| Fair Value Measurements |
5. Fair Value Measurements As discussed in Note 1, accounting standards 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. The standards establish a hierarchy that prioritizes inputs to valuation techniques to measure fair value and gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Substantially all of the Company's investments are carried at fair value, with the exception of its investments in non-consolidated CLO entities that have not been impaired in the current fiscal period and certain non-marketable investments that are accounted for using the equity or cost method. There were no significant transfers between Level 1 and Level 2 during the years ending October 31, 2011 and 2010. The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value, as well as the general classification of such financial assets and liabilities pursuant to the valuation hierarchy. | Financial | | | | | | Instrument | | Hierarchy | | Valuation Methodology | | | | | | | | Cash Equivalents | | Level 1 | | Includes investments in money market funds. Fair value is determined based upon unadjusted quoted market prices. | | | | Level 2 | | Includes agency securities. Fair value is determined based upon observable inputs other than Level 1 unadjusted quoted market prices, such as quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data. | | Investments | | Level 1 | | Includes certain debt and certain equity securities held in the portfolios of consolidated funds and separately managed accounts, which are classified as trading, and investments in sponsored funds. Fair value is determined based upon unadjusted quoted market prices. | | | | Level 2 | | Includes commercial paper, certain debt securities, certain equity securities, investments in privately offered equity funds that are not listed but have a net asset value that is comparable to mutual funds and investments in portfolios that have a net asset value that is comparable to mutual funds. Fair value is determined using observable inputs other than Level 1 unadjusted quoted market prices, such as quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data. If events occur after the close of the primary market for any security, the quoted market prices may be adjusted for the observable price movements of country-specific market proxies. |
| Financial | | | | | | Instrument | | Hierarchy | | Valuation Methodology | | | | | | | | Derivative assets and liabilities | | Level 2 | | Includes foreign exchange contracts, stock index futures contracts and commodity futures contracts. Foreign exchange contract pricing is determined by interpolating a value using the spot foreign currency rate based on spot rate and currency exchange rate differentials, which are all observable inputs. Index futures contracts and commodity futures contracts pricing is determined by a third-party pricing service that determines fair value based on bid and ask prices. | | Securities sold, not yet purchased | | Level 2 | | Pricing is determined by a third-party pricing service that determines fair value based on bid and ask prices. | | Assets of consolidated collateralized loan obligation entity | | Level 1 | | Includes investments in money market funds and certain equity securities. Fair value is determined based upon unadjusted quoted market prices. | | | | Level 2 | | Includes bank loans, debt and equity securities. Fair value is determined based upon valuations obtained from independent third-party broker or dealer prices and are derived from such services matrix pricing models, which considers information regarding securities with similar characteristics to determine the valuation. | | | | Level 3 | | Includes warrants, bank loans and equity securities. In certain instances the fair value has been determined using discounted cash flow analyses. Fair value in which pricing is received from one non-binding broker quote is also considered to be Level 3. | | Liabilities of consolidated collateralized loan obligation entity | | Level 3 | | Includes senior and subordinated note obligations. Fair value is determined primarily from model-based valuation techniques in which one or more significant inputs are unobservable in the market. |
Other assets not held at fair value include investments in equity method investees and other investments carried at cost which, in accordance with GAAP, are not measured at fair value. The following table summarizes the assets and liabilities measured at fair value on a recurring basis and their assigned levels within the hierarchy at October 31, 2011. | | 2011 | | | | | | | | | | | | | | | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | | Other Assets Not Held at Fair Value | | Total | | | Cash equivalents | $ | 6,691 | $ | 360,676 | | $ | - | | $ | - | $ | 367,367 | | | | | | | | | | | | | | | | | | | Investments: | | | | | | | | | | | | | | | Corporate debt securities | $ | - | $ | 4,832 | | $ | - | | $ | - | $ | 4,832 | | | Consolidated funds: | | | | | | | | | | | | | | | Debt securities | | 6,879 | | 62,204 | | | - | | | - | | 69,083 | | | Equity securities | | 69,279 | | 5,155 | | | - | | | - | | 74,434 | | | Separately managed | | | | | | | | | | | | | | | accounts: | | | | | | | | | | | | | | | Debt securities | | 4,429 | | 6,878 | | | - | | | - | | 11,307 | | | Equity securities | | 33,511 | | 42 | | | - | | | - | | 33,553 | | | Sponsored funds | | 36,128 | | 3,713 | | | - | | | - | | 39,841 | | | Collateralized loan | | | | | | | | | | | | | | | obligation entities | | - | | - | | | - | | | 278 | | 278 | | | Investments in affiliates | | - | | - | | | - | | | 46,900 | | 46,900 | | | Other investments | | - | | 37 | | | - | | | 7,470 | | 7,507 | | | Total Investments | $ | 150,226 | $ | 82,861 | | $ | - | | $ | 54,648 | $ | 287,735 |
| | 2011 | | | | | | | | | | | | | | | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | | Other Assets Not Held at Fair Value | | Total | | | Other financial assets: | | | | | | | | | | | | | | | Derivative financial assets | $ | - | $ | 1,060 | | $ | - | | $ | - | $ | 1,060 | | | Assets of consolidated | | | | | | | | | | | | | | | collateralized loan obligation | | | | | | | | | | | | | | | entity: | | | | | | | | | | | | | | | Cash equivalents | | 15,829 | | - | | | - | | | - | | 15,829 | | | Bank loans and other | | | | | | | | | | | | | | | investments | | 85 | | 456,591 | | | 5,910 | | | - | | 462,586 | | | Total other financial assets | $ | 15,914 | $ | 457,651 | | $ | 5,910 | | $ | - | $ | 479,475 | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | Derivative financial liabilities | $ | - | $ | 6,654 | | $ | - | | $ | - | $ | 6,654 | | | Securities sold, not yet | | | | | | | | | | | | | | | purchased | | - | | 6,270 | | | - | | | - | | 6,270 | | | Liabilities of consolidated | | | | | | | | | | | | | | | collateralized loan obligation | | | | | | | | | | | | | | | entity: | | | | | | | | | | | | | | | Senior and subordinated | | | | | | | | | | | | | | | note obligations | | - | | - | | | 477,699 | | | - | | 477,699 | | | Total financial liabilities | $ | - | $ | 12,924 | | $ | 477,699 | | $ | - | $ | 490,623 |
The following table summarizes the assets and liabilities measured at fair value on a recurring basis and their assigned levels within the hierarchy at October 31, 2010: | | | | | | | | | | | | | | | | | | 2010 | | | | | | | | | | | | | | | (in thousands) | | Level 1 | | Level 2 | | | Level 3 | | | Other Assets Not Held at Fair Value | | Total | | | Cash equivalents | $ | 1,291 | $ | 90,416 | | $ | - | | $ | - | $ | 91,707 |
| | Investments: | | | | | | | | | | | | | | | Corporate debt securities | $ | - | $ | 4,732 | | $ | - | | $ | - | $ | 4,732 | | | Consolidated funds: | | | | | | | | | | | | | | | Debt securities | | 9,372 | | 102,213 | | | - | | | - | | 111,585 | | | Equity securities | | 45,135 | | 43,049 | | | - | | | - | | 88,184 | | | Separately managed | | | | | | | | | | | | | | | | accounts: | | | | | | | | | | | | | | | Debt securities | | - | | 3,666 | | | - | | | - | | 3,666 | | | Equity securities | | 27,724 | | 968 | | | - | | | - | | 28,692 | | | Sponsored funds | | 34,194 | | 3,347 | | | - | | | - | | 37,541 | | | Collateralized loan | | | | | | | | | | | | | | | | obligation entities | | - | | - | | | - | | | 1,391 | | 1,391 | | | Investments in affiliates | | - | | - | | | - | | | 51,111 | | 51,111 | | | Other investments | | - | | 37 | | | - | | | 7,470 | | 7,507 | | | Total investments | $ | 116,425 | $ | 158,012 | | $ | - | | $ | 59,972 | $ | 334,409 |
| | Other financial assets: | | | | | | | | | | | | | | | Derivative financial assets | $ | - | $ | 582 | | $ | - | | $ | - | $ | 582 | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | Derivative financial liabilities | $ | - | $ | 3,519 | | $ | - | | $ | - | $ | 3,519 | | | Securities sold, not yet | | | | | | | | | | | | | | | | purchased | | - | | 731 | | | - | | | - | | 731 | | | Total financial liabilities | $ | - | $ | 4,250 | | $ | - | | $ | - | $ | 4,250 |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the fiscal year ended October 31, 2011 were as follows: | (in thousands) | | Bank loans and other investments of consolidated CLO entity | | | Senior and subordinated note obligations of consolidated CLO entity | | | | | | | | | | Balance at November 1, 2010 | $ | - | | $ | - | | Adjustment for adoption of new consolidation guidance | | 5,265 | | | 444,087 | | Net losses on investments and note obligations(1) | | 1,314 | | | 33,612 | | Purchases, sales and settlements, net | | (1,353) | | | - | | Net transfers into (out of) Level 3 | | 684 | | | - | | Balance at October 31, 2011 | $ | 5,910 | | $ | 477,699 | | Change in unrealized gains included in net income | | | | | | | relating to assets and liabilities held at October 31, 2011 | $ | 1,314 | | $ | 33,612 | | | | | | | | | | (1) | Substantially all net losses on investments and note obligations attributable to the assets and borrowings of the Company's | | | consolidated CLO entity are allocated to non-controlling and other beneficial interests on the Company's Consolidated | | | Statement of Income. |
The transfers into (out of) Level 3 is the result of changes in the observability of the inputs in the valuation model. Although the Company believes the valuation methods described above are appropriate, the use of different methodologies or assumptions to determine fair value could result in a different estimate of fair value at the reporting date. The Company maintains an investment in one non-consolidated CLO entity totaling $0.3 million at October 31, 2011. The Company's investment in this CLO entity is carried at amortized cost unless facts and circumstances indicate that the investment has been impaired, at which point the investment is written down to fair value. |