Edgar Filing: BlackRock Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from to .

Commission file number 001-33099

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

Delaware

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 31, 2011, there were 139,050,009 shares of the registrant’s common stock outstanding.

BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION


			Page
Item 1.	Financial Statements (unaudited)

		Condensed Consolidated Statements of Financial Condition	1
		Condensed Consolidated Statements of Income	3
		Condensed Consolidated Statements of Comprehensive Income	4
		Condensed Consolidated Statements of Changes in Equity	5
		Condensed Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		95

Item 4.	Controls and Procedures		97

PART II OTHER INFORMATION

Item 1.	Legal Proceedings		98

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		98

Item 6.	Exhibits		99

- ii -

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(Dollar amounts in millions, except share data)

(unaudited)


	September 30, 2011		December 31, 2010

Assets
Cash and cash equivalents	$	2,983	$	3,367
Accounts receivable		2,073		2,095
Due from related parties		145		150
Investments		1,525		1,540
Assets of consolidated variable interest entities
Cash and cash equivalents		70		93
Bank loans and other investments		1,638		1,312
Separate account assets		115,265		121,137
Collateral held under securities lending agreements		19,317		17,638
Deferred sales commissions, net		45		66
Property and equipment (net of accumulated depreciation of $518 and $426 at September 30, 2011 and December 31, 2010, respectively)		545		428
Intangible assets (net of accumulated amortization of $712 and $615 at September 30, 2011 and December 31, 2010, respectively)		17,395		17,512
Goodwill		12,797		12,805
Other assets		484		316

Total assets	$	174,282	$	178,459


Liabilities
Accrued compensation and benefits	$	1,105	$	1,520
Accounts payable and accrued liabilities		1,171		1,068
Due to related parties		23		57
Short-term borrowings		100		100
Liabilities of consolidated variable interest entities
Borrowings		1,586		1,278
Other liabilities		7		7
Convertible debentures		—		67
Long-term borrowings		4,690		3,192
Separate account liabilities		115,265		121,137
Collateral liabilities under securities lending agreements		19,317		17,638
Deferred income tax liabilities		5,366		5,477
Other liabilities		713		584

Total liabilities		149,343		152,125

Commitments and contingencies (Note 11)
Temporary equity
Redeemable non-controlling interests		1		6

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition (continued)

(Dollar amounts in millions, except share data)

(unaudited)


	September 30, 2011			December 31, 2010

Permanent Equity
BlackRock, Inc. stockholders’ equity
Common stock, $0.01 par value;		1			1
Shares authorized: 500,000,000 at September 30, 2011 and December 31, 2010;
Shares issued: 139,880,380 and 131,923,624 at September 30, 2011 and December 31, 2010, respectively;
Shares outstanding: 139,015,436 and 131,216,561 at September 30, 2011 and December 31, 2010, respectively
Preferred stock (Note 14)		—			1
Additional paid-in capital		20,150			22,502
Retained earnings		4,736			3,723
Appropriated retained earnings		79			75
Accumulated other comprehensive loss		(110	)		(96	)
Escrow shares, common, at cost (3,603 shares held at September 30, 2011 and December 31, 2010)		(1	)		(1	)
Treasury stock, common, at cost (861,341 and 703,460 shares held at September 30, 2011 and December 31, 2010, respectively)		(128	)		(111	)

Total BlackRock, Inc. stockholders’ equity		24,727			26,094
Nonredeemable non-controlling interests		175			189
Nonredeemable non-controlling interests of consolidated variable interest entities		36			45

Total permanent equity		24,938			26,328

Total liabilities, temporary equity and permanent equity	$	174,282		$	178,459

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Income

(Dollar amounts in millions, except per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue
Investment advisory, administration fees and securities lending revenue
Related parties	$	1,320		$	1,217		$	4,075		$	3,529
Other third parties		629			577			1,958			1,810

Investment advisory, administration fees and securities lending revenue		1,949			1,794			6,033			5,339
Investment advisory performance fees		91			114			224			214
BlackRock Solutions and advisory		117			101			361			328
Distribution fees		23			29			78			89
Other revenue		45			54			158			149

Total revenue		2,225			2,092			6,854			6,119
Expenses
Employee compensation and benefits		771			774			2,425			2,256
Distribution and servicing costs
Related parties		1			67			3			194
Other third parties		89			38			296			108
Amortization of deferred sales commissions		20			26			63			79
Direct fund expenses		139			124			435			359
General and administration		389			316			1,074			945
Amortization of intangible assets		39			40			117			120

Total expenses		1,448			1,385			4,413			4,061

Operating income		777			707			2,441			2,058
Non-operating income (expense)
Net gain (loss) on investments		(59	)		93			18			117
Net gain (loss) on consolidated variable interest entities		(16	)		12			(36	)		(16	)
Interest and dividend income		12			10			25			19
Interest expense		(49	)		(37	)		(128	)		(115	)

Total non-operating income (expense)		(112	)		78			(121	)		5

Income before income taxes		665			785			2,320			2,063
Income tax expense		95			201			564			662

Net income		570			584			1,756			1,401
Less:
Net income (loss) attributable to redeemable non-controlling interests		—			—			—			2
Net income (loss) attributable to nonredeemable non-controlling interests		(25	)		33			(26	)		(7	)

Net income attributable to BlackRock, Inc.	$	595		$	551		$	1,782		$	1,406

Earnings per share attributable to BlackRock, Inc. common stockholders:
Basic	$	3.28		$	2.85		$	9.46		$	7.28
Diluted	$	3.23		$	2.83		$	9.33		$	7.21
Cash dividends declared and paid per share	$	1.375		$	1.00		$	4.125		$	3.00
Weighted-average common shares outstanding:
Basic		179,034,837			190,494,905			186,187,318			190,385,046
Diluted		181,825,329			192,326,841			188,792,952			192,280,679

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Dollar amounts in millions)

(unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Net income	$	570		$	584	$	1,756		$	1,401
Other comprehensive income:
Change in net unrealized gains (losses) from available-for-sale investments, net of tax:
Unrealized holding gains (losses), net of tax		(5	)		1		(6	)		4
Less: reclassification adjustment included in net income		(2	)		—		—			2

Net change from available-for-sale investments, net of tax⁽¹⁾		(3	)		1		(6	)		2
Minimum pension liability adjustment		—			1		—			—
Foreign currency translation adjustments		(67	)		89		(8	)		(1	)

Other comprehensive income (loss)		(70	)		91		(14	)		1

Comprehensive income		500			675		1,742			1,402
Less: Comprehensive income (loss) attributable to non-controlling interests		(25	)		33		(26	)		(5	)

Comprehensive income attributable to BlackRock, Inc.	$	525		$	642	$	1,768		$	1,407

⁽¹⁾	The tax benefit (expense) on unrealized holding gains (losses) was $2 million and ($1) million during the three months ended September 30, 2011 and 2010, respectively, and $3 million and ($2) million during the nine months ended September 30, 2011 and 2010, respectively.

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)


	Additional Paid-in Capital ⁽¹⁾			Retained Earnings			Appropriated Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Shares Held in Escrow			Treasury Stock Common			Total Stockholders’ Equity			Nonredeemable Non-controlling Interests			Nonredeemable Non-controlling Interests of Consolidated VIEs			Total Permanent Equity			Redeemable Non-controlling Interests / Temporary Equity
December 31, 2010	$	22,504		$	3,723		$	75		($	96	)	($	1	)	($	111	)	$	26,094		$	189		$	45		$	26,328		$	6
Net income		—			1,782			—			—			—			—			1,782			10			(36	)		1,756			—
Consolidation of a collateralized loan obligation⁽²⁾		—			—			41			—			—			—			41			—			—			41			—
Allocation of losses of consolidated collateralized loan obligations		—			—			(37	)		—			—			—			(37	)		—			37			—			—
Dividends paid, net of dividend expense for unvested RSUs		—			(769	)		—			—			—			—			(769	)		—			—			(769	)		—
Stock-based compensation		373			—			—			—			—			2			375			—			—			375			—
PNC preferred stock capital contribution		200			—			—			—			—			—			200			—			—			200			—
Retirement of preferred stock		(200	)		—			—			—			—			—			(200	)		—			—			(200	)		—
Merrill Lynch cash capital contribution		8			—			—			—			—			—			8			—			—			8			—
Issuance of common shares related to employee stock transactions		(202	)		—			—			—			—			217			15			—			—			15			—
Employee tax withholdings related to employee stock transactions		—			—			—			—			—			(237	)		(237	)		—			—			(237	)		—
Shares repurchased		(2,545	)		—			—			—			—			—			(2,545	)		—			—			(2,545	)		—
Convertible debt conversions		4			—			—			—			—			1			5			—			—			5
Net tax benefit (shortfall) from stock-based compensation		9			—			—			—			—			—			9			—			—			9			—
Subscriptions (redemptions/ distributions)- non-controlling interest holders		—			—			—			—			—			—			—			(24	)		(10	)		(34	)		7
Net consolidations (deconsolidations) of sponsored investment funds		—			—			—			—			—			—			—			—			—			—			(12	)
Foreign currency translation adjustments		—			—			—			(8	)		—			—			(8	)		—			—			(8	)		—
Change in net unrealized gain (loss) from available-for-sale investments, net of tax		—			—			—			(6	)		—			—			(6	)		—			—			(6	)		—

September 30, 2011	$	20,151		$	4,736		$	79		($	110	)	($	1	)	($	128	)	$	24,727		$	175		$	36		$	24,938		$	1

⁽¹⁾	Includes $1 million of common stock at both September 30, 2011 and December 31, 2010 and $1 million of preferred stock at December 31, 2010.

⁽²⁾	Consolidated during the three months ended September 30, 2011.

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(Dollar amounts in millions)

(unaudited)


	Additional Paid-in Capital ⁽¹⁾			Retained Earnings			Appropriated Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Shares Held in Escrow			Treasury Stock Common			Total Stockholders’ Equity			Nonredeemable Non-controlling Interests			Nonredeemable Non-controlling Interests of Consolidated VIEs			Total Permanent Equity			Redeemable Non-controlling Interests / Temporary Equity
December 31, 2009	$	22,129		$	2,436		$	—		($	96	)	($	137	)	($	3	)	$	24,329		$	224		$	—		$	24,553		$	49
January 1, 2010 initial recognition of ASU 2009-17		—			—			114			—			—			—			114			(49	)		49			114			—
Net income		—			1,406			—			—			—			—			1,406			11			(18	)		1,399			2
Allocation of losses of consolidated collateralized loan obligations		—			—			(20	)		—			—			—			(20	)		—			20			—			—
Dividends paid, net of dividend expense for unvested RSUs		—			(582	)		—			—			—			—			(582	)		—			—			(582	)		—
Stock-based compensation		334			—			—			—			—			1			335			—			—			335			—
PNC preferred stock capital contribution		5			—			—			—			—			—			5			—			—			5			—
Merrill Lynch cash capital contribution		10			—			—			—			—			—			10			—			—			10			—
Exchange of common stock for preferred shares series B		128			—			—			—			—			(128	)		—			—			—			—			—
Net issuance of common shares related to employee stock transactions		(194	)		—			—			—			—			(60	)		(254	)		—			—			(254	)		—
Convertible debt conversions, net of tax		(53	)		—			—			—			—			66			13			—			—			13			—
Net tax benefit (shortfall) from stock-based compensation		43			—			—			—			—			—			43			—			—			43			—
Subscriptions/ (redemptions/ distributions) - non-controlling interest holders		—			—			—			—			—			—			—			(4	)		(5	)		(9	)		97
Net consolidations (deconsolidations) of sponsored investment funds		—			—			—			—			—			—			—			—			—			—			(94	)
Other changes in non-controlling interests		—			—			—			—			—			—			—			(2	)		—			(2	)		—
Foreign currency translation adjustments		—			—			—			(1	)		—			—			(1	)		—			—			(1	)		—
Change in net unrealized gains (losses) from available-for-sale investments, net of tax		—			—			—			2			—			—			2			—			—			2			—

September 30, 2010	$	22,402		$	3,260		$	94		($	95	)	($	137	)	($	124	)	$	25,400		$	180		$	46		$	25,626		$	54

⁽¹⁾	Includes $1 million of common stock and $1 million of preferred stock at both September 30, 2010 and December 31, 2009.

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in millions)

(unaudited)


	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities
Net income	$	1,756		$	1,401
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization		222			231
Amortization of deferred sales commissions		63			79
Stock-based compensation		375			335
Deferred income tax expense (benefit)		(108	)		42
Net (gains) losses on non-trading investments		(17	)		(34	)
Purchases of investments within consolidated funds		(8	)		(13	)
Proceeds from sales and maturities of investments within consolidated funds		41			23
Assets and liabilities of consolidated VIEs:
Change in cash and cash equivalents		38			(43	)
Net (gains) losses within consolidated VIEs		36			16
Net (purchases) proceeds within consolidated VIEs		44			41
(Earnings) losses from equity method investees		(13	)		(104	)
Distributions of earnings from equity method investees		26			11
Changes in operating assets and liabilities:
Accounts receivable		6			(334	)
Due from related parties		(9	)		13
Deferred sales commissions		(42	)		(51	)
Investments, trading		(31	)		(139	)
Other assets		(156	)		162
Accrued compensation and benefits		(420	)		(329	)
Accounts payable and accrued liabilities		90			391
Due to related parties		(34	)		(339	)
Other liabilities		94			56

Cash flows from operating activities		1,953			1,415

Cash flows from investing activities
Purchases of investments		(142	)		(522	)
Proceeds from sales and maturities of investments		142			131
Distributions of capital from equity method investees		32			39
Net consolidations (deconsolidations) of sponsored investment funds		—			(17	)
Acquisitions, net of cash acquired		—			(16	)
Purchases of property and equipment		(218	)		(96	)
Other		—			1

Cash flows from investing activities		(186	)		(480	)

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

(Dollar amounts in millions)

(unaudited)


	Nine Months Ended September 30,
	2011			2010
Cash flows from financing activities
Repayments of short-term borrowings		(600	)		(2,134	)
Proceeds from short-term borrowings		600			—
Repayments of convertible debt		(67	)		(176	)
Proceeds from long-term borrowings		1,496			—
Cash dividends paid		(769	)		(582	)
Proceeds from stock options exercised		13			7
Proceeds from issuance of common stock		3			4
Repurchases of common stock		(2,783	)		(264	)
Merrill Lynch cash capital contribution		8			10
Repayments of borrowings by consolidated VIEs		(72	)		—
Net (redemptions/distributions paid) subscriptions received from non-controlling interests holders		(27	)		88
Excess tax benefit from stock-based compensation		23			43

Cash flows from financing activities		(2,175	)		(3,004	)

Effect of exchange rate changes on cash and cash equivalents		24			(3	)

Net increase (decrease) in cash and cash equivalents		(384	)		(2,072	)
Cash and cash equivalents, beginning of period		3,367			4,708

Cash and cash equivalents, end of period	$	2,983		$	2,636

Supplemental disclosure of cash flow information:
Cash paid for:
Interest	$	98		$	98
Interest on borrowings of consolidated VIEs	$	43		$	38
Income taxes	$	819		$	355
Supplemental schedule of non-cash investing and financing transactions:
Issuance of common stock	$	207		$	257
Increase (decrease) in borrowings due to consolidation of VIEs	$	390		$	1,157
PNC preferred stock capital contribution	$	200		$	5

See accompanying notes to condensed consolidated financial statements.

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients, intermediary and individual investors through various investment vehicles. Investment management services primarily consist of the management of equity, fixed income, multi-asset class, alternative investment and cash management products. BlackRock offers its investment products in a variety of vehicles, including open-end and closed-end mutual funds, iShares^® exchange-traded funds (“ETFs”), collective investment trusts and separate accounts. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

On June 1, 2011, BlackRock completed its repurchase of Bank of America Corporation’s (“Bank of America”) remaining ownership interest of 13,562,878 Series B Convertible Preferred Shares for $2.545 billion, or $187.65 per share.

On September 30, 2011, equity ownership of BlackRock was as follows:


	Voting Common Stock			Capital Stock⁽¹⁾
The PNC Financial Services Group, Inc. (“PNC”)		23.9	%		21.0	%
Barclays Bank PLC (“Barclays”)		2.2	%		19.7	%
Other		73.9	%		59.3	%

		100.0	%		100.0	%

⁽¹⁾	Includes outstanding common and non-voting preferred stock.

2. Significant Accounting Policies

Basis of Presentation. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Non-controlling interests on the condensed consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2011.

The interim financial information at September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Reclassifications. Certain items previously reported have been reclassified to conform to the current period presentation.

Fair Value Measurements. Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), requires among other things, disclosures about assets and liabilities that are measured and reported at fair value.

Hierarchy of Fair Value Inputs. The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major class of assets and liabilities and disclosures with regards to significant transfers into and out of Levels 1 and 2.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

•

Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”) which, in accordance with GAAP, are calculated under fair value measures and the changes are equal to the earnings of such funds), ETFs, equities and certain exchange-traded derivatives.

2. Significant Accounting Policies (continued)

Fair Value Measurements (continued)

Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies on the NAV (or its equivalent) of certain investments as their fair value.

•

Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds and certain equity method limited partnership interests in hedge funds valued based on NAV where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

•

Level 3 assets in this category may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds and bank loans.

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, including independent appraisals, from third party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third party source or fund management may conclude that the valuations that are available from third party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

•

Level 3 liabilities included in this category include borrowings of consolidated collateralized loan obligations valued based upon non-binding single broker quotes.

Significance of Inputs. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Fair Value Option. ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis, must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

2. Significant Accounting Policies (continued)

Disclosure of Fair Value. The disclosure requirements within ASC 825-10 require disclosure of estimated fair values of certain financial instruments, both on and off the consolidated statements of financial condition. For financial instruments recognized at fair value in the statement of consolidated financial condition, the disclosure requirements of ASC 820-10 also apply.

The methods and assumptions for assets and liabilities measured at fair value, including those on a non-recurring basis, are set forth below:

•

Cash and cash equivalents are carried at either cost or amortized cost which approximates fair value due to their short term maturities. Money market funds are valued through the use of quoted market prices, or $1.00, which generally is the NAV.

•

The carrying amounts of receivables, accounts payable and accrued liabilities approximate fair value due to their short maturities.

•

The fair value of marketable investments is based on quoted market prices or broker quotes. If investments are not readily marketable, fair values primarily are determined based on NAVs (or capital accounts) of investments in limited partnerships/limited liability companies or by the Company based on management’s assumptions or estimates, taking into consideration financial information of the investment, the industry of the investment, market indices or valuation services from third party service providers. At September 30, 2011, with the exception of certain equity and cost method investments and carried interest investments that are not accounted for under a fair value measure, the carrying value of investments approximated fair value. See Note 5, Fair Value Disclosures, for further discussion.

•

Long-term borrowings are recorded at amortized amounts. See Note 10, Borrowings, for the fair value of the Company’s long-term borrowings.

Collateral Assets Held and Liabilities Under Securities Lending Agreements. The Company facilitates securities lending arrangements whereby securities held as separate account assets maintained by BlackRock’s registered life insurance companies are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, with minimums generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can re-sell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

As a result of the Company’s ability to resell or re-pledge the collateral, the Company records on its condensed consolidated statements of financial condition the collateral received under these arrangements (both cash and non-cash) as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. At September 30, 2011, the fair value of loaned securities held as separate account assets was approximately $18.3 billion and the collateral held under these securities lending agreements was approximately $19.3 billion. During the nine months ended September 30, 2011 and 2010, the Company had not sold or repledged any of the collateral received under these arrangements.

Appropriated Retained Earnings. Upon adoption of Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), on January 1, 2010, BlackRock consolidated three collateralized loan obligations (“CLOs”) and recorded a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statement of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. The net change in the fair value of the CLOs’ assets and liabilities has been recorded as net income (loss) attributable to nonredeemable non-controlling interests and as an adjustment to appropriated retained earnings. In addition, as of September 30, 2011 BlackRock consolidated one additional CLO, resulting in $41 million of additional appropriated retained earnings.

3. Investments

A summary of the carrying value of total investments is as follows:


*(Dollar amounts in millions)*	September 30, 2011		December 31, 2010
Available-for-sale investments	$	48	$	45
Held-to-maturity investments		94		100
Trading investments:
Consolidated sponsored investment funds		92		60
Other equity securities		3		22
Deferred compensation plan mutual funds		46		49

Total trading investments		141		131
Other investments:
Consolidated sponsored investment funds		347		337
Equity method investments		492		556
Deferred compensation plan hedge fund equity method investments		22		27
Carried interest		44		13
Cost method investments		337		331

Total other investments		1,242		1,264

Total investments	$	1,525	$	1,540

At September 30, 2011, the Company consolidated $439 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $92 million and $347 million were classified as trading investments and other investments, respectively.

At December 31, 2010, the Company consolidated $397 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $60 million and $337 million were classified as trading investments and other investments, respectively.

3. Investments (continued)

Available-for-Sale Investments

A summary of the cost and carrying value of available-for-sale investments is as follows:


*(Dollar amounts in millions)*
			Gross Unrealized					Carrying Value
September 30, 2011	Cost		Gains		Losses			Carrying Value
Available-for-sale investments:
Equity securities:
Sponsored investment funds	$	51	$	1	($	6	)	$	46
Collateralized debt obligations (“CDOs”)		1		—		—			1
Debt securities:
Asset-backed debt		1		—		—			1

Total available-for-sale investments	$	53	$	1	($	6	)	$	48


			Gross Unrealized					Carrying Value
December 31, 2010	Cost		Gains		Losses			Carrying Value
Available-for-sale investments:
Equity securities:
Sponsored investment funds	$	33	$	4	($	1	)	$	36
CDOs		2		—		—			2
Debt securities:
Mortgage debt		4		2		—			6
Asset-backed debt		1		—		—			1

Total available-for-sale investments	$	40	$	6	($	1	)	$	45

Available-for-sale investments include seed investments in BlackRock sponsored investment funds and debt securities received upon closure of certain funds in lieu of the Company’s remaining investment in the funds.

Held-to-Maturity Investments

A summary of the carrying value of held-to-maturity investments is as follows:


	Carrying Value
*(Dollar amounts in millions)*	September 30, 2011		December 31, 2010
Foreign government debt	$	94	$	100

Held-to-maturity investments include debt instruments held for regulatory purposes. The amortized cost (the carrying value) of these investments approximates fair value.

3. Investments (continued)

Held-to-Maturity Investments (continued)

The fair values of debt securities classified as held-to-maturity at September 30, 2011 by maturity date were as follows:


*(Dollar amounts in millions)*	1 Year or less		After 1 Year through 5 Years		After 5 Years through 10 Years		After 10 Years		Total
	$	88	$	—	$	—	$	6	$	94

Trading Investments

A summary of the cost and carrying value of trading investments is as follows:


	September 30, 2011				December 31, 2010
*(Dollar amounts in millions)*	Cost		Carrying Value		Cost		Carrying Value
Deferred compensation plan mutual funds	$	45	$	46	$	45	$	49
Equity securities		77		65		37		45
Debt securities:
Municipal debt		—		1		10		10
Corporate debt		38		29		25		27

Total trading investments	$	160	$	141	$	117	$	131

At September 30, 2011, trading investments included $62 million of equity securities and $30 million of debt securities held by consolidated sponsored investment funds, $46 million of certain deferred compensation plan mutual fund investments and $3 million of equity securities held in separate investment accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.

Other Investments

A summary of the cost and carrying value of other investments is as follows:


	September 30, 2011				December 31, 2010
*(Dollar amounts in millions)*	Cost		Carrying Value		Cost		Carrying Value
Consolidated sponsored investment funds	$	334	$	347	$	319	$	337
Equity method		520		492		569		556
Deferred compensation plan hedge fund equity method investments		17		22		20		27
Carried interest		—		44		—		13
Cost method investments:
Federal Reserve Bank stock		327		327		325		325
Other		10		10		6		6

Total cost method investments		337		337		331		331

Total other investments	$	1,208	$	1,242	$	1,239	$	1,264

3. Investments (continued)

Other Investments (continued)

Consolidated sponsored investment funds include investments in third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.

Equity method investments include BlackRock’s direct investments in BlackRock sponsored investment products.

Carried interest represents allocations to BlackRock general partner capital accounts for certain funds. These balances are subject to change upon cash distributions, additional allocations, or reallocations back to limited partners within the respective funds.

Cost method investments include non-marketable securities, including $327 million of Federal Reserve Bank stock at September 30, 2011, which is held for regulatory purposes and is restricted from sale. As of September 30, 2011, there were no indicators of impairments on these investments.

4. Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds in accordance with GAAP. The investments owned by these consolidated sponsored investment funds are classified as other investments or trading investments. The following table presents the balances related to these consolidated funds that were included on the condensed consolidated statements of financial condition as well as BlackRock’s net interest in these funds:


*(Dollar amounts in millions)*	September 30, 2011			December 31, 2010
Cash and cash equivalents	$	67		$	65
Investments:
Trading investments		92			60
Other investments		347			337
Other assets		12			3
Other liabilities		(24	)		(10	)
Non-controlling interests		(176	)		(195	)

BlackRock’s net interests in consolidated investment funds	$	318		$	260

BlackRock’s total exposure to consolidated sponsored investment funds of $318 million and $260 million at September 30, 2011 and December 31, 2010, respectively, represents the value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and partially offset in net income (loss) attributable to non-controlling interests for the portion not attributable to BlackRock.

In addition, at September 30, 2011 and December 31, 2010, four and three consolidated CLOs, respectively, and one other consolidated sponsored investment fund which were deemed to be variable interest entities (“VIEs”), were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion on these consolidated products.

The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.

5. Fair Value Disclosures

Fair Value Hierarchy

Total assets measured at fair value on a recurring basis of $136.6 billion at September 30, 2011 were as follows:


	Assets measured at fair value
*(Dollar amounts in millions)*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Other Assets Not Held at Fair Value⁽¹⁾		September 30, 2011
Assets:

Investments
Available-for-sale:
Equity securities (funds and CDOs)	$	46	$	—	$	1	$	—	$	47
Debt securities		—		1		—		—		1

Total available-for-sale		46		1		1		—		48
Held-to-maturity:
Debt securities		—		—		—		94		94
Trading:
Deferred compensation plan mutual funds		46		—		—		—		46
Equity securities		62		3		—		—		65
Debt securities		—		30		—		—		30

Total trading		108		33		—		—		141
Other investments:
Consolidated sponsored investment funds:
Hedge funds / Funds of hedge funds		—		25		14		—		39
Private / public equity		14		—		294		—		308

Total consolidated sponsored investment funds		14		25		308		—		347
Equity method:
Hedge funds / Funds of hedge funds		—		39		192		20		251
Private equity investments		—		—		81		20		101
Real estate funds		—		19		55		19		93
Fixed income mutual funds		41		—		—		—		41
Equity / Multi-asset class mutual funds		6		—		—		—		6

Total equity method		47		58		328		59		492
Deferred compensation plan hedge fund equity method investments		—		22		—		—		22
Carried interest		—		—		—		44		44
Cost method investments		—		—		—		337		337

Total investments		215		139		637		534		1,525
Separate account assets:
Equity securities		70,348		—		1		—		70,349
Debt securities		—		39,415		8		—		39,423
Derivatives		—		2,440		—		—		2,440
Money market funds		2,478		—		—		—		2,478
Other		—		—		—		575		575

Total separate account assets		72,826		41,855		9		575		115,265
Collateral held under securities lending agreements:
Equity securities		10,105		—		—		—		10,105
Debt securities		—		9,212		—		—		9,212

Total collateral held under securities lending agreements		10,105		9,212		—		—		19,317
Other assets⁽²⁾		—		11		—		—		11
Assets of consolidated VIEs:
Bank loans		—		1,395		72		—		1,467
Bonds		—		135		—		—		135
Private / public equity		3		4		29		—		36

Total assets of consolidated VIEs		3		1,534		101		—		1,638

Total	$	83,149	$	52,751	$	747	$	1,109	$	137,756

⁽¹⁾

Amount comprised of investments held at cost, amortized cost, carried interest and equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

⁽²⁾	Amount includes company-owned and split-dollar life insurance policies.

5. Fair Value Disclosures (continued)

Fair Value Hierarchy (continued)

Liabilities measured at fair value on a recurring basis at September 30, 2011 were as follows:


*(Dollar amounts in millions)*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		September 30, 2011
Liabilities:
Borrowings of consolidated VIEs	$	—	$	—	$	1,586	$	1,586
Collateral liabilities under securities lending agreements		10,105		9,212		—		19,317
Other liabilities⁽¹⁾		—		3		—		3

Total liabilities measured at fair value	$	10,105	$	9,215	$	1,586	$	20,906

⁽¹⁾	Amount includes credit default swap (Pillars) recorded within other liabilities on the condensed consolidated statement of financial condition. See Note 7, Derivatives and Hedging, for more information.

5. Fair Value Disclosures (continued)

Fair Value Hierarchy (continued)

Total assets measured at fair value on a recurring basis of $140.5 billion at December 31, 2010 were as follows:


	Assets measured at fair value
*(Dollar amounts in millions)*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Other Assets Not Held at Fair Value⁽¹⁾		December 31, 2010
Assets:

Investments
Available-for-sale:
Equity securities (funds and CDOs)	$	36	$	—	$	2	$	—	$	38
Debt securities		—		7		—		—		7

Total available-for-sale		36		7		2		—		45
Held-to-maturity:
Debt securities		—		—		—		100		100
Trading:
Deferred compensation plan mutual funds		49		—		—		—		49
Equity securities		36		9		—		—		45
Debt securities		—		37		—		—		37

Total trading		85		46		—		—		131
Other investments:
Consolidated sponsored investment funds:
Hedge funds / Funds of funds		—		1		19		—		20
Private / public equity		18		—		299		—		317

Total consolidated sponsored investment funds		18		1		318		—		337
Equity method:
Hedge funds / Funds of hedge funds		—		44		226		34		304
Private equity investments		—		—		68		20		88
Real estate funds		—		8		36		10		54
Fixed income mutual funds		103		—		—		—		103
Equity / Multi-asset class mutual funds		7		—		—		—		7

Total equity method		110		52		330		64		556
Deferred compensation plan hedge fund equity method investments		—		27		—		—		27
Carried interest		—		—		—		13		13
Cost method investments		—		—		—		331		331

Total investments		249		133		650		508		1,540

Separate account assets:
Equity securities		79,727		3		4		—		79,734
Debt securities		—		36,415		170		—		36,585
Derivatives		1		1,598		—		—		1,599
Money market funds		2,549		—		—		—		2,549
Other		—		—		—		670		670

Total separate account assets		82,277		38,016		174		670		121,137
Collateral held under securities lending agreements:
Equity securities		15,237		—		—		—		15,237
Debt securities		—		2,401		—		—		2,401

Total collateral held under securities lending agreements		15,237		2,401		—		—		17,638
Other assets⁽²⁾		—		11		—		—		11
Assets of consolidated VIEs:
Bank loans		—		1,130		32		—		1,162
Bonds		—		113		—		—		113
Private / public equity		4		3		30		—		37

Total assets of consolidated VIEs		4		1,246		62		—		1,312

Total assets measured at fair value	$	97,767	$	41,807	$	886	$	1,178	$	141,638

⁽¹⁾

Amount comprised of investments held at cost, amortized cost, carried interest and equity method investments, which include investment companies, and other assets which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and financial liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

⁽²⁾	Amount includes company-owned and split-dollar life insurance policies.

5. Fair Value Disclosures (continued)

Fair Value Hierarchy (continued)

Liabilities measured at fair value on a recurring basis at December 31, 2010 were as follows:


*(Dollar amounts in millions)*	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		December 31, 2010
Liabilities:
Borrowings of consolidated VIEs	$	—	$	—	$	1,278	$	1,278
Collateral liabilities under securities lending agreements		15,237		2,401		—		17,638
Other liabilities⁽¹⁾		—		3		—		3

Total liabilities measured at fair value	$	15,237	$	2,404	$	1,278	$	18,919

⁽¹⁾	Amount includes credit default swap (Pillars) recorded within other liabilities on the condensed consolidated statement of financial condition.

Separate Account Assets. BlackRock Pensions Limited and BlackRock Asset Management Pensions Limited, both wholly owned subsidiaries of the Company, are registered life insurance companies in the United Kingdom that maintain separate account assets, representing segregated funds held for purposes of funding individual and group pension contracts, and equal and offsetting separate account non-financial liabilities. The net investment income attributable to separate account assets accrue directly to the contract owners and are not reported on the Company’s condensed consolidated statements of income.

Money Market Funds within Cash and Cash Equivalents. At September 30, 2011 and December 31, 2010, approximately $79 million and $87 million, respectively, of money market funds were recorded within cash and cash equivalents on the Company’s condensed consolidated statements of financial condition. Money market funds are valued through the use of quoted market prices (a Level 1 input), or $1.00, which generally is the net asset value of the fund.

Level 3 Assets. Level 3 assets recorded within investments, which include equity method investments and consolidated investments of real estate funds, private equity funds and funds of private equity funds, are valued based upon valuations, including capital accounts, received from internal as well as third party fund managers. Fair valuations of the underlying funds are based on a combination of methods, which may include third-party independent appraisals and discounted cash flow techniques. Direct investments in private equity companies held by funds of private equity funds are valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third party financing, changes in valuations of comparable peer companies, the business environment of the companies and market indices, among other factors.

Level 3 assets recorded within separate account assets include single broker non-binding quotes for fixed income securities and equity securities which have unobservable inputs due to certain corporate actions.

Level 3 assets of consolidated VIEs include bank loans valued based on single broker non-binding quotes and direct private equity investments and private equity funds valued based upon valuations received from internal as well as third party fund managers, which may be adjusted by using the returns of certain market indices.

Level 3 Liabilities. Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single broker non-binding quotes.

5. Fair Value Disclosures (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2011


*(Dollar amounts in millions)*	June 30, 2011		Realized and unrealized gains (losses) in earnings and OCI			Purchases		Sales and maturities			Issuances and other settlements⁽¹⁾			Transfers into Level 3		Transfers out of Level 3			September 30, 2011		Total net gains (losses) included in earnings⁽²⁾
Assets:
Investments
Available-for-sale:
Equity securities (CDOs)	$	2	($	1	)	$	—	$	—		$	—		$	—	$	—		$	1	($	1	)
Consolidated sponsored investment funds:
Hedge funds / Funds of funds		17		(2	)		—		—			(1	)		—		—			14		(1	)
Private equity		312		(7	)		—		(10	)		(1	)		—		—			294		(10	)
Equity method:
Hedge funds / Funds of hedge funds		211		(19	)		—		—			—			—		—			192		(20	)
Private equity investments		77		3			1		—			—			—		—			81		2
Real estate funds		48		3			5		—			(1	)		—		—			55		3

Total Level 3 investments		667		(23	)		6		(10	)		(3	)		—		—			637		(27	)
Separate account assets:
Equity securities		4		(1	)		1		(3	)		—			—		—			1
Debt securities		10		(1	)		—		(1	)		—			—		—			8

Total Level 3 separate account assets		14		(2	)		1		(4	)		—			—		—			9		n/a	⁽³⁾

Assets of consolidated VIEs:
Bank loans		41		(2	)		5		—			16			23		(11	)		72
Private equity		29		—			—		—			—			—		—			29

Total Level 3 assets of consolidated VIEs		70		(2	)		5		—			16			23		(11	)		101		n/a	⁽⁴⁾

Total Level 3 assets	$	751	($	27	)	$	12	($	14	)	$	13		$	23	($	11	)	$	747

Liabilities:
Borrowings of consolidated VIEs	$	1,292	$	38		$	—	$	—		$	332		$	—	$	—		$	1,586		n/a	⁽⁴⁾

n/a – not applicable

⁽¹⁾	Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

⁽²⁾	Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

⁽³⁾	The net investment income attributable to separate account assets accrues directly to the contract owners and are not reported on the Company’s condensed consolidated statements of income.

⁽⁴⁾	The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

5. Fair Value Disclosures (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2011


*(Dollar amounts in millions)*	December 31, 2010		Realized and unrealized gains (losses) in earnings and OCI			Purchases		Sales and maturities			Issuances and other settlements⁽¹⁾			Transfers into Level 3		Transfers out of Level 3			September 30, 2011		Total net gains (losses) included in earnings⁽²⁾
Assets:
Investments
Available-for-sale:
Equity securities (funds and CDOs)	$	2	$	—		$	—	$	—		($	1	)	$	—	$	—		$	1	$	—
Consolidated sponsored investment funds:
Hedge funds / Funds of funds		19		(1	)		—		(2	)		(1	)		—		(1	)		14		—
Private equity		299		23			8		(38	)		—			2		—			294		20
Equity method:
Hedge funds / Funds of hedge funds		226		(7	)		5		(1	)		(31	)		—		—			192		(7	)
Private equity investments		68		10			4		—			(1	)		—		—			81		10
Real estate funds		36		5			17		—			(3	)		—		—			55		5

Total Level 3 investments		650		30			34		(41	)		(37	)		2		(1	)		637		28
Separate account assets:
Equity securities		4		1			8		(41	)		—			38		(9	)		1
Debt securities		170		(3	)		96		(168	)		—			—		(87	)		8

Total Level 3 separate account assets		174		(2	)		104		(209	)		—			38		(96	)		9		n/a	⁽³⁾

Assets of consolidated VIEs:
Bank loans		32		(4	)		25		(16	)		16			46		(27	)		72
Private equity		30		3			—		(4	)		—			—		—			29

Total Level 3 assets of consolidated VIEs		62		(1	)		25		(20	)		16			46		(27	)		101		n/a	⁽⁴⁾

Total Level 3 assets	$	886	$	27		$	163	($	270	)	($	21	)	$	86	($	124	)	$	747

Liabilities:
Borrowings of consolidated VIEs	$	1,278	$	10		$	—	$	—		$	318		$	—	$	—		$	1,586		n/a	⁽⁴⁾

n/a – not applicable

⁽¹⁾	Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO.

⁽²⁾	Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date.

⁽³⁾	The net investment income attributable to separate account assets accrues directly to the contract owners and are not reported on the Company’s condensed consolidated statements of income.

⁽⁴⁾	The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s condensed consolidated statements of income.

5. Fair Value Disclosures (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2010


*(Dollar amounts in millions)*	June 30, 2010		Realized and unrealized gains (losses), net			Purchases, sales, other settlements and issuances, net			Net transfers in and/or out of Level 3			September 30, 2010		Total net gains (losses) included in earnings⁽¹⁾
Assets:
Investments:
Consolidated sponsored investment funds:
Hedge funds / Funds of hedge funds	$	23	$	—		($	1	)	$	—		$	22	$	—
Private equity		259		38			(5	)		(2	)		290		38
Equity method:
Hedge funds / Funds of hedge funds		261		16			(7	)		—			270		18
Private equity investments		56		1			3			—			60		1
Real estate funds		48		10			1			—			59		10
Deferred compensation plan hedge funds		18		(1	)		—			—			17		—

Total Level 3 investments		665		64			(9	)		(2	)		718		67
Separate account assets:
Equity		7		37			34			2			80
Fixed income		1,448		(4	)		(21	)		—			1,423

Total Level 3 separate account assets		1,455		33			13			2			1,503		n/a	⁽²⁾
Other assets⁽³⁾		24		2			—			—			26		2
Private equity investments of consolidated VIEs		30		5			—			—			35		n/a	⁽⁴⁾

Total level 3 assets	$	2,174	$	104		$	4		$	—		$	2,282

Liabilities:
Borrowings of consolidated VIEs	$	1,215	($	22	)	$	—		$	—		$	1,237		n/a	⁽⁴⁾

n/a – not applicable

⁽¹⁾	Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date.

⁽²⁾	The net investment income attributable to separate account assets accrues directly to the contract owner and is not reported on the Company’s condensed consolidated statements of income.

⁽³⁾	Amounts include disposal group assets.

⁽⁴⁾	The net investment income (expense) attributable to assets and borrowings of consolidated VIEs are allocated to non-controlling interests on the Company’s condensed consolidated statements of income.

5. Fair Value Disclosures (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2010


*(Dollar amounts in millions)*	December 31, 2009		Realized and unrealized gains (losses), net			Purchases, sales, other settlements and issuances, net			Net transfers in and/or out of Level 3			September 30, 2010		Total net gains (losses) included in earnings⁽¹⁾
Assets:
Investments:
Consolidated sponsored investment funds:
Hedge funds / Funds of hedge funds	$	26	($	1	)	($	3	)	$	—		$	22	($	1	)
Private equity		312		20			(39	)		(3	)		290		21
Equity method:
Hedge funds / Funds of hedge funds		247		30			(7	)		—			270		31
Private equity investments		47		3			10			—			60		3
Real estate funds		36		12			11			—			59		12
Deferred compensation plan hedge funds		15		2			—			—			17		2

Total Level 3 investments		683		66			(28	)		(3	)		718		68
Separate account assets:
Equity		5		32			(20	)		63			80
Fixed income		1,287		36			324			(224	)		1,423

Total Level 3 separate account assets		1,292		68			304			(161	)		1,503		n/a	⁽²⁾
Other assets⁽³⁾		46		(8	)		(12	)		—			26		(8	)
Private equity investments of consolidated VIEs		—		1			34			—			35		n/a	⁽⁴⁾

Total Level 3 assets	$	2,021	$	127		$	298		($	164	)	$	2,282

Liabilities:
Borrowings of consolidated VIEs	$	—	($	80	)	$	1,157		$	—		$	1,237		n/a	⁽⁴⁾

n/a – not applicable

⁽¹⁾	Earnings attributable to the change in unrealized gains or (losses) relating to assets still held at the reporting date.

⁽²⁾	The net investment income attributable to separate account assets accrues directly to the contract owner and is not reported on the Company’s condensed consolidated statements of income.

⁽³⁾	Amounts include disposal group assets.

⁽⁴⁾	The net investment income (expense) attributable to assets and borrowings of consolidated VIEs are allocated to non-controlling interests on the Company’s condensed consolidated statements of income.

5. Fair Value Disclosures (continued)

Realized and Unrealized Gains (Losses) for Level 3 Assets and Liabilities. Realized and unrealized gains (losses) recorded for Level 3 assets and liabilities are reported in non-operating income (expense) on the Company’s condensed consolidated statements of income. A portion of net income (loss) for consolidated investments and all of the net income (loss) for consolidated VIEs are allocated to non-controlling interests to reflect net income (loss) not attributable to the Company.

Significant Transfers in and/or out of Levels. Transfers in and/or out of levels are reflected as of the beginning of the period when significant inputs, including market inputs or performance attributes, used for the fair value measurement become observable / unobservable, or when the Company determines it has the ability, or no longer has the ability, to redeem in the near term certain investments that the Company values using a NAV (or a capital account), or when the book value of certain equity method investments no longer represents fair value as determined under fair value methodologies.

Separate Account Assets. There were no transfers in or out of Level 3 for the three months ended September 30, 2011. For the nine months ended September 30, 2011 there were $9 million of transfers out of Level 3 to Level 1 related to equity securities held within separate accounts. In addition, for the nine months ended September 30, 2011 there were $87 million of debt securities transferred out of Level 3 to Level 2 within separate account assets. The transfers out of Level 3 primarily were due to availability of observable market inputs, including additional inputs from pricing vendors and brokers.

For the nine months ended September 30, 2011 there were $38 million of transfers of equity securities held within separate account assets into Level 3 from Level 1. The transfers into Level 3 were primarily due to market inputs no longer being considered observable.

For the nine months ended September 30, 2010 there were $63 million of net transfers of equity securities held within separate account assets into Level 3 from Level 1. The transfers into Level 3 were primarily due to market inputs no longer being considered observable. For the nine months ended September 30, 2010 there were $224 million of net transfers of debt securities held within separate accounts out of Level 3 to Level 2. The transfers out of Level 3 primarily were due to availability of observable market inputs, including additional inputs from pricing vendors and brokers.

Significant Other Settlements. For the nine months ended September 30, 2011 there were $35 million of distributions from equity method investees categorized in Level 3 of the fair value hierarchy.

During the three and nine months ended September 30, 2011, other settlements included $390 million of borrowings related to the consolidation of one additional CLO.

As of January 1, 2010, upon the adoption of ASU 2009-17, there was a $35 million reclassification of assets from Level 3 private equity investments to Level 3 private equity assets of consolidated VIEs, as well as the consolidation of $1,157 million of borrowings within the consolidated CLOs.

5. Fair Value Disclosures (continued)

Investments in Certain Entities that Calculate Net Asset Value Per Share. As a practical expedient to value certain investments, the Company relies on net asset values as the fair value for certain investments. The following tables list information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a net asset value per share (or its equivalent).

At September 30, 2011

(Dollar amounts in millions)

Ref

Fair Value

Total
Unfunded
Commitments

Redemption
Frequency

Redemption
Notice Period

Trading:

Equity

(a)

—

Daily

none

Consolidated sponsored investment funds:

Private equity funds of funds

(b)

238

n/r

Other funds of hedge funds

(c)

—

Monthly (32%),

Quarterly (68%)

30 – 90 days

Equity method:⁽¹⁾

Hedge funds/funds of hedge funds

(d)

231

Monthly (2%),
Quarterly (18%)

n/r (80%)

15 – 90 days

Private equity funds

(e)

n/r

Real estate funds

(f)

Quarterly (26%)

n/r (74%)

60 days

Deferred compensation plan hedge fund investments

(g)

—

Monthly (13%),
Quarterly (87%)

60 – 90 days

Consolidated VIE:

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company