare royalty strategy is now making allocations from the strategy's fourth fund. Our private healthcare strategy is now deploying capital from its third fund, having made twenty investments by the end of the three months ended December 31, 2020, with a pipeline of opportunities ahead. Finally, our sustainable investing strategy is now deploying capital from its first fund, and has made two investments as of December 31, 2020, with a pipeline of opportunities ahead. The liquidation of certain multi-strategy hedge funds advised by the Company also continues.
As of December 31, 2020, the Company had assets under management of $12.5 billion.
Capability Private Healthcare Investments Healthcare Royalties Activism Merger Arbitrage Sustainability Other (a)
(dollars in millions)
AUM $896 $3,579 $6,420 $392 $477 $715
Team
Private Equity ü ü ü
Hedge Fund ü ü
Managed Account ü ü ü ü
UCITS ü
Other ü
(a) Other capabilities include private equity funds, legacy funds, and other trading strategies.
The Company's Invested Capital
The Company invests a significant portion of its capital base to help drive results and facilitate the growth of the Op Co and Asset Co business segments. Within Op Co, management allocates capital to three primary investment categories: (i) broker-dealer capital and related trading strategies; (ii) liquid alternative trading strategies; and (iii) public and private healthcare strategies. Broker-dealer capital and related trading strategies include capital investments in the Company's broker-dealers as well as securities finance and special purpose acquisition company trading strategies to grow liquidity and returns within operating businesses. Much of the Company's public and private healthcare strategies and liquid alternative trading strategies portfolios are invested alongside the Company's investment management clients. The Company's liquid alternative trading strategies include merger arbitrage and activist fund strategies. In addition, from time to time, the Company makes investments in private capital raising transactions of its investment banking clients.
The Company allocates capital to Asset Co's private investments. Asset Co's private investments include the Company's investment in Italian wireless broadband provider Linkem, private equity funds Formation8 and Eclipse and legacy real estate investments.
As of December 31, 2020, the Company's invested capital amounted to a net value of $853.8 million (supporting a long market value of $993.8 million), representing approximately 88% of Cowen's stockholders' equity presented in accordance with US GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of Cowen's stockholders' equity as of December 31, 2020. The total net values presented in the table below do not tie to Cowen's consolidated statement of financial condition as of December 31, 2020 because they represent only some of the line items in the accompanying consolidated statement of financial condition.
Strategy Net Value % of Stockholders' Equity
(dollars in millions)
Op Co
Broker-dealer capital and related trading $ 567.4 59%
Public and Private Healthcare 68.8 7%
Liquid Alternative Trading 72.0 7%
Other 14.6 2%
Asset Co
Private Investments 131.0 14%
Total 853.8 88%
Cowen Inc. Stockholders' Equity $ 969.5
The allocations shown in the table above will change over time.
Results of Operations
To provide comparative information of the Company's operating results for the periods presented, a discussion of Economic Income (Loss) (which is a non-GAAP measure) of our Op Co and Asset Co segments follows the discussion of our total consolidated US GAAP results.
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
Consolidated Statements of Operations
Year Ended December 31, Period to Period
2020 2019 $ Change % Change
(dollars in thousands)
Revenues
Investment banking $ 769,486 $ 375,025 $ 394,461 105 %
Brokerage 572,548 402,747 169,801 42 %
Management fees 47,515 32,608 14,907 46 %
Incentive income 592 1,547 (955) (62) %
Interest and dividends 187,459 174,913 12,546 7 %
Reimbursement from affiliates 1,048 1,026 22 2 %
Reinsurance premiums 30,147 46,335 (16,188) (35) %
Other revenues 8,621 5,433 3,188 59 %
Consolidated Funds revenues 5,888 9,809 (3,921) (40) %
Total revenues 1,623,304 1,049,443 573,861 55 %
Interest and dividends expense 187,725 168,628 19,097 11 %
Total net revenues 1,435,579 880,815 554,764 63 %
Expenses
Employee compensation and benefits 860,531 535,772 324,759 61 %
Reinsurance claims, commissions and amortization of deferred acquisition costs 33,905 44,070 (10,165) (23) %
Operating, general, administrative and other expenses 369,840 335,499 34,341 10 %
Depreciation and amortization expense 22,677 20,460 2,217 11 %
Goodwill impairment - 4,100 (4,100) NM
Consolidated Funds expenses 5,409 8,963 (3,554) (40) %
Total expenses 1,292,362 948,864 343,498 36 %
Other income (loss)
Net gains (losses) on securities, derivatives and other investments 175,877 80,409 95,468 119 %
Gain/(loss) on debt extinguishment 2,719 - 2,719 NM
Consolidated Funds net gains (losses) (24,376) 58,363 (82,739) (142) %
Total other income (loss) 154,220 138,772 15,448 11 %
Income (loss) before income taxes 297,437 70,723 226,714 321 %
Income tax expense (benefit) 90,373 14,853 75,520 508 %
Net income (loss) 207,064 55,870 151,194 271 %
Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds (9,299) 31,239 (40,538) (130) %
Net income (loss) attributable to Cowen Inc. 216,363 24,631 191,732 778 %
Preferred stock dividends 6,792 6,792 - - %
Net income (loss) attributable to Cowen Inc. common stockholders $ 209,571 $ 17,839 $ 191,732 1,075 %
Revenues
Investment Banking
Investment banking revenues increased $394.5 million to $769.5 million for the year ended December 31, 2020 compared with $375.0 million in the prior year period. During the year ended December 31, 2020, the Company completed 165 underwriting transactions, 74 strategic advisory transactions and 12 debt capital markets transactions. During the year ended December 31, 2019, the Company completed 126 capital markets transactions, 48 strategic advisory transactions and 14 debt capital markets transactions.
Brokerage
Brokerage revenues increased $169.8 million to $572.5 million for the year ended December 31, 2020 compared with $402.7 million in the prior year period. This was attributable to an increase in Institutional Brokerage, primarily Special Situations and electronic trading commission revenue and an increase in Institutional Services, primarily Prime Brokerage. Customer trading volumes across the industry (according to Bloomberg) increased 56% for the year ended December 31, 2020 compared to the prior year period.
Management Fees
Management fees increased $14.9 million to $47.5 million for the year ended December 31, 2020 compared with $32.6 million in the prior year period. This increase is primarily related to the healthcare royalty business, our healthcare investments business and our sustainable investments business.
Incentive Income
Incentive income decreased $0.9 million to $0.6 million for the year ended December 31, 2020 compared with $1.5 million in the prior year period. This decrease is primarily related to the merger arbitrage business. Revenue recognition standards, effective January 1, 2018, require the Company to recognize the majority of incentive income allocated to the Company as net gains (losses) on securities, derivatives and other investments or as incentive income when the fees are no longer subject to reversal or are crystallized.
Interest and Dividends
Interest and dividends increased $12.6 million to $187.5 million for the year ended December 31, 2020 compared with $174.9 million in the prior year period. Interest and dividends amounts are primarily attributable to securities finance activity. The increase in the securities finance activity is due to higher customer demand which has created more matched book opportunities for international securities.
Reimbursements from Affiliates
Reimbursements from affiliates remained fairly flat at $1.0 million for the year ended December 31, 2020 compared with $1.0 million in the prior year period.
Reinsurance Premiums
Reinsurance premiums decreased $16.2 million to $30.1 million for the year ended December 31, 2020 compared with $46.3 million in the prior year period. This decrease is because premiums from policies that were not renewed in 2020 outweighed premiums from new policies in 2020 and because of lower activity in certain existing contracts due to COVID-19.
Other Revenues
Other revenues increased $3.2 million to $8.6 million for the year ended December 31, 2020 compared with $5.4 million in the prior year period. The increase relates to an increase in board monitoring fees from our private equity business.
Consolidated Funds Revenues
Consolidated Funds revenues decreased $3.9 million to $5.9 million for the year ended December 31, 2020 compared with $9.8 million in the prior year period. The decrease is due to the deconsolidation of two consolidated funds during 2020.
Interest and Dividends Expense
Interest and dividends expense increased $19.1 million to $187.7 million for the year ended December 31, 2020 compared with $168.6 million in the prior year period. Interest and dividends amounts are primarily attributable to securities finance activities. There was an increase in the securities finance activity due to higher customer demand which has created more matched book opportunities for international securities.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses increased $324.7 million to $860.5 million for the year ended December 31, 2020 compared with $535.8 million in the prior year period. The increase is primarily due to $573.9 million higher total revenues as well as an increase of $15.4 million in other income (loss) during 2020 as compared to 2019 and thus resulting in a higher compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 48% for the year ended December 31, 2020, compared with 45% in the prior year period.
Reinsurance Claims and Commissions
Reinsurance-related expenses decreased $10.2 million to $33.9 million for the year ended December 31, 2020 compared with $44.1 million in the prior year period. This decrease is due to fewer policies in force during 2020 compared to 2019 partially offset by a higher loss ratio.
Operating, General, Administrative and Other Expenses
Operating, general, administrative and other expenses increased $34.3 million to $369.8 million for the year ended December 31, 2020 compared with $335.5 million in the prior year period. The increase is primarily related to higher brokerage and trade execution costs as well as higher underwriting fees, due to higher brokerage and investment banking revenues, offset only partially by decreased marketing and business development expenses and occupancy costs.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $2.2 million to $22.7 million for the year ended December 31, 2020 compared with $20.5 million in the prior year period. The increase is primarily related to an increase in tangible and intangible assets related to software purchases and recent acquisitions.
Consolidated Funds Expenses
Consolidated Funds expenses decreased $3.6 million to $5.4 million for the year ended December 31, 2020 compared with $9.0 million in the prior year period. The decrease is due to the deconsolidation of two consolidated funds during 2020.
Other Income (Loss)
Other income (loss) increased $15.4 million to $154.2 million for the year ended December 31, 2020 compared with $138.8 million in the prior year period. The increase in other income (loss) was primarily attributable to the increase in Net gains (losses) on securities, derivatives and other investments which relates to an increase in performance in our activist investments, and Cowen Merchant Banking, specifically the $27 million increase in our investment in electric truck maker Nikola Corporation. The liquid strategy increases were partially offset by the impairment of our Surfside real estate investment. The increase was partially offset by a decrease in Other Income (loss) from Consolidated Funds which decreased during 2020 due to weaker performance of our UCITS Fund and losses in the Ramius Merger Fund LLC compared to the prior year period. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests.
Income Taxes
Income tax expense increased $75.5 million to $90.4 million for the year ended December 31, 2020 compared with an income tax expense of $14.9 million in the prior year period. This change is primarily attributable to the change in the Company’s income before income taxes for the respective periods.
Net Income (Loss) Attributable to Non-controlling Interests
Net income (loss) attributable to non-controlling interests decreased $40.5 million to a loss of $9.3 million for the year ended December 31, 2020 compared with income of $31.2 million in the prior year period. The decrease was primarily the result of a decrease in income earned from our Cowen Private fund as 2019 had a large amount of positive realizations and the fund continues to wind down into 2020. We also experienced weaker performance in the Merger Fund and UCITS Fund prior to their deconsolidation in 2020. Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities.
Preferred Stock Dividends
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Year Ended December 31, 2019 Compared with the Year Ended December 31, 2018
Consolidated Statements of Operations
Year Ended December 31, Period to Period
2019 2018 $ Change % Change
(dollars in thousands)
Revenues
Investment banking $ 375,025 $ 357,222 $ 17,803 5 %
Brokerage 402,747 413,582 (10,835) (3) %
Management fees 32,608 29,658 2,950 10 %
Incentive income 1,547 3,117 (1,570) (50) %
Interest and dividends 174,913 108,009 66,904 62 %
Reimbursement from affiliates 1,026 1,038 (12) (1) %
Aircraft lease revenue - 1,852 (1,852) NM
Reinsurance premiums 46,335 38,096 8,239 22 %
Other revenues 5,433 4,504 929 21 %
Consolidated Funds revenues 9,809 9,838 (29) - %
Total revenues 1,049,443 966,916 82,527 9 %
Interest and dividends expense 168,628 104,116 64,512 62 %
Total net revenues 880,815 862,800 18,015 2 %
Expenses
Employee compensation and benefits 535,772 512,627 23,145 5 %
Reinsurance claims, commissions and amortization of deferred acquisition costs 44,070 41,086 2,984 7 %
Operating, general, administrative and other expenses 335,499 316,180 19,319 6 %
Depreciation and amortization expense 20,460 12,436 8,024 65 %
Goodwill impairment 4,100 - 4,100 NM
Consolidated Funds expenses 8,963 8,615 348 4 %
Total expenses 948,864 890,944 57,920 7 %
Other income (loss)
Net gain (loss) on securities, derivatives and other investments 80,409 68,043 12,366 18 %
Gain/(loss) on debt extinguishment - (556) 556 NM
Consolidated Funds net gains (losses) 58,363 56,255 2,108 4 %
Total other income (loss) 138,772 123,742 15,030 12 %
Income (loss) before income taxes 70,723 95,598 (24,875) (26) %
Income tax expense (benefit) 14,853 15,719 (866) (6) %
Net income (loss) 55,870 79,879 (24,009) (30) %
Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds 31,239 37,060 (5,821) (16) %
Net income (loss) attributable to Cowen Inc. 24,631 42,819 (18,188) (42) %
Preferred stock dividends 6,792 6,792 - - %
Net income (loss) attributable to Cowen Inc. common stockholders $ 17,839 $ 36,027 $ (18,188) (50) %
Revenues
Investment Banking
Investment banking revenues increased $17.8 million to $375.0 million for the year ended December 31, 2019 compared with $357.2 million in the prior year period. During the year ended December 31, 2019, the Company completed 126 capital markets transactions, 48 strategic advisory transactions and 14 debt capital markets transactions. During the year ended December 31, 2018, the Company completed 114 underwriting transactions, 30 strategic advisory transactions and seven debt capital markets transactions.
Brokerage
Brokerage revenues decreased $10.9 million to $402.7 million for the year ended December 31, 2019 compared with $413.6 million in the prior year period. This was attributable to a decrease in institutional services and cross asset revenues partially offset by an increase in commission management revenue. Customer trading volumes across the industry (according to Bloomberg) decreased 4% for the year ended December 31, 2019 compared to the prior year period.
Management Fees
Management fees increased $2.9 million to $32.6 million for the year ended December 31, 2019 compared with $29.7 million in the prior year period. This increase is primarily related to the healthcare royalty business.
Incentive Income
Incentive income decreased $1.6 million to $1.5 million for the year ended December 31, 2019, compared with $3.1 million in the prior year period. This decrease is primarily related to the merger arbitrage business. Revenue recognition standards, effective January 1, 2018, require the Company to recognize the majority of incentive income allocated to the Company as net gains (losses) on securities, derivatives and other investments or as incentive income when the fees are no longer subject to reversal or are crystalized.
Interest and Dividends
Interest and dividends increased $66.9 million to $174.9 million for the year ended December 31, 2019 compared with $108.0 million in the prior year period. This is primarily attributable to an increase in the securities finance activity due to customer demand which has created greater matched book opportunities for both domestic and international securities.
Reimbursements from Affiliates
Reimbursements from affiliates remained fairly flat at $1.0 million for the year ended December 31, 2019 and the prior year period.
Aircraft Lease Revenues
Aircraft lease revenue ceased at the end of 2018 due to our exit from the aviation business.
Reinsurance Premiums
Reinsurance premiums increased $8.2 million to $46.3 million for the year ended December 31, 2019 compared with $38.1 million in the prior year period. This increase is due to a higher change in unearned premiums in 2019 compared to 2018 as well as higher premium volume from renewed policies in 2019 compared to 2018.
Other Revenues
Other revenues increased $0.9 million to $5.4 million for the year ended December 31, 2019 compared with $4.5 million in the prior year period.
Consolidated Funds Revenues
Consolidated Funds revenues remained flat at $9.8 million for the year ended December 31, 2019 and prior year period.
Interest and Dividends Expenses
Interest and dividends expenses increased $64.5 million to $168.6 million for the year ended December 31, 2019 compared with $104.1 million in the prior year period. This is primarily attributable to securities finance activities. The increase in the securities finance activity is due to customer demand which has created greater matched book opportunities for both domestic and international securities.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses increased $23.2 million to $535.8 million for the year ended December 31, 2019 compared with $512.6 million in the prior year period. The increase is primarily due to a higher compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 45% for the year ended December 31, 2019, compared with 47% in the prior year period.
Reinsurance Claims Commissions
Reinsurance related expenses increased $3.0 million to $44.1 million for the year ended December 31, 2019 compared with $41.1 million in the prior year period. This increase is primarily due to additional reinsurance-related expenses in 2019 from additional reinsurance policies, partially offset by a better claims experience in 2019 compared to 2018.
Operating, General, Administrative and Other Expenses
Operating, general, administrative and other expenses increased $19.3 million to $335.5 million for the year ended December 31, 2019 compared with $316.2 million in the prior year period. The increase is primarily related to increased professional fees and client servicing and business development costs.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $8.1 million to $20.5 million for the year ended December 31, 2019 compared with $12.4 million in the prior year period. The increase in amortization expenses primarily related to intangibles acquired through the Quarton acquisition in January 2019.
Consolidated Funds Expenses
Consolidated Funds expenses increased $0.4 million to $9.0 million for the year ended December 31, 2019 compared with $8.6 million in the prior year period. The increase is due to increased professional, advisory and other fees expenses in the Consolidated Funds.
Other Income (Loss)
Other income (loss) increased $15.1 million to $138.8 million for the year ended December 31, 2019 compared with $123.7 million in the prior year period. The increase primarily relates to an increase in performance in the Company's own invested capital, primarily Cowen Healthcare (the healthcare investment strategy), and our activist strategy. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such investment funds, and the portion of those gains or losses that are attributable to other investors is allocated to non-controlling interests.
Income Taxes
Income tax expense decreased $0.8 million to $14.9 million for the year ended December 31, 2019 compared with an income tax expense of $15.7 million in the prior year period. This change is primarily attributable to the change in the Company's income before income taxes and non-deductible expenses for the respective periods.
Net Income (Loss) Attributable to Non-controlling Interests
Net income (loss) attributable to non-controlling interests decreased $5.9 million to $31.2 million for the year ended December 31, 2019 compared with $37.1 million in the prior year period. The decrease was primarily the result of a decrease in income earned by the Merger Fund in the current year period offset partially by an increase in performance of our Cowen Private fund (our healthcare strategy). Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities.
Preferred Stock Dividends
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Segment Analysis, Economic Income (Loss) and related components
Economic Income (Loss) and related components
The Company presents supplemental financial measures that are not prepared in accordance with US GAAP. These non-GAAP financial measures include (i) Economic Income (Loss), (ii) Economic Operating Income (Loss), (iii) Economic Proceeds and related components, (iv) Net Economic Proceeds and related components (v) Economic Expenses and related components and (vi) related per share measures. The Company believes that these non-GAAP financial measures, viewed in addition to, and not in lieu of, the Company’s reported US GAAP results, provide useful information to investors and analysts regarding its performance and overall results of operations as it presents investors and analysts with a supplemental operating view of the Company’s financials to help better inform their analysis of the Company’s performance.
These Non-GAAP financial measures are an integral part of the Company’s internal reporting to measure the performance of its business segments, allocate capital and other strategic decisions as well as assess the overall effectiveness of senior management. The Company believes that presenting these non-GAAP measures may provide expanded transparency into the Company’s business operations, growth opportunities and expense allocation decisions.
The Company’s primary non-GAAP financial measures of profit or loss are Economic Income (Loss) and Economic Operating Income (Loss). Economic Income (Loss) is a pre-tax measure that (i) includes management reclassifications which the Company believes provides additional insight on the performance of the Company’s core businesses and divisions (ii) eliminates the impact of consolidation for Consolidated Funds and excludes (iii) goodwill and intangible impairment (iv) certain other transaction-related adjustments and/or reorganization expenses and (v) certain costs associated with debt. Economic Operating Income (Loss) is a similar measure but before depreciation and amortization expenses. The Company believes that these non-GAAP financial measures provide analysts and investors transparency into the measures of profit and loss management uses to evaluate the financial performance of and make operating decisions for the segments including determining appropriate compensation levels. Additionally, the measures provide investors and analysts with additional insight into the activities of the Company’s core businesses, taking into account, among other things, the impact of minority investment stakes, securities borrowing and lending activities and expenses from investment banking activities on US GAAP reported results.
In addition to Economic Income (Loss) and Economic Operating Income (Loss), the Company also presents Economic Proceeds, Net Economic Proceeds, Economic Expenses, as well as their related components. These measures include management reclassifications and the elimination of the impact of the consolidation for Consolidated funds as described for Economic Income (Loss) and Economic Operating Income (Loss) described above. These adjustments are meant to provide comparability to our peers as well as to provide investors and analysts with transparency into how the Company manages its operating businesses and how analysts and investors review and analyze the Company’s and its peers’ similar lines of businesses. For example, among others, within the Company’s Op Co business segment, investors and analysts typically review and analyze the performance of investment banking revenues net of underwriting expenses and excluding the impact of reimbursable expenses. Additionally, the performance of the Company’s Markets business is typically analyzed as a unit incorporating commissions, interest from securities financing transactions and gains and losses from proprietary and facilitation trading. The Company’s investment management business performance is analyzed and reviewed by investors and analysts through investment income, incentive income and management fees. The presentation of Economic Proceeds, Net Economic Proceeds, Economic Expenses as well as their related components align with these and other examples of how the Company’s business activities and performance are reviewed by analysts and investors in addition to providing simplification related to legacy businesses and investments for which the Company maintains long-term monetization strategies . Additionally, the Company manages its operating businesses to an Economic Compensation-to-Proceeds ratio. Presentation of Economic Compensation Expense and Economic Proceeds provides transparency in addition to the Company’s US GAAP Compensation Expense.
Reconciliations to comparable US GAAP measures are presented along with the Company’s Non-GAAP financial measures. The non-GAAP measures presented herein may not be comparable to similarly titled measures presented by other public companies and are not identical to corresponding measures used in our various agreements or public filings.
These Non-GAAP measures should not be considered in isolation or as a substitute for revenue, expenses, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with US GAAP. As a result of the adjustments made to arrive at Economic Income (Loss) described below, Economic Income (Loss) has limitations in that it does not take into account certain items included or excluded under US GAAP, including its consolidated funds.
For a reconciliation of US GAAP net income (loss) to Economic Income (Loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see the following section "Reconciliation of US GAAP (Unaudited) to Non-GAAP Measures".
The Company conducts its operations through two segments: Op Co and Asset Co. The Company's principle sources of revenues included in Economic Income (Loss) are derived from activities in the following business segments. The Op Co and Asset Co segments do not conduct inter-segment transactions.
The Op Co segment generates revenue through five principal sources: investment banking revenue, brokerage revenue, management fees, incentive income and investment income from the Company's own capital.
The Asset Co segment generates revenue through management fees, incentive income and investment income from the Company’s own capital.
Year Ended December 31, 2020 Compared with Year Ended December 30, 2019
Total Economic Operating Income (Loss) was $335.9 million for the year ended December 31, 2020, an increase of $271.8 million compared to Economic Operating Income (Loss) of $64.1 million in the prior year period. Total Economic Income (Loss) was $313.2 million for the year ended December 31, 2020, an increase of $269.5 million compared to Economic Income (Loss) of $43.7 million in the prior year period.
Economic Proceeds included in total Economic Income (Loss) were $1,556.3 million for the year ended December 31, 2020, an increase of $616.5 million compared to $939.8 million in the prior year period. This was primarily related to an increase in investment banking and brokerage revenues.
Operating Company Segment
Economic Proceeds
Year Ended December 31, Total Period-to-Period
2020 2019 $ Change % Change
(dollars in thousands)
Economic Proceeds
Investment banking $ 729,180 $ 351,085 $ 378,095 108 %
Brokerage 652,647 459,143 193,504 42 %
Management fees 58,154 40,321 17,833 44 %
Incentive income 83,435 44,600 38,835 87 %
Investment income (loss) 37,786 32,614 5,172 16 %
Other economic proceeds 775 5,785 (5,010) (87) %
Total: Economic Proceeds 1,561,977 933,548 628,429 67 %
Economic Interest Expense 24,519 22,576 1,943 9 %
Net Economic Proceeds $ 1,537,458 $ 910,972 $ 626,486 69 %
Economic Proceeds The Op Co segment economic proceeds included in Economic Income (Loss) were $1,562.0 million for the year ended December 31, 2020, an increase of $628.4 million compared to $933.5 million in the prior year period.
Investment Banking Economic Proceeds increased $378.1 million to $729.2 million for the year ended December 31, 2020 compared with $351.1 million in the prior year period. During the year ended December 31, 2020, the Company completed 165 underwriting transactions, 74 strategic advisory transactions and 12 debt capital markets transactions. During the year ended December 31, 2019, the Company completed 126 capital markets transactions, 48 strategic advisory transactions and 14 debt capital markets transactions.
Brokerage Economic Proceeds increased $193.5 million to $652.6 million for the year ended December 31, 2020, compared with $459.1 million in the prior year period. This was attributable to an increase in Institutional Brokerage, primarily Special Situations and electronic trading commission revenue and an increase in Institutional Services, primarily Prime Brokerage. Customer trading volumes across the industry (according to Bloomberg) increased 56% for the year ended December 31, 2020 compared to the prior year period.
Management Fees Economic Proceeds for the segment increased $17.9 million to $58.2 million for the year ended December 31, 2020 compared with $40.3 million in the prior year period. This increase is primarily related to the healthcare royalty business and our healthcare investments business.
Incentive Income (Loss) Economic Proceeds for the segment increased $38.8 million to $83.4 million for the year ended December 31, 2020 compared with $44.6 million in the prior year period. This increase was primarily related to an increase in performance fees from our healthcare investments businesses and our activist strategy.
Investment Income (Loss) Economic Proceeds for the segment increased $5.2 million to $37.8 million for the year ended December 31, 2020 compared with income of $32.6 million in the prior year period. The increase primarily relates to an increase in performance by our merchant banking investments, namely electric truck maker Nikola Corporation, merchant banking and our activist investments. The liquid strategy increases were partially offset by the impairment of our Surfside real estate investment.
Other Income (Loss) Economic Proceeds for the segment decreased $5.0 million to $0.8 million for the year ended December 31, 2020 compared with $5.8 million in the prior year period. This decrease is because premiums from policies that were not renewed in 2020 outweighed premiums from new policies in 2020 and because of lower activity in certain existing contracts due to COVID-19.
Economic Interest Expenses were $24.5 million for the year ended December 31, 2020, an increase of $1.9 million compared with $22.6 million in the prior year period.
Net Economic Proceeds were $1,537.5 million for the year ended December 31, 2020, an increase of $626.5 million compared with $911.0 million in the prior year period.
Economic Expenses
Year Ended December 31, Total Period-to-Period
2020 2019 $ Change % Change
Economic Expenses (dollars in thousands)
Employee compensation and benefits $ 860,753 $ 532,468 $ 328,285 62 %
Non-Compensation Expense 312,173 294,614 17,559 6 %
Depreciation & Amortization 22,655 20,403 2,252 11 %
Non-Controlling Interest 6,892 4,796 2,096 44 %
Total: Economic Expenses $ 1,202,473 $ 852,281 $ 350,192 41 %
Economic Expenses were $1,202.5 million for the year ended December 31, 2020, an increase of $350.2 million compared with $852.3 million in the prior year period.
Economic Compensation Expenses were $860.8 million compared to $532.5 million in the prior year period. The increase was due to higher revenues offset only partially by a lower economic compensation-to-proceeds ratio. The economic compensation-to-proceeds ratio was 55% a decrease from 57% in the prior year period.
Economic Non-compensation Expenses Fixed non-compensation expense increased $2.1 million to $146.2 million for the year ended December 31, 2020 compared with $144.1 million in the prior year period. The increase is primarily related to increased service, professional, advisory and other fees offset partially by lower occupancy and equipment expenses. Variable non-compensation expense which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased $15.4 million to $165.9 million for the year ended December 31, 2020 compared with $150.5 million in the prior year period. The increase is related to increased brokerage and trade execution costs partially offset by lower marketing and business development costs.
Economic Depreciation and Amortization Expenses increased to $22.7 million for the year ended December 31, 2020 compared with $20.4 million in the prior year period.
Economic Non-controlling interests increased by $2.1 million to $6.9 million for the year ended December 31, 2020 compared with $4.8 million in the prior year period. Non-controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries.
Economic Income and Economic Operating Income
Year Ended December 31, Total Period-to-Period
2020 2019 $ Change % Change
(dollars in thousands)
Economic Income (Loss) $ 329,381 $ 53,257 $ 276,124 518 %
Add back: Depreciation and amortization expense 22,655 20,403 2,252 11 %
Economic Operating Income (Loss) $ 352,036 $ 73,660 $ 278,376 378 %
* Economic Income (loss) is net of preferred dividends
Economic Income (Loss) was $329.4 million for the year ended December 31, 2020 compared with $53.3 million in the prior year period.
Economic Operating Income (Loss) was $352.0 million for the year ended December 31, 2020 compared with $73.7 million in the prior year period.
Asset Co Segment
Year Ended December 31, Total Period-to-Period
2020 2019 $ Change % Change
Economic Proceeds (dollars in thousands)
Management fees $ 946 $ 1,976 $ (1,030) (52) %
Incentive income 1,927 1,132 795 70 %
Investment income (loss) (8,564) 3,111 (11,675) (375) %
Other economic proceeds 5 58 (53) (91) %
Total: Economic Proceeds (5,686) 6,277 (11,963) (191) %
Economic Interest Expense 5,123 5,449 (326) (6) %
Net Economic Proceeds $ (10,809) $ 828 $ (11,637) (1,405) %
Economic Proceeds The Asset Co segment proceeds included in Economic Income (Loss) were a loss of $5.7 million for the year ended December 31, 2020, a decrease of $12.0 million compared with $6.3 million in the prior year period.
Management Fees Economic Proceeds for the segment decreased $1.0 million to $0.9 million for the year ended December 31, 2020 compared with $2.0 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from the Company's real estate investments.
Incentive Income (Loss) Economic Proceeds for the segment increased $0.8 million to $1.9 million for the year ended December 31, 2020 compared with $1.1 million in the prior year period. This increase was related to an increase in performance fees from the Company's multi-strategy business.
Investment Income (Loss) Economic Proceeds for the segment decreased $11.7 million to $(8.6) million for the year ended December 31, 2020, compared with $3.1 million in the prior year period. The decrease primarily relates to a decrease in valuation of our legacy real estate investments.
Economic Interest Expenses were $5.1 million for the year ended December 31, 2020, a decrease of $0.3 million compared with $5.4 million in the prior year period.
Net Economic Proceeds for the segment were $10.8 million for the year ended December 31, 2020, an increase of $11.6 million compared with $0.8 million in the prior year period.
Economic Expenses
Year Ended December 31, Total Period-to-Period
2020 2019 $ Change % Change
(dollars in thousands)
Economic Expenses
Employee compensation and benefits $ 3,767 $ 5,070 $ (1,303) (26) %
Non-Compensation Expense 350 3,924 (3,574) (91) %
Depreciation & Amortization 22 36 (14) (39) %
Total: Economic Expenses $ 4,139 $ 9,030 $ (4,891) (54) %
Economic Expenses were $4.1 million for the year ended December 31, 2020, a decrease of $4.9 million compared to $9.0 million in the prior year period.
Economic Compensation Expenses were $3.8 million for the year ended December 31, 2020, compared to $5.1 million in the prior year period. The decrease was due to lower revenues related to investment income losses. This resulted in an economic compensation-to-proceeds ratio of (66)%, a decrease from 81% in the prior year period.
Economic Non-compensation Expenses Fixed non-compensation expense decreased $2.2 million to $0.3 million for the year ended December 31, 2020 compared with $2.5 million in the prior year period. The decrease is primarily related to decreased professional, advisory and other fees and fees related to our real estate business. Variable non-compensation expenses are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities.
Economic Depreciation and Amortization Expenses remained fairly flat for the year ended December 31, 2020 compared to December 31, 2019 and relates to costs allocated from general company assets.
Economic Income and Economic Operating Income
Year Ended December 31, Total Period-to-Period
2020 2019 $ Change % Change
(dollars in thousands)
Economic Income (Loss) $ (16,136) $ (9,560) $ (6,576) 69 %
Add back: Depreciation and amortization expense 22 36 (14) (39) %
Economic Operating Income (Loss) $ (16,114) $ (9,524) $ (6,590) 69 %
* Economic Income (loss) is net of preferred dividends
Economic Income (Loss) was $(16.1) million for the year ended December 31, 2020 compared with $(9.6) million in the prior year period.
Economic Operating Income (Loss) was $(16.1) million for the year ended December 31, 2020 compared with $(9.5) million in the prior year period.
Year Ended December 31, 2019 Compared with Year Ended December 30, 2018
Total Economic Operating Income (Loss) (which is Economic Income (Loss) was $64.1 million for the year ended December 31, 2019, a decrease of $16.4 million compared to Economic Operating Income (Loss) of $80.5 million in the prior year period. Total Economic Income (Loss) was $43.7 million for the year ended December 31, 2019, a decrease of $25.2 million compared to Economic Income (Loss) of $68.9 million in the prior year period.
Proceeds included in total Economic Income (Loss) were $939.8 million for the year ended December 31, 2019, an increase of $30.8 million compared to $909.0 million in the prior year period. This was primarily related to an increase in investment banking and incentive income offset partially by a decrease in brokerage income.
Operating Company Segment
Economic Proceeds
Year Ended December 31, Total Period-to-Period
2019 2018 $ Change % Change
(dollars in thousands)
Economic Proceeds
Investment banking $ 351,085 $ 329,062 $ 22,023 7 %
Brokerage 459,143 467,117 (7,974) (2) %
Management fees 40,321 43,466 (3,145) (7) %
Incentive income 44,600 16,269 28,331 174 %
Investment income (loss) 32,614 38,776 (6,162) (16) %
Other economic proceeds 5,785 (1,619) 7,404 (457) %
Total: Economic Proceeds 933,548 893,071 40,477 5 %
Economic Interest Expense 22,576 17,490 5,086 29 %
Net Economic Proceeds $ 910,972 $ 875,581 $ 35,391 4 %
Economic Proceeds The Op Co segment Economic Proceeds included in Economic Income (Loss) were $933.5 million for the year ended December 31, 2019, an increase of $40.4 million compared to $893.1 million in the prior year period.
Investment Banking Economic Proceeds increased $22.0 million to $351.1 million for the year ended December 31, 2019 compared with $329.1 million in the prior year period. During the year ended December 31, 2019, the Company completed 126 capital markets transactions, 48 strategic advisory transactions and 14 debt capital markets transactions. During the year ended December 31, 2018, the Company completed 114 underwriting transactions, 30 strategic advisory transactions and seven debt capital markets transactions.
Brokerage Economic Proceeds decreased $8.0 million to $459.1 million for the year ended December 31, 2019, compared with $467.1 million in the prior year period. This was attributable to a decrease in institutional services and cross asset revenues partially offset by an increase in commission management revenue. Customer trading volumes across the industry (according to Bloomberg) decreased 4% for the year ended December 31, 2019 compared to the prior year period.
Management Fees Economic Proceeds for the segment decreased $3.2 million to $40.3 million for the year ended December 31, 2019 compared with $43.5 million in the prior year period. This increase in management fees was primarily related to an increase from our healthcare royalty business partially offset by a decrease in management fees from our activist business.
Incentive Income (Loss) Economic Proceeds for the segment increased $28.3 million to $44.6 million for the year ended December 31, 2019 compared with $16.3 million in the prior year period. This increase was related to an increase in performance fees from our activist and healthcare investments businesses.
Investment Income (Loss) Economic Proceeds for the segment decreased $6.2 million to $32.6 million for the year ended December 31, 2019 compared with income of $38.8 million in the prior year period. The decrease primarily relates to a decrease in relative performance of the Merger strategy and our Private Investments (Linkem and Formation 8).
Other Income (Loss) Economic Proceeds for the segment increased $7.4 million to $5.8 million for the year ended December 31, 2019 compared with $1.6 million in the prior year period. The increase is due to higher premiums and lower claims and claims-related reserves from our reinsurance business through 2019 compared to the same period in 2018.
Economic Interest Expenses were $22.6 million for the year ended December 31, 2019, an increase of $5.1 million compared to $17.5 million in the prior year period.
Net Economic Proceeds were $911.0 million for the year ended, an increase of $35.4 million compared to $875.6 million in the prior year period.
Economic Expenses
Year Ended December 31, Total Period-to-Period
2019 2018 $ Change % Change
(dollars in thousands)
Economic Expenses
Employee compensation and benefits $ 532,468 $ 498,771 $ 33,697 7 %
Non-Compensation Expense 294,614 278,099 16,515 6 %
Depreciation & Amortization 20,403 11,402 9,001 79 %
Non-Controlling Interest 4,796 4,212 584 14 %
Total: Economic Expenses $ 852,281 $ 792,484 $ 59,797 8 %
Economic Expenses were $852.3 million for the year ended December 31, 2019, an increase $59.8 million compared to $792.5 million in the prior year period.
Economic Compensation Expenses expense was $532.5 million compared to $498.8 million in the prior year period. The increase was due to higher revenues. The economic compensation-to-proceeds ratio was 57%, an increase from 56% in the prior year period.
Economic Non-compensation Expenses Fixed non-compensation expenses increased $9.0 million to $144.1 million for the year ended December 31, 2019 compared with $135.1 million in the prior year period. The increase is primarily related to increased professional, advisory and other fees offset partially by lower expenses from equity investments. Variable non-compensation expense which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased $7.5 million to $150.5 million for the year ended December 31, 2019 compared with $143.0 million in the prior year period. The increase is related to increased marketing and business development costs offset partially by lower brokerage and trade execution costs.
Economic Depreciation and Amortization Expenses increased to $20.4 million for the year ended December 31, 2019 compared with $11.4 million in the prior year period.
Economic Non-controlling interests increased by $0.6 million to $4.8 million for the year ended December 31, 2019 compared with $4.2 million in the prior year period. Non-controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries.
Economic Income and Economic Operating Income
Year Ended December 31, Total Period-to-Period
2019 2018 $ Change % Change
(dollars in thousands)
Economic Income (Loss) $ 53,257 $ 77,935 $ (24,678) (32) %
Add back: Depreciation and amortization expense 20,403 11,402 9,001 79 %
Economic Operating Income (Loss) $ 73,660 $ 89,337 $ (15,677) (18) %
* Economic Income (loss) is net of preferred dividends
Economic Income (Loss) was $53.3 million for the year ended December 31, 2019 compared with $77.9 million in the prior year period.
Economic Operating Income (Loss) was $73.7 million for the year ended December 31, 2019 compared with $89.3 million in the prior year period.
Asset Co Segment
Economic Proceeds
Year Ended December 31, Total Period-to-Period
2019 2018 $ Change % Change
Economic Proceeds (dollars in thousands)
Management fees $ 1,976 $ 5,709 $ (3,733) (65) %
Incentive income 1,132 7,035 (5,903) (84) %
Investment income (loss) 3,111 2,753 358 13 %
Other economic proceeds 58 451 (393) (87) %
Total: Economic Proceeds 6,277 15,948 (9,671) (61) %
Economic Interest Expense 5,449 5,523 (74) (1) %
Net Economic Proceeds $ 828 $ 10,425 $ (9,597) (92) %
Economic Proceeds The Asset Co segment Economic Proceeds included in Economic Income (Loss) were income of $6.3 million for the year ended December 31, 2019, a decrease of $9.7 million compared with $15.9 million in the prior year.
Management fees Economic Proceeds for the segment decreased $3.7 million to $2.0 million for the year ended December 31, 2019 compared with $5.7 million in the prior year period. This decrease in management fees was primarily related to a decrease in management fees from the real estate investments.
Incentive income Economic Proceeds for the segment decreased $5.9 million to $1.1 million for the year ended December 31, 2019 compared with income of $7.0 million in the prior year period. This decrease was related to a decrease in performance fees from the real estate investments and was partially offset by an increase in performance fees from the multi-strategy business.
Investment income Economic Proceeds for the segment increased $0.3 million to income of $3.1 million for the year ended December 31, 2019 compared with income of $2.8 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital.
Economic Interest Expenses were $5.4 million for the year ended December 31, 2019, a decrease of $0.1 million for the year ended December 31, 2019 compared with $5.5 million in the prior year period.
Net Economic Proceeds were $0.8 million for the year ended December 31, 2019, a decrease of $9.6 million compared with $10.4 million in the prior year period.
Economic Expenses
Year Ended December 31, Total Period-to-Period
2019 2018 $ Change % Change
(dollars in thousands)
Economic Expenses
Employee compensation and benefits $ 5,070 $ 10,847 $ (5,777) (53) %
Non-Compensation Expenses 3,924 6,059 (2,135) (35) %
Depreciation & Amortization 36 181 (145) (80) %
Non-Controlling Interest - 742 (742) (100) %
Total: Economic Expenses $ 9,030 $ 17,829 $ (8,799) (49) %
Economic Expenses were $9.0 million for the year ended December 31, 2019, a decrease of $8.8 million compared with $17.8 million in the prior year period.
Economic Compensation Expenses expense was $5.1 million compared to $10.8 million in the prior year period. The decrease was due to lower revenues offset only partially by a higher economic compensation-to-proceeds ratio. The economic compensation-to-proceeds ratio was 81%, an increase from 68% in the prior year period.
Economic Non-compensation Expenses decreased $2.9 million to $2.5 million for the year ended December 31, 2019 compared with $5.4 million in the prior year period. The decrease is primarily related to decreased professional, advisory and other fees and fees related to our real estate business. Variable non-compensation expense which primarily are comprised of expenses that are incurred as a direct result of the processing and soliciting of revenue generating activities, increased $0.8 million to $1.4 million for the year ended December 31, 2019 compared with $0.6 million in the prior year period. The increase is related to increased marketing and business development costs offset partially by lower brokerage and trade execution costs.
Economic Depreciation and Amortization Expenses remained fairly flat for the year ended December 31, 2019 compared to December 31, 2018 and relates to costs allocated from general company assets.
Economic Non-controlling interests There were no economic non-controlling interests for the year ended December 31, 2019 compared with $0.7 million in the prior year period. Non-controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries.
Economic Income and Economic Operating Income
Year Ended December 31, Total Period-to-Period
2019 2018 $ Change % Change
(dollars in thousands)
Economic Income (Loss) $ (9,560) $ (9,034) $ (526) 6 %
Add back: Depreciation and amortization expense 36 181 (145) (80) %
Economic Operating Income (Loss) $ (9,524) $ (8,853) $ (671) 8 %
* Economic Income (loss) is net of preferred dividends
Economic Income (Loss) was $(9.6) million for the year ended December 31, 2019 compared with $(9.0) million in the prior year period.
Economic Operating Income (Loss) was $(9.5) million for the year ended December 31, 2019 compared with $(8.9) million in the prior year period.
Reconciliation of US GAAP to Non-GAAP Measures for the years ended December 31, 2020, 2019 and 2018
The following tables reconciles total US GAAP Revenues to total Economic Proceeds for the twelve months ended December 31, 2020, 2019 and 2018:
(unaudited)
Year Ended December 31, 2020
(Dollar amounts in thousands)
Investment Banking Brokerage Management Fees Incentive Income Investment Income Interest and Dividends Reimbursement from Affiliates Reinsurance premiums Other revenues Consolidated Funds Revenues Other Income (Loss) Total
Total US GAAP Revenues and Other Income (Loss) $ 769,486 $ 572,548 $ 47,515 $ 592 $ - $ 187,459 $ 1,048 $ 30,147 $ 8,621 $ 5,888 $ 154,220 $ 1,777,524
Management Presentation Reclassifications:
Underwriting expenses a (22,565) - - - - - - - - - - (22,565)
Reimbursable client expenses b (17,741) - - - - - (1,098) - - - - (18,839)
Securities financing interest expense c - 14,499 - - - (142,998) - - - - - (128,499)
Fund start-up costs and distribution fees d - (293) (3,970) (719) - - - - (2,529) - - (7,511)
Certain equity method investments e - - 12,540 24,121 - - - - - - (28,346) 8,315
Carried interest f - - - 61,335 - - - - - - (61,335) -
Proprietary trading gains and losses g - - - - 42,564 (17,442) - - (1,518) - (56,351) (32,747)
Insurance related activities expenses h - - - - - - - (30,147) (3,759) - - (33,906)
Facilitation trading gains and losses i - 65,893 - - (13,342) (27,019) - - - - (31,768) (6,236)
Total Management Presentation Reclassifications: (40,306) 80,099 8,570 84,737 29,222 (187,459) (1,098) (30,147) (7,806) - (177,800) (241,988)
Fund Consolidated Reclassifications l - - 3,015 33 - - 50 - (35) (5,888) 26,299 23,474
Income Statement Adjustments:
Debt extinguishment q - - - - - - - - - - (2,719) (2,719)
Total Economic Proceeds $ 729,180 $ 652,647 $ 59,100 $ 85,362 $ 29,222 $ - $ - $ - $ 780 $ - $ - $ 1,556,291
(unaudited)
Year Ended December 31, 2019
(Dollar amounts in thousands)
Investment Banking Brokerage Management Fees Incentive Income Investment Income Interest and Dividends Reimbursement from Affiliates Reinsurance premiums Other revenues Consolidated Funds Revenues Other Income (Loss) Total
Total US GAAP Revenues and Other Income (Loss) $ 375,025 $ 402,747 $ 32,608 $ 1,547 $ - $ 174,913 $ 1,026 $ 46,335 $ 5,433 $ 9,809 $ 138,772 $ 1,188,215
Management Presentation Reclassifications:
Underwriting expenses a (15,067) - - - - - - - - - - (15,067)
Reimbursable client expenses b (15,485) - - - - - (1,148) - - - - (16,633)
Securities financing interest expense c - 22,198 - - - (132,000) - - - - - (109,802)
Fund start-up costs and distribution fees d - - (5,500) - - - - - (1,123) - - (6,623)
Certain equity method investments e - - 12,919 19,975 - - - - - - (25,204) 7,690
Carried interest f - - - 23,610 - - - - - - (23,610) -
Proprietary trading gains and losses g - - - - 54,455 (24,067) - - (725) - (44,631) (14,968)
Insurance related activities expenses h - - - - - - - (46,335) 2,243 - - (44,092)
Facilitation trading gains and losses i 6,612 34,198 - - (18,730) (18,846) - - - - (8,662) (5,428)
Total Management Presentation Reclassifications: (23,940) 56,396 7,419 43,585 35,725 (174,913) (1,148) (46,335) 395 - (102,107) (204,923)
Fund Consolidated Reclassifications l - - 2,270 600 - - 122 - 15 (9,809) (36,665) (43,467)
Total Economic Proceeds $ 351,085 $ 459,143 $ 42,297 $ 45,732 $ 35,725 $ - $ - $ - $ 5,843 $ - $ - $ 939,825
(unaudited)
Year Ended December 31, 2018
(Dollar amounts in thousands)
Investment Banking Brokerage Management Fees Incentive Income Investment Income Interest and Dividends Reimbursement from Affiliates Aircraft lease revenue Reinsurance premiums Other revenues Consolidated Funds Revenues Other Income Gain/Loss Total
Total US GAAP Revenues and Other Income (Loss) $ 357,222 $ 413,582 $ 29,658 $ 3,117 $ - $ 108,009 $ 1,038 $ 1,852 $ 38,096 $ 4,504 $ 9,838 $ 123,742 $ 1,090,658
Management Presentation Reclassifications:
Underwriting expenses a (15,282) - - - - - - - - - - - (15,282)
Reimbursable client expenses b (12,878) - - - - - (1,307) - - - - - (14,185)
Securities financing interest expense c - 4,744 - - - (59,019) - - - - - - (54,275)
Fund start-up costs and distribution fees d - - (1,111) (6,365) - - - - - (1,407) - - (8,883)
Certain equity method investments e - - 18,114 6,567 - - - - - - - (12,680) 12,001
Carried interest f - - - 19,933 - - - - - - - (19,933) -
Proprietary trading gains and losses g - - - - 41,529 (22,060) - (1,852) - (506) - (31,501) (14,390)
Insurance related activities expenses h - - - - - - - - (38,096) (2,986) - - (41,082)
Facilitation trading gains and losses i - 48,791 - - - (26,930) - - - - - (25,260) (3,399)
Total Management Presentation Reclassifications: (28,160) 53,535 17,003 20,135 41,529 (108,009) (1,307) (1,852) (38,096) (4,899) - (89,374) (139,495)
Fund Consolidated Reclassifications l - - 2,514 52 - - 269 - - - (9,838) (35,494) (42,497)
Income Statement Adjustments:
Acquisition adjustments n - - - - - - - - - (773) - - (773)
Debt extinguishment q - - - - - - - - - - - 570 570
Exited business costs r - - - - - - - - - - - 556 556
Total Income Statement Adjustments: - - - - - - - - - (773) - 1,126 353
Total Economic Proceeds $ 329,062 $ 467,117 $ 49,175 $ 23,304 $ 41,529 $ - $ - $ - $ - $ (1,168) $ - $ - $ 909,019
The following table reconciles total US GAAP interest and dividends expense to total Economic Interest Expense for the years ended December 31, 2020, 2019 and 2018:
(unaudited)
Year Ended December 31,
(Dollar amounts in thousands)
2020 2019 2018
Total US GAAP Interest & Dividend Expense $ 187,725 $ 168,628 $ 104,116
Management Presentation Reclassifications:
Securities financing interest expense c (128,499) (109,802) (54,275)
Proprietary trading gains and losses g (18,849) (21,076) (12,003)
Facilitation trading gains and losses i (6,236) (5,428) (3,399)
Total Management Presentation Reclassifications: (153,584) (136,306) (69,677)
Income Statement Adjustments:
Amortization of discount/(premium) on debt m (4,499) (4,297) (11,426)
Total Economic Interest Expense $ 29,642 $ 28,025 $ 23,013
The following tables reconcile total US GAAP Expenses and non-controlling interests to total Economic Expenses for the years ended December 31, 2020, 2019 and 2018:
(unaudited)
Year Ended December 31, 2020
(Dollar amounts in thousands)
Employee Compensation and Benefits Non-compensation US GAAP Expenses Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds Total
Total US GAAP $ 860,531 $ 431,831 $ (9,299) $ 1,283,063
Management Presentation Reclassifications:
Underwriting expenses a - (22,565) - (22,565)
Reimbursable client expenses b - (18,839) - (18,839)
Fund start-up costs and distribution fees d - (7,511) - (7,511)
Certain equity method investments e - 8,315 - 8,315
Proprietary trading gains and losses g - 5,686 (19,584) (13,898)
Insurance related activities expenses h - (33,906) - (33,906)
Associated partner/banker compensation j 5,377 (5,377) - -
Management company non-Controlling interest k (1,388) (5,504) 6,892 -
Total Management Presentation Reclassifications: 3,989 (79,701) (12,692) (88,404)
Fund Consolidated Reclassifications l - (5,409) 28,883 23,474
Income Statement Adjustments:
Acquisition adjustments n - (9,098) - (9,098)
Goodwill and other impairment o - (2,423) - (2,423)
Total Income Statement Adjustments: - (11,521) - (11,521)
Total Economic Expenses $ 864,520 $ 335,200 $ 6,892 $ 1,206,612
(unaudited)
Year Ended December 31, 2019
(Dollar amounts in thousands)
Employee Compensation and Benefits Non-compensation US GAAP Expenses Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds Total
Total US GAAP $ 535,772 $ 413,092 $ 31,239 $ 980,103
Management Presentation Reclassifications:
Underwriting expenses a - (15,067) - (15,067)
Reimbursable client expenses b - (16,633) - (16,633)
Fund start-up costs and distribution fees d - (6,623) - (6,623)
Certain equity method investments e - 7,690 - 7,690
Proprietary trading gains and losses g - 2,843 3,265 6,108
Insurance related activities expenses h - (44,092) - (44,092)
Associated partner/banker compensation j 3,419 (3,419) - -
Management company non-Controlling interest k (1,653) (3,143) 4,796 -
Total Management Presentation Reclassifications: 1,766 (78,444) 8,061 (68,617)
Fund Consolidated Reclassifications l - (8,963) (34,504) (43,467)
Income Statement Adjustments:
Acquisition adjustments n - (2,608) - (2,608)
Goodwill and other impairment o - (4,100) - (4,100)
Total Income Statement Adjustments: - (6,708) - (6,708)
Total Economic Expenses $ 537,538 $ 318,977 $ 4,796 $ 861,311
(unaudited)
Year Ended December 31, 2018
(Dollar amounts in thousands)
Employee Compensation and Benefits Non-compensation US GAAP Expenses Net income (loss) attributable to non-controlling interests in consolidated subsidiaries and investment funds Total
Total US GAAP $ 512,627 $ 378,317 $ 37,060 $ 928,004
Management Presentation Reclassifications:
Underwriting expenses a - (15,282) - (15,282)
Reimbursable client expenses b - (14,185) - (14,185)
Fund start-up costs and distribution fees d - (8,883) - (8,883)
Certain equity method investments e - 12,001 - 12,001
Proprietary trading gains and losses g - (1,154) (1,233) (2,387)
Insurance related activities expenses h - (41,082) - (41,082)
Management company non-Controlling interest k (3,009) 4,954 (1,945) -
Total Management Presentation Reclassifications: (3,009) (63,631) (3,178) (69,818)
Fund Consolidated Reclassifications l - (8,615) (33,882) (42,497)
Income Statement Adjustments:
Acquisition adjustments n - (3,550) - (3,550)
Exited business costs r - (1,826) - (1,826)
Total Income Statement Adjustments: - (5,376) - (5,376)
Total Economic Expenses $ 509,618 $ 300,695 $ - $ 810,313
The following table reconciles US GAAP Net Income (loss) Attributable to Cowen Inc. Common Stockholders to Economic Income (loss) and Economic Operating Income (loss) for the years ended December 31, 2020, 2019 and 2018:
(unaudited)
Year Ended December 31,
(Dollar amounts in thousands)
2020 2019 2018
US GAAP Net income (loss) attributable to Cowen Inc. common stockholders $ 209,571 $ 17,839 $ 36,027
Income Statement Adjustments:
Income tax expense (benefit) p 90,373 14,853 15,719
Amortization of discount (premium) on debt m 4,499 4,297 4,010
Exited business costs r - - 2,395
Debt extinguishment q (2,719) - 7,972
Goodwill and other impairment o 2,423 4,100 -
Transaction-related and other costs n 9,098 2,608 2,778
Economic Income (Loss) $ 313,245 $ 43,697 $ 68,901
Add back: Depreciation and amortization expense 22,677 20,439 11,583
Economic Operating Income (Loss) $ 335,922 $ 64,136 $ 80,484
Management Reclassifications
Management reclassification adjustments and fund consolidation reclassification adjustments have no effect on economic income. These adjustments are reclassifications to change the location of certain line items.
a Underwriting expenses: Economic Income (Loss) presents investment banking revenues net of underwriting expenses.
b Reimbursable client expenses: Economic Income (Loss) presents expenses reimbursed from clients and affiliates within their respective expense category but is included as a part of revenues under US GAAP.
c Securities financing interest expense: Economic Income (Loss) brokerage revenues included net securities borrowed and securities loaned activities which are shown gross in interest income and interest expense for US GAAP.
d Fund start-up costs and distribution fees: Economic Income (Loss) presents revenues net of fund start-up costs and distribution fees paid to agents.
e Certain equity method investments: Economic Income (Loss) recognizes the Company's proportionate share of management and incentive fees and associated share of expenses on a gross basis for equity method investments within the activist business, real estate operating entities and the healthcare royalty business. The Company applies the equity method of accounting to these entities and accordingly the results from these businesses are recorded within Other Income (Loss) for US GAAP.
f Carried interest: The Company applies an equity ownership model to carried interest which is recorded in Other Income (Loss) for US GAAP. The Company presents carried interest as incentive income for Economic Income (Loss).
g Proprietary trading gains and losses: Economic Income (Loss) recognizes Company income from proprietary trading (including interest and dividends) for which the majority of this activity is shown in other income (loss) for US GAAP reporting.
h Insurance related activities expenses: Economic Income (Loss) recognizes underwriting income from the Company's insurance related activities, net of expenses, within other revenue. The costs are recorded within expenses for US GAAP reporting.
i Facilitation trading gains and losses: Economic Income (Loss) recognizes gains and losses on investments held as part of the Company's facilitation and trading business within brokerage revenues as these investments are directly related to the markets business activities.
j Associated partner/banker compensation reclassification: Economic Income (Loss) presents certain payments to associated banking partners as compensation rather than non-compensation expenses.
k Management company non-controlling interest: Economic income (Loss) non-controlling interest represents only operating entities that are not wholly owned by the Company. The Company also presents non-controlling interests within total expenses for Economic Income (Loss).
Fund Consolidation Reclassifications
l The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income (Loss). Adjustments to reconcile to US GAAP Net Income (Loss) included elimination of incentive income and management fees earned from the Consolidated Funds and addition of investment fund expenses excluding management fees paid, investment fund revenues and investment income (loss).
Income Statement Adjustments
m Economic Income (Loss) excludes the amortization of discount (premium) on debt.
n Economic Income (Loss) excludes acquisition related adjustments.
o Economic Income (Loss) excludes goodwill and other impairments.
p Economic Income (Loss) excludes income taxes.
q Economic Income (Loss) excludes gain/(loss) on debt extinguishment.
r Economic income (Loss) excludes certain exited business costs
Liquidity and Capital Resources
We continually monitor our liquidity position. The working capital needs of the Company's business have been met through current levels of equity capital, current cash and cash equivalents, and anticipated cash generated from our operating activities, including management fees, incentive income, returns on the Company's own capital, investment banking fees and brokerage commissions. The Company expects that its primary working capital liquidity needs over the next twelve months will be:
•to pay our operating expenses, primarily consisting of compensation and benefits, interest on debt and other general and administrative expenses; and
•to provide capital to facilitate the growth of our existing business.
Based on our historical results, management's experience, our current business strategy and current assets under management, the Company believes that its existing cash resources will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next twelve months. However, the Company’s assessment could be affected by various risks and uncertainties, including but not limited to, the effects of the COVID-19 pandemic. Our cash reserves include cash, cash equivalents and assets readily convertible into cash such as our securities held in inventory. Securities inventories are stated at fair value and are generally readily marketable. As of December 31, 2020, we had cash and cash equivalents of $645.2 million and net liquid investment assets of $954.5 million, which includes cash and cash equivalents and short-term investments held by foreign subsidiaries as of December 31, 2020 of $65.1 million. The Company continues to permanently reinvest the capital and accumulated earnings of its subsidiaries in the United Kingdom, Germany, Switzerland, Canada, South Africa and Hong Kong.
The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which can make up a significant portion of total compensation, are generally paid by March 15th.
As a clearing member firm providing services to certain of our brokerage customers, we are subject to cash deposit requirements with clearing organizations, brokers and banks that may be large in relation to total liquid assets and may fluctuate significantly based upon the nature and size of customers' trading activity and market volatility. At December 31, 2020, the Company had security deposits totaling $105.0 million with clearing organizations in the U.S. for the settlement of equity trades. In the normal course of our U.S. settlement activities, we may also need to temporarily finance customer securities positions from short settlements or delivery failures.
Unfunded commitments
The following table summarizes unfunded commitments as of December 31, 2020:
Entity Unfunded Commitments Commitment term
(dollars in thousands)
HealthCare Royalty Partners funds (a) $ 7,571 4 years
Eclipse Ventures Fund I, L.P. $ 59 4 years
Eclipse Fund II, L.P. $ 100 5 years
Eclipse Continuity Fund I, L.P. $ 58 6 years
Cowen Healthcare Investments II LP $ 1,202 1 year
Cowen Healthcare Investments III LP $ 5,094 6 years
Cowen Sustainable Investments I LP $ 10,639 9 years
(a) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata investment in the HealthCare Royalty Partners funds along with the other limited partners.
Due to the nature of the securities business and our role as a market-maker and execution agent, the amount of our cash and short-term investments, as well as operating cash flow, may vary considerably due to a number of factors, including the dollar value of our positions as principal, whether we are net buyers or sellers of securities, the dollar volume of executions by our customers and clearinghouse requirements, among others. Certain regulatory requirements constrain the use of a portion of our liquid assets for financing, investing or operating activities. Similarly, due to the nature of our business lines, the capital necessary to maintain current operations and our current funding needs subject our cash and cash equivalents to different requirements and uses.
Preferred Stock and Purchase of Capped Call Option
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock") that provided $117.2 million of proceeds, net of
underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum, which will be payable, when and if declared by the board of directors of the Company, quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. The Company declared and accrued a cash dividend in respect of the Series A Convertible Preferred Stock of $6.8 million, for the years ended December 31, 2020, 2019, and 2018, respectively.
Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the Company's existing and future indebtedness with respect to dividend rights and rights upon the Company's involuntary liquidation, dissolution or winding down.
Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder, into a number of shares of the Company's Class A common stock equal to the liquidation preference of $1,000 divided by the conversion rate. The initial conversion rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or after May 20, 2020, when the Company's capped call option expired, the Company may elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the Company's Class A common stock, cash or a combination thereof, at the Company's election, in each case, based on the then-applicable conversion rate (which at December 31, 2020 was 38.488), if the last reported sale price of the Company's Class A common stock equals or exceeds 150% of the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion, the conversion rate may be adjusted based on certain events, including but not limited to the issuance of cash dividends or Class A common stock as dividends to the Company's Class A common shareholders or a share split or combination. The Company has the intent and ability to settle the preferred shares in cash and, as a result, the preferred shares do not have an impact on the Company's diluted earnings per share calculation (See Note 26).
The Company may also incur additional indebtedness or raise additional capital under certain circumstances to respond to market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds or raise additional capital.
Regulation
As registered broker-dealers, Cowen and Company, ATM Execution, Cowen Prime and Westminster are subject to the SEC's Uniform Net Capital Rule 15c3-1 ("SEC Rule 15c3-1"), which requires the maintenance of minimum net capital. Each registered broker-dealer has elected to compute net capital under the alternative method permitted by that rule. Under the alternative method, Cowen and Company's minimum net capital requirement, as defined in (a)(4) of SEC Rule 15c3-1, is equal to the greater of $1.0 million or 2% of aggregate debits arising from customer transactions. ATM Execution, Cowen Prime and Westminster are required to maintain minimum net capital, as defined in (a)(1)(ii) of SEC Rule 15c3-1, equal to the greater of $250,000 or 2% of aggregate debits arising from customer transactions. Advances to affiliates, repayment of borrowings, distributions, dividend payments, and other equity withdrawals are subject to certain notification and other provisions of SEC Rule 15c3-1 and other regulatory bodies.
On May 1, 2020, Cowen and Company completed its merger with Cowen Execution. Cowen and Company is the surviving entity. The merger had no impact to the Company’s financial results. On July 3rd, 2020, Cowen Execution’s registration was formally terminated with FINRA.
Cowen Prime is also subject to Commodity Futures Trading Commission ("CFTC") Regulation 1.17 ("Regulation 1.17"). Regulation 1.17 requires net capital equal to or in excess of $45,000 or the amount of net capital required by SEC Rule 15c3-1, whichever is greater. Cowen and Company is also subject to Options Clearing Corporation ("OCC") Rule 302. OCC Rule 302 requires maintenance of net capital equal to the greater of $2.0 million or 2% of aggregate debit items. At December 31, 2020, Cowen and Company had $288.2 million of net capital in excess of this minimum requirement.
Cowen International Ltd and Cowen Execution Ltd are subject to the capital requirements of the U.K. Financial Conduct Authority ("FCA"), as defined, and must exceed the minimum capital requirement set forth by the FCA.
Cowen Asia, a previously established entity, was re-registered with regulatory approval on May 17, 2019. Cowen Asia is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources must exceed the Total Financial Resources requirement of the SFC.
As of December 31, 2020, these regulated broker-dealers had regulatory net capital or financial resources, regulatory net capital requirements or minimum FCA or SFC requirement and excess as follows:
Subsidiary Net Capital Net Capital Requirement Excess Net Capital
(dollars in thousands)
Cowen and Company $ 291,803 $ 3,594 $ 288,209
ATM Execution $ 3,857 $ 250 $ 3,607
Cowen Prime $ 18,553 $ 250 $ 18,303
Westminster $ 29,330 $ 250 $ 29,080
Cowen International Ltd $ 29,511 $ 22,699 $ 6,812
Cowen Execution Ltd $ 12,188 $ 3,331 $ 8,857
Cowen Asia $ 2,030 $ 387 $ 1,643
The Company's U.S. broker-dealers must also comply with SEC Rule 15c3-3 or claim an exemption pursuant to subparagraphs (k)(2)(i) or (k)(2)(ii) of that rule. Firms can rely on more than one exemption. Cowen Prime and ATM Execution claim the (k)(2)(ii) exemption with regard to all of their customer accounts and transactions that are introduced on a fully-disclosed basis to their clearing agents for clearing, settlement and custody. Cowen Prime and Westminster claim the (k)(2)(i) exemption with regards to customer transactions and balances that are cleared, settled and custodied in bank accounts designated as Special Accounts for the Exclusive Benefit of Customers ("Special Bank Accounts"). Westminster also claims exemption for other business activities that are not covered under (k)(2)(i) contemplated by Footnote 74 of the SEC Release No. 34-70073 adopting amendments to 17 C.F.R. § 240.17a-5 for receiving transaction-based compensation in return for providing commission management services.
In accordance with the requirements of SEC Rule 15c3-3, Cowen and Company may be required to deposit in a Special Reserve Account cash or acceptable qualified securities for the exclusive benefit of customers. As of December 31, 2020, Cowen and Company had segregated approximately $49.2 million of cash, while its required deposit was $31.3 million.
As a clearing broker-dealer, Cowen and Company is required to compute a reserve requirement for proprietary accounts of broker-dealers ("PAB"), as defined in SEC Rule 15c3-3. Cowen and Company conducts PAB reserve computations in order to determine the amount it is required to deposit in its PAB Reserve Bank Accounts pursuant to SEC Rule 15c3-3. This allows each correspondent firm that uses Cowen and Company as its clearing broker-dealer to classify its PAB account assets held at Cowen and Company as allowable assets in the correspondent's net capital calculation. At December 31, 2020, Cowen and Company had $28.8 million of cash on deposit in PAB Reserve Bank Accounts, which was more than its required deposit of $19.2 million. Cowen and Company, ATM Execution, and Cowen Prime also maintain certain assets in PAB accounts held at their respective clearing brokers. Each treats its assets held in those PAB accounts at the respective clearing brokers as allowable assets for net capital purposes.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010. The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. The CFTC has finalized rules establishing capital requirements and financial reporting requirements for CFTC registered swap dealers not subject to regulation by a banking regulator. The SEC has finalized rules establishing similar standards for an entity registering as a standalone securities-based swaps dealer. Compliance with these rules is required by October 6, 2021. Cowen Financial Products LLC is expected to comply with the SEC capital rules for standalone securities-based swaps dealers by the effective date. Under the rules there is a minimum net capital requirement for, among others, an entity that acts as a dealer in security-based swaps, which is the greater of $20 million or 2% (that the SEC could, in the future, increase up to 4% or 8% of a risk margin amount. The risk margin amount means the sum of (i) the total initial margin required to be maintained by the SEC securities-based swaps dealer at each clearing agency with respect to securities-based swaps transactions cleared for securities-based swap customers and (ii) the total initial margin amount calculated by the SEC securities-based swaps dealer swaps dealer with respect to non-cleared securities-based swaps under new SEC rules.
Cowen's Luxembourg reinsurance companies, Vianden RCG Re SCA and Hollenfels, individually and their Luxembourg parent holding company, Ramius Enterprise Luxembourg Holdco S.à r.l., on a combined basis with the reinsurance companies, are required to maintain a solvency capital ratio as calculated by relevant European Commission directives and local regulatory rules in Luxembourg. Each reinsurance company's individual solvency capital ratio as well as the combined solvency capital ratio of the holding and reinsurance companies calculated as of December 31 of each year must exceed a minimum requirement. As of, December 31, 2019, all of these entities were in excess of this minimum requirement. Hollenfels and Vianden RCG Re SCA were tested at December 31, 2020 and were again in excess of the minimum requirement. The remaining company is expected to be also in compliance at its next testing date of December 31, 2020.
Based on minimum capital and surplus requirements pursuant to the laws of the state of New York that apply to captive insurance companies, RCG Insurance Company, Cowen's captive insurance company incorporated and licensed in the state of
New York, was required to maintain capital and surplus of approximately $0.3 million as of December 31, 2020. RCG Insurance Company’s capital and surplus as of December 31, 2020 totaled approximately $6.4 million.
Cash Flows Analysis
The Company's primary sources of cash are derived from its operating activities and realized returns on its own invested capital. The Company's primary uses of cash include compensation and general and administrative expenses.
Operating Activities. Net cash provided by operating activities of $521.3 million for the year ended December 31, 2020 was primarily related to (i) Company net income, (ii) proceeds from securities owned, at fair value, held at broker-dealers (iii) increase in payable to customers offset partially by the decrease in purchases of securities owned, at fair value, the decrease in securities borrowed, and the decrease in receivable from brokers, dealers and clearing organizations. Net cash used in operating activities of $179.9 million for the year ended December 31, 2019 was primarily related to the purchases of securities owned, at fair value, held at broker dealer, offset partially by stock borrow stock loan activity. Net cash provided by operating activities of $324.5 million for the year ended December 31, 2018 was primarily related to the (i) proceeds from sales of other investments in consolidated funds (ii) proceeds from sales of securities owned, at fair value, (iii) increase in payable to customers offset by decrease in receivable from brokers, dealers and clearing organizations and purchases of securities owned, at fair value.
Investing Activities. Net cash used in investing activities of $20.8 million for the year ended December 31, 2020 was primarily related to the purchases of other investments only partially offset by the proceeds from sales of other investments. Net cash used in investing activities of $47.6 million for the year ended December 31, 2019 was primarily related to the purchase of Quarton and other investments. Net cash used in investing activities of $17.9 million for the year ended December 31, 2018 was primarily related to purchases of other investments partially offset by proceeds from sales of other investments.
Financing Activities. Net cash provided by financing activities for the year ended December 31, 2020 of $25.6 million was primarily related to (i) capital contributions by non-controlling interests in Consolidated Funds offset only partially by capital withdrawals by non-controlling interests in Consolidated Funds and (ii) borrowings on notes and other debt offset only partially by repayments on notes and other debt. Net cash provided by financing activities for the year ended December 31, 2019 of $200.4 million was primarily related to (i) capital contributions by non-controlling interests offset only partially by capital withdrawals by non-controlling interests in Consolidating Funds and (ii) borrowings on notes and other debt. Net cash provided by financing activities for the year ended December 31, 2018 of $128.7 million was primarily related to capital withdrawal to non-controlling interests in Consolidating Funds offset partially contributions from non-controlling interests in Consolidated Funds.
Debt
December 2022 Convertible Notes
The Company, on December 14, 2017, issued $135.0 million aggregate principal amount of 3.00% convertible senior notes due December 2022 (the “December 2022 Convertible Notes”). The December 2022 Convertible Notes are due on December 15, 2022 unless earlier repurchased by the Company or converted by the holder in accordance with their terms prior to such date. The interest on the December 2022 Convertible Notes is payable semi-annually on December 15 and June 15 of each year. The December 2022 Convertible Notes are senior unsecured obligations of Cowen. The December 2022 Convertible Notes may be converted into cash or shares of Class A common stock at the Company's election based on the current conversion price (which at December 31, 2020 was 58.198). The December 2022 Convertible Notes were issued with an initial conversion price of $17.375 per share of Cowen's Class A common stock.
On June 26, 2018, the Company received shareholder approval for the Company to settle the December 2022 Convertible Notes entirely in Class A common stock. Upon receiving shareholder approval, the Company reclassified the separately recognized conversion option from a derivative liability to equity. Pursuant to the indenture governing the December 2022 Convertible Notes, conversions of the December 2022 Convertible Notes will be settled by the delivery and/or payment, as the case may be, of Cowen’s Class A Common Stock, cash, or a combination thereof, at the Company's election. The Company has the intent and ability to settle the convertible notes in cash and, as a result, the convertible notes do not have an impact on the Company's diluted earnings per share calculation (See Note 26).
The Company recognized the embedded cash conversion option at issuance date fair value, which also represents the initial unamortized discount on the December 2022 Convertible Notes of $23.4 million and is shown net in convertible debt in the accompanying consolidated statements of financial condition. Amortization on the discount, included within interest and dividends expense in the accompanying consolidated statements of operations is $4.6 million, $4.3 million and $4.0 million for the years ended December 31, 2020, 2019, and 2018, respectively, based on an effective interest rate of 7.13%. The Company
capitalized the debt issuance costs in the amount of $2.2 million, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the December 2022 Convertible Notes in interest and dividends expense in the accompanying consolidated statements of operations. The Company recorded interest expense of $4.0 million, $4.1 million and $4.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.
During December 2020, the Company repurchased and extinguished $46.9 million of the outstanding principal amount of the December 2022 Convertible Notes for cash consideration of $70.5 million. In conjunction with the partial extinguishment of the December 2022 Convertible Notes, the Company accelerated the pro rata unamortized discount of $3.6 million and capitalized debt issuance costs of $0.4 million. The Company allocated $29.6 million of the cash consideration paid to the extinguishment of the equity component of the December 2022 Convertible Notes. The Company recognized $2.7 million of gain on debt extinguishment. As of December 31, 2020, the outstanding principal amount of the December 2022 Convertible Notes was $88.1 million.
Notes Payable
May 2024 Notes
On May 7, 2019, the Company completed its private placement of $53.0 million aggregate principal amount of 7.25% senior notes due May 2024 (the "May 2024 Notes") with certain institutional investors. On September 30, 2019, the Company issued an additional $25.0 million of the same series of notes. The additional May 2024 Notes were purchased at a premium of $0.5 million, which is shown net in notes payable in the accompanying consolidated statement of financial condition. To date the May 2024 Notes have maintained their initial private rating, and the interest rate has remained unchanged. Interest on the May 2024 Notes is payable semi-annually in arrears on May 6 and November 6. The Company recorded interest expense of $5.7 million and $2.9 million for the years ended December 31, 2020 and 2019, respectively. The Company capitalized debt issuance costs of approximately $1.5 million in May 2019 and $0.6 million in December 2019, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the May 2024 Notes in interest and dividends expense in the accompanying consolidated statements of operations.
June 2033 Notes
On June 11, 2018, the Company completed its public offering of $90.0 million of 7.75% senior notes due June 2033 (the "June 2033 Notes") and subsequently the underwriters exercised in full their option to purchase an additional $10.0 million principal amount of the June 2033 Notes. Interest on the June 2033 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $7.7 million, $7.7 million and $4.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. The Company capitalized debt issuance costs of approximately $3.6 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the June 2033 Notes in interest and dividends expense in the accompanying consolidated statements of operations.
December 2027 Notes
On December 8, 2017, the Company completed its public offering of $120.0 million of 7.35% senior notes due December 2027 (the "December 2027 Notes") and subsequently the underwriters exercised in full their option to purchase an additional $18.0 million principal amount of the December 2027 Notes. Interest on the December 2027 Notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15. The Company recorded interest expense of $10.1 million, $10.1 million and $10.1 million for the years ended December 31, 2020, 2019, and 2018, respectively. The Company capitalized debt issuance costs of approximately $5.0 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the December 2027 Notes in interest and dividends expense in the accompanying consolidated statements of operations. The net proceeds of the offering, after deducting the underwriting discount and estimated offering expenses payable by the Company were used to redeem all of its 8.25% senior notes due October 2021 and for general corporate purposes.
Term Loans
On June 30, 2017, a subsidiary of the Company borrowed $28.2 million to fund general corporate purposes. In July 2019, the subsidiary of the Company borrowed separately, from the same lender, $4.0 million to fund general corporate purposes. Each loan was secured by the value of the Company's limited partnership interests in two affiliated investment funds. The Company had provided a guarantee for these loans. Both loans had an effective interest rate of London Inter-bank Offered Rate ("LIBOR") plus 3.75% with a lump sum payment of the entire combined principal amount due (as amended) on June 26, 2020 when they were both fully repaid. The Company recorded interest expense of $0.8 million, $1.8 million and $1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Other Notes Payable
During January 2020, the Company borrowed $2.9 million to fund insurance premium payments. This note had an effective interest rate of 2.01% and was due in December 2020, with monthly payment requirements of $0.3 million. As of December 31, 2020, the note was fully repaid. Interest expense for the years ended December 31, 2020, 2019, and 2018 was insignificant.
During November 2019, the Company borrowed $2.6 million to fund general corporate capital expenditures. This note had an effective interest rate of 6% and is due in November 2024, with monthly payment requirements of $0.1 million. As of December 31, 2020, the outstanding balance on this note was $2.1 million. Interest expense for the years ended December 31, 2020 was $0.1 million and for year ended December 31, 2019 was insignificant.
On September 30, 2020, the Company borrowed $72.0 million from Purple Protected Asset S-91 ("PPA S-91"), a Luxembourg entity unrelated to Cowen. The loan is payable on September 30, 2023, had an initial interest rate of 1.4 times the Secured Overnight Financing Rate ("SOFR") plus 6.07% until December 31, 2020 and 1.4 times the SOFR plus 5.8% thereafter with quarterly interest payments. The loan obligation, as well as a loan issued by The Military Mutual Ltd (a United Kingdom company unrelated to Cowen) with principal of $28.4 million that was sold by Hollenfels to PPA S-91 at fair value for no gain or loss on September 30, 2020, are fully cash collateralized through a reinsurance policy provided by Hollenfels which is reflected in cash collateral pledged in the consolidated statements of financial condition as of December 31, 2020 (see Notes 4 and 18). The Company capitalized debt issuance costs of approximately $1.7 million which is a direct deduction from the carrying value of the loan and will be amortized over the life of the loan in interest and dividends expense shown in the accompanying consolidated statements of operations. The Company recorded interest expense of $1.2 million for the year ended December 31, 2020 related to its loan payable to PPA S-91.
Spike Line
Pursuant to an amendment in May 2020, Cowen and Company replaced Cowen Execution as the borrower and accepted, reaffirmed and assumed all of Cowen Execution’s rights, duties, obligations and liabilities under the spike line facility and the related loan documents. In August 2020, Cowen and Company renewed a one-year committed spike line facility to cover short term increases in National Securities Clearing Corporation margin deposit requirements. The spike line facility has a capacity of $70 million. This facility has (i) an effective interest rate equal to the Federal Funds rate plus 2.50% on any money drawn from the liquidity facility and (ii) a commitment or unused line fee that is 50 basis points on the undrawn amount. All amounts outstanding under this facility were fully repaid during the second quarter of 2020. Interest expense for the year ended December 31, 2020 was $0.4 million.
Revolving Credit Facility
In December 2019, the Company entered into a two-year committed corporate credit facility with a capacity of $25.0 million. This credit facility has (i) an effective interest rate equal to LIBOR plus 3.25% on any money drawn from the credit facility and (ii) a commitment or unused line fee that is 50 basis points on the undrawn amount. All amounts outstanding under this credit facility were fully repaid during the second quarter of 2020. Interest expense for the year ended December 31, 2020 was $0.3 million.
Finance Lease Obligations
The Company has entered into various finance leases for computer equipment. These finance lease obligations are included in notes payable and other debt in the accompanying consolidated statements of financial condition.
For the years ended December 31, 2020 and 2019, quantitative information regarding the Company's finance lease obligations reflected in the accompanying consolidated statements of operations, the supplemental cash flow information and certain other information related to finance leases were as follows:
Year Ended December 31,
2020 2019
(dollars in thousands)
Lease cost
Finance lease cost:
Amortization of finance lease right-of-use assets $ 1,232 $ 1,266
Interest on lease liabilities 171 227
Weighted average remaining lease term - operating leases (in years) 2.24 3.21
Weighted average discount rate - operating leases 4.89 % 4.88 %
Letters of Credit
As of December 31, 2020, the Company has the following irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also has pledged cash collateral for reinsurance agreements which amounted to $106.8 million, as of December 31, 2020, and $2.0 million, as of December 31, 2019, which are expected to be released periodically as per the terms of the reinsurance policy between June 30, 2021 and March 31, 2024.
Location Amount Maturity
(dollars in thousands)
New York $ 208 April 2021
New York $ 1,424 October 2022
New York $ 1,252 November 2021
Boston $ 386 March 2021
San Francisco $ 712 October 2025
$ 3,982
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of December 31, 2020 and 2019 there were no amounts due related to these letters of credit.
Contractual Obligations
The following tables summarize the Company's contractual cash obligations as of December 31, 2020:
Total < 1 Year 1-3 Years 3-5 Years More Than
5 Years
(dollars in thousands)
Equipment, Service and Facility Leases
Real Estate and Other Facility Rental $ 90,145 $ 24,520 $ 40,092 $ 19,570 $ 5,963
Service Payments 66,927 24,610 23,167 8,556 10,594
Operating Equipment Leases 444 283 161 - -
Total 157,516 49,413 63,420 28,126 16,557
Debt
Convertible Debt 93,407 2,644 90,763 - -
Notes Payable 503,669 23,548 47,096 116,614 316,411
Finance Lease Obligation 3,072 1,483 1,578 11 -
Other Notes Payable 78,587 4,858 73,186 543 -
Total $ 678,735 $ 32,533 $ 212,623 $ 117,168 $ 316,411
Minimum payments for all debt outstanding
Annual scheduled maturities of debt and minimum payments for all debt outstanding as of December 31, 2020, are as follows:
Convertible Debt Notes Payable Other Notes Payable Finance Lease
Obligation
(dollars in thousands)
2021 $ 2,644 $ 23,548 $ 4,858 $ 1,483
2022 90,763 23,548 593 1,167
2023 - 23,548 72,593 411
2024 - 98,721 543 11
2025 - 17,893 - -
Thereafter - 316,411 - -
Subtotal 93,407 503,669 78,587 3,072
Less (a) (12,599) (196,016) (6,082) (163)
Total $ 80,808 $ 307,653 $ 72,505 $ 2,909
(a)Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes capitalized debt costs and the unamortized discount on the Company's convertible debt.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as of December 31, 2020. However, through indemnification provisions in our clearing agreements, customer activities may expose us to off-balance-sheet credit risk. Pursuant to the clearing agreements, we are required to reimburse our clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.
Cowen and Company, Cowen Prime, and ATM Execution are members of various securities exchanges and clearing organizations. Under the standard membership agreement, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the various securities exchanges and clearing organizations, all other members would be required to meet the shortfall. The Company's liability under these arrangements is not quantifiable. Accordingly, no contingent liability is carried in the accompanying consolidated statements of financial condition for these arrangements.
Cowen and Company temporarily loans securities to other brokers in connection with its securities lending activities. Cowen and Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event that counterparty to these transactions does not return the loaned securities, Cowen and Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. Cowen and Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis, and by requiring additional cash as collateral or returning collateral when necessary.
Cowen and Company temporarily borrows securities from other brokers in connection with its securities borrowing activities. Cowen and Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event that counterparty to these transactions does not return collateral, Cowen and Company may be exposed to the risk of selling the securities at prevailing market prices. Cowen and Company controls this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis, and by depositing additional collateral with counterparties or receiving cash when deemed necessary.
Critical Accounting Policies and Estimates
Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions that affect amounts reported in its consolidated financial statements or the notes thereto. The Company bases its judgments, estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be reasonable and prudent. Actual results may differ materially from these estimates.
The following is a summary of what the Company believes to be its most critical accounting policies and estimates.
Consolidation
The Company's consolidated financial statements include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest, including the Consolidated Funds, in which the Company has a controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. The Company's investment funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized accounting.
The Company's consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the Consolidated Funds on a gross basis. The management fees and incentive income earned by the Company from the Consolidated Funds were eliminated in consolidation; however, the Company's allocated share of net income from these investment funds was increased by the amount of this eliminated income. Hence, the consolidation of these investment funds had no net effect on the Company's net earnings. The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those investment funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.
The Company consolidates three investment funds for which it acts as the managing member/general partner and investment manager. At December 31, 2020, the Company consolidated the following investment funds: Ramius Enterprise LP (“Enterprise LP”), Cowen Private Investments LP ("Cowen Private"), and Cowen Sustainable Investments I LP ("CSI I LP"). These funds are referred to as each a "Consolidated Fund" and collectively the "Consolidated Funds".
During the second quarter of 2020, the Company deconsolidated Ramius Merger Fund LLC (the "Merger Fund") and UCITS Fund ("UCITS Fund") due to a partial redemption of the Company’s direct portfolio fund investment in Merger Fund and a partial termination of the notional value of UCITS Fund units referenced in a total return swap with a third party. The Company continues to hold a direct retained portfolio fund investment in the Merger Fund and continues to have economic exposure to the returns of UCITS Fund through a total return swap with a third party. Both Merger Fund and UCITS Fund continue to be related parties of the Company after deconsolidation. CSI I Golden Holdco LP ("Golden HoldCo") and CSI I Prodigy Holdco LP ("Prodigy HoldCo") were consolidated through November 2020 when the Company raised additional capital within the sustainable investing strategy that diluted the Company's direct and indirect ownership. As a result, the Company's direct and indirect ownership in Golden Holdco and Prodigy Holdco is no longer expected to be significant to either entity and the entities were deconsolidated.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting operating entity ("VOE") or a variable interest entity ("VIE") under US GAAP.
Voting Operating Entities-VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently, (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance and (iii) voting rights of equity holders are proportionate to their obligation to absorb losses or the right to receive returns.
Under US GAAP consolidation requirements, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
Variable Interest Entities-VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate it.
The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily investment funds for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights.
The Company does not consolidate the Unconsolidated Master Fund or real estate funds that are VIEs due to the Company's conclusion that it is not the primary beneficiary of these funds in each instance. Investment fund investors are entitled to all of the
economics of these VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company has equity interests in the funds as both a general partner and a limited partner. In these instances the Company has concluded that the variable interests are not potentially significant to the VIE. Although the Company may advance amounts and pay certain expenses on behalf of the investment funds that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management services.
Equity Method Investments-For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is deemed other than temporary.
Other-If the Company does not consolidate an entity or apply the equity method of accounting, the Company accounts for such entities (primarily, all securities of such entity which are bought and held principally for the purpose of selling them in the near term as trading securities), at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Retention of Specialized Accounting-The Consolidated Funds and certain other consolidated companies are investment companies and apply specialized industry accounting. The Company reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within net realized and unrealized gains (losses) on investments and other transactions. Accordingly, the accompanying consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company.
Certain portfolio fund investments qualify as equity method investments and are investment companies that apply specialized industry accounting. In applying equity method accounting guidance, the Company retains the specialized accounting of the investees and reports its investments on the consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected within net realized and unrealized gains (losses) on investments and other transactions.
In addition, the Company's broker-dealer subsidiaries apply the specialized industry accounting for brokers and dealers in securities, which the Company retains upon consolidation.
Valuation of investments and derivative contracts
US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date
Level 2Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and
Level 3Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little, if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this category requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment by the Company. The Company considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's
perceived risk of that instrument. Inputs reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
The Company and its operating subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value of these investments is based on their proportional rights of the underlying portfolio company, and is generally estimated based on proprietary models developed by the Company, which include discounted cash flow analysis, public market comparables, and other techniques and may be based, at least in part, on independently sourced market information. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation impact the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.
The Company primarily uses the market approach to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments into three categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the fair value option for certain of its investments held by its operating companies. This option has been elected because the Company believes that it is consistent with the manner in which the business is managed, as well as the way that financial instruments in other parts of the business are recorded.
Securities-Securities with values based on quoted market prices in active markets for identical assets are classified within level 1 of the fair value hierarchy. These securities primarily include active listed equities, certain U.S. government and sovereign obligations, Exchange Traded Funds ("ETFs"), mutual funds and certain money market securities.
Certain positions for which trading activity may not be readily visible, consisting primarily of convertible debt, corporate debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The estimated fair values assigned by management are determined in good faith and are based on available information considering trading activity, broker quotes, quotations provided by published pricing services, counterparties and other market participants, and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. As level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative contracts-Derivative contracts can be exchange-traded or privately negotiated over-the-counter (“OTC”). Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, are classified as level 2 when their inputs can be corroborated by market data. OTC derivatives, such as swaps and options, with significant inputs that cannot be corroborated by readily available or observable market data are classified as level 3.
Other investments-Other investments consist primarily of portfolio funds, real estate investments, carried interest and equity method investments, which are valued as follows:
i. Portfolio funds-Portfolio funds (“Portfolio Funds”) include interests in private investment partnerships, foreign investment companies and other collective investment vehicles which may be managed by the Company or its affiliates. The Company applies the practical expedient provided by the US GAAP fair value measurements and disclosures guidance relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The practical expedient permits an entity holding investments in certain entities that either are investment companies or have attributes similar to an investment company, and calculate NAV per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment. Investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy.
ii. Carried Interest-For the private equity and debt fund products the Company offers, the Company is allocated incentive income by the investment funds based on the extent by which the investment funds performance exceeds predetermined thresholds. Carried interest allocations are generally structured from a legal standpoint as an allocation of capital in the Company’s capital account. The Company accounts for carried interest allocations by applying an equity ownership model. Accordingly, the Company accrues performance allocations quarterly based on the fair value of the underlying investments assuming hypothetical liquidation at book value.
iii. Equity Method Investments-For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company applies the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the accompanying consolidated statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.
In accordance with US GAAP requirements for testing for impairment of goodwill, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Intangible assets
Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value. The Company continually monitors the estimated average useful lives of existing intangible assets.
Legal Reserves
The Company estimates potential losses that may arise out of legal and regulatory proceedings and records a reserve and takes a charge to income when losses with respect to such matters are deemed probable and can be reasonably estimated, in accordance with US GAAP. These amounts are reported in other expenses, net of recoveries, in the consolidated statements of operations. See Note 22 in our accompanying consolidated financial statements for the quarter ended December 31, 2020 for further discussion.
Recently adopted and future adoption of accounting pronouncements
For a detailed discussion, see Note 2aa "Recent pronouncements" in our accompanying consolidated financial statements for the year ended December 31, 2020.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary exposure to market risk is a function of our role as investment manager for our funds and managed accounts, our role as a financial intermediary in customer trading and market-making activities, as well as the fact that a
significant portion of our own capital is invested in securities. Adverse movements in the prices of securities that are either owned or sold short may negatively impact the Company's management fees and incentive income, as well as the value of our own invested capital.
The market value of the assets and liabilities in our investment funds and managed accounts, as well as the Company's own securities, may fluctuate in response to changes in equity prices, interest rates, credit spreads, currency exchange rates, commodity prices, implied volatility, dividends, prepayments, recovery rates and the passage of time. The net effect of market value changes caused by fluctuations in these risk factors will result in gains (losses) for our investment funds and managed accounts which will impact our management fees and incentive income and for the Company's securities which will impact the value of our own invested capital as well as the capital utilized in facilitating customer trades. Some of the Company's investments are in private companies and other investments are in securities that are subject, from time to time, to contractual lock-up agreements or other resale restrictions. The private investments we have made generally have no established trading market or are generally subject to restrictions on resale. Our inability to liquidate these securities when it may be otherwise advantageous for us to do so could lead to volatility in the market value ascribed to these investments and securities which could adversely affect our investment income.
The Company's risk measurement and risk management processes are an integral part of our proprietary investment process as well as market making and customer facilitation trading activities. These processes are implemented at the individual position, strategy and total portfolio levels and are designed to provide a complete picture of the risks of the Company's balance sheet. The key elements of our risk reporting include sensitivities, exposures, stress testing and profit and loss attribution. As a result of our views of levels of risk being taken, the Company may undertake to hedge out some or all of any or all risks at either the individual position, strategy or total portfolio levels.
Impact on Management Fees
The Company's management fees are generally based on the net asset value of the Company's investment funds and managed accounts. Accordingly, management fees will change in proportion to changes in the market value of investments held by the Company's investment funds and managed accounts.
Impact on Incentive Income
The Company's incentive income is generally based on a percentage of the profits of the Company's various investment funds and managed accounts, which is impacted by global economies and market conditions as well as other factors. Consequently, incentive income cannot be readily predicted or estimated.
Custody and prime brokerage risks
There are risks involved in dealing with the custodians or prime brokers who settle trades. Under certain circumstances, including certain transactions where the Company's assets are pledged as collateral for leverage from a non-broker-dealer custodian or a non-broker-dealer affiliate of the prime broker, or where the Company's assets are held at a non-U.S. prime broker, the securities and other assets deposited with the custodian or broker may be exposed to credit risk with regard to such parties. In addition, there may be practical or timing problems associated with enforcing the Company's rights to its assets in the case of an insolvency of any such party.
Market risk
Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is primarily related to the fluctuation in the fair values of securities owned and sold, but not yet purchased in the Company's investment funds and our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments and risks arise in options, warrants and derivative contracts from changes in the fair values of their underlying financial instruments. Securities sold, but not yet purchased, represent obligations of the Company's investment funds to deliver specified securities at contracted prices and thereby create a liability to repurchase the securities at prevailing future market prices. We trade in equity securities as an active participant in both listed and over-the-counter markets. We typically maintain securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures. In connection with our trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities are intended to ensure that our trading strategies are conducted within acceptable risk tolerance parameters, particularly when we commit our own capital to facilitate client trading. Activities include price verification procedures, position reconciliations and
reviews of transaction booking. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.
A 10% change in the fair value of the investments held by the Company's investment funds as of December 31, 2020 would result in a change of approximately $1.1 billion in our assets under management and would impact management fees by approximately $4.4 million on an annual basis. This number is an estimate. The amount would be dependent on the fee structure of the particular investment fund or funds that experienced such a change.
Currency risk
The Company is also exposed to foreign currency fluctuations. Currency risk arises from the possibility that fluctuations in foreign currency exchange rates will affect the value of such financial instruments, including direct or indirect investments in securities of non-U.S. companies. A 10% weakening or strengthening of the U.S. dollar against all or any combination of currencies to which the Company's investments or the Company's investment funds have exposure to exchange rates would not have a material effect on the Company's revenues, net loss or Economic Income.
Inflation risk
Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial condition and results of operations in certain businesses.
Leverage and interest rate risk
There is no guarantee that the Company's borrowing arrangements or other arrangements for obtaining leverage will continue to be available, or if available, will be available on terms and conditions acceptable to the Company. Unfavorable economic conditions also could increase funding costs, limit access to the capital markets or result in a decision by lenders not to extend credit to the Company. In addition, a decline in market value of the Company's assets may have particular adverse consequences in instances where we have borrowed money based on the market value of those assets. A decrease in market value of those assets may result in the lender (including derivative counterparties) requiring the Company to post additional collateral or otherwise sell assets at a time when it may not be in the Company's best interest to do so.
Credit risk
The Company clears all of its securities transactions through clearing brokers on a fully disclosed basis. Pursuant to the terms of the agreements between the Company and the clearing brokers, the clearing brokers have the right to charge the Company for losses that result from a counterparty's failure to fulfill its contractual obligations. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing brokers, we believe there is no maximum amount assignable to this right. Accordingly, at December 31, 2020, the Company had recorded no liability.
Credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. The Company's exposure to credit risk at any point in time is represented by the fair value of the amounts reported as assets at such time.
In the normal course of business, our activities may include trade execution for our clients as well as agreements to borrow or lend securities. These activities may expose us to risk arising from price volatility which can reduce clients' ability to meet their obligations. To the extent investors are unable to meet their commitments to us, we may be required to purchase or sell financial instruments at prevailing market prices to fulfill clients' obligations.
In accordance with industry practice, client trades are settled generally two business days after trade date. Should either the client or the counterparty fail to perform, we may be required to complete the transaction at prevailing market prices.
We manage credit risk by monitoring the credit exposure to and the standing of each counterparty, requiring additional collateral where appropriate, and using master netting agreements whenever possible.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We outsource all or a portion of certain critical business functions, such as clearing. Accordingly, we negotiate our agreements with these firms with attention focused not only on the delivery of core services but also on the safeguards afforded by back-up systems and disaster recovery capabilities. We make specific inquiries on any relevant exceptions noted in a service provider's System and Organization Controls (SOC) report on the state of its internal controls, when available.
Our service offerings in electronic and algorithmic trading require us to maintain consistent levels of speed and accuracy in the management of orders generated by our models. We monitor these activities on a continuous basis and do not believe that they comprise a material risk.
Our Internal Audit department oversees, monitors, measures, analyzes and reports on operational risk across the Company. The scope of Internal Audit encompasses the examination and evaluation of the adequacy and effectiveness of the Company's system of internal controls and is sufficiently broad to help determine whether the Company's network of risk management, control and governance processes, as designed by management, is adequate and functioning as intended. Internal Audit works with the senior management to help ensure a transparent, consistent and comprehensive framework exists for managing operational risk within each area, across the Company and globally.
We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these risks through a formalized control assessment process to ensure awareness and adherence to key policies and control procedures. Primary responsibility for management of operational risk is with the businesses and the business managers therein. The business managers, generally, maintain processes and controls designed to identify, assess, manage, mitigate and report operational risk. As new products and business activities are developed and processes are designed and modified, operational risks are considered.
Legal risk
Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and standards. Legal risk also includes contractual and commercial risk such as the risk that a counterparty's performance obligations will be unenforceable. The Company has established procedures based on legal and regulatory requirements that are designed to achieve compliance with applicable statutory and regulatory requirements. The Company, principally through the Legal and Compliance Division, also has established procedures that are designed to require that the Company's policies relating to conduct, ethics and business practices are followed. In connection with its businesses, the Company has and continuously develops various procedures addressing issues such as regulatory capital requirements, sales and trading practices, new products, potential conflicts of interest, use and safekeeping of customer funds and securities, money laundering, privacy, cybersecurity, and recordkeeping. In addition, the Company has established procedures to mitigate the risk that a counterparty's performance obligations will be unenforceable, including consideration of counterparty legal authority and capacity, adequacy of legal documentation, the permissibility of a transaction under applicable law and whether applicable bankruptcy or insolvency laws limit or alter contractual remedies. The legal and regulatory focus on the financial services industry presents a continuing business challenge for the Company.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are listed in Item 15 - "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and 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 is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level.
For Management's report on internal control over financial reporting see page, and attestation report of our independent registered public accounting firm see page.
In addition, there were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, that occurred in the fourth quarter.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information in the definitive proxy statement for our 2021 annual meeting of stockholders under the captions "Executive Officers," "Board of Directors," "Information Regarding the Board of Directors and Corporate Governance-Committees of the Board-Audit Committee," "Information Regarding the Board of Directors and Corporate Governance-Director Nomination Process," "Information Regarding the Board of Directors and Corporate Governance-Procedures for Nominating Director Candidates," "Information Regarding the Board of Directors and Corporate Governance-Code of Business Conduct and Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information in the definitive proxy statement for our 2021 annual meeting of stockholders under the captions "Executive Compensation-Compensation and Benefits Committee Report," "Certain Relationships and Related Transactions-Compensation and Benefits Committee Interlocks and Insider Participation" and "Information Regarding the Board of Directors and Corporate Governance-Compensation Program for Non-Employee Directors" is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in the definitive proxy statement for our 2021 annual meeting of stockholders under the captions "Security Ownership-Beneficial Ownership of Directors, Nominees and Executive Officers," "Security Ownership-Beneficial Owners of More than Five Percent of our Common Stock" and "Securities Authorized for Issuance Under Equity Compensation Plans" are incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions
The information in the definitive proxy statement for our 2021 annual meeting of stockholders under the captions "Information Regarding the Board of Directors and Corporate Governance-Director Independence," "Certain Relationships and Related Transactions-Transactions with Related Persons," and "Certain Relationships and Related Transactions-Review and Approval of Transactions with Related Persons" is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information in the definitive proxy statement for our 2021 annual meeting of stockholders under the captions "Audit Committee Report and Payment of Fees to Our Independent Auditor-Auditor Fees" and "Audit Committee Report and Payment of Fees to Our Independent Auditor-Auditor Services Pre-Approval Policy" is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on page hereof. The required financial statements appear on pages through hereof.
2. Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
3. Exhibits
Exhibit No. Description
2.1
Securities Purchase Agreement, dated as of April 2, 2017, by and among Convergex Holdings LLC, Convergex Group, LLC, GTCR Convergex Holdings LLC, Cowen CV Acquisition LLC and Cowen Inc. (previously filed as Exhibit 2.1 to the Form 8-K filed on April 6, 2017)
Exhibit No. Description
2.2
Purchase Agreement, dated as of November 20, 2018, by and among Cowen Inc., Cowen International Limited, Cowen QN Acquisition LLC, the Sellers signatory thereto, the Beneficial Owners signatory thereto and the Seller Representatives signatory thereto (previously filed as Exhibit 2.1 to the Form 8-K filed on November 21, 2018).
3.1
Amended and Restated Certificate of Incorporation of Cowen Inc. (previously filed as Exhibit 3.1 to the Form 10-Q filed November 25, 2009).
3.2
Second Amended and Restated By-Laws of Cowen Inc. (previously filed as Exhibit 3.1 to the Form 8-K filed on February 18, 2020).
3.3
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Cowen Inc. (previously filed as Exhibit 3.3 to the Form 10-Q filed November 25, 2009).
3.4
Certificate of Designations of the Company for its Series A Cumulative Perpetual Preferred Stock (previously filed as Exhibit 3.1 to Form 8-K filed May 20, 2015).
3.5
Amendment to the Amended and Restated Certificate of Incorporation of Cowen Inc. (previously filed as Exhibit 3.1 to the Form 8-K filed December 5, 2016).
3.6
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Cowen Inc. (previously filed as Exhibit 3.1 to the Form 8-K filed on May 16, 2017)
4.1
Form of Class A Common Stock Certificate (previously filed as Exhibit 4.1 to Amendment No. 2 to Form S-1 filed on December 14, 2009).
4.2
Indenture, dated March 10, 2014 by and between Cowen Inc., as Issuer and The Bank of New York Mellon, as Trustee (previously filed as Exhibit 4.1 to Form 8-K filed on March 11, 2014).
4.3
First Supplemental Indenture by and between Cowen Inc., as Issuer and The Bank of New York Mellon, as Trustee (previously filed as Exhibit 4.1 to the Form 10-Q filed May 8, 2014).
4.4
Senior Notes Indenture dated October 10, 2014, by and between Cowen Inc. and The Bank of New York Mellon (previously filed as Exhibit 4.1 to Form 8-K filed on October 10, 2014).
4.5
First Supplemental Indenture dated October 10, 2014, by and between Cowen Inc. and The Bank of New York Mellon (previously filed as Exhibit 4.2 to Form 8-K filed on October 10, 2014).
4.6
Indenture, dated as of December 14, 2017 between Cowen Inc. and The Bank of New York Mellon (previously filed as Exhibit 4.1 to Form 8-K filed on December 14, 2017).
4.7
Second Supplemental Indenture, dated as of December 8, 2017, by and between Cowen Inc. and The Bank of New York Mellon, as Trustee. (previously filed as Exhibit 4.2 to Form 8-K filed on December 8, 2017).
4.8
Third Supplemental Indenture, dated June 11, 2018, by and between Cowen Inc. and The Bank of New York Mellon (previously filed as Exhibit 4.2 to the Form 8-K filed June 11, 2018).
4.9
Form of Note Purchase Agreement including Form of Note attached thereto (previously filed as Exhibit 4.1 to the Form 8-K filed April 29, 2019).
4.10
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed herewith).
10.1
Lease, dated as of June 22, 2007 by and between 599 Lexington Avenue LLC and Cowen Investment Management LLC (as successor in interest to RCG Holdings LLC (f/k/a Ramius Capital Group, LLC)), as amended by the First Amendment to Lease, dated as of June 9, 2008, by and between BP 599 Lexington Avenue LLC and Cowen Investment Management LLC (as successor in interest to RCG Holdings LLC (f/k/a Ramius LLC)) (previously filed as Exhibit 10.14 to Amendment No. 2 to Form S-1 filed on December 14, 2009).
10.2
Cowen Inc. 2006 Equity and Incentive Plan (previously filed as Exhibit 10.20 to Amendment No. 2 to Form S-1 filed on December 14, 2009).*
10.3
Cowen Inc. 2007 Equity and Incentive plan (previously filed as Exhibit 10.21 to Amendment No. 2 to Form S-1 filed on December 14, 2009).*
10.4
Cowen Inc. 2010 Equity and Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement of Cowen Inc., on Schedule 14A for the year ended December 31, 2009, as filed on April 30, 2010).*
10.5
Second Amendment to Lease dated August 20, 2010 between BP 599 Lexington Avenue and the Company, amending that certain Lease dated as of June 22, 2007 by and between 599 Lexington Avenue LLC and Cowen Investment Management LLC (as successor in interest to RCG Holdings LLC (f/k/a Ramius Capital Group, LLC)), as amended by the First Amendment to Lease, dated as of June 9, 2008, by and between BP 599 Lexington Avenue LLC and Ramius LLC (previously filed as Exhibit 10.2 to Form 8-K filed August 24, 2010).
Exhibit No. Description
10.6
Initial capped call confirmation, dated as of May 13, 2015, by and between Nomura Global Financial Products Inc. and the Company (previously filed as Exhibit 10.1 to Form 8-K filed May 20, 2015).
10.7
Additional capped call confirmation, dated as of May 19, 2015, by and between Nomura Global Financial Products Inc. and the Company (previously filed as Exhibit 10.2 to Form 8-K filed May 20, 2015).
10.8
Form of Performance Shares Award Agreement (previously filed as Exhibit 10.1 to the Form 10-Q filed May 2, 2016).*
10.9
Underwriting Agreement, dated as of December 5, 2017, by and between Cowen Inc. and with Morgan Stanley & Co. LLC and UBS Securities LLC, as representatives of the several Underwriters named therein. (previously filed as Exhibit 1.1 to the Form 8-K filed December 8, 2017).
10.10
Letter Amendment between the Company and Mr. Solomon dated November 30, 2017 (previously filed as Exhibit 10.1 to the Form 8-K filed December 1, 2017).*
10.11
Underwriting Agreement, dated as of June 6, 2018, by and between Cowen Inc. and with Morgan Stanley & Co. LLC and UBS Securities LLC, as representatives of the several Underwriters named therein (previously filed as Exhibit 1.1 to the Form 8-K filed June 11, 2018).
10.12
Form of Performance Shares Award Agreement (previously filed as Exhibit 10.1 to the Form 10-Q filed August 1, 2019).*
10.13
Credit Agreement dated December 2, 2019 (previously filed as Exhibit 10.1 to the Form 8-K filed December 4. 2019).
10.14
Form of Restricted Stock Unit and Deferred Cash Award (previously filed as Exhibit 10.22 to the Form 10-K filed March 4, 2020).*
10.15
Amended and Restated Employment Agreement between the Company and Jeffrey Solomon dated January 31, 2020 (previously filed as Exhibit 10.1 to Form 8-K filed February 3, 2020). *
10.16
Amended and Restated Employment Agreement between the Company and John Holmes dated January 31, 2020 (previously filed as Exhibit 10.2 to Form 8-K filed February 3, 2020). *
10.17
Amended and Restated Employment Agreement between the Company and Stephen Lasota dated January 31, 2020 (previously filed as Exhibit 10.3 to Form 8-K filed February 3, 2020).*
10.18
Amended and Restated Employment Agreement between the Company and Owen Littman dated January 31, 2020 (previously filed as Exhibit 10.4 to Form 8-K filed February 3, 2020).*
10.19
2020 Equity Incentive Plan (previously filed as Appendix A to the Definitive Proxy Statement of Cowen Inc. on Schedule 14A for the year ended December 31, 2019, as filed on May 22, 2020).*
10.20
Form of Performance Share Award Agreement (filed herewith). *
10.21
Form of Restricted Stock Unit and Deferred Cash Award Agreement (filed herewith). *
21.1
Subsidiaries of Cowen Inc. (filed herewith).
23.1
Consent of Independent Registered Public Accounting Firm (filed herewith).
31.1
Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
Certification of CEO and CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS XBRL INSTANCE DOCUMENT
101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
101.LAB XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
104 Cover Page Interactive Data File - (formatted as inline XBRL and contained in Exhibit 101)
* Signifies management contract or compensatory plan or arrangement.