Table of Contents    

                                    

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
o
 
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 1-13908
Invesco Ltd.
(Exact Name of Registrant as Specified in Its Charter)
Bermuda
(State or Other Jurisdiction of Incorporation or Organization)
 
98-0557567
(I.R.S. Employer Identification No.)
 
 
 
1555 Peachtree Street, N.E., Suite 1800, Atlanta, GA
(Address of Principal Executive Offices)
 
30309
(Zip Code)

(404) 892-0896
(Registrant's telephone number, including area code)

N/A
(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 þ No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
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):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ
As of June 30, 2014, the most recent practicable date, the number of Common Shares outstanding was 431,653,339.

Table of Contents    

                                    

TABLE OF CONTENTS
We include cross references to captions elsewhere in this Quarterly Report on Form 10-Q, which we refer to as this “Report,” where you can find related additional information. The following table of contents tells you where to find these captions.
 
 
 
Page
TABLE OF CONTENTS
 
 
 
 
 
EX-3.2
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 


2

Table of Contents    

                                    

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Invesco Ltd.
Condensed Consolidated Balance Sheets
(Unaudited)

 
As of
$ in millions, except per share data
June 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Cash and cash equivalents
1,196.0

 
1,331.2

Unsettled fund receivables
1,228.8

 
932.4

Accounts receivable
517.8

 
500.8

Investments
919.1

 
839.7

Assets of consolidated sponsored investment products (CSIP)
326.8

 
108.5

Assets of consolidated investment products (CIP):
 
 
 
Cash and cash equivalents of CIP
292.4

 
583.6

Accounts receivable and other assets of CIP
121.7

 
58.3

Investments of CIP
4,971.4

 
4,734.7

Assets held for policyholders
1,539.9

 
1,416.0

Prepaid assets
108.2

 
101.4

Other assets
144.2

 
182.1

Property and equipment, net
354.8

 
350.8

Intangible assets, net
1,258.3

 
1,263.7

Goodwill
6,920.1

 
6,867.3

Total assets
19,899.5

 
19,270.5

LIABILITIES
 
 
 
Accrued compensation and benefits
463.2

 
676.4

Accounts payable and accrued expenses
755.6

 
763.1

Liabilities of CIP:
 
 
 
Debt of CIP
4,301.5

 
4,181.7

Other liabilities of CIP
201.0

 
461.8

Policyholder payables
1,539.9

 
1,416.0

Unsettled fund payables
1,219.6

 
882.0

Long-term debt
1,588.9

 
1,588.6

Deferred tax liabilities, net
351.9

 
323.6

Total liabilities
10,421.6

 
10,293.2

Commitments and contingencies (See Note 11)


 


TEMPORARY EQUITY
 
 
 
Redeemable noncontrolling interests in CSIP
155.0

 
—

PERMANENT EQUITY
 
 
 
Equity attributable to common shareholders:
 
 
 
Common shares ($0.20 par value; 1,050.0 million authorized; 490.4 million shares issued as of June 30, 2014 and December 31, 2013)
98.1

 
98.1

Additional paid-in-capital
6,068.8

 
6,100.8

Treasury shares
(1,807.5
)
 
(1,700.4
)
Retained earnings
3,617.1

 
3,361.9

Retained earnings appropriated for investors in CIP
63.3

 
104.3

Accumulated other comprehensive income, net of tax
509.9

 
427.9

Total equity attributable to common shareholders
8,549.7

 
8,392.6

Equity attributable to nonredeemable noncontrolling interests in consolidated entities
773.2

 
584.7

Total permanent equity
9,322.9

 
8,977.3

Total liabilities, temporary and permanent equity
19,899.5

 
19,270.5

See accompanying notes.

3

Table of Contents    

                                    

Invesco Ltd.
Condensed Consolidated Statements of Income
(Unaudited)

 
Three months ended June 30,
 
Six months ended June 30,
$ in millions, except per share data
2014
 
2013
 
2014
 
2013
Operating revenues:
 
 
 
 
 
 
 
Investment management fees
1,031.9

 
885.5

 
1,997.3

 
1,730.1

Service and distribution fees
214.7

 
215.7

 
453.3

 
422.0

Performance fees
5.0

 
6.0

 
36.1

 
42.1

Other
38.3

 
28.3

 
72.7

 
53.5

Total operating revenues
1,289.9

 
1,135.5

 
2,559.4

 
2,247.7

Operating expenses:
 
 
 
 
 
 
 
Employee compensation
342.9

 
324.1

 
705.0

 
665.6

Third-party distribution, service and advisory
410.6

 
366.0

 
816.0

 
712.1

Marketing
30.2

 
23.8

 
53.6

 
46.0

Property, office and technology
75.3

 
68.6

 
188.0

 
135.1

General and administrative
76.1

 
77.3

 
197.7

 
144.8

Transaction and integration
—

 
1.8

 
—

 
3.2

Total operating expenses
935.1

 
861.6

 
1,960.3

 
1,706.8

Operating income
354.8

 
273.9

 
599.1

 
540.9

Other income/(expense):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
5.5

 
6.9

 
15.5

 
15.0

Interest and dividend income
3.1

 
2.1

 
6.0

 
4.3

Interest expense
(18.2
)
 
(10.0
)
 
(36.9
)
 
(19.7
)
Other gains and losses, net
16.2

 
0.4

 
22.8

 
18.1

Other income/(loss) of CSIP, net
7.7

 
—

 
15.9

 
—

CIP:
 
 
 
 
 
 
 
Interest and dividend income of CIP
48.0

 
50.7

 
96.3

 
101.0

Interest expense of CIP
(30.3
)
 
(30.6
)
 
(60.6
)
 
(63.3
)
Other gains/(losses) of CIP, net
36.8

 
(1.6
)
 
63.3

 
(22.7
)
Income from continuing operations before income taxes
423.6

 
291.8

 
721.4

 
573.6

Income tax provision
(107.0
)
 
(83.5
)
 
(196.0
)
 
(169.8
)
Income from continuing operations, net of taxes
316.6

 
208.3

 
525.4

 
403.8

Income/(loss) from discontinued operations, net of taxes
0.2

 
(4.6
)
 
(1.8
)
 
(0.5
)
Net income
316.8

 
203.7

 
523.6

 
403.3

Net (income)/loss attributable to noncontrolling interests in consolidated entities
(42.3
)
 
(1.1
)
 
(61.3
)
 
21.5

Net income attributable to common shareholders
274.5

 
202.6

 
462.3

 
424.8

Earnings per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Earnings per share from continuing operations

$0.63

 

$0.46

 

$1.06

 

$0.95

Earnings per share from discontinued operations

$—

 

($0.01
)
 

$—

 

$—

Basic earnings per share

$0.63

 

$0.45

 

$1.06

 

$0.95

Diluted:
 
 
 
 
 
 
 
Earnings per share from continuing operations

$0.63

 

$0.46

 

$1.06

 

$0.95

Earnings per share from discontinued operations

$—

 

($0.01
)
 

$—

 

$—

Diluted earnings per share

$0.63

 

$0.45

 

$1.06

 

$0.94

Dividends declared per share

$0.2500

 

$0.2250

 

$0.4750

 

$0.3975


See accompanying notes.


4

Table of Contents    

                                    

Invesco Ltd.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Net income
316.8

 
203.7

 
523.6

 
403.3

Other comprehensive income/(loss), before tax:
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries
130.5

 
(94.3
)
 
77.3

 
(303.9
)
Actuarial (loss)/gain related to employee benefit plans
(2.2
)
 
0.3

 
(2.6
)
 
6.8

Reclassification of amortization of prior service cost/(credit) into employee compensation expense
(0.4
)
 
(0.5
)
 
(0.9
)
 
(1.0
)
Reclassification of amortization of actuarial (gain)/loss into employee compensation expense
0.6

 
0.7

 
1.2

 
1.4

Share of other comprehensive income/(loss) of equity method investments
3.2

 
(1.3
)
 
7.2

 
(1.6
)
Unrealized (losses)/gains on available-for-sale investments
6.8

 
(0.3
)
 
11.0

 
4.0

Reclassification of net (gains)/losses realized on available-for-sale investments included in other gains and losses, net
(8.1
)
 
—

 
(10.8
)
 
(1.4
)
Other comprehensive income/(loss), before tax
130.4

 
(95.4
)
 
82.4

 
(295.7
)
Income tax related to items of other comprehensive income/(loss):
 
 
 
 
 
 
 
Tax benefit/(expense) on foreign currency translation adjustments
—

 
(0.3
)
 
—

 
(1.1
)
Tax on actuarial (loss)/gain related to employee benefit plans
0.4

 
(0.1
)
 
0.5

 
(1.5
)
Reclassification of tax on amortization of prior service cost/(credit) into income tax provision
0.1

 
0.1

 
0.2

 
0.2

Reclassification of tax on amortization of actuarial (gain)/loss into income tax provision
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.3
)
Tax on net unrealized (losses)/gains on available-for-sale investments
2.0

 
(0.8
)
 
2.2

 
(0.6
)
Reclassification of tax on net (gains)/losses realized on available-for-sale investments included in income tax provision
(2.7
)
 
—

 
(3.4
)
 
(0.3
)
Total income tax benefit/(expense) related to items of other comprehensive income
(0.3
)
 
(1.2
)
 
(0.7
)
 
(3.6
)
Other comprehensive income/(loss), net of tax
130.1

 
(96.6
)
 
81.7

 
(299.3
)
Total comprehensive income/(loss)
446.9

 
107.1

 
605.3

 
104.0

Comprehensive loss/(income) attributable to noncontrolling interests in consolidated entities
(42.4
)
 
4.9

 
(61.0
)
 
34.2

Comprehensive income attributable to common shareholders
404.5

 
112.0

 
544.3

 
138.2

See accompanying notes.



5

Table of Contents    

                                    

Invesco Ltd.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six months ended June 30,
$ in millions
2014
 
2013
Operating activities:
 
 
 
Net income
523.6

 
403.3

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
 
 


Amortization and depreciation
45.8

 
44.2

Share-based compensation expense
70.0

 
69.4

(Gain)/loss on disposal of business, property and equipment, net
—

 
0.5

Other (gains)/losses, net
(22.8
)
 
(18.1
)
Other (gains)/losses of CSIP, net
(11.5
)
 
—

Other (gains)/losses of CIP, net
(63.3
)
 
22.7

Equity in earnings of unconsolidated affiliates
(15.5
)
 
(15.0
)
Dividends from unconsolidated affiliates
15.4

 
1.9

Changes in operating assets and liabilities:
 
 
 
(Increase)/decrease in cash held by CIP
260.1

 
(76.0
)
(Increase)/decrease in cash held by CSIP
(1.0
)
 
—

(Purchase)/sale of trading investments, net
(10.4
)
 
0.6

(Increase)/decrease in receivables
(402.7
)
 
(711.9
)
Increase/(decrease) in payables
162.6

 
534.0

Net cash provided by/(used in) operating activities
550.3

 
255.6

Investing activities:
 
 
 
Purchase of property and equipment
(49.8
)
 
(40.3
)
Purchase of available-for-sale investments
(112.5
)
 
(25.2
)
Sale of available-for-sale investments
75.1

 
23.0

Purchase of investments by CIP
(2,848.8
)
 
(2,504.3
)
Sale of investments by CIP
2,108.5

 
2,584.6

Purchase of investments by CSIP
(476.1
)
 
—

Sale of investments by CSIP
274.3

 
—

Purchase of other investments
(67.5
)
 
(164.6
)
Sale of other investments
40.3

 
39.7

Returns of capital and distributions from unconsolidated partnership investments
25.9

 
9.9

Acquisition earn-out payments
—

 
(1.2
)
Sale of business
60.8

 
—

Net cash provided by/(used in) investing activities
(969.8
)
 
(78.4
)
Financing activities:
 
 
 
Proceeds from exercises of share options
5.2

 
10.8

Purchases of treasury shares
(169.6
)
 
(120.5
)
Dividends paid
(207.1
)
 
(178.4
)
Excess tax benefits from share-based compensation
17.6

 
16.7

Repayment on unsettled fund account
(35.7
)
 
—

Third-party capital invested into CIP
155.8

 
34.5

Third-party capital distributed by CIP
(68.0
)
 
(128.1
)
Third-party capital invested into CSIP
152.5

 
—

Third-party capital distributed by CSIP
(1.4
)
 
—

Borrowings of debt by CIP
715.0

 
409.4

Repayments of debt by CIP
(295.5
)
 
(364.7
)
Net borrowings/(repayments) under credit facility
—

 
259.5

Net cash provided by/(used in) financing activities
268.8

 
(60.8
)
Increase/(decrease) in cash and cash equivalents
(150.7
)
 
116.4

Foreign exchange movement on cash and cash equivalents
15.5

 
(35.7
)
Cash and cash equivalents, beginning of period
1,331.2

 
835.5

Cash and cash equivalents, end of period
1,196.0

 
916.2

Supplemental Cash Flow Information:
 
 
 
Interest paid
(23.6
)
 
(16.4
)
Interest received
3.2

 
2.0

Taxes paid
(155.1
)
 
(141.9
)
See accompanying notes.

6

Table of Contents    

                                    

Invesco Ltd.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
Equity Attributable to Common Shareholders
 
 
 
 
 
 
$ in millions
Common Shares
 
Additional Paid-in-Capital
 
Treasury Shares
 
Retained Earnings
 
Retained Earnings Appropriated for Investors in CIP
 
Accumulated Other Comprehensive Income
 
Total Equity Attributable to Common Shareholders
 
Nonredeemable Noncontrolling Interests in Consolidated Entities
 
Total Permanent Equity
 
Redeemable Noncontrolling Interests in CSIP/Temporary Equity
January 1, 2014
98.1

 
6,100.8

 
(1,700.4
)
 
3,361.9

 
104.3

 
427.9

 
8,392.6

 
584.7

 
8,977.3

 
—

Net income
—

 
—

 
—

 
462.3

 
—

 
—

 
462.3

 
56.3

 
518.6

 
5.0

Other comprehensive income/(loss)
—

 
—

 
—

 
—

 
—

 
82.0

 
82.0

 
(0.3
)
 
81.7

 
—

Net income/(loss) reclassified to appropriated retained earnings
—

 
—

 
—

 
—

 
(40.0
)
 
—

 
(40.0
)
 
40.0

 
—

 
—

Deconsolidation of CIP
—

 
—

 
—

 
—

 
(1.0
)
 
—

 
(1.0
)
 
—

 
(1.0
)
 
—

Change in noncontrolling interests in consolidated entities, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
92.5

 
92.5

 
150.0

Dividends
—

 
—

 
—

 
(207.1
)
 
—

 
—

 
(207.1
)
 
—

 
(207.1
)
 
—

Employee share plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
—

 
70.0

 
—

 
—

 
—

 
—

 
70.0

 
—

 
70.0

 
—

Vested shares
—

 
(115.7
)
 
115.7

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of options
—

 
(3.9
)
 
9.1

 
—

 
—

 
—

 
5.2

 
—

 
5.2

 
—

Tax impact of share-based payment
—

 
17.6

 
—

 
—

 
—

 
—

 
17.6

 
—

 
17.6

 
—

Purchase of shares
—

 
—

 
(231.9
)
 
—

 
—

 
—

 
(231.9
)
 
—

 
(231.9
)
 
—

June 30, 2014
98.1

 
6,068.8

 
(1,807.5
)
 
3,617.1

 
63.3

 
509.9

 
8,549.7

 
773.2

 
9,322.9

 
155.0


See accompanying notes.

7

Table of Contents    

                                    

Invesco Ltd.
Consolidated Statements of Changes in Equity (continued)
(Unaudited)
 
Equity Attributable to Common Shareholders
 
 
 
 
$ in millions
Common Shares
 
Additional Paid-in-Capital
 
Treasury Shares
 
Retained Earnings
 
Retained Earnings Appropriated for Investors in CIP
 
Accumulated Other Comprehensive Income
 
Total Equity Attributable to Common Shareholders
 
Nonredeemable Noncontrolling Interests in Consolidated Entities
 
Total Permanent Equity
January 1, 2013
98.1

 
6,141.0

 
(1,382.9
)
 
2,801.3

 
128.8

 
530.5

 
8,316.8

 
732.2

 
9,049.0

Net income
—

 
—

 
—

 
424.8

 
—

 
—

 
424.8

 
(21.5
)
 
403.3

Other comprehensive income/(loss)
—

 
—

 
—

 
—

 
—

 
(286.6
)
 
(286.6
)
 
(12.7
)
 
(299.3
)
Net income/(loss) reclassified to appropriated retained earnings
—

 
—

 
—

 
—

 
(30.8
)
 
—

 
(30.8
)
 
30.8

 
—

Deconsolidation of CIP
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(27.7
)
 
(27.7
)
Change in noncontrolling interests in consolidated entities, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(111.6
)
 
(111.6
)
Dividends
—

 
—

 
—

 
(178.4
)
 
—

 
—

 
(178.4
)
 
—

 
(178.4
)
Employee share plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
—

 
69.4

 
—

 
—

 
—

 
—

 
69.4

 
—

 
69.4

Vested shares
—

 
(167.7
)
 
167.7

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of options
—

 
(13.2
)
 
24.0

 
—

 
—

 
—

 
10.8

 
—

 
10.8

Tax impact of share-based payment
—

 
16.7

 
—

 
—

 
—

 
—

 
16.7

 
—

 
16.7

Purchase of shares
—

 
—

 
(178.2
)
 
—

 
—

 
—

 
(178.2
)
 
—

 
(178.2
)
June 30, 2013
98.1

 
6,046.2

 
(1,369.4
)
 
3,047.7

 
98.0

 
243.9

 
8,164.5

 
589.5

 
8,754.0


See accompanying notes.


8

Table of Contents    

                                    

Invesco Ltd.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1.  ACCOUNTING POLICIES
Corporate Information
Invesco Ltd. (Parent) and all of its consolidated entities (collectively, the company or Invesco) provide retail and institutional clients with an array of global investment management capabilities. The company operates globally and its sole business is investment management.
Certain disclosures included in the company's annual report are not required to be included on an interim basis in the company's quarterly reports on Forms 10-Q. The company has condensed or omitted the disclosures. Therefore, this Form 10-Q (Report) should be read in conjunction with the company's annual report on Form 10-K for the year ended December 31, 2013.
Basis of Accounting and Consolidation
In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation.
The company provides investment management services to, and has transactions with, various private equity funds, real estate funds, fund-of-funds, collateralized loan obligations (CLOs), and other investment products sponsored by the company in the normal course of business for the investment of client assets. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of these products. Certain of these entities, typically CLOs and funds that are structured as partnership entities (such as private equity funds, real estate funds, and fund-of-funds), are considered to be variable interest entities (VIEs) if the VIE criteria are met, otherwise, they are considered to be voting interest entities (VOEs). A VIE, in the context of the company and its managed funds, is a fund that does not have sufficient equity to finance its operations without additional subordinated financial support, or a fund for which the risks and rewards of ownership are not directly linked to voting interests.
The Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Parent and all of its controlled subsidiaries. Additionally, the Condensed Consolidated Financial Statements include the consolidation of certain managed funds that meet the definition of a VIE if the company has been deemed to be the primary beneficiary of those funds, any non-VIE general partnership or similar investments where the company is deemed to have control, and other managed investment products in which the company has a controlling financial interest. Control is deemed to be present when the Parent holds a majority voting interest or otherwise has the power to govern the financial and operating policies of the subsidiary managed fund so as to obtain the majority of the benefits from its activities. The company is generally considered to have a controlling financial interest in a managed fund when it owns a majority of the fund's outstanding shares, which may arise as a result of a seed money investment in a newly launched investment product from the time of initial launch to the time that the fund becomes majority-held by third-party investors, or in certain cases until the time that the company's investment becomes non-substantive.
Investment products that are consolidated are referred to in this Report as Consolidated Sponsored Investment Products (CSIP), which generally include consolidated sponsored investment products in which Invesco holds the majority of the voting rights or partnerships in which the company has substantive equity at risk but in which the other investors lack removal or liquidation rights, or Consolidated Investment Products (CIP), which includes consolidated nominally-held investment products. The distinction is important, as it differentiates the company's economic risk associated with each type of consolidated managed fund. The company's economic risk with respect to each investment in a CSIP and a CIP is limited to its equity ownership and any uncollected management fees. Gains and losses arising from nominally-held CIP do not have a significant impact on the company's results of operations, liquidity, or capital resources. Gains and losses arising from majority-held CSIP could have a significant impact on the company's results of operations, as the company has greater economic risk associated with its investment. See Note 12, "Consolidated Sponsored Investment Products," and Note 13, "Consolidated Investment Products," for additional information regarding the impact of consolidation of investment products.
Noncontrolling interests in consolidated entities and retained earnings appropriated for investors in CIP represent the interests in certain entities consolidated by the company either because the company has control over the entity or has determined that it is the primary beneficiary, but of which the company does not own all of the entity's equity. To the extent that noncontrolling interests represent equity which is redeemable or convertible for cash or other assets at the option of the equity

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holder, as is the case with the CSIP noncontrolling interests, these are deemed to represent temporary equity, and are classified as equity attributable to redeemable noncontrolling interests in CSIPs in the Condensed Consolidated Balance Sheets. Nonredeemable noncontrolling interests are classified as a component of permanent equity.
Use of Estimates
In preparing the Condensed Consolidated Financial Statements, management is required to make estimates and assumptions that affect reported revenues, expenses, assets, liabilities, and disclosure of contingent liabilities. The primary estimates and assumptions made relate to goodwill and intangible impairment, certain investments which are carried at fair value, and taxes. Additionally, estimation is involved when determining investment and debt valuation for certain CIP; however, changes in the fair values of these amounts are largely offset by noncontrolling interests. Use of available information and application of judgment are inherent in the formation of estimates. Actual results in the future could differ from such estimates and the differences may be material to the Condensed Consolidated Financial Statements.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02). ASU 2013-02 amends Topic 220 to require an entity to present current period reclassifications out of accumulated other comprehensive income and other amounts of current-period other comprehensive income, separately, for each component of other comprehensive income. ASU 2013-02 also requires an entity to provide information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income, if those amounts are required under other Topics to be reclassified to net income in their entirety in the same reporting period. The amendments to Topic 220 made by ASU 2013-02 are effective for interim and annual periods beginning on or after December 15, 2012 and are reflected in these Condensed Consolidated Financial Statements.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is not permitted. The company is currently evaluating the potential impact on its Consolidated Financial Statements, as well as the available transition methods.


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2. FAIR VALUE OF ASSETS AND LIABILITIES
The carrying value and fair value of financial instruments are presented in the below summary table. The fair value of financial instruments held by CSIP and CIP is presented in Note 12, "Consolidated Sponsored Investment Products" and Note 13, "Consolidated Investment Products," respectively.
 
 
 
June 30, 2014
 
December 31, 2013
$ in millions
Footnote Reference
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Cash and cash equivalents
 
 
1,196.0

 
1,196.0

 
1,331.2

 
1,331.2

Available-for-sale investments
3
 
293.7

 
293.7

 
244.1

 
244.1

Trading investments
3
 
278.2

 
278.2

 
253.0

 
253.0

Foreign time deposits *
3
 
28.4

 
28.4

 
28.8

 
28.8

Assets held for policyholders
 
 
1,539.9

 
1,539.9

 
1,416.0

 
1,416.0

Policyholder payables *
 
 
(1,539.9
)
 
(1,539.9
)
 
(1,416.0
)
 
(1,416.0
)
UIT-related financial instruments sold, not yet purchased
 
 
(1.9
)
 
(1.9
)
 
(1.7
)
 
(1.7
)
Note payable
 
 
(0.3
)
 
(0.3
)
 
(0.3
)
 
(0.3
)
Long-term debt *
4
 
(1,588.9
)
 
(1,666.4
)
 
(1,588.6
)
 
(1,544.7
)
____________
*
These financial instruments are not measured at fair value on a recurring basis. See the indicated footnotes or most recently filed Form 10-K for additional information about the carrying and fair values of these financial instruments. Foreign time deposits are measured at cost plus accrued interest, which approximates fair value, and are accordingly classified as Level 2 securities.
A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
•
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
An asset or liability's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
There are three types of valuation approaches: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount; and a cost approach, which is based on the amount that currently would be required to replace the service capacity of an asset.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Cash equivalents
Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the net asset value of the underlying funds, and are classified within level 1 of the valuation hierarchy.

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Available-for-sale investments
Seed money is valued under the market approach through the use of quoted market prices available in an active market and is classified within level 1 of the valuation hierarchy; there is no modeling or additional information needed to arrive at the fair values of these investments. CLO assets are valued based on price quotations provided by an independent third-party pricing source or using an income approach through the use of certain observable and unobservable inputs. At June 30, 2014 and December 31, 2013, investments in CLOs were valued using third-party pricing information. Due to liquidity constraints within the market for CLO products that require the use of unobservable inputs, these investments are classified within level 3 of the valuation hierarchy. Other debt securities are valued using a cost valuation technique due to the lack of available cash flow and market data and are accordingly also classified within level 3 of the valuation hierarchy.
Trading investments
•Investments related to deferred compensation plans
Investments related to deferred compensation plans are valued under the market approach through the use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy.
•Other equity securities
Other equity securities consist of investments in publicly-traded equity securities. These securities are valued under the market approach through the use of quoted prices on an exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
•UIT-related equity and debt securities
The company invests in UIT-related equity and debt securities consisting of investments in corporate stock, UITs, and U.S. state and political subdivision securities. Each is discussed more fully below.
Corporate equities
The company temporarily holds investments in corporate equities for purposes of creating a UIT. Corporate equities are valued under the market approach through use of quoted prices on an exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
UITs
The company may hold units of its sponsored UITs at period-end for sale in the primary market or secondary market. Equity UITs are valued under the market approach through use of quoted prices on an exchange. Fixed income UITs are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
Municipal securities
Municipal securities are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
Assets held for policyholders
Assets held for policyholders represent investments held by one of the company’s subsidiaries, which is an insurance entity that was established to facilitate retirement savings plans in the U.K. The assets held for policyholders are accounted for at fair value pursuant to ASC Topic 944, “Financial Services — Insurance,” and are comprised primarily of affiliated unitized funds. The assets are measured at fair value under the market approach based on the quoted prices of the underlying funds in an active market and are classified within level 1 of the valuation hierarchy. The policyholder payables are indexed to the value of the assets held for policyholders and are therefore not included in the tables below.

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UIT-related financial instruments sold, not yet purchased, and derivative instruments
The company uses U.S. Treasury futures, which are types of derivative financial instruments, to hedge economically fixed income UIT inventory and securities in order to mitigate market risk. Open futures contracts are marked-to-market daily through earnings, which are recorded in the company’s Condensed Consolidated Statements of Income in other revenue, along with the mark-to-market on the underlying trading securities held. Fair values of derivative contracts in an asset position are included in other assets in the company’s Condensed Consolidated Balance Sheets. Fair values of derivative contracts in a liability position are included in other liabilities in the company’s Condensed Consolidated Balance Sheets. These derivative contracts are valued under the market approach through use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy. At June 30, 2014 there were 9 futures contracts with a notional value of $1.2 million (December 31, 2013: 2 open futures contracts with a notional value of $0.3 million). Additionally, to hedge economically the market risk associated with equity and debt securities and UITs temporarily held as trading investments, the company will hold short corporate equities, exchange-traded funds, or U.S. treasury security positions. These transactions are recorded as financial instruments sold, not yet purchased and are included in accounts payable and accrued expenses in the company’s Condensed Consolidated Balance Sheets. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
The following table presents, for each of the hierarchy levels described above, the carrying value of the company's assets and liabilities, including major security type for equity and debt securities, which are measured at fair value on the company's Condensed Consolidated Balance Sheet as of June 30, 2014:
 
As of June 30, 2014
$ in millions
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
408.5

 
408.5

 
—

 
—

Investments:*
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Seed money
283.3

 
283.3

 
—

 
—

CLOs
4.1

 
—

 
—

 
4.1

Other debt securities
6.3

 
—

 
—

 
6.3

Trading investments:
 
 
 
 
 
 
 
Investments related to deferred compensation plans
246.9

 
246.9

 
—

 
—

Other equity securities
25.8

 
25.8

 
—

 
—

UIT-related equity and debt securities:
 
 
 
 
 
 
 
Corporate equities
1.9

 
1.9

 
—

 
—

UITs
0.7

 
0.7

 
—

 
—

Municipal securities
2.9

 
—

 
2.9

 
—

Assets held for policyholders
1,539.9

 
1,539.9

 
—

 
—

Total
2,520.3

 
2,507.0

 
2.9

 
10.4

Liabilities:
 
 
 
 
 
 
 
UIT-related financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
Corporate equities
(1.9
)
 
(1.9
)
 
—

 
—

Note payable
(0.3
)
 
—

 
—

 
(0.3
)
Total
(2.2
)
 
(1.9
)
 
—

 
(0.3
)
____________
*
Foreign time deposits of $28.4 million are excluded from this table. Equity and other investments of $313.2 million and $5.6 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards.

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The following table presents, for each of the hierarchy levels described above, the carrying value of the company's assets and liabilities, including major security type for equity and debt securities, which are measured at fair value on the company's Condensed Consolidated Balance Sheet as of December 31, 2013:
 
As of December 31, 2013
$ in millions
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
447.8

 
447.8

 
—

 
—

Investments:*
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Seed money
233.8

 
233.8

 
—

 
—

CLOs
4.0

 
—

 
—

 
4.0

Other debt securities
6.3

 
—

 
—

 
6.3

Trading investments:
 
 
 
 
 
 
 
Investments related to deferred compensation plans
249.7

 
249.7

 
—

 
—

UIT-related equity and debt securities:
 
 
 
 
 
 
 
Corporate equities
2.1

 
2.1

 
—

 
—

UITs
1.2

 
1.2

 
—

 
—

Assets held for policyholders
1,416.0

 
1,416.0

 
—

 
—

Total
2,360.9

 
2,350.6

 
—

 
10.3

Liabilities:
 
 
 
 
 
 
 
UIT-related financial instruments sold, not yet purchased:
 
 
 
 
 
 
 
Corporate equities
(1.7
)
 
(1.7
)
 
—

 
—

Note payable
(0.3
)
 
—

 
—

 
(0.3
)
Total
(2.0
)
 
(1.7
)
 
—

 
(0.3
)
____________
*
Foreign time deposits of $28.8 million are excluded from this table. Equity and other investments of $308.2 million and $5.6 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards.

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The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities during the three and six months ended June 30, 2014 and June 30, 2013, which are valued using significant unobservable inputs:
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
$ in millions
CLOs
 
Other Debt Securities
 
Note Payable
 
CLOs
 
Other Debt Securities
 
Note Payable
Beginning balance
4.3

 
6.3

 
(0.3
)
 
4.0

 
6.3

 
(0.3
)
Returns of capital
—

 
—

 
—

 
(0.2
)
 
—

 
—

Net unrealized gains and losses included in other gains and losses*
—

 
—

 
—

 
—

 
—

 
—

Net unrealized gains and losses included in accumulated other comprehensive income/(loss)*
(0.2
)
 
—

 
—

 
0.3

 
—

 
—

Ending balance
4.1

 
6.3

 
(0.3
)
 
4.1

 
6.3

 
(0.3
)

 
Three months ended June 30, 2013
 
Six months ended June 30, 2013
$ in millions
CLOs
 
Other Debt Securities
 
Note Payable
 
CLOs
 
Other Debt Securities
 
Note Payable
Beginning balance
2.4

 
6.3

 
(2.4
)
 
2.4

 
6.3

 
(3.4
)
Settlements
(0.1
)
 
—

 
1.0

 
(0.1
)
 
—

 
1.7

Net unrealized gains and losses included in other gains and losses*
—

 
—

 
—

 
—

 
—

 
0.1

Net unrealized gains and losses included in accumulated other comprehensive income/(loss)*
0.1

 
—

 
—

 
0.1

 
—

 
—

Foreign exchange gains/(losses)
—

 
—

 
0.2

 
—

 
—

 
0.4

Ending balance
2.4

 
6.3

 
(1.2
)
 
2.4

 
6.3

 
(1.2
)
_______________
*    These unrealized gains and losses are attributable to balances still held at the respective period ends.
3.  INVESTMENTS
The disclosures below include details of the company's investments. Investments held by CSIP are detailed in Note 12, "Consolidated Sponsored Investment Products." Investments held by CIP are detailed in Note 13, "Consolidated Investment Products."
$ in millions
June 30, 2014
 
December 31, 2013
Available-for-sale investments:
 
 
 
Seed money
283.3

 
233.8

CLOs
4.1

 
4.0

Other debt securities
6.3

 
6.3

Trading investments:
 
 
 
Investments related to deferred compensation plans
246.9

 
249.7

Other equity securities
25.8

 
—

UIT-related equity and debt securities
5.5

 
3.3

Equity method investments
313.2

 
308.2

Foreign time deposits
28.4

 
28.8

Other
5.6

 
5.6

Total investments
919.1

 
839.7


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Available for sale investments
Realized gains and losses recognized in the Condensed Consolidated Statements of Income during the period from investments classified as available-for-sale are as follows:
 
For the three months ended June 30, 2014
 
For the six months ended June 30, 2014
$ in millions
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
 
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
Seed money
64.7

 
8.2

 
(0.1
)
 
74.9

 
11.0

 
(0.2
)
CLOs
—

 
—

 
—

 
0.2

 
—

 
—

 
For the three months ended June 30, 2013
 
For the six months ended June 30, 2013
$ in millions
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
 
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
Seed money
—

 
—

 
—

 
22.9

 
1.7

 
(0.3
)
CLOs
—

 
—

 
—

 
0.1

 
—

 
—

Upon the sale of available-for-sale securities, net realized gains of $8.1 million and $10.8 million were transferred from accumulated other comprehensive income into the Condensed Consolidated Statements of Income during the three and six months ended June 30, 2014, respectively (three and six months ended June 30, 2013: none and $1.4 million, respectively). The specific identification method is used to determine the realized gain or loss on securities sold or otherwise disposed.
Gross unrealized holding gains and losses recognized in other accumulated comprehensive income from available-for-sale investments are presented in the table below:
 
June 30, 2014
 
December 31, 2013
$ in millions
Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
 
Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Seed money
265.3

 
18.7

 
(0.7
)
 
283.3

 
215.7

 
19.0

 
(0.9
)
 
233.8

CLOs
3.6

 
0.5

 
—

 
4.1

 
3.8

 
0.2

 
—

 
4.0

Other debt securities
6.3

 
—

 
—

 
6.3

 
6.3

 
—

 
—

 
6.3

 
275.2

 
19.2

 
(0.7
)
 
293.7

 
225.8

 
19.2

 
(0.9
)
 
244.1

At June 30, 2014, 112 seed money funds (December 31, 2013: 149 seed money funds) included gross unrealized holding losses. The following table provides a breakdown of the unrealized losses.
 
June 30, 2014
 
December 31, 2013
$ in millions
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Less than 12 months
13.9

 
(0.3
)
 
69.0

 
(0.8
)
12 months or greater
3.2

 
(0.4
)
 
0.2

 
(0.1
)
Total
17.1

 
(0.7
)
 
69.2

 
(0.9
)
The company has reviewed investment securities for other-than-temporary impairment (OTTI) in accordance with its accounting policy and has recognized no other-than-temporary impairment charges on available-for-sale investments during the six months ended June 30, 2014 (six months ended June 30, 2013: none). The company reviewed the financial condition and near-term prospects of the underlying securities in the seeded funds as well as the severity and duration of the impairment and concluded that the gross unrealized losses on these securities did not represent other-than-temporarily impairments. The securities are expected to recover their value over time and the company has the intent and ability to hold the securities until this recovery occurs. During the six months ended June 30, 2014 and 2013, there were no charges to other comprehensive income from other-than-temporary impairment related to non-credit related factors.
At June 30, 2014, $1.7 million available-for-sale debt securities mature in one year through five years, and $8.7 million after five years through ten years.

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Trading investments
The portion of trading gains and losses for the three and six months ended June 30, 2014, that relates to trading securities still held at June 30, 2014, was a $7.9 million net gain and $5.1 million net gain, respectively (three and six months ended June 30, 2013: $2.5 million net loss and $14.0 million net gain, respectively).
4.  LONG-TERM DEBT
The disclosures below include details of the company's debt. Debt of CIP is detailed in Note 13, “Consolidated Investment Products.”
 
June 30, 2014
 
December 31, 2013
$ in millions
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Unsecured Senior Notes*:
 
 
 
 
 
 
 
$600 million 3.125% - due November 30, 2022
599.6

 
593.5

 
599.6

 
551.5

$600 million 4.000% - due January 30, 2024
596.0

 
629.2

 
595.8

 
593.2

$400 million 5.375% - due November 30, 2043
393.3

 
443.7

 
393.2

 
400.0

Long-term debt
1,588.9

 
1,666.4

 
1,588.6

 
1,544.7

____________
*
The company's senior note indentures contain certain restrictions on mergers or consolidations. Beyond these items, there are no other restrictive covenants in the indentures.
The issuer of the senior notes is an indirect 100% owned finance subsidiary of Invesco Ltd. (the Parent), and the Parent fully and unconditionally guaranteed the securities. The requirement of certain subsidiaries of ours to maintain minimum levels of capital and other similar provisions of applicable law may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends by such entities.
The fair market value of the company's senior notes was determined by market quotes provided by Bloomberg, which is considered a Level 2 valuation input. In the absence of an active market, the company relies upon the average price quoted by brokers for determining the fair market value of the debt.
At June 30, 2014, the company's outstanding debt of $1,588.9 million matures in periods greater than five years from the balance sheet date.
At June 30, 2014, the outstanding balance on the $1.25 billion credit facility was zero (December 31, 2013: zero). The credit facility has a maturity of December 17, 2018. Borrowings under the credit facility will bear interest at (i) LIBOR for specified interest periods or (ii) a floating base rate (based upon the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1.00%), plus, in either case, an applicable margin determined with reference to the higher of the available credit ratings of the company or its indirect subsidiary Invesco Finance PLC. Based on credit ratings as of June 30, 2014 of the company, the applicable margin for LIBOR-based loans was 1.10% and for base rate loans was 0.10%. In addition, the company is required to pay the lenders a facility fee on the aggregate commitments of the lenders (whether or not used) at a rate per annum which is based on the higher of the available credit ratings of the company or its indirect subsidiary Invesco Finance PLC. Based on credit ratings as of June 30, 2014, the annual facility fee was equal to 0.15%.
The credit agreement governing the credit facility contains customary restrictive covenants on the company and its subsidiaries. Restrictive covenants in the credit agreement include, but are not limited to: prohibitions on creating, incurring or assuming any liens; entering into merger arrangements; selling, leasing, transferring or otherwise disposing of assets; making a material change in the nature of the business; making a significant accounting policy change in certain situations; entering into transactions with affiliates; and incurring indebtedness through the subsidiaries. Many of these restrictions are subject to certain minimum thresholds and exceptions. Financial covenants under the credit agreement include: (i) the quarterly maintenance of a debt/EBITDA leverage ratio, as defined in the credit agreement, of not greater than 3.25:1.00, (ii) a coverage ratio (EBITDA, as defined in the credit agreement/interest payable for the four consecutive fiscal quarters ended before the date of determination) of not less than 4.00:1.00.
The credit agreement governing the credit facility also contains customary provisions regarding events of default which could result in an acceleration or increase in amounts due, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control, certain judgments, ERISA matters, cross-default to other debt agreements,

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governmental action prohibiting or restricting the company or its subsidiaries in a manner that has a material adverse effect and failure of certain guaranty obligations. The company is in compliance with all regulatory minimum net capital requirements.
The lenders (and their respective affiliates) may have provided, and may in the future provide, investment banking, cash management, underwriting, lending, commercial banking, leasing, foreign exchange, trust or other advisory services to the company and its subsidiaries and affiliates. These parties may have received, and may in the future receive, customary compensation for these services.
The company maintains approximately $36.1 million in letters of credit from a variety of banks. The letters of credit are generally one-year automatically-renewable facilities and are maintained for various commercial reasons.
5.  SHARE CAPITAL
The number of common shares and common share equivalents issued are represented in the table below:
In millions
Six months ended June 30, 2014
 
Six months ended June 30, 2013
Common shares issued
490.4

 
490.4

Less: Treasury shares for which dividend and voting rights do not apply
(58.7
)
 
(47.6
)
Common shares outstanding
431.7

 
442.8

During the three and six months ended June 30, 2014, the company repurchased 1.3 million and 4.9 million shares, respectively (three and six months ended June 30, 2013: 2.2 million and 3.8 million, respectively) in the market at a cost of $50.0 million and $169.6 million, respectively (three and six months ended June 30, 2013: $75.5 million and $120.5 million cost, respectively). Separately, an aggregate of 1.9 million shares were withheld on vesting events during the six months ended June 30, 2014 to meet employees' withholding tax obligations (June 30, 2013: 2.2 million). The fair value of these shares withheld at the respective withholding dates was $62.3 million (June 30, 2013: $57.7 million). Approximately $1,326.8 million remained authorized under the company's share repurchase plan at June 30, 2014 (June 30, 2013: $346.5 million).
Total treasury shares at June 30, 2014 were 67.9 million (June 30, 2013: 57.7 million), including 9.2 million unvested restricted stock awards (June 30, 2013: 10.1 million) for which dividend and voting rights apply. The market price of common shares at June 30, 2014 was $37.75. The total market value of the company's 67.9 million treasury shares was $2.6 billion at June 30, 2014.

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6.  OTHER COMPREHENSIVE INCOME/(LOSS)
The components of accumulated other comprehensive income/(loss) were as follows:
 
For the three months ended June 30, 2014
$ in millions
Foreign currency translation
 
Employee benefit plans
 
Equity method investments
 
Available-for-sale investments
 
Total
Other comprehensive income/(loss) before tax:
 
 
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries
130.5

 
—

 
—

 
—

 
130.5

Actuarial (loss)/gain related to employee benefit plans
—

 
(2.2
)
 
—

 
—

 
(2.2
)
Reclassification of amortization of prior service cost/(credit) into employee compensation expenses
—

 
(0.4
)
 
—

 
—

 
(0.4
)
Reclassification of amortization of actuarial (gain)/loss into employee compensation expenses
—

 
0.6

 
—

 
—

 
0.6

Share of other comprehensive income/(loss) of equity method investments
—

 
—

 
3.2

 
—

 
3.2

Unrealized(losses)/gains on available-for-sale investments
—

 
—

 
—

 
6.8

 
6.8

Reclassification of net (gains)/losses realized on available-for-sale investments included in other gains and losses, net
—

 
—

 
—

 
(8.1
)
 
(8.1
)
Other comprehensive income/(loss) before tax
130.5

 
(2.0
)
 
3.2

 
(1.3
)
 
130.4

Income tax related to items of other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
Tax on actuarial (loss)/gain related to employee benefit plans
—

 
0.4

 
—

 
—

 
0.4

Reclassification of tax on amortization of prior service cost/(credit) into income tax provision
—

 
0.1

 
—

 
—

 
0.1

Reclassification of tax on amortization of actuarial (loss)/gain into income tax provision
—

 
(0.1
)
 
—

 
—

 
(0.1
)
Tax on net unrealized gains/(losses) on available-for-sale investments
—

 
—

 
—

 
2.0

 
2.0

Reclassification of tax on net (gains)/losses on available-for-sale investments
—

 
—

 
—

 
(2.7
)
 
(2.7
)
Total income tax benefit(expense) related to items of other comprehensive income
—

 
0.4

 
—

 
(0.7
)
 
(0.3
)
Accumulated other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
 
 
Beginning balance
439.7

 
(78.1
)
 
2.2

 
16.1

 
379.9

Other comprehensive income/(loss), net of tax:
130.5

 
(1.6
)
 
3.2

 
(2.0
)
 
130.1

Other comprehensive (income)/loss attributable to noncontrolling interests
(0.1
)
 
—

 
—

 
—

 
(0.1
)
Ending balance
570.1

 
(79.7
)
 
5.4

 
14.1

 
509.9


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For the six months ended June 30, 2014
$ in millions
Foreign currency translation
 
Employee benefit plans
 
Equity method investments
 
Available-for-sale investments
 
Total
Other comprehensive income/(loss) before tax:
 
 
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries
77.3

 
—

 
—

 
—

 
77.3

Actuarial (loss)/gain related to employee benefit plans
—

 
(2.6
)
 
—

 
—

 
(2.6
)
Reclassification of amortization of prior service cost/(credit) into employee compensation expenses
—

 
(0.9
)
 
—

 
—

 
(0.9
)
Reclassification of amortization of actuarial (gain)/loss into employee compensation expenses
—

 
1.2

 
—

 
—

 
1.2

Share of other comprehensive income/(loss) of equity method investments
—

 
—

 
7.2

 
—

 
7.2

Unrealized(losses)/gains on available-for-sale investments
—

 
—

 
—

 
11.0

 
11.0

Reclassification of net (gains)/losses realized on available-for-sale investments included in other gains and losses, net
—

 
—

 
—

 
(10.8
)
 
(10.8
)
Other comprehensive income/(loss) before tax
77.3

 
(2.3
)
 
7.2

 
0.2

 
82.4

Income tax related to items of other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
Tax on actuarial (loss)/gain related to employee benefit plans
—

 
0.5

 
—

 
—

 
0.5

Reclassification of tax on amortization of prior service cost/(credit) into income tax provision
—

 
0.2

 
—

 
—

 
0.2

Reclassification of tax on amortization of actuarial (loss)/gain into income tax provision
—

 
(0.2
)
 
—

 
—

 
(0.2
)
Tax on net unrealized gains/(losses) on available-for-sale investments
—

 
—

 
—

 
2.2

 
2.2

Reclassification of tax on net (gains)/losses on available-for-sale investments
—

 
—

 
—

 
(3.4
)
 
(3.4
)
Total income tax benefit(expense) related to items of other comprehensive income
—

 
0.5

 
—

 
(1.2
)
 
(0.7
)
Accumulated other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
 
 
Beginning balance
492.5

 
(77.9
)
 
(1.8
)
 
15.1

 
427.9

Other comprehensive income/(loss), net of tax:
77.3

 
(1.8
)
 
7.2

 
(1.0
)
 
81.7

Other comprehensive (income)/loss attributable to noncontrolling interests
0.3

 
—

 
—

 
—

 
0.3

Ending balance
570.1

 
(79.7
)
 
5.4

 
14.1

 
509.9



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For the three months ended June 30, 2013
$ in millions
Foreign currency translation
 
Employee benefit plans
 
Equity method investments
 
Available-for-sale investments
 
Total
Other comprehensive income/(loss) before tax:
 
 
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries*
(94.3
)
 
—

 
—

 
—

 
(94.3
)
Actuarial (loss)/gain related to employee benefit plans
—

 
0.3

 
—

 
—

 
0.3

Reclassification of amortization of prior service cost/(credit) into employee compensation expenses
—

 
(0.5
)
 
—

 
—

 
(0.5
)
Reclassification of amortization of actuarial (gain)/loss into employee compensation expenses
—

 
0.7

 
—

 
—

 
0.7

Share of other comprehensive income/(loss) of equity method investments
—

 
—

 
(1.3
)
 
—

 
(1.3
)
Unrealized(losses)/gains on available-for-sale investments
—

 
—

 
—

 
(0.3
)
 
(0.3
)
Reclassification of net (gains)/losses realized on available-for-sale investments included in other gains and losses, net
—

 
—

 
—

 
—

 
—

Other comprehensive income/(loss) before tax
(94.3
)
 
0.5

 
(1.3
)
 
(0.3
)
 
(95.4
)
Income tax related to items of other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
Tax benefit/(expenses) on foreign currency translation differences
(0.3
)
 
—

 
—

 
—

 
(0.3
)
Tax on actuarial (loss)/gain related to employee benefit plans
—

 
(0.1
)
 
—

 
—

 
(0.1
)
Reclassification of tax on amortization of prior service cost/(credit) into income tax provision
—

 
0.1

 
—

 
—

 
0.1

Reclassification of tax on amortization of actuarial (loss)/gain into income tax provision
—

 
(0.1
)
 
—

 
—

 
(0.1
)
Tax on net unrealized gains/(losses) on available-for-sale investments
—

 
—

 
—

 
(0.8
)
 
(0.8
)
Reclassification of tax on net (gains)/losses on available-for-sale investments
—

 
—

 
—

 
—

 
—

Total income tax benefit(expense) related to items of other comprehensive income
(0.3
)
 
(0.1
)
 
—

 
(0.8
)
 
(1.2
)
Accumulated other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
 
 
Beginning balance
398.0

 
(74.2
)
 
1.8

 
8.9

 
334.5

Other comprehensive income/(loss), net of tax:
(94.6
)
 
0.4

 
(1.3
)
 
(1.1
)
 
(96.6
)
Other comprehensive (income)/loss attributable to noncontrolling interests
6.0

 
—

 
—

 
—

 
6.0

Ending balance
309.4

 
(73.8
)
 
0.5

 
7.8

 
243.9

__________________
*
Included in this amount are net losses of $6.0 million for the three months ended June 30, 2013 related to foreign currency translation adjustments attributable to CIP. Of this amount, gross losses of $0.3 million were reclassified from accumulated other comprehensive income into retained earnings appropriated for investors in CIP.

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For the six months ended June 30, 2013
$ in millions
Foreign currency translation
 
Employee benefit plans
 
Equity method investments
 
Available-for-sale investments
 
Total
Other comprehensive income/(loss) before tax:
 
 
 
 
 
 
 
 
 
Currency translation differences on investments in foreign subsidiaries*
(303.9
)
 
—

 
—

 
—

 
(303.9
)
Actuarial (loss)/gain related to employee benefit plans
—

 
6.8

 
—

 
—

 
6.8

Reclassification of amortization of prior service cost/(credit) into employee compensation expenses
—

 
(1.0
)
 
—

 
—

 
(1.0
)
Reclassification of amortization of actuarial (gain)/loss into employee compensation expenses
—

 
1.4

 
—

 
—

 
1.4

Share of other comprehensive income/(loss) of equity method investments
—

 
—

 
(1.6
)
 
—

 
(1.6
)
Unrealized(losses)/gains on available-for-sale investments
—

 
—

 
—

 
4.0

 
4.0

Reclassification of net (gains)/losses realized on available-for-sale investments included in other gains and losses, net
—

 
—

 
—

 
(1.4
)
 
(1.4
)
Other comprehensive income/(loss) before tax
(303.9
)
 
7.2

 
(1.6
)
 
2.6

 
(295.7
)
Income tax related to items of other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
Tax benefit/(expenses) on foreign currency translation differences
(1.1
)
 
—

 
—

 
—

 
(1.1
)
Tax on actuarial (loss)/gain related to employee benefit plans
—

 
(1.5
)
 
—

 
—

 
(1.5
)
Reclassification of tax on amortization of prior service cost/(credit) into income tax provision
—

 
0.2

 
—

 
—

 
0.2

Reclassification of tax on amortization of actuarial (loss)/gain into income tax provision
—

 
(0.3
)
 
—

 
—

 
(0.3
)
Tax on net unrealized gains/(losses) on available-for-sale investments
—

 
—

 
—

 
(0.6
)
 
(0.6
)
Reclassification of tax on net (gains)/losses on available-for-sale investments
—

 
—

 
—

 
(0.3
)
 
(0.3
)
Total income tax benefit(expense) related to items of other comprehensive income
(1.1
)
 
(1.6
)
 
—

 
(0.9
)
 
(3.6
)
Accumulated other comprehensive income/(loss), net of tax:
 
 
 
 
 
 
 
 
 
Beginning balance
601.7

 
(79.4
)
 
2.1

 
6.1

 
530.5

Other comprehensive income/(loss), net of tax:
(305.0
)
 
5.6

 
(1.6
)
 
1.7

 
(299.3
)
Other comprehensive (income)/loss attributable to noncontrolling interests
12.7

 
—

 
—

 
—

 
12.7

Ending balance
309.4

 
(73.8
)
 
0.5

 
7.8

 
243.9

__________________
*
Included in this amount are net losses of $12.7 million for the six months ended June 30, 2013 related to foreign currency translation adjustments attributable to CIP. None of this amount was reclassified from accumulated other comprehensive income into retained earnings appropriated for investors in CIP for the six months ended June 30, 2013.


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7.  SHARE-BASED COMPENSATION
The company recognized total expenses of $70.0 million and $69.4 million related to equity-settled share-based payment transactions in the six months ended June 30, 2014 and June 30, 2013, respectively.
Cash received from exercise of share options granted under share-based compensation arrangements was $5.2 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $10.8 million).
Share Awards
Share awards are broadly classified into two categories: time-vested and performance-vested. Share awards are measured at fair value at the date of grant and are expensed, based on the company's estimate of shares that will eventually vest, on a straight-line or accelerated basis over the vesting period.
Time-vested awards vest ratably over a period of continued employee service. Performance-vested awards cliff-vest at the end of or vest ratably over a defined vesting period of continued employee service upon the company's attainment of certain performance criteria. Time-vested and performance-vested share awards are granted in the form of restricted share awards (RSAs) or restricted share units (RSUs). Performance-vested awards are tied to the achievement of specified levels of adjusted diluted earnings per share and adjusted operating margin. In the event that either targeted financial measure is achieved at or above a vesting threshold for a particular performance measurement period, the portion of the performance-vested award subject to targeted financial measures will vest proportionately between 0% and 100% based upon the higher achieved level for that year.
With respect to time-vested awards, dividends accrue directly to the employee holder of RSAs, and cash payments in lieu of dividends are made to employee holders of certain RSUs. With respect to performance-vested awards, dividends and cash payments in lieu of dividends are deferred and are paid at the same rate as on our shares if and to the extent the award vests.
In May 2011, the company's shareholders approved the 2011 Global Equity Incentive Plan, which authorized the issuance of up to 28 million shares under this plan. In May 2010, the board approved the 2010 Global Equity Incentive Plan (ST), which authorized the issuance of up to 3 million shares under this plan. Under the terms of the 2010 Global Equity Incentive Plan (ST), shares are issued only as employment inducement awards in connection with a strategic transaction and, as a result, do not require shareholder approval under the rules of the New York Stock Exchange or otherwise.
Movements on share awards priced in U.S. dollars during the periods ended June 30, are detailed below:
 
For the six months ended June 30, 2014
 
For the six months ended June 30, 2013
Millions of shares, except fair values
Time- Vested
 
Performance- Vested
 
Weighted Average Grant Date Fair Value ($)
 
Time- Vested
 
Performance- Vested
Unvested at the beginning of period
13.9

 
0.4

 
25.00

 
16.5

 
0.3

Granted during the period
4.2

 
0.2

 
34.31

 
5.1

 
0.2

Forfeited during the period
(0.9
)
 
—

 
23.42

 
(0.2
)
 
—

Vested and distributed during the period
(5.2
)
 
(0.1
)
 
24.14

 
(6.5
)
 
(0.1
)
Unvested at the end of the period
12.0

 
0.5

 
28.79

 
14.9

 
0.4



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In December 2007, in connection with the redomicile of the company from the U.K. to Bermuda, the company’s primary share listing moved from the London Stock Exchange to the New York Stock Exchange. Movements on share awards priced in Pounds Sterling, which were awarded prior to the move of the company’s primary share listing to the New York Stock Exchange, during the six months ended June 30, are detailed below:
 
For the six months ended June 30, 2014
 
For the six months ended June 30, 2013
Millions of shares, except fair values
Time-Vested
 
Weighted Average Grant Date Fair Value (£ Sterling)
 
Time-Vested
Unvested at the beginning of period
0.1

 
12.90

 
0.3

Forfeited during the period
—

 
—

 
—

Vested and distributed during the period
(0.1
)
 
12.90

 
(0.2
)
Unvested at the end of the period
—

 
—

 
0.1

All share awards outstanding at June 30, 2014, had a weighted average remaining contractual life of 1.68 years. The total fair value of shares that vested during the six months ended June 30, 2014 was $181.9 million (six months ended June 30, 2013: $181.7 million). The weighted average grant date fair value of the U.S. dollar share awards that were granted during the six months ended June 30, 2014 was $34.31 (six months ended June 30, 2013: $26.85).
At June 30, 2014, there was $307.4 million of total unrecognized compensation cost related to non-vested share awards; that cost is expected to be recognized over a weighted average period of 2.88 years.
Share Options
The company has not granted share option awards since 2005. All share options awards, therefore, were granted prior to the December 2007 redomicile from the United Kingdom to Bermuda and re-listing from the London Stock Exchange (where the predecessor company's ordinary shares traded in Pounds Sterling) to the New York Stock Exchange (where the company's common shares now trade in U.S. Dollars). At the time of their grants, the exercise prices of the share options were denominated in the company's trading currency, which was the Pound Sterling. The company did not change the accounting for share options at the redomicile/re-listing date, because the share options were not modified at that date. The exercise price remains in Pounds Sterling and was not changed to U.S. Dollars. Therefore, upon exercise of the share options, the Pound Sterling exercise price will be converted into U.S. Dollars using the spot foreign exchange rate in effect on the exercise date. Upon the exercise of share options, the company either issues new shares or can utilize shares held in treasury (see Note 5, “Share Capital”) to satisfy the exercise.
Changes in outstanding share option awards are as follows:
 
For the six months ended June 30, 2014
 
For the six months ended June 30, 2013
Millions of shares, except prices
Options
 
Weighted Average Exercise Price
(£ Sterling)
 
Options
 
Weighted Average Exercise Price
(£ Sterling)
Outstanding at the beginning of period
1.1

 
7.32

 
2.6

 
7.31

Exercised during the period
(0.4
)
 
6.74

 
(0.9
)
 
7.27

Outstanding at the end of the period
0.7

 
7.64

 
1.7

 
7.33

Exercisable at the end of the period
0.7

 
7.64

 
1.7

 
7.33


Employee Stock Purchase Plan (ESPP)
During 2012, the company established a nonqualified, broad-based ESPP for all eligible employees. Employees may purchase shares of our common stock generally in annual intervals at 85% of fair market value. Employee ESPP contributions may not exceed $6,000 per offering period. Upon the plan vesting date, the company either issues new shares or can utilize shares held in treasury (see Note 5, "Share Capital") to satisfy the exercise. For the six months ended June 30, 2014, the company recognized $0.4 million in compensation expense related to the ESPP (June 30, 2013: $0.5 million).

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8.  RETIREMENT BENEFIT PLANS
Defined Contribution Plans
The company operates defined contribution retirement benefit plans for all qualifying employees. The assets of the plans are held separately from those of the company in funds under the control of trustees. When employees leave the plans prior to vesting fully in the contributions, the contributions payable by the company are reduced by the amount of forfeited contributions.
The total amounts charged to the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 of $14.3 million and $29.7 million, respectively (three and six months ended June 30, 2013: 13.5 million and $28.1 million, respectively) represent contributions paid or payable to these plans by the company at rates specified in the rules of the plans. As of June 30, 2014, accrued contributions of $12.3 million (December 31, 2013: $21.8 million) for the current year will be paid to the plans.
Defined Benefit Plans
The company maintains legacy defined benefit pension plans for qualifying employees of its subsidiaries in the U.K., Ireland, Germany and Taiwan. All defined benefit plans are closed to new participants. The company also maintains a postretirement medical plan in the U.S., which was closed to new participants in 2005. In 2006, the plan was amended to eliminate benefits for all participants who did not meet retirement eligibility by 2008. The assets of all defined benefit schemes are held in separate trustee-administered funds. Under the plans, the employees are generally entitled to retirement benefits based on final salary at retirement.
The components of net periodic benefit cost in respect of these defined benefit plans are as follows:
 
Retirement Plans
 
Medical Plan
 
For the three months ended June 30,
 
For the six months ended June 30,
 
For the three months ended June 30,
 
For the six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
(1.1
)
 
(1.1
)
 
(2.2
)
 
(2.2
)
 
—

 
(0.1
)
 
(0.1
)
 
(0.2
)
Interest cost
(4.7
)
 
(4.9
)
 
(9.5
)
 
(9.8
)
 
(0.5
)
 
(0.5
)
 
(1.0
)
 
(1.0
)
Expected return on plan assets
4.7

 
4.4

 
9.3

 
8.8

 
0.1

 
0.1

 
0.3

 
0.2

Amortization of prior service cost/(credit)
(0.1
)
 
—

 
(0.1
)
 
—

 
0.5

 
0.5

 
1.0

 
1.0

Amortization of net actuarial gain/(loss)
(0.5
)
 
(0.6
)
 
(1.0
)
 
(1.2
)
 
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.2
)
Net periodic benefit cost
(1.7
)
 
(2.2
)
 
(3.5
)
 
(4.4
)
 
—

 
(0.1
)
 
—

 
(0.2
)
The estimated amounts of contributions expected to be paid to the plans during 2014 are $15.9 million for retirement plans and $2.2 million for the medical plan. Payments made to the plans during the six months ended June 30, 2014 were $8.0 million to the retirement plan and $1.1 million to the medical plan.
9.  TAXATION
At June 30, 2014, the total amount of gross unrecognized tax benefits was $8.8 million as compared to the December 31, 2013 total of $16.8 million. During the three months ended June 30, 2014, gross unrecognized tax benefits of $7.9 million were recognized as a result of a favorable tax settlement. Including interest and penalties, income tax expense decreased by $4.8 million, net of federal tax effects. The company and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in numerous foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the company has unrecognized tax benefits, is finally resolved. To the extent that the company has favorable tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the applicable statute of limitations or other reasons, such liabilities, as well as the related interest and penalty, would be reversed as a reduction of income tax expense (net of federal tax effects, if applicable) in the period such determination is made.

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10.  EARNINGS PER SHARE
The calculation of earnings per share is as follows:
 
For the three months ended June 30,
 
For the six months ended June 30,
In millions, except per share data
2014
 
2013
 
2014
 
2013
Income from continuing operations, net of taxes

$316.6

 

$208.3

 

$525.4

 

$403.8

Net (income)/loss attributable to noncontrolling interests in consolidated entities
(42.3
)
 
(1.1
)
 
(61.3
)
 
21.5

Income from continuing operations attributable to Invesco Ltd. for basic and diluted EPS calculations
274.3

 
207.2

 
464.1

 
425.3

Income/(loss) from discontinued operations, net of taxes
0.2

 
(4.6
)
 
(1.8
)
 
(0.5
)
Net income attributable to common shareholders

$274.5

 

$202.6

 

$462.3

 

$424.8

 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
435.7

 
449.1

 
436.2

 
448.5

Dilutive effect of share-based awards
0.7

 
1.0

 
0.7

 
1.1

Weighted average shares outstanding - diluted
436.4

 
450.1

 
436.9

 
449.6

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Earnings per share from continuing operations

$0.63

 

$0.46

 

$1.06

 

$0.95

Earnings per share from discontinued operations

$—

 

($0.01
)
 

$—

 

$—

Basic earnings per share

$0.63

 

$0.45

 

$1.06

 

$0.95

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Earnings per share from continuing operations

$0.63

 

$0.46

 

$1.06

 

$0.95

Earnings per share from discontinued operations

$—

 

($0.01
)
 

$—

 

$—

Diluted earnings per share

$0.63

 

$0.45

 

$1.06

 

$0.94

See Note 7, “Share-Based Compensation,” for a summary of share awards outstanding under the company's share-based payment programs. These programs could result in the issuance of common shares that would affect the measurement of basic and diluted earnings per share.
There were no antidilutive options excluded from the computation of diluted earnings per share in the six months ended June 30, 2014 (six months ended June 30, 2013: none). Antidilutive options are those where the options' exercise prices are greater than the average market price of the shares.
There were no time-vested share awards that were excluded from the computation of diluted earnings per share during the six months ended June 30, 2014 and 2013, due to their inclusion being anti-dilutive. There were 0.3 million contingently issuable shares excluded from the diluted earnings per share computation during the six months ended June 30, 2014 (six months ended June 30, 2013: 0.4 million), because the necessary performance conditions for the shares to be issuable had not yet been satisfied at the end of the respective period.
11.  COMMITMENTS AND CONTINGENCIES
Commitments and contingencies may arise in the ordinary course of business.
Off Balance Sheet Commitments
The company has transactions with various private equity, real estate and other investment entities sponsored by the company for the investment of client assets in the normal course of business. Many of the company's investment products are structured as limited partnerships. The company's investment may take the form of the general partner or a limited partner. The entities are structured such that each partner makes capital commitments that are to be drawn down over the life of the partnership as investment opportunities are identified. At June 30, 2014, the company's undrawn capital commitments were $101.8 million (December 31, 2013: $152.5 million).
The Parent and various company subsidiaries have entered into agreements with financial institutions to guarantee certain obligations of other company subsidiaries. The company would be required to perform under these guarantees in the event of

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certain defaults. The company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Legal Contingencies
In July 2010, various closed-end funds formerly advised by Van Kampen Investments or Morgan Stanley Investment Management had complaints filed against them in New York State Court commencing derivative lawsuits purportedly brought on behalf of the common shareholders of those funds. The funds are nominal defendants in these derivative lawsuits and the defendants also include Van Kampen Investments (acquired by Invesco on June 1, 2010), Morgan Stanley Investment Management and certain officers and trustees of the funds who are or were employees of those firms. Invesco has certain obligations under the applicable acquisition agreement regarding the defense costs and any damages associated with this litigation. The plaintiffs allege breaches of fiduciary duties owed by the non-fund defendants to the funds’ common shareholders related to the funds’ redemption in prior periods of Auction Rate Preferred Securities (ARPS) theretofore issued by the funds. The complaints are similar to other complaints filed against investment advisers, officers and trustees of closed-end funds in other fund complexes which issued and redeemed ARPS. The complaints allege that the advisers, distributors and certain officers and trustees of those funds breached their fiduciary duty by redeeming ARPS at their liquidation value when there was no obligation to do so and when the value of ARPS in the secondary marketplace were significantly below their liquidation value. The complaints also allege that the ARPS redemptions were principally motivated by the fund sponsors’ interests to preserve distribution relationships with brokers and other financial intermediaries who held ARPS after having repurchased them from their own clients. The complaints do not specify alleged damages. Certain other funds included in the acquired business have received demand letters expressing similar allegations. Such demand letters could be precursors to additional similar lawsuits being commenced against those other funds. The Boards of Trustees of the funds established special committees of independent trustees to conduct an inquiry regarding the allegations set forth in the complaints and demand letters. The Boards of Trustees of the funds accepted the recommendation of their special litigation committees to (i) reject the demands contained in the demand letters and (ii) to seek dismissal of the related lawsuits. Motions to dismiss were filed on October 4, 2011 and remain pending.
Invesco believes the cases and other claims identified above should be dismissed or otherwise will terminate, although there can be no assurance of that result. Invesco intends to defend vigorously any cases which may survive beyond initial motions to dismiss. The company cannot predict with certainty, however, the eventual outcome of such cases and other claims, nor whether they will have a material negative impact on the company. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the company. There are many reasons that the company cannot make these assessments, including, among others, one or more of the following: the proceeding is in its early stages; the damages sought are unspecified, unsupportable, unexplained or uncertain; the claimant is seeking relief other than compensatory damages; the matter presents novel legal claims or other meaningful legal uncertainties; discovery has not started or is not complete; there are significant facts in dispute; and there are other parties who may share in any ultimate liability.
The company is from time to time involved in litigation relating to other claims arising in the ordinary course of its business. In management’s opinion, adequate accrual has been made as of June 30, 2014 to provide for any such losses that may arise from matters for which the company could reasonably estimate an amount. Management is of the opinion that the ultimate resolution of such claims will not materially affect the company’s business, financial position, results of operation or liquidity. Furthermore, in management’s opinion, it is not possible to estimate a range of reasonably possible losses with respect to other litigation contingencies.
The investment management industry also is subject to extensive levels of ongoing regulatory oversight and examination. In the United States, United Kingdom, and other jurisdictions in which the company operates, governmental authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to compliance with applicable laws and regulations. Additional lawsuits or regulatory enforcement actions arising out of these inquiries may in the future be filed against the company and related entities and individuals in the United States, United Kingdom, and other jurisdictions in which the company and its affiliates operate. Any material loss of investor and/or client confidence as a result of such inquiries and/or litigation could result in a significant decline in assets under management, which would have an adverse effect on the company’s future financial results and its ability to grow its business.
In a separate matter, a Canadian subsidiary of the company has received assessments related to various prior taxation periods for goods and services tax on revenue to which management fee rebates had been applied in those periods. The assessments, related interest, and penalty amounts are approximately $21.9 million. The trial between Invesco Canada Ltd. and the Canada Revenue Agency, argued in the Tax Court of Canada, concluded in May 2014, and the company is waiting for the Tax Court decision. Management believes Canada Revenue Agency's claims are unfounded and that these assessments are unlikely to stand, and accordingly no provision has been recorded in the Condensed Consolidated Financial Statements.

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12. CONSOLIDATED SPONSORED INVESTMENT PRODUCTS
The following table presents the balances related to CSIP that are included on the Condensed Consolidated Balance Sheets as well as Invesco's net interests in CSIP for each period presented.
$ in millions
June 30, 2014
 
December 31, 2013
Investments of CSIP
306.4

 
93.2

Cash and cash equivalents of CSIP
13.7

 
12.7

Accounts receivable and other assets of CSIP
6.7

 
2.6

Assets of CSIP
326.8

 
108.5

Other liabilities of CSIP
(7.7
)
 
(4.7
)
Equity attributable to redeemable noncontrolling interests
(155.0
)
 
—

Equity attributable to nonredeemable noncontrolling interests
(17.7
)
 
(12.0
)
Invesco's net interests in CSIP
146.4

 
91.8

Invesco's net economic interests as a percentage of investments of CSIP
47.8
%
 
98.5
%
The carrying value of investments held by CSIP is also their fair value. The following tables present the fair value hierarchy levels of investments held by CSIP, which are measured at fair value as of June 30, 2014, and December 31, 2013:
 
As of June 30, 2014
$ in millions
Fair
Value
Measurements
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investments:
 
 
 
 
 
 
 
Fixed income securities
186.0

 
72.2

 
113.8

 
—

Equity securities
29.6

 
29.6

 
—

 
—

Investments in fixed income funds*
66.7

 
66.7

 
—

 
—

Investments in other private equity funds*
24.1

 
—

 
—

 
24.1

Total investments at fair value
306.4

 
168.5

 
113.8

 
24.1

 
As of December 31, 2013
$ in millions
Fair
Value
Measurements
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level2)
 
Significant
Unobservable
Inputs
(Level 3)
Investments:
 
 
 
 
 
 
 
Fixed income securities
43.2

 
—

 
43.2

 
—

Equity securities
27.8

 
27.8

 
—

 
—

Investments in fixed income funds*
6.0

 
6.0

 
—

 
—

Investments in other private equity funds*
16.2

 
—

 
—

 
16.2

Total investments at fair value
93.2

 
33.8

 
43.2

 
16.2

________________
*
Investments in fixed income funds and other private equity funds are valued using the net asset value (NAV) as a practical expedient. The NAVs that have been provided are derived from the fair values of the underlying investments as of the consolidation date. Refer to Note 13, "Consolidated Investment Products," for additional discussion regarding the fair value of private equity funds.

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The tables below summarizes as of June 30, 2014 and December 31, 2013, the nature of investments that are valued using the NAV as a practical expedient and any related liquidation restrictions or other factors which may impact the ultimate value realized:
 
 
As of June 30, 2014
 
 
Fair Value
($ in millions)
 
Total Unfunded Commitments ($ in millions)
 
Weighted Average Remaining Term (1)
 
Redemption Frequency
 
Redemption Notice Period
Fixed income funds
 
$66.7
 

$—

 
n/a
 
Monthly
 
10 days
Private equity fund of funds
 
$24.1
 
$30.8
 
7.6 years
 
n/a (2)
 
n/a(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
Fair Value
($ in millions)
 
Total Unfunded Commitments ($ in millions)
 
Weighted Average Remaining Term (1)
 
Redemption Frequency
 
Redemption Notice Period
Fixed income funds
 
$6.0
 

$—

 
n/a
 
Monthly
 
10 days
Private equity fund of funds
 
$16.2
 

$35.6

 
8.5 years
 
n/a (2)
 
n/a (2)
__________________
(1) These investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over the weighted average periods indicated.
(2) These investments are not subject to redemption; however, for certain funds, the investors may sell or transfer their interest, which may require approval by the general partner of the underlying funds.
Equity securities are valued under the market approach through use of quoted prices on an exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
Fixed income securities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institution-size trading in similar groups of securities, developments related to specific securities, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets using significant unobservable inputs for the three and six months ended June 30, 2014 (three and six months ended June 30, 2013: none):
 $ in millions
Three months ended June 30, 2014
 
Six months ended June 30, 2014
Beginning balance
19.5

 
16.2

Purchases
1.8

 
4.0

Sales
—

 
(0.4
)
Gains and losses included in the Condensed Consolidated Statements of Income*
2.8

 
4.3

Ending balance
24.1

 
24.1

__________________
*
Included in other income/(loss) of CSIP, net, in the Consolidated Statement of Income for the three and six months ended June 30, 2014 are $2.8 million and $4.3 million in net unrealized gains attributable to investments still held at June 30, 2014.

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13.  CONSOLIDATED INVESTMENT PRODUCTS
The following table presents the balances related to CIP that are included on the Condensed Consolidated Balance Sheets as well as Invesco's net interest in the CIP for each period presented.
 
As of
$ in millions
June 30, 2014
 
December 31, 2013
Cash and cash equivalents of CIP
292.4

 
583.6

Investments of CIP
4,971.4

 
4,734.7

Accounts receivable and other assets of CIP
121.7

 
58.3

Less: Debt of CIP
(4,301.5
)
 
(4,181.7
)
Less: Other liabilities of CIP
(201.0
)
 
(461.8
)
Less: Retained earnings (1)
(15.8
)
 
(12.5
)
Less: Retained earnings appropriated for investors in CIP
(63.3
)
 
(104.3
)
Less: Accumulated other comprehensive income, net of tax (1)
15.7

 
12.7

Less: Equity attributable to nonredeemable noncontrolling interests
(753.2
)
 
(570.3
)
Invesco's net interests in CIP
66.4

 
58.7

Invesco's net economic interests as a percentage of investments of CIP
1.3
%
 
1.2
%
____________
(1)
These amounts reflect the reclassification of the company's gain or loss (representing the changes in the market value of the company's holding in the consolidated CLOs) from other comprehensive income into other gains/losses upon consolidation.

The company's risk with respect to each investment in CIP is limited to its equity ownership and any uncollected management and performance fees. Therefore, the gains or losses of CIP have not had a significant impact on the company's net income attributable to common shareholders, liquidity or capital resources. The company has no right to the benefits from, nor does it bear the risks associated with, these investments, beyond the company's minimal direct investments in, and management and performance fees generated from, the investment products. If the company were to liquidate, these investments would not be available to the general creditors of the company, and as a result, the company does not consider investments held by CIP to be company assets. Additionally, the collateral assets of consolidated collateralized loan obligations (CLOs) are held solely to satisfy the obligations of the CLOs, and the investors in the consolidated CLOs have no recourse to the general credit of the company for the notes issued by the CLOs.
At June 30, 2014, the company's maximum risk of loss in significant VIEs in which the company is not the primary beneficiary is presented in the table below.
$ in millions
Footnote Reference
 
Carrying Value
 
Company's Maximum Risk of Loss
CLO investments
3
 
4.1

 
4.1

Partnership and trust investments

 
17.0

 
17.0

Investments in Invesco Mortgage Capital Inc.

 
30.6

 
30.6

Total
 
 
 
 
51.7

During the six months ended June 30, 2014, the company invested in and consolidated three new VIEs and one VOE. The table below illustrates the summary balance sheet amounts related to these products before consolidation into the company. The balances below are reflective of the balances existing at the consolidation date after the initial funding of the investments by the company and unrelated third-party investors. The current period activity for the consolidated funds, including the initial funding and subsequent investment of initial cash balances into underlying investments of CIP, is reflected in the company’s Condensed Consolidated Financial Statements.

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Balance Sheet information - newly consolidated VIEs/VOEs
 
For the six months ended June 30, 2014
$ in millions
VIEs
 
VOEs
Cash and cash equivalents of CIP
576.5

 
—

Accounts receivable and other assets of CIP
0.5

 
9.0

Investments of CIP
538.0

 
40.1

Total assets
1,115.0

 
49.1

 
 
 
 
Debt of CIP
691.2

 
—

Other liabilities of CIP
432.6

 
11.8

Total liabilities
1,123.8

 
11.8

Total equity
(8.8
)
 
37.3

Total liabilities and equity
1,115.0

 
49.1

During the three months ended June 30, 2014, the company determined that it was no longer the primary beneficiary of a CLO due to a change in the rights held by others. The amounts deconsolidated from the Condensed Consolidated Balance Sheet are illustrated in the table below. There was no net impact to the Condensed Consolidated Statement of Income from the deconsolidation of this CLO.
Balance Sheet
$ in millions
Deconsolidated-CLOs-VIEs
Cash and cash equivalents of CIP
30.5

Accounts receivable and other assets of CIP
17.6

Investments of CIP
346.5

Total assets
394.6

Debt of CIP
347.9

Other liabilities of CIP
45.7

Total liabilities
393.6

Equity
1.0

Total liabilities and equity
394.6



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The following tables reflect the impact of consolidation of investment products into the Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, and the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013.
Summary of Balance Sheet Impact of CIP
 
As of June 30, 2014
$ in millions
CLOs - VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Impact of CIP
Accounts receivable
—

 
—

 
—

 
(2.8
)
 
(2.8
)
Investments
—

 
—

 
—

 
(63.6
)
 
(63.6
)
Cash and cash equivalents of CIP
247.1

 
5.4

 
39.9

 
—

 
292.4

Accounts receivable of CIP
98.9

 
0.1

 
22.7

 
—

 
121.7

Investments of CIP
4,325.2

 
42.4

 
671.2

 
(67.4
)
 
4,971.4

Total assets
4,671.2

 
47.9

 
733.8

 
(133.8
)
 
5,319.1

Debt of CIP
4,407.5

 
—

 
—

 
(106.0
)
 
4,301.5

Other liabilities of CIP
200.3

 
1.0

 
2.5

 
(2.8
)
 
201.0

Total liabilities
4,607.8

 
1.0

 
2.5

 
(108.8
)
 
4,502.5

Retained earnings
15.8

 
—

 
—

 
—

 
15.8

Retained earnings appropriated for investors in CIP
63.3

 
—

 
—

 
—

 
63.3

Accumulated other comprehensive income, net of tax
(15.7
)
 
—

 
—

 
—

 
(15.7
)
Equity attributable to nonredeemable noncontrolling interests in consolidated entities
—

 
46.9

 
731.3

 
(25.0
)
 
753.2

Total liabilities and equity
4,671.2

 
47.9

 
733.8

 
(133.8
)
 
5,319.1

____________
(1)
Adjustments include the elimination of intercompany transactions between the company and its CIP, primarily the elimination of the company's equity at risk recorded as investments by the company (before consolidation) against either equity (private equity funds) or subordinated debt (CLOs) of the funds.
 
As of December 31, 2013
$ in millions
CLOs - VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Impact of CIP
Accounts receivable
—

 
—

 
—

 
(3.4
)
 
(3.4
)
Investments
—

 
—

 
—

 
(55.3
)
 
(55.3
)
Cash and cash equivalents of CIP
542.3

 
5.6

 
35.7

 
—

 
583.6

Accounts receivable of CIP
56.3

 
0.2

 
1.8

 
—

 
58.3

Investments of CIP
4,237.3

 
40.4

 
512.2

 
(55.2
)
 
4,734.7

Total assets
4,835.9

 
46.2

 
549.7

 
(113.9
)
 
5,317.9

Debt of CIP
4,270.4

 
—

 
—

 
(88.7
)
 
4,181.7

Other liabilities of CIP
461.4

 
0.9

 
3.0

 
(3.5
)
 
461.8

Total liabilities
4,731.8

 
0.9

 
3.0

 
(92.2
)
 
4,643.5

Retained earnings
12.5

 
—

 
—

 
—

 
12.5

Retained earnings appropriated for investors in CIP
104.3

 
—

 
—

 
—

 
104.3

Accumulated other comprehensive income, net of tax
(12.7
)
 
—

 
—

 
—

 
(12.7
)
Equity attributable to nonredeemable noncontrolling interests in consolidated entities
—

 
45.3

 
546.7

 
(21.7
)
 
570.3

Total liabilities and equity
4,835.9

 
46.2

 
549.7

 
(113.9
)
 
5,317.9

____________
(1)
Adjustments include the elimination of intercompany transactions between the company and its CIP, primarily the elimination of the company's equity at risk recorded as investments by the company (before consolidation) against either equity (private equity and real estate partnership funds) or subordinated debt (CLOs) of the funds.

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Summary of Income Statement Impact of CIP
 
Three months ended June 30, 2014
$ in millions
CLOs - VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Impact of CIP
Total operating revenues
—

 
0.1

 
—

 
(8.7
)
 
(8.6
)
Total operating expenses
8.9

 
0.2

 
1.3

 
(8.7
)
 
1.7

Operating income
(8.9
)
 
(0.1
)
 
(1.3
)
 
—

 
(10.3
)
Equity in earnings of unconsolidated affiliates
—

 
—

 
—

 
(2.2
)
 
(2.2
)
Interest and dividend income
—

 
—

 
—

 
(0.6
)
 
(0.6
)
Other gains and losses, net
—

 
—

 
—

 
(4.7
)
 
(4.7
)
Interest and dividend income of CIP
50.1

 
—

 
—

 
(2.1
)
 
48.0

Interest expense of CIP
(33.1
)
 
—

 
—

 
2.8

 
(30.3
)
Other gains/(losses) of CIP, net
(18.1
)
 
(0.2
)
 
52.3

 
2.8

 
36.8

Income from continuing operations before income taxes
(10.0
)
 
(0.3
)
 
51.0

 
(4.0
)
 
36.7

Income tax provision
—

 
—

 
—

 
—

 
—

Income from continuing operations, net of income taxes
(10.0
)
 
(0.3
)
 
51.0

 
(4.0
)
 
36.7

Income from discontinued operations, net of income taxes
—

 
—

 
—

 
—

 
—

Net income
(10.0
)
 
(0.3
)
 
51.0

 
(4.0
)
 
36.7

Net (income)/loss attributable to noncontrolling interests in consolidated entities
9.8

 
0.3

 
(48.8
)
 
—

 
(38.7
)
Net income attributable to common shareholders
(0.2
)
 
—

 
2.2

 
(4.0
)
 
(2.0
)
 
Three months ended June 30 , 2013
$ in millions
CLOs - VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Impact of CIP
Total operating revenues
—

 
—

 
0.4

 
(9.4
)
 
(9.0
)
Total operating expenses
17.0

 
0.2

 
1.5

 
(9.4
)
 
9.3

Operating income
(17.0
)
 
(0.2
)
 
(1.1
)
 
—

 
(18.3
)
Equity in earnings of unconsolidated affiliates
—

 
—

 
—

 
(0.8
)
 
(0.8
)
Interest and dividend income
—

 
—

 
—

 
(1.8
)
 
(1.8
)
Interest and dividend income of CIP
53.1

 
—

 
—

 
(2.4
)
 
50.7

Interest expense of CIP
(34.8
)
 
—

 
—

 
4.2

 
(30.6
)
Other gains/ (losses) of CIP, net
(10.7
)
 
0.5

 
12.6

 
(4.0
)
 
(1.6
)
Income from continuing operations before income taxes
(9.4
)
 
0.3

 
11.5

 
(4.8
)
 
(2.4
)
Income tax provision
—

 
—

 
—

 
—

 
—

Income from continuing operations, net of income taxes
(9.4
)
 
0.3

 
11.5

 
(4.8
)
 
(2.4
)
Income from discontinued operations, net of income taxes
—

 
—

 
—

 
—

 
—

Net income
(9.4
)
 
0.3

 
11.5

 
(4.8
)
 
(2.4
)
Net (income)/loss attributable to noncontrolling interests in consolidated entities
9.4

 
(0.3
)
 
(10.2
)
 
—

 
(1.1
)
Net income attributable to common shareholders
—

 
—

 
1.3

 
(4.8
)
 
(3.5
)


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Six months ended June 30, 2014
$ in millions
CLOs - VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Impact of CIP
Total operating revenues
—

 
0.1

 
—

 
(17.1
)
 
(17.0
)
Total operating expenses
26.8

 
0.5

 
4.1

 
(17.1
)
 
14.3

Operating income
(26.8
)
 
(0.4
)
 
(4.1
)
 
—

 
(31.3
)
Equity in earnings of unconsolidated affiliates
—

 
—

 
—

 
(3.4
)
 
(3.4
)
Interest and dividend income
—

 
—

 
—

 
(1.5
)
 
(1.5
)
Other gains and losses, net
—

 
—

 
—

 
(4.7
)
 
(4.7
)
Interest and dividend income of CIP
102.0

 
—

 
—

 
(5.7
)
 
96.3

Interest expense of CIP
(67.9
)
 
—

 
—

 
7.3

 
(60.6
)
Other gains/(losses) of CIP, net
(47.3
)
 
(1.2
)
 
103.9

 
7.9

 
63.3

Income from continuing operations before income taxes
(40.0
)
 
(1.6
)
 
99.8

 
(0.1
)
 
58.1

Income tax provision
—

 
—

 
—

 
—

 
—

Income from continuing operations, net of income taxes
(40.0
)
 
(1.6
)
 
99.8

 
(0.1
)
 
58.1

Income from discontinued operations, net of income taxes
—

 
—

 
—

 
—

 
—

Net income
(40.0
)
 
(1.6
)
 
99.8

 
(0.1
)
 
58.1

Net (income)/loss attributable to noncontrolling interests in consolidated entities
40.0

 
1.6

 
(96.5
)
 
0.1

 
(54.8
)
Net income attributable to common shareholders
—

 
—

 
3.3

 
—

 
3.3

 
Six months ended June 30, 2013
$ in millions
CLOs - VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Impact of CIP
Total operating revenues
—

 
—

 
0.4

 
(18.2
)
 
(17.8
)
Total operating expenses
25.5

 
0.5

 
4.0

 
(18.2
)
 
11.8

Operating income
(25.5
)
 
(0.5
)
 
(3.6
)
 
—

 
(29.6
)
Equity in earnings of unconsolidated affiliates
—

 
—

 
—

 
(1.2
)
 
(1.2
)
Interest and dividend income
—

 
—

 
—

 
(3.7
)
 
(3.7
)
Interest and dividend income of CIP
106.7

 
—

 
—

 
(5.7
)
 
101.0

Interest expense of CIP
(72.7
)
 
—

 
—

 
9.4

 
(63.3
)
Other gains/ (losses) of CIP, net
(39.2
)
 
0.2

 
17.3

 
(1.0
)
 
(22.7
)
Income from continuing operations before income taxes
(30.7
)
 
(0.3
)
 
13.7

 
(2.2
)
 
(19.5
)
Income tax provision
—

 
—

 
—

 
—

 
—

Income from continuing operations, net of income taxes
(30.7
)
 
(0.3
)
 
13.7

 
(2.2
)
 
(19.5
)
Income from discontinued operations, net of income taxes
—

 
—

 
—

 
—

 
—

Net income
(30.7
)
 
(0.3
)
 
13.7

 
(2.2
)
 
(19.5
)
Net (income)/loss attributable to noncontrolling interests in consolidated entities
30.8

 
0.3

 
(12.0
)
 
—

 
19.1

Net income attributable to common shareholders
0.1

 
—

 
1.7

 
(2.2
)
 
(0.4
)
____________
(1)
Adjustments include the elimination of intercompany transactions between the company and its CIP, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company. These also include the reclassification of the company's gain or loss (representing the changes in the market value of the company's holding in the consolidated CLOs) from other comprehensive income into other gains/losses upon consolidation.

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The carrying values of investments held and notes issued by CIP are also their fair values. The following tables present the fair value hierarchy levels of investments held and notes issued by CIP, which are measured at fair value as of June 30, 2014 and December 31, 2013:
 
As of June 30, 2014
$ in millions
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
CLO collateral assets:
 
 
 
 
 
 
 
Bank loans
4,142.4

 
—

 
4,142.4

 
—

Bonds
106.2

 
—

 
106.2

 
—

Equity securities
9.2

 
—

 
9.2

 
—

Private equity fund assets:
 
 
 
 
 
 
 
Equity securities
248.8

 
22.5

 
—

 
226.3

Debt securities
0.8

 
—

 
—

 
0.8

Investments in other private equity funds
464.0

 
—

 
—

 
464.0

Total assets at fair value
4,971.4

 
22.5

 
4,257.8

 
691.1

Liabilities:
 
 
 
 
 
 
 
CLO notes
(4,301.5
)
 
—

 
—

 
(4,301.5
)
Total liabilities at fair value
(4,301.5
)
 
—

 
—

 
(4,301.5
)
 
As of December 31, 2013
$ in millions
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
CLO collateral assets:
 
 
 
 
 
 
 
Bank loans
4,035.8

 
—

 
4,035.8

 
—

Bonds
133.1

 
—

 
133.1

 
—

Equity securities
14.1

 
—

 
14.1

 
—

Private equity fund assets:
 
 
 
 
 
 
 
Equity securities
106.0

 
47.3

 
—

 
58.7

Investments in other private equity funds
442.2

 
—

 
—

 
442.2

Debt securities issued by the U.S. Treasury
3.5

 
3.5

 
—

 
—

Total assets at fair value
4,734.7

 
50.8

 
4,183.0

 
500.9

Liabilities:
 
 
 
 
 
 
 
CLO notes
(4,181.7
)
 
—

 
—

 
(4,181.7
)
Total liabilities at fair value
(4,181.7
)
 
—

 
—

 
(4,181.7
)

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The following tables show a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities using significant unobservable inputs:
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
$ in millions
Level 3 Assets
 
Level 3 Liabilities
 
Level 3 Assets
 
Level 3 Liabilities
Beginning balance
560.7

 
(4,762.7
)
 
500.9

 
(4,181.7
)
Purchases
96.9

 
—

 
139.6

 
—

Sales
(18.9
)
 
—

 
(50.4
)
 
—

Issuances
—

 
—

 
1.8

 
(714.1
)
Settlements
—

 
136.3

 
—

 
297.7

Deconsolidation of CIP
—

 
339.0

 
—

 
339.0

Gains and losses included in the Condensed Consolidated Statements of Income*
52.4

 
(14.1
)
 
99.2

 
(42.4
)
Ending balance
691.1

 
(4,301.5
)
 
691.1

 
(4,301.5
)

 
Three months ended June 30, 2013
 
Six months ended June 30, 2013
$ in millions
Level 3 Assets
 
Level 3 Liabilities
 
Level 3 Assets
 
Level 3 Liabilities
Beginning balance
535.1

 
(4,221.4
)
 
602.9

 
(3,899.4
)
Purchases
1.6

 
—

 
13.3

 
—

Sales
(29.1
)
 
—

 
(91.1
)
 
—

Issuances
3.8

 
—

 
3.8

 
(405.0
)
Settlements
—

 
208.9

 
—

 
361.7

Deconsolidation of CIP
(0.1
)
 
—

 
(18.4
)
 
—

Gains and losses included in the Condensed Consolidated Statements of Income*
3.2

 
(32.5
)
 
4.4

 
(101.5
)
Transfers to Level 2**
(6.1
)
 
—

 
(6.1
)
 
—

Foreign exchange
(0.1
)
 
0.7

 
(0.5
)
 
(0.1
)
Ending balance
508.3

 
(4,044.3
)
 
508.3

 
(4,044.3
)
____________
*
Included in gains/(losses) of CIP, net in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 are $51.7 million in net unrealized gains and $81.3 million in net unrealized gains attributable to investments still held at June 30, 2014 by CIP (three and six months ended June 30, 2013: $ 3.0 million in net unrealized gains and $14.0 million net unrealized losses attributable to investments still held at June 30, 2013).
**
During the six months ended June 30, 2013, $6.1 million of equity securities held by consolidated private equity funds were transferred from Level 3 to Level 2 due to the public offering of securities in the underlying companies with legal lock-up restrictions in place. For transfers to public offerings, the company's policy is to use the fair value of the transferred security on the offering date.
Unforeseen events might occur that would subsequently change the fair values of the investments and debt of CIP, but such changes would be inconsequential to the company due to its minimal investments in these products. Any gains or losses resulting from valuation changes in the investments and debt of CIP are substantially offset by resulting changes in gains and losses attributable to noncontrolling interests in consolidated entities and therefore do not have a material effect on the financial condition, operating results (including earnings per share), liquidity or capital resources of the company's common shareholders.
Fair value of consolidated CLOs
The company elected the fair value option for collateral assets held and notes issued by its consolidated CLOs to eliminate the measurement and recognition inconsistency that would otherwise arise from measuring assets and liabilities and recognizing the related gains and losses on different accounting bases.

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The collateral assets held by consolidated CLOs are primarily invested in senior secured bank loans, bonds, and equity securities. Bank loan investments, which comprise the majority of consolidated CLO portfolio collateral, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. Bank loan investments mature at various dates between 2014 and 2023, pay interest at Libor plus a spread of up to 12.1%, and typically range in S&P credit rating categories from BBB down to unrated. Interest income on bank loans and bonds is recognized based on the unpaid principal balance and stated interest rate of these investments on an accrual basis. At June 30, 2014, the fair value exceeded the unpaid principal balance of the senior secured bank loans and bonds by approximately $0.1 million (December 31, 2013: the unpaid principal balance exceeded the fair value of the senior secured bank loans by approximately $6.3 million). Approximately 0.4% of the collateral assets are in default as of June 30, 2014 (December 31, 2013: 0.8% of the collateral assets were in default). CLO investments are valued based on price quotations provided by third party pricing sources. These third party sources aggregate indicative price quotations daily to provide the company with a price for the CLO investments. The company has developed internal controls to review the reasonableness and completeness of these price quotations on a daily basis. If necessary, price quotations are challenged through the third-party pricing source price challenge process. For the six months ended June 30, 2014 and the year ended December 31, 2013, there were no price quotation challenges by the company.
In addition, the company's internal valuation committee conducts an annual due diligence review of all independent third-party pricing sources to review the provider's valuation methodology as well as ensure internal controls exist over the valuation of the CLO investments. In the event that the third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment and interests in similar investments, the market environment, and investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including, for senior secured corporate loans, the cost, size, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the senior secured corporate loan and any related agreements, and the position of the senior secured corporate loan in the borrower's debt structure; iii) the nature, adequacy and value of the senior secured corporate loan's collateral, including the CLO's rights, remedies and interests with respect to the collateral; iv) for senior secured corporate loans, the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan.
Notes issued by consolidated CLOs mature at various dates between 2020 and 2026 and have a weighted average maturity of 8.7 years. The notes are issued in various tranches with different risk profiles. The interest rates are generally variable rates based on Libor plus a pre-defined spread, which varies from 0.21% for the more senior tranches to 6.10% for the more subordinated tranches. At June 30, 2014, the outstanding balance on the notes issued by consolidated CLOs exceeds their fair value by approximately $0.1 billion (December 31, 2013: $0.2 billion excess). The investors in this debt are not affiliated with the company and have no recourse to the general credit of the company for this debt. Notes issued by CLOs are recorded at fair value using an income approach, driven by cash flows expected to be received from the portfolio collateral assets. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the notes, taking into account the overall credit quality of the issuers and the company's past experience in managing similar securities. Market yields, default rates and recovery rates used in the company's estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the notes may be adversely affected. The current liquidity constraints within the market for CLO products require the use of certain unobservable inputs for CLO valuation. Once the undiscounted cash flows of the collateral assets have been determined, the company applies appropriate discount rates that a market participant would use to determine the discounted cash flow valuation of the notes.
Fair value of consolidated private equity funds
Consolidated private equity funds are generally structured as partnerships. Generally, the investment strategy of underlying holdings in these partnerships is to seek capital appreciation through direct investments in public or private companies with compelling business models or ideas or through investments in partnership investments that also invest in similar private or public companies. Various strategies may be used. Companies targeted could be distressed organizations, targets of leveraged buyouts or fledgling companies in need of venture capital. Investors generally may not redeem their investment until the partnership liquidates. Generally, the partnerships have a life that ranges from seven to twelve years unless dissolved earlier. The general partner may extend the partnership term up to a specified period of time as stated in the Partnership Agreement. Some partnerships allow the limited partners to cause an earlier termination upon the occurrence of certain events as specified in the Partnership Agreement.

37

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For private equity partnerships, fair value is determined by reviewing each investment for the sale of additional securities of an issuer to sophisticated investors or for investee financial conditions and fundamentals. Publicly traded portfolio investments are carried at market value as determined by their most recent quoted sale, or if there is no recent sale, at their most recent bid price. For these investments held by CIP, level 1 classification indicates that fair values have been determined using unadjusted quoted prices in active markets for identical assets that the partnership has the ability to access. Level 2 classification may indicate that fair values have been determined using quoted prices in active markets but give effect to certain lock-up restrictions surrounding the holding period of the underlying investments.
The fair value of level 3 investments held are derived from inputs that are unobservable and which reflect the limited partnerships' own determinations about the assumptions that market participants would use in pricing the investments, including assumptions about risk. These inputs are developed based on the partnership's own data, which is adjusted if information indicates that market participants would use different assumptions. The partnerships which invest directly into private equity portfolio companies (direct private equity funds) take into account various market conditions, subsequent rounds of financing, liquidity, financial condition, purchase multiples paid in other comparable third-party transactions, the price of securities of other companies comparable to the portfolio company, and operating results and other financial data of the portfolio company, as applicable.
The partnerships which invest into other private equity funds take into account information received from those underlying funds, including their reported net asset values and evidence as to their fair value approach, including consistency of their fair value application. These investments do not trade in active markets and represent illiquid long-term investments that generally require future capital commitments. The partnerships' reported share of the underlying net asset values of the underlying funds is used as a practical expedient, as allowed by ASC Topic 820, in arriving at fair value.

38

Table of Contents    

                                    

Quantitative Information about Level 3 Fair Value Measurements
The following tables show significant unobservable inputs used in the fair value measurement of level 3 assets and liabilities at June 30, 2014 and December 31, 2013:
Assets and Liabilities *
 
Fair Value at
June 30, 2014
($ in millions)
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
Weighted Average (by fair value)
Private Equity Funds --Equity Securities
 
40.0
 
Market Comparable
 
Revenue Multiple
 
1 - 4x
 
3.3x
 
 
 
 
 
 
Discount
 
25% - 36%
 
30.9%
 
 
 
 
 
 
 
 
 
 
 
CLO Debt
 
(4,301.5)
 
Discounted Cash Flow- USD
 
Assumed Default Rate***
 
1% - 2%
 
<1yr: 1.1% >1yr: 2.0%
 
 
 
 
 
 
Spread over Libor **
 
125 - 739bps
 
218 bps
Assets and Liabilities *
 
Fair Value at
December 31, 2013
($ in millions)
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
Weighted Average (by fair value)
Private Equity Funds --Equity Securities
 
58.7
 
Market Comparable
 
Revenue Multiple
 
1 - 5x
 
3.0x
 
 
 
 
 
 
Discount
 
n/a
 
24.0%
CLO Debt
 
(4,181.7)
 
Discounted Cash Flow- USD
 
Assumed Default Rate***
 
1% - 2%
 
<1yr: 1.4% >1yr: 2.0%
 
 
 
 
 
 
Spread over Libor **
 
123 - 864bps
 
208 bps
____________
*
Excluded from the table above are certain equity securities held by consolidated private equity funds valued using recent private market transactions (June 30, 2014: $23.6 million; December 31, 2013: $5.8 million) and third party appraisals (June 30, 2014: $3.7 million; December 31, 2013: none). At June 30, 2014, certain tranches of the consolidated CLOs are valued using third party pricing information. Quantitative unobservable inputs for such valuations were not developed or adjusted by the company. Investments in equity securities and other private equity funds as of June 30, 2014 of $623.8 million (as of December 31, 2013: $442.2 million ) are also excluded from the table above as they are valued using the NAV practical expedient. The NAVs that have been provided are derived from the fair values of the underlying investments as of the consolidation date.
**
Lower spreads relate to the more senior tranches in the CLO note structure; higher spreads relate to the less senior tranches.
***
Assumed default rates listed in the table above apply to CLOs established prior to 2012. A default rate of 1.4% was assumed for CLOs established after January 1, 2012.

The table below summarizes as of June 30, 2014 and December 31, 2013, the nature of investments that are valued using the NAV as a practical expedient and any related liquidation restrictions or other factors which may impact the ultimate value realized:
 
 
June 30, 2014
 
December 31, 2013
in millions, except term data
 
Fair Value
 
Total Unfunded Commitments
 
Weighted Average Remaining Term (2)
 
Fair Value
 
Total Unfunded Commitments
 
Weighted Average Remaining Term (2)
Private equity fund of funds (1)
 
$464.0
 
$196.8
 
2.0 years
 

$426.3

 

$71.6

 
2.6 years
Private equity funds (1)
 
$159.8
 
$501.7
 
9.0 years
 

$15.9

 

$80.6

 
8.5 years
(1)
These investments are not subject to redemption; however, for certain funds, the investors may sell or transfer their interest, which may require approval by the general partner of the underlying funds.
(2)
These investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over the weighted average periods indicated.

39

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The following narrative will indicate the sensitivity of inputs illustrating the impact of significant increases to the inputs. An opposite impact would result for significant decreases in these inputs:
•
For investments held by consolidated private equity funds, significant increases in discounts in isolation would result in significantly lower fair value measurements, while significant increases in revenue multiple assumptions in isolation would result in significantly higher fair value measurements. An increase in discount assumptions would result in a directionally opposite change in the assumptions for revenue multiple resulting in lower fair value measurements.
•
For CLO notes, a change in the assumption used for spreads is generally accompanied by a directionally similar change in default rate. Significant increases in any of these inputs in isolation would result in significantly lower fair value measurements.
14. RELATED PARTIES
Certain managed funds are deemed to be affiliated entities under the related party definition in ASC 850, "Related Party Disclosures." Additionally, related parties include those defined in the company's proxy statement.
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Affiliated operating revenues:
 
 
 
 
 
 
 
Investment management fees
922.7

 
785.8

 
1,779.0

 
1,531.8

Service and distribution fees
211.3

 
211.6

 
446.7

 
413.3

Performance fees
2.2

 
2.5

 
28.1

 
34.0

Other
28.3

 
27.7

 
61.3

 
52.8

Total affiliated operating revenues
1,164.5

 
1,027.6

 
2,315.1

 
2,031.9

$ in millions
June 30, 2014
 
December 31, 2013
Affiliated asset balances:
 
 
 
Cash and cash equivalents
408.5

 
447.8

Unsettled fund receivables
273.9

 
315.5

Accounts receivable
304.9

 
298.5

Investments
878.4

 
789.8

Assets held for policyholders
1,539.4

 
1,415.7

Other assets
5.5

 
5.4

Total affiliated asset balances
3,410.6

 
3,272.7

 
 
 
 
Affiliated liability balances:
 
 
 
Accrued compensation and benefits
128.2

 
151.6

Accounts payable and accrued expenses
19.5

 
19.5

Unsettled fund payables
504.0

 
389.9

Total affiliated liability balances
651.7

 
561.0

15. DISCONTINUED OPERATIONS
On December 31, 2013, the company completed the sale of Atlantic Trust Private Wealth Management business ("Atlantic Trust") to the Canadian Imperial Bank of Commerce ("CIBC") for a base purchase price of $210 million less certain working capital and cash funding requirements. The results of Atlantic Trust, together with expenses and the gain associated with the sale, are reflected as discontinued operations in the Condensed Consolidated Statements of Income and are therefore excluded from the continuing operations of Invesco. Comparative periods shown in the Condensed Consolidated Statements of Income have been adjusted to conform with this presentation.

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The components of income from discontinued operations, net of tax, were as follows for the six months ended June 30, 2014 and 2013, respectively.
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Income (loss) from discontinued operations before income taxes
0.3

 
(7.2
)
 
(2.8
)
 
(0.8
)
Income tax (provision) benefit
(0.1
)
 
2.6

 
1.0

 
0.3

Income (loss) from discontinued operations, net of taxes
0.2

 
(4.6
)
 
(1.8
)
 
(0.5
)

16.  SUBSEQUENT EVENTS
On July 31, 2014, the company declared a second quarter 2014 dividend of 25.0 cents per share, payable on September 5, 2014, to shareholders of record at the close of business on August 21, 2014 with an ex-dividend date of August 19, 2014.

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Table of Contents    

                                    

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto, which appear elsewhere in this Report. Except for the historical financial information, this Report may include statements that constitute “forward-looking statements” under the United States securities laws. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” “forecasts,” and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would” as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.
Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in this Report and our most recent Form 10-K filed with the Securities and Exchange Commission.
You may obtain these reports from the SEC’s website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.
References
In this Report, unless otherwise specified, the terms “we,” “our,” “us,” “company,” “Invesco,” and “Invesco Ltd.” refer to Invesco Ltd., a company incorporated in Bermuda, and its subsidiaries.
Executive Overview
The following executive overview summarizes the significant trends affecting our results of operations and financial condition for the periods presented. This overview and the remainder of this management's discussion and analysis supplements and should be read in conjunction with the Condensed Consolidated Financial Statements of Invesco Ltd. and its subsidiaries (collectively, the “company” or “Invesco”) and the notes thereto contained elsewhere in this Report.
During the three months ended June 30, 2014, returns from global equity markets were positive despite geopolitical uncertainty in Ukraine and the Middle East, and a continued decline in monetary easing from the Federal Reserve in the U.S. The S&P 500 index in the U.S. ended up 4.7% for the period. Equity indices in the U.K., Japan and the emerging markets also increased 2.2%, 2.3% and 5.6%, respectively. Bond market prices ended up for the period as U.S. economic data continued to point to slow, but steady, growth. Inflation in the U.S. also supported bond prices, as it was positive enough to dampen concerns about deflation, but still low enough to support the Federal Reserve’s current monetary policy. The Barclays U.S. Aggregate Bond Index rose 2.0% during the second quarter.
The table below summarizes returns based on price appreciation/(depreciation) of several major market indices for the three- and six-month periods ended June 30, 2014 and 2013:
 
Three months ended June 30,
 
Six months ended June 30,
Equity Index
2014
 
2013
 
2014
 
2013
S&P 500
4.7
%
 
2.4
 %
 
6.5
 %
 
12.6
 %
FTSE 100
2.2
%
 
(3.1
)%
 
(0.1
)%
 
5.4
 %
Nikkei 225
2.3
%
 
10.3
 %
 
(6.9
)%
 
31.6
 %
MSCI Emerging Markets
5.6
%
 
(9.1
)%
 
4.8
 %
 
(10.9
)%
Bond Index
 
 
 
 
 
 
 
Barclays U.S. Aggregate Bond
2.0
%
 
(2.3
)%
 
3.9
 %
 
(2.4
)%
A significant portion of our business and assets under management (AUM) is based outside of the U.S. The strengthening or weakening of the U.S. Dollar against other currencies, primarily the Pound Sterling, Canadian dollar, Yen and Euro, will impact our reported revenues and expenses from period to period. Additionally, our revenues are directly influenced by the level and composition of our AUM. Therefore, movements in global capital market levels, net new business inflows (or

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outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period.

Invesco benefits from the long-term efforts to ensure a diversified base of AUM. One of Invesco's core strengths, and a key differentiator for the company within the industry, is our broad diversification across client domiciles, asset classes and distribution channels. Our geographical diversification recognizes growth opportunities in different parts of the world. This broad diversification mitigates the impact on Invesco of different market cycles and enables the company to take advantage of growth opportunities in various markets and channels.
Regulators in various jurisdictions have proposed or are exploring changes to the manner in which fund distributors are compensated for the services they provide.  The U.K. Financial Conduct Authority (FCA) has implemented its Retail Distribution Review (“RDR”), which is expected to reshape the manner in which retail investment funds are sold in the U.K. by changing how retail clients pay for investment advice given in respect of all retail investment products. During the first half of 2014, Invesco began transitioning investment funds to this new basis by offering new fund classes to U.K. investors which are priced at a reduced gross management fee, but which in turn do not result in the payment by the company of a distribution fee to the intermediary. All new retail clients must select the new fund classes while existing clients will transition to the new classes over a two-year period. Separately, Invesco introduced a single Fund Management Fee (FMF) during the second quarter of 2014 for U.K. retail funds, replacing the separate annual management fee and registration fee. This simplified fee structure is a proactive response to the regulatory promotion of providing clients with a clear disclosure of product charges. Invesco's U.K. business has taken the lead in the industry in moving to this single FMF. The U.K. business' move to the single FMF and the change to distribution fees are not expected to have a significant impact on net revenues as investors move into these offerings.  In the U.S., the SEC has previously proposed and may repropose significant changes to Rule 12b-1. Other countries have announced similar distribution fee reviews.
The investment management industry is subject to extensive levels of ongoing regulatory oversight and examination. In the United States, United Kingdom, and other jurisdictions in which the company operates, governmental authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to compliance with applicable laws and regulations. On April 28, 2014, the U.K. FCA announced the settlement of an enforcement proceeding pertaining to the company's compliance with certain FCA rules and regulations for the period from May 2008 to November 2012. The company paid a penalty of £18.6 million ($31.1 million) under this settlement. This charge, together with settlement-related legal costs of $0.5 million, was recorded in the first quarter of 2014 and reduced diluted earnings per share by $0.07. The company believes its current systems and controls now are adequate and in compliance with applicable rules and regulations.
Retaining highly skilled technical and management personnel is important to our ability to attract and retain clients and retail shareholder accounts. Our policy has been to provide our investment management professionals with a supportive professional working environment and compensation and benefits that we believe are competitive with other leading investment management firms. However, we may not be successful in retaining our key personnel, and the loss of key individuals or significant investment management personnel can reduce the attractiveness of our products to potential and current clients. On April 29, 2014, the former head of U.K. Equities, Neil Woodford, left the company. The company executed its succession planning strategy, and effective March 6, 2014, Mark Barnett became the named lead manager for the Invesco Perpetual High Income Fund and the Invesco Perpetual Income Fund, previously managed by Mr. Woodford.
Between the announcement of Mr. Woodford's departure on October 15, 2013 and April 29, 2014, U.K. equity income AUM experienced net outflows of $15.5 billion. During April 2014, U.K. AUM experienced a single client withdrawal of $13.1 billion which included $6.2 billion of U.K. equity income AUM, $1.3 billion of other equity AUM and $5.6 billion of balanced AUM. Excluding this single client withdrawal, U.K. equity income AUM net flows would have improved relative to the prior quarter. Our total AUM in EMEA at June 30, 2014 were $176.1 billion. Excluding the net outflows from U.K. equity income, EMEA long-term net inflows for the second quarter of 2014 were $0.3 billion and for the first half of 2014 were $6.8 billion.
On July 23, 2014, the SEC voted to approve new rules to require institutional prime money market funds and institutional municipal money market funds to maintain a floating net asset value (FNAV) for sales and redemptions based on the current market value of the securities in their portfolio. The requirement will result in the daily share price of these money market funds fluctuating along with changes in the market-based value of the funds' investments. Our initial evaluation of these new rules suggests that they will apply to approximately $30 billion of our AUM. The changes will need to be implemented over a two-year period.
One of the company's strategic objectives is to harness the power of our global platform by improving effectiveness and efficiency, and allocating our resources to the opportunities that will best benefit clients and our business. Consistent with this objective, during the first quarter, an initiative was undertaken to align the company's location footprint to reflect current and future business needs. This resulted in the company recording business optimization initiative charges in the first quarter of

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$43.0 million that included $35.8 million associated with vacating leased properties and $7.2 million of staff severance. These charges reduced first quarter diluted earnings per share by $0.08.
Presentation of Management's Discussion and Analysis of Financial Condition and Results of Operations
The company provides investment management services to, and has transactions with, various private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and other investment entities sponsored by the company for the investment of client assets in the normal course of business. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of the products.
Investment products that are consolidated are referred to in this Report as either Consolidated Sponsored Investment Products (CSIP), which generally includes consolidated sponsored investment products in which Invesco holds the majority of the voting rights or partnerships in which the company has substantive equity at risk but in which the other investors lack removal or liquidation rights, or Consolidated Investment Products (CIP), which includes consolidated nominally-held investment products. This distinction is important, as it differentiates the company's economic risk associated with each type of consolidated managed fund. The company's economic risk with respect to each investment in a CSIP and a CIP is limited to its equity ownership and any uncollected management fees. Gains and losses arising from nominally-held CIP do not have a significant impact on the company's results of operations, liquidity, or capital resources. Gains and losses arising from majority-held CSIP could have a significant impact on the company's results of operations, as the company has greater economic risk associated with its investment. See Part I, Item 1, Financial Statements, - Note 1 "Accounting Policies," Note 12, "Consolidated Sponsored Investment Products," and Note 13, "Consolidated Investment Products," for additional information regarding the impact of the consolidation of managed funds.
The majority of the company's CIP balances are CLO-related. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company's minimal direct investments in, and management and performance fees generated from, the CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Likewise, the investors in the CLOs have no recourse to the general credit of the company for the notes issued by the CLOs. The company therefore does not consider this debt to be a company liability.
The impact of CIP is so significant to the presentation of the company’s Condensed Consolidated Financial Statements (but not to the underlying financial condition or results of operations of the company) that the company has elected to deconsolidate these products in its non-GAAP disclosures. The following discussion therefore combines the results presented under U.S. generally accepted accounting principles (U.S. GAAP) with the company’s non-GAAP presentation. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains four distinct sections, which follow after the Assets Under Management discussion:
•
Results of Operations (three and six months ended June 30, 2014 compared to three and six months ended June 30, 2013);
•
Schedule of Non-GAAP Information;
•
Balance Sheet Discussion; and
•
Liquidity and Capital Resources.
Each of the Condensed Consolidated Financial Statement summary sections (Results of Operations, Balance Sheet Discussion, and Liquidity and Capital Resources) begins with a table illustrating the impact of CIP relative to the company's consolidated totals. The impact is illustrated by a column which shows the dollar-value change in the consolidated figures, as caused by the consolidation of CIP. For example, the impact of CIP on operating revenues for the three and six months ended June 30, 2014 was a reduction of $8.6 million and a reduction of $17.0 million, respectively. This indicates that their consolidation reduced consolidated revenues by this amount, reflecting the elimination upon their consolidation of the operating revenues earned by Invesco for managing these investment products.
The narrative in each of these sections separately provides discussion of the underlying financial statement activity for the company, before consolidation of CIP, as well as of the financial statement activity of CIP. Additionally, wherever a non-GAAP measure is referenced, a disclosure will follow in the narrative or in the note referring the reader to the Schedule of Non-GAAP Information, where additional details regarding the use of the non-GAAP measure by the company are disclosed, along with reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures. To further enhance the readability of the Results of Operations section, separate tables for each of the revenue, expense, and other income and expenses (non-operating income/expense) sections of the income statement introduce the narrative that follows, providing a section-by-section review of the company’s income statements for the periods presented.

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Summary Operating Information
Summary operating information is presented in the table below:
$ in millions, other than per share amounts, operating margins, ratios and AUM
Three months ended June 30,
 
Six months ended June 30,
U.S. GAAP Financial Measures Summary (1)
2014
 
2013
 
2014
 
2013
Operating revenues
1,289.9

 
1,135.5

 
2,559.4

 
2,247.7

Operating income
354.8

 
273.9

 
599.1

 
540.9

Operating margin
27.5
%
 
24.1
%
 
23.4
%
 
24.1
%
Net income attributable to common shareholders
274.5

 
202.6

 
462.3

 
424.8

Diluted EPS
0.63

 
0.45

 
1.06

 
0.94

Debt/equity ratio including CIP (%)
63.2
%
 
62.7
%
 
63.2
%
 
62.7
%
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures Summary
 
 
 
 
 
 
 
Net revenues (2)
901.0

 
790.3

 
1,788.8

 
1,578.3

Adjusted operating income (3)
377.0

 
310.6

 
740.0

 
616.8

Adjusted operating margin (3)
41.8
%
 
39.3
%
 
41.4
%
 
39.1
%
Adjusted net income attributable to common shareholders (4)
282.4

 
223.7

 
544.0

 
449.2

Adjusted diluted EPS (4)
0.65

 
0.50

 
1.25

 
1.00

Debt/equity ratio excluding CIP (%) (5)
18.7
%
 
17.9
%
 
18.7
%
 
17.9
%
 
 
 
 
 
 
 
 
Assets Under Management (1)
 
 
 
 
 
 
 
Ending AUM (billions)
802.4

 
705.6

 
802.4

 
705.6

Average AUM (billions)
790.1

 
719.8

 
784.9

 
705.7

_________
(1)
On December 31, 2013, the company completed the sale of Atlantic Trust. The company has adopted a discontinued operations presentation for the disposed business. Amounts presented represent continuing operations and exclude Atlantic Trust, with the exception of net income attributable to common shareholders and diluted earnings per share.
(2)
Net revenues is a non-GAAP financial measure. Net revenues are operating revenues plus our proportional share of the net revenues of our joint venture investments, less third-party distribution, service and advisory expenses, plus management and performance fees earned from CIP, less other revenue recorded by CIP, plus other reconciling items. See "Schedule of Non-GAAP Information," for the reconciliation of operating revenues to net revenues.
(3)
Adjusted operating income and adjusted operating margin are non-GAAP financial measures. Adjusted operating margin is adjusted operating income divided by net revenues. Adjusted operating income includes operating income plus our proportional share of the operating income of our joint venture investments, the operating income impact of the consolidation of investment products, acquisition/disposition-related adjustments, compensation expense related to market valuation changes in deferred compensation plans, and other reconciling items. See "Schedule of Non-GAAP Information," for the reconciliation of operating income to adjusted operating income.
(4)
Adjusted net income attributable to common shareholders and adjusted diluted EPS are non-GAAP financial measures. Adjusted net income attributable to common shareholders is net income attributable to common shareholders adjusted to exclude the net income of CIP, add back acquisition/disposition related adjustments, the net income impact of deferred compensation plans and other reconciling items. Adjustments made to net income attributable to common shareholders are tax-effected in arriving at adjusted net income attributable to common shareholders. By calculation, adjusted diluted EPS is adjusted net income attributable to common shareholders divided by the weighted average number of shares outstanding (for diluted EPS). See "Schedule of Non-GAAP Information," for the reconciliation of net income attributable to common shareholders to adjusted net income attributable to common shareholders.
(5)
The debt-to-equity ratio excluding CIP is a non-GAAP financial measure. See the "Liquidity and Capital Resources" section for a recalculation of this ratio and other important disclosures.


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Investment Capabilities Performance Overview
Invesco's first strategic priority is to achieve strong investment performance over the long-term for our clients. The table below presents the one-, three- and five-year performance of our actively managed investment products measured by the percentage of AUM ahead of benchmark and AUM in the top half of peer group.(1)
 
Benchmark Comparison
 
Peer Group Comparison
 
% of AUM Ahead of Benchmark
 
% of AUM In Top Half of Peer Group
 
1yr
3yr
5yr
 
1yr
3yr
5yr
Equities
 
 
 
 
 
 
 
U.S. Core
34
%
40
%
24
%
 
30
%
42
%
39
%
U.S. Growth
95
%
24
%
24
%
 
95
%
24
%
73
%
U.S. Value
54
%
57
%
54
%
 
45
%
57
%
79
%
Sector Funds
81
%
55
%
64
%
 
35
%
21
%
50
%
U.K.
94
%
100
%
98
%
 
98
%
98
%
98
%
Canadian
70
%
100
%
100
%
 
80
%
100
%
100
%
Asian
79
%
86
%
84
%
 
68
%
75
%
72
%
European
95
%
100
%
100
%
 
65
%
99
%
92
%
Global
67
%
87
%
82
%
 
81
%
92
%
87
%
Global Ex U.S. and Emerging Markets
80
%
99
%
99
%
 
82
%
96
%
97
%
Fixed Income
 
 
 
 
 
 
 
Money Market
65
%
65
%
35
%
 
95
%
95
%
96
%
U.S. Fixed Income
86
%
89
%
100
%
 
69
%
95
%
95
%
Global Fixed Income
89
%
87
%
98
%
 
86
%
87
%
84
%
Stable Value
100
%
100
%
100
%
 
100
%
100
%
100
%
Other
 
 
 
 
 
 
 
Alternatives
40
%
64
%
24
%
 
32
%
54
%
28
%
Balanced
44
%
73
%
70
%
 
70
%
98
%
70
%
_____________________________
(1)
AUM measured in the one-, three-, and five-year peer group rankings represents 61%, 61%, and 60% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one-, three-, and five-year basis represents 72%, 71%, and 69% of total Invesco AUM, respectively, as of June 30, 2014. Peer group rankings are sourced from a widely-used third party ranking agency in each fund's market (Lipper, Morningstar, IMA, Russell, Mercer, eVestment Alliance, SITCA, Value Research) and are asset-weighted in USD. Rankings are as of prior quarter-end for most institutional products and preceding month-end for Australian retail funds due to their late release by third parties. Rankings for the most representative fund in each Global Investment Performance Standard (GIPS) composite are applied to all products within each GIPS composite. Excludes passive products, closed-end funds, private equity limited partnerships, non-discretionary direct real estate, unit investment trusts fund-of-funds with component funds managed by Invesco, stable value building block funds and CLOs. Certain funds and products were excluded from the analysis because of limited benchmark or peer group data. Had these been available, results may have been different. These results are preliminary and subject to revision. Performance assumes the reinvestment of dividends. Past performance is not indicative of future results and may not reflect an investor's experience.
As of June 30, 2014, 72%, 80% and 80% of ranked actively managed assets performed in the top half of peer groups on a one-year, three-year and five-year basis respectively. The U.K., Asian, Continental European and Global Ex U.S. and Emerging Markets equities have had strong relative performance, with 84% or more of assets beating their benchmark over three- and five-year periods. Additionally, the U.K., Canadian Continental European and Global Ex U.S. and Emerging Markets reflect strong performance with 92% or more of assets beating peers on a five-year basis. Within our fixed income asset class, Stable Value products have achieved excellent long-term performance with 100% of AUM ahead of benchmark and in the top half on a one-, three- and five-year basis.

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Assets Under Management movements for the three months ended June 30, 2014 compared with the three months ended June 30, 2013
The following presentation and discussion of AUM includes Passive and Active AUM. Passive AUM include ETFs, UITs, leveraged fund balances upon which we do not earn a fee, and other passive mandates. Active AUM are total AUM less Passive AUM.
The AUM tables and the discussion below refer to AUM as long-term and short-term. Short-term AUM include institutional money market and Invesco PowerShares QQQ AUM. Long-term AUM are total AUM less short-term AUM.
Changes in AUM were as follows:
 
For the three months ended June 30,
 
2014
 
2013
$ in billions
Total AUM
 
Active
 
Passive
 
Total AUM
 
Active
 
Passive
March 31
787.3

 
644.4

 
142.9

 
707.7

 
584.6

 
123.1

Long-term inflows
42.5

 
36.1

 
6.4

 
44.4

 
32.6

 
11.8

Long-term outflows
(49.4
)
 
(44.1
)
 
(5.3
)
 
(43.0
)
 
(32.5
)
 
(10.5
)
Long-term net flows
(6.9
)
 
(8.0
)
 
1.1

 
1.4

 
0.1

 
1.3

Net flows in Invesco Powershares QQQ fund
(3.0
)
 
—

 
(3.0
)
 
0.7

 
—

 
0.7

Net flows in institutional money market funds
1.1

 
1.1

 
—

 
(0.7
)
 
(0.7
)
 
—

Total net flows
(8.8
)
 
(6.9
)
 
(1.9
)
 
1.4

 
(0.6
)
 
2.0

Market gains and losses/reinvestment
19.9

 
15.1

 
4.8

 
(1.3
)
 
(0.3
)
 
(1.0
)
Foreign currency translation
4.0

 
4.0

 
—

 
(2.2
)
 
(1.8
)
 
(0.4
)
June 30
802.4

 
656.6

 
145.8

 
705.6

 
581.9

 
123.7

Average AUM
 
 
 
 
 
 
 
 
 
 
 
Average long-term AUM
674.7

 
574.9

 
99.8

 
609.1

 
517.1

 
92.0

Average short-term AUM
115.4

 
73.3

 
42.1

 
110.7

 
76.8

 
33.9

Average AUM
790.1

 
648.2

 
141.9

 
719.8

 
593.9

 
125.9

Revenue yield
 
 
 
 
 
 
 
 
 
 
 
Gross revenue yield on AUM (1)
65.7

 
77.3

 
13.2

 
63.4

 
74.5

 
11.6

Gross revenue yield on AUM before performance fees (1)
65.4

 
77.0

 
13.2

 
63.1

 
74.1

 
11.6

Net revenue yield on AUM (2)
45.6

 
52.7

 
13.2

 
43.9

 
50.8

 
11.6

Net revenue yield on AUM before performance fees (2)
45.2

 
52.3

 
13.2

 
43.4

 
50.2

 
11.6

(1)
Gross revenue yield on AUM is equal to annualized total operating revenues divided by average AUM, excluding joint venture (JV) AUM. Our share of the average AUM in the three months ended June 30, 2014 for our JVs in China was $4.7 billion (three months ended June 30, 2013: $3.6 billion). It is appropriate to exclude the average AUM of our JVs for purposes of computing gross revenue yield on AUM because the revenues resulting from these AUM are not presented in our operating revenues. Under U.S. GAAP, our share of the net income of the JVs is recorded as equity in earnings of unconsolidated affiliates on our Condensed Consolidated Statements of Income. Additionally, the numerator of the gross revenue yield measure, operating revenues, excludes the management fees earned from CIP; however, the denominator of the measure includes the AUM of these investment products. Therefore, the gross revenue yield measure is not considered representative of the company's true effective fee rate from AUM.
(2)
Net revenue yield on AUM is equal to annualized net revenues divided by average AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues.

Flows
AUM at June 30, 2014 were $802.4 billion (June 30, 2013: $705.6 billion). During the three months ended June 30, 2014, we experienced long-term net outflows of $6.9 billion. U.K. AUM experienced a single client withdrawal of $13.1 billion during the second quarter which included $6.2 billion of U.K. equity income AUM outflows, $1.3 billion of other equity AUM outflows and $5.6 billion of balanced AUM outflows. We also experienced net outflows in Invesco PowerShares QQQ fund of $3.0 billion, partially offset by net inflows in institutional money market funds of $1.1 billion during the three months ended June 30, 2014. Net outflows during the three months ended June 30, 2014 included active net long-term outflows of $8.0

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billion, partially offset by net long-term inflows of passive AUM of $1.1 billion. Net flows were driven by net outflows from our retail distribution channel of $8.2 billion, offset by net inflows into our institutional channel of $1.3 billion. 
During the three months ended June 30, 2013, we experienced long-term net inflows and total net inflows of $1.4 billion. Net inflows of Invesco PowerShares QQQ fund of $0.7 billion were offset by outflows in institutional money market funds of $0.7 billion during the three months ended June 30, 2013. Long-term net inflows during the three months ended June 30, 2013 included inflows of passive AUM of $1.3 billion and active inflows of $0.1 billion. Long-term net flows in 2013 were driven by net inflows of $4.9 billion into our retail distribution channel, offset by net outflows from our institutional channel of $3.5 billion. We experienced net long-term inflows in our balanced asset class, money market funds, fixed income and alternatives, partially offset by net long-term outflows in our equity AUM.
Average AUM during the three months ended June 30, 2014 were $790.1 billion, compared to $719.8 billion for the three months ended June 30, 2013.
Market Returns
During the three months ended June 30, 2014, positive market movement increased AUM by $19.9 billion, with $14.4 billion attributed to our equity asset class. Our fixed income, alternatives and balanced asset classes were also positively impacted by the change in market valuations during the period, with market increases of $2.1 billion, $1.9 billion and $1.5 billion, respectively. During the three months ended June 30, 2013, market losses decreased AUM by $1.3 billion and included a $2.7 billion decrease in the value of our fixed income asset class, with the balanced and alternative asset classes also experiencing losses of $1.5 billion and $1.6 billion, respectively. These market valuation losses were partly offset by an increase in market value of $4.3 billion in our equity asset class and an increase in money market assets of $0.2 billion.
Foreign Exchange Rates
The table below illustrates the spot foreign exchange rates used for translation of non-U.S. Dollar denominated AUM into U.S. Dollars:
Foreign Exchange Rates
June 30, 2014
 
March 31, 2014
 
June 30, 2013
 
March 31, 2013
Pound Sterling ($ per £)
1.710

 
1.667

 
1.518

 
1.520

Canadian Dollar (CAD per $)
1.066

 
1.104

 
1.054

 
1.018

Japan (¥ per $)
101.310

 
102.980

 
99.320

 
94.160

Euro ($ per Euro)
1.369

 
1.378

 
1.300

 
1.282

During the three months ended June 30, 2014, we experienced increases in AUM of $4.0 billion due to changes in foreign exchange rates. Changes in foreign exchange rates in the three months ended June 30, 2014 were driven primarily by the strengthening of the Pound Sterling relative to the U.S. Dollar, which was reflected in the translation of our Pound Sterling-based AUM into U.S. Dollars. The Japanese Yen and the Canadian Dollar also strengthened relative to the U.S. Dollar, which was reflected in the translation of our Yen-based and Canadian Dollar-based AUM into U.S. Dollars. These changes were partially offset by the weakening of the Euro relative to the U.S. Dollar, which was reflected in the translation of our Euro-based AUM into U.S. Dollars.
The impact of the change in foreign exchange rates in the three months ended June 30, 2013 was driven primarily by the weakening of the Pound Sterling, the Canadian Dollar and the Japanese Yen relative to the U.S. Dollar, which was reflected in the translation of our Sterling-based, Canadian Dollar-based, and Japanese Yen-based AUM into U.S. Dollars, partially offset by the strengthening of the Euro relative to the U.S. Dollar, which was reflected in the translation of our Euro-based AUM into U.S. Dollars.
Revenue Yield
Net revenue yield on AUM increased 1.7 basis points to 45.6 basis points in the three months ended June 30, 2014 when compared to the three months ended June 30, 2013 yield of 43.9 basis points. Excluding performance fees, the net revenue yield increased 1.8 basis points to 45.2 basis points in the three months ended June 30, 2014 (three months ended June 30, 2013: 43.4 basis points).
Changes in our AUM mix significantly impact our net revenue yield. For example, on an asset class basis, our equity and balanced AUM generally earn a higher net revenue rate than money market and fixed income AUM. The combination of average equity and average balanced AUM increased to 55.4% in the three months ended June 30, 2014 from 52.2% of total average AUM in the three months ended June 30, 2013. This resulted in a lower proportion of average assets in money market and fixed income AUM in the three months ended June 30, 2014 when compared to the three months ended June 30, 2013. This

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change in asset class mix correlates with the increase in net revenue yield on AUM before performance fees in the three months ended June 30, 2014 when compared to the three months ended June 30, 2013.
Changes in the geographic mix of our AUM have also factored into the improved revenue yield. Sales have been strong in our Continental European business during recent quarters. As of June 30, 2014, the AUM attributable to clients domiciled in Continental Europe accounts for 8.8% of total AUM compared to 6.6% as of June 30, 2013. On average, the AUM in Continental Europe earn a higher fee rate than the company's average fee rate for existing total AUM.
The tables that follow analyze AUM into active and passive style. Passive AUM generally earn a lower effective fee rate than active asset classes. At June 30, 2014, passive AUM were $145.8 billion, representing 18.2% of total AUM at that date; whereas at June 30, 2013, passive AUM were $123.7 billion, representing 17.5% of our total AUM at that date. In the three months ended June 30, 2014, the net revenue yield on passive AUM was 13.2 basis points compared to 11.6 basis points in the three months ended June 30, 2013, an increase of 1.6 basis points, due to changes in mix of passive AUM including sales of the PowerShares ETFs. The increase in the average yield from passive AUM in the three months ended June 30, 2014 when compared to the three months ended June 30, 2013 has offset any reduction in total net revenue yield normally associated with the higher level of passive AUM as a percentage of total AUM.
The increase in passive AUM includes the movements in the Powershares QQQ Nasdaq-100 index tracking fund. The Powershares QQQ fund AUM increased to $44.0 billion at June 30, 2014 compared to $34.0 billion at June 30, 2013. The revenue yield for Invesco on this product is less than 1 basis point, reimbursing Invesco for the portfolio trading services provided to the fund, and flows into and out of this product therefore have a significant impact on the overall net revenue yield and are a significant factor in the year-over-year yield changes.
Gross revenue yield on AUM increased 2.3 basis points to 65.7 basis points in the three months ended June 30, 2014 from the three months ended June 30, 2013 level of 63.4 basis points. Management does not consider gross revenue yield, the most comparable U.S. GAAP-based measure to net revenue yield, to be a meaningful effective fee rate measure for the reasons outlined in footnote 1 to the Changes in AUM table above. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues (gross revenues) to net revenues.

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Changes in our AUM by channel, asset class, and client domicile, and average AUM by asset class, are presented below:
Total AUM by Channel(1)
$ in billions
Total
 
Retail
 
Institutional
March 31, 2014 AUM
787.3

 
534.6

 
252.7

Long-term inflows
42.5

 
36.3

 
6.2

Long-term outflows
(49.4
)
 
(44.5
)
 
(4.9
)
Long-term net flows
(6.9
)
 
(8.2
)
 
1.3

Net flows in Invesco PowerShares QQQ fund
(3.0
)
 
(3.0
)
 
—

Net flows in institutional money market funds
1.1

 
—

 
1.1

Total net flows
(8.8
)
 
(11.2
)
 
2.4

Market gains and losses/reinvestment
19.9

 
17.7

 
2.2

Foreign currency translation
4.0

 
3.7

 
0.3

June 30, 2014 AUM
802.4

 
544.8

 
257.6

 
 
 
 
 
 
March 31, 2013 AUM
707.7

 
454.9

 
252.8

Long-term inflows
44.4

 
37.7

 
6.7

Long-term outflows
(43.0
)
 
(32.8
)
 
(10.2
)
Long-term net flows
1.4

 
4.9

 
(3.5
)
Net flows in Invesco PowerShares QQQ fund
0.7

 
0.7

 
—

Net flows in institutional money market funds
(0.7
)
 
—

 
(0.7
)
Total net flows
1.4

 
5.6

 
(4.2
)
Market gains and losses/reinvestment
(1.3
)
 
(1.6
)
 
0.3

Foreign currency translation
(2.2
)
 
(1.2
)
 
(1.0
)
June 30, 2013 AUM
705.6

 
457.7

 
247.9

____________
See accompanying notes immediately following these AUM tables.

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Passive AUM by Channel(1)
$ in billions
Total
 
Retail
 
Institutional
March 31, 2014 AUM
142.9

 
121.5

 
21.4

Long-term inflows
6.4

 
5.6

 
0.8

Long-term outflows
(5.3
)
 
(5.0
)
 
(0.3
)
Long-term net flows
1.1

 
0.6

 
0.5

Net flows in Invesco PowerShares QQQ fund
(3.0
)
 
(3.0
)
 
—

Net flows in institutional money market funds
—

 
—

 
—

Total net flows
(1.9
)
 
(2.4
)
 
0.5

Market gains and losses/reinvestment
4.8

 
4.8

 
—

Foreign currency translation
—

 
—

 
—

June 30, 2014 AUM
145.8

 
123.9

 
21.9

 
 
 
 
 
 
March 31, 2013 AUM
123.1

 
98.5

 
24.6

Long-term inflows
11.8

 
10.1

 
1.7

Long-term outflows
(10.5
)
 
(8.2
)
 
(2.3
)
Long-term net flows
1.3

 
1.9

 
(0.6
)
Net flows in Invesco PowerShares QQQ fund
0.7

 
0.7

 
—

Net flows in institutional money market funds
—

 
—

 
—

Total net flows
2.0

 
2.6

 
(0.6
)
Market gains and losses/reinvestment
(1.0
)
 
(1.1
)
 
0.1

Foreign currency translation
(0.4
)
 
—

 
(0.4
)
June 30, 2013 AUM
123.7

 
100.0

 
23.7

____________
See accompanying notes immediately following these AUM tables.

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Total AUM by Asset Class(2)
$ in billions
Total
 
Equity
 
Fixed Income
 
Balanced
 
Money Market
 
Alternatives(3)
March 31, 2014 AUM
787.3

 
388.0

 
177.0

 
54.6

 
76.1

 
91.6

Long-term inflows
42.5

 
21.4

 
8.4

 
4.3

 
0.6

 
7.8

Long-term outflows
(49.4
)
 
(29.3
)
 
(6.2
)
 
(8.4
)
 
(0.7
)
 
(4.8
)
Long-term net flows
(6.9
)
 
(7.9
)
 
2.2

 
(4.1
)
 
(0.1
)
 
3.0

Net flows in Invesco PowerShares QQQ fund
(3.0
)
 
(3.0
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
1.1

 
—

 
—

 
—

 
1.1

 
—

Total net flows
(8.8
)
 
(10.9
)
 
2.2

 
(4.1
)
 
1.0

 
3.0

Market gains and losses/reinvestment
19.9

 
14.4

 
2.1

 
1.5

 
—

 
1.9

Foreign currency translation
4.0

 
2.7

 
0.6

 
0.6

 
—

 
0.1

June 30, 2014 AUM
802.4

 
394.2

 
181.9

 
52.6

 
77.1

(4) 
96.6

Average AUM
790.1

 
385.9

 
179.7

 
52.2

 
77.3

 
95.0

% of total average AUM
100.0
%
 
48.8
%
 
22.7
%
 
6.6
%
 
9.8
%
 
12.0
%
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013 AUM
707.7

 
319.1

 
175.9

 
49.3

 
77.8

 
85.6

Long-term inflows
44.4

 
21.0

 
9.6

 
5.6

 
1.2

 
7.0

Long-term outflows
(43.0
)
 
(22.4
)
 
(9.5
)
 
(3.5
)
 
(0.7
)
 
(6.9
)
Long-term net flows
1.4

 
(1.4
)
 
0.1

 
2.1

 
0.5

 
0.1

Net flows in Invesco PowerShares QQQ fund
0.7

 
0.7

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
(0.7
)
 
—

 
—

 
—

 
(0.7
)
 
—

Total net flows
1.4

 
(0.7
)
 
0.1

 
2.1

 
(0.2
)
 
0.1

Market gains and losses/reinvestment
(1.3
)
 
4.3

 
(2.7
)
 
(1.5
)
 
0.2

 
(1.6
)
Foreign currency translation
(2.2
)
 
(1.3
)
 
(0.2
)
 
(0.2
)
 
—

 
(0.5
)
June 30, 2013 AUM
705.6

 
321.4

 
173.1

 
49.7

 
77.8

 
83.6

Average AUM
719.8

 
324.4

 
177.4

 
51.3

 
81.3

 
85.4

% of total average AUM
100.0
%
 
45.1
%
 
24.6
%
 
7.1
%
 
11.3
%
 
11.9
%
____________
See accompanying notes immediately following these AUM tables.

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Passive AUM by Asset Class(2)
$ in billions
Total
 
Equity
 
Fixed Income
 
Balanced
 
Money Market
 
Alternatives(3)
March 31, 2014 AUM
142.9

 
87.0

 
40.9

 
—

 
—

 
15.0

Long-term inflows
6.4

 
4.3

 
1.4

 
—

 
—

 
0.7

Long-term outflows
(5.3
)
 
(3.6
)
 
(0.6
)
 
—

 
—

 
(1.1
)
Long-term net flows
1.1

 
0.7

 
0.8

 
—

 
—

 
(0.4
)
Net flows in Invesco PowerShares QQQ fund
(3.0
)
 
(3.0
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
(1.9
)
 
(2.3
)
 
0.8

 
—

 
—

 
(0.4
)
Market gains and losses/reinvestment
4.8

 
4.3

 
0.3

 
—

 
—

 
0.2

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

June 30, 2014 AUM
145.8

 
89.0

 
42.0

 
—

 
—

 
14.8

Average AUM
141.9

 
85.4

 
41.6

 
—

 
—

 
14.9

% of total average AUM
100.0
%
 
60.2
%
 
29.3
%
 
—
%
 
—
%
 
10.5
%
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013 AUM
123.1

 
62.0

 
41.9

 
—

 
—

 
19.2

Long-term inflows
11.8

 
6.8

 
4.0

 
—

 
—

 
1.0

Long-term outflows
(10.5
)
 
(4.8
)
 
(2.2
)
 
—

 
—

 
(3.5
)
Long-term net flows
1.3

 
2.0

 
1.8

 
—

 
—

 
(2.5
)
Net flows in Invesco PowerShares QQQ fund
0.7

 
0.7

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
2.0

 
2.7

 
1.8

 
—

 
—

 
(2.5
)
Market gains and losses/reinvestment
(1.0
)
 
1.0

 
(1.2
)
 
—

 
—

 
(0.8
)
Foreign currency translation
(0.4
)
 
—

 
—

 
—

 
—

 
(0.4
)
June 30, 2013 AUM
123.7

 
65.7

 
42.5

 
—

 
—

 
15.5

Average AUM
125.9

 
65.5

 
43.7

 
—

 
—

 
16.7

% of total average AUM
100.0
%
 
52.0
%
 
34.7
%
 
—
%
 
—
%
 
13.3
%
____________
See accompanying notes immediately following these AUM tables.

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Total AUM by Client Domicile(5)
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental Europe
 
Asia
March 31, 2014 AUM
787.3

 
526.1

 
27.1

 
115.9

 
63.4

 
54.8

Long-term inflows
42.5

 
19.7

 
0.9

 
6.1

 
10.4

 
5.4

Long-term outflows
(49.4
)
 
(19.5
)
 
(1.1
)
 
(19.9
)
 
(5.3
)
 
(3.6
)
Long-term net flows
(6.9
)
 
0.2

 
(0.2
)
 
(13.8
)
 
5.1

 
1.8

Net flows in Invesco PowerShares QQQ fund
(3.0
)
 
(3.0
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
1.1

 
(0.7
)
 
0.1

 
1.5

 
0.1

 
0.1

Total net flows
(8.8
)
 
(3.5
)
 
(0.1
)
 
(12.3
)
 
5.2

 
1.9

Market gains and losses/reinvestment
19.9

 
14.9

 
0.7

 
1.3

 
1.8

 
1.2

Foreign currency translation
4.0

 
—

 
1.0

 
2.7

 
—

 
0.3

June 30, 2014 AUM
802.4

 
537.5

 
28.7

 
107.6

 
70.4

 
58.2

 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013 AUM
707.7

 
482.4

 
26.0

 
104.6

 
44.3

 
50.4

Long-term inflows
44.4

 
25.6

 
0.9

 
4.4

 
7.5

 
6.0

Long-term outflows
(43.0
)
 
(25.9
)
 
(1.3
)
 
(5.0
)
 
(5.0
)
 
(5.8
)
Long-term net flows
1.4

 
(0.3
)
 
(0.4
)
 
(0.6
)
 
2.5

 
0.2

Net flows in Invesco PowerShares QQQ fund
0.7

 
0.7

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
(0.7
)
 
(0.4
)
 
—

 
0.1

 
(0.1
)
 
(0.3
)
Total net flows
1.4

 
—

 
(0.4
)
 
(0.5
)
 
2.4

 
(0.1
)
Market gains and losses/reinvestment
(1.3
)
 
(0.9
)
 
0.1

 
0.3

 
(0.4
)
 
(0.4
)
Foreign currency translation
(2.2
)
 
—

 
(0.9
)
 
(0.1
)
 
0.1

 
(1.3
)
June 30, 2013 AUM
705.6

 
481.5

 
24.8

 
104.3

 
46.4

 
48.6

____________
See accompanying notes immediately following these AUM tables.

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Passive AUM by Client Domicile(5) 
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental Europe
 
Asia
March 31, 2014 AUM
142.9

 
138.5

 
0.1

 
—

 
1.8

 
2.5

Long-term inflows
6.4

 
6.3

 
—

 
—

 
0.1

 
—

Long-term outflows
(5.3
)
 
(4.8
)
 
—

 
—

 
(0.2
)
 
(0.3
)
Long-term net flows
1.1

 
1.5

 
—

 
—

 
(0.1
)
 
(0.3
)
Net flows in Invesco PowerShares QQQ fund
(3.0
)
 
(3.0
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
(1.9
)
 
(1.5
)
 
—

 
—

 
(0.1
)
 
(0.3
)
Market gains and losses/reinvestment
4.8

 
4.7

 
—

 
—

 
0.1

 
—

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

June 30, 2014 AUM
145.8

 
141.7

 
0.1

 
—

 
1.8

 
2.2

 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013 AUM
123.1

 
116.9

 
0.1

 
—

 
1.2

 
4.9

Long-term inflows
11.8

 
11.5

 
—

 
—

 
0.2

 
0.1

Long-term outflows
(10.5
)
 
(8.3
)
 
—

 
—

 
(0.1
)
 
(2.1
)
Long-term net flows
1.3

 
3.2

 
—

 
—

 
0.1

 
(2.0
)
Net flows in Invesco PowerShares QQQ fund
0.7

 
0.7

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
2.0

 
3.9

 
—

 
—

 
0.1

 
(2.0
)
Market gains and losses/reinvestment
(1.0
)
 
(1.1
)
 
—

 
—

 
—

 
0.1

Foreign currency translation
(0.4
)
 
—

 
—

 
—

 
—

 
(0.4
)
June 30, 2013 AUM
123.7

 
119.7

 
0.1

 
—

 
1.3

 
2.6

(1)
Channel refers to the internal distribution channel from which the AUM originated. Retail AUM represents AUM distributed by the company's retail sales team. Institutional AUM represents AUM distributed by our institutional sales team. This aggregation is viewed as a proxy for presenting AUM in the retail and institutional markets in which the company operates.
(2)
Asset classes are descriptive groupings of AUM by common type of underlying investments.
(3)
There have been no significant changes to the managed objectives under the Alternatives asset class, which are disclosed in our most recent Form 10-K for the year ended December 31, 2013.
(4)
Ending Money Market AUM includes $73.1 billion in institutional money market AUM and $4.0 billion in retail money market AUM.
(5)
Client domicile disclosure groups AUM by the domicile of the underlying clients.

Results of Operations for the three months ended June 30, 2014 compared to the three months ended June 30, 2013
To assist in the comparisons, the discussion that follows will separate the impact of CIP from the overall consolidated results of operations. The impact is illustrated in the tables immediately below by a column which shows the dollar-value change in the consolidated figures, as caused by the consolidation of CIP. For example, the impact of CIP on total operating revenues for the three months ended June 30, 2014 was a reduction of $8.6 million. This indicates that the consolidation of CIP reduced consolidated revenues by $8.6 million, primarily reflecting the elimination upon consolidation of the revenues earned by Invesco for managing these investment products. The discussion below includes the use of non-GAAP financial measures. See “Schedule of Non-GAAP Information” for additional details and reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures.

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Summary of Income Statement Impact of CIP
 
Three months ended June 30,
 
2014
 
2013
$ in millions
Impact of CIP
 
Invesco Ltd. Consolidated
 
Impact of CIP
 
Invesco Ltd. Consolidated
Total operating revenues
(8.6
)
 
1,289.9

 
(9.0
)
 
1,135.5

Total operating expenses
1.7

 
935.1

 
9.3

 
861.6

Operating income
(10.3
)
 
354.8

 
(18.3
)
 
273.9

Equity in earnings of unconsolidated affiliates
(2.2
)
 
5.5

 
(0.8
)
 
6.9

Interest and dividend income
(0.6
)
 
3.1

 
(1.8
)
 
2.1

Interest expense
—

 
(18.2
)
 
—

 
(10.0
)
Other gains and losses, net
(4.7
)
 
16.2

 
—

 
0.4

Other income/(loss) of CSIP, net
—

 
7.7

 
—

 
—

Interest and dividend income of CIP
48.0

 
48.0

 
50.7

 
50.7

Interest expense of CIP
(30.3
)
 
(30.3
)
 
(30.6
)
 
(30.6
)
Other gains/(losses) of CIP, net
36.8

 
36.8

 
(1.6
)
 
(1.6
)
Income from continuing operations before taxes
36.7

 
423.6

 
(2.4
)
 
291.8

Income tax provision
—

 
(107.0
)
 
—

 
(83.5
)
Income from continuing operations, net of taxes
36.7

 
316.6

 
(2.4
)
 
208.3

Income/(loss) from discontinued operations, net of taxes
—

 
0.2

 
—

 
(4.6
)
Net income
36.7

 
316.8

 
(2.4
)
 
203.7

Net (income)/loss attributable to noncontrolling interests in consolidated entities
(38.7
)
 
(42.3
)
 
(1.1
)
 
(1.1
)
Net income attributable to common shareholders
(2.0
)
 
274.5

 
(3.5
)
 
202.6

Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods, are as follows:
 
 
 
 
 
Variance
 
Three months ended June 30,
 
2014 vs 2013
$ in millions
2014
 
2013
 
$ Change
 
% Change
Investment management fees
1,031.9

 
885.5

 
146.4

 
16.5
 %
Service and distribution fees
214.7

 
215.7

 
(1.0
)
 
(0.5
)%
Performance fees
5.0

 
6.0

 
(1.0
)
 
(16.7
)%
Other
38.3

 
28.3

 
10.0

 
35.3
 %
Total operating revenues
1,289.9

 
1,135.5

 
154.4

 
13.6
 %
Third-party distribution, service and advisory expenses
(410.6
)
 
(366.0
)
 
(44.6
)
 
12.2
 %
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
13.1

 
11.8

 
1.3

 
11.0
 %
CIP
8.6

 
9.0

 
(0.4
)
 
(4.4
)%
Net revenues
901.0

 
790.3

 
110.7

 
14.0
 %
Operating revenues increased by 13.6% in the three months ended June 30, 2014 to $1,289.9 million (three months ended June 30, 2013: $1,135.5 million). Net revenues increased by 14.0% in the three months ended June 30, 2014 to $901.0 million (three months ended June 30, 2013: $790.3 million). Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of net revenues from joint venture arrangements, plus management and performance fees earned from, less other revenues recorded by, CIP, plus other reconciling items. See “Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues.
A significant portion of our business and AUM is based outside of the U.S. The strengthening or weakening of the U.S. Dollar against other currencies, primarily the Pound Sterling, Canadian Dollar, Euro and Japanese Yen will impact our reported

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revenues and expenses from period to period. The income statements of foreign currency subsidiaries are translated into U.S. dollars, the reporting currency of the company, using average foreign exchange rates. The impact of foreign exchange rate movements increased operating revenues by $26.4 million, equivalent to 2.0% of total operating revenues, during the three months ended June 30, 2014 when compared to the three months ended June 30, 2013. Additionally, our revenues are directly influenced by the level and composition of our AUM. Therefore, movements in global capital market levels, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period. As discussed in the Executive Overview, returns from capital markets were positive in the three months ended June 30, 2014.
Investment Management Fees
Investment management fees increased by $146.4 million (16.5%) in the three months ended June 30, 2014, to $1,031.9 million (three months ended June 30, 2013: $885.5 million). In April 2014, our UK Invesco Perpetual business introduced a single Fund Management Fee (FMF) for their retail funds to replace the separate annual management fee and registration fee. This resulted in an increase in investment management fees of $29.6 million and a corresponding reduction in service and distribution fees during the three months ended June 30, 2014. After adjusting for the introduction of the single FMF, the increase is equivalent to 13.2%. This compares to a 9.8% increase in average AUM and a 10.8% increase in average long-term AUM. As discussed above, the net revenue yield is higher in the three months ended June 30, 2014 when compared to the three months ended June 30, 2013, reflecting the change in AUM weighting to higher fee-earning asset classes. See the company's disclosures regarding the changes in AUM and revenue yields during the three months ended June 30, 2014 in the “Assets Under Management” section above for additional information regarding the movements in AUM. The impact of foreign exchange rate movements increased investment management fees by $26.4 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Service and Distribution Fees
In the three months ended June 30, 2014, service and distribution fees decreased by $1.0 million (0.5%) to $214.7 million (three months ended June 30, 2013: $215.7 million). The decrease is primarily driven by the introduction of a single FMF for several UK funds as noted above. The decrease is partially offset by the increases in average AUM and revenue yields, as well as a new recurring asset-based service fee that began in 2014. The impact of foreign exchange rate movements decreased service and distribution fees by $0.5 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Performance Fees
Of our $802.4 billion in AUM at June 30, 2014, approximately $49.2 billion or 6.1%, could potentially earn performance fees.
In the three months ended June 30, 2014, performance fees decreased by $1.0 million (16.7%) to $5.0 million when compared to the performance fees in three months ended June 30, 2013 of $6.0 million. The impact of foreign exchange rate movements increased performance fees by $0.3 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Other Revenues
In the three months ended June 30, 2014, other revenues increased by $10.0 million (35.3%) to $38.3 million (three months ended June 30, 2013: $28.3 million). The impact of foreign exchange rate movements increased other revenues $0.2 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. After allowing for foreign exchange rate changes, the increase in other revenues was $9.8 million. The increase in other revenues during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 includes increases in real estate acquisition and disposition fees of $6.9 million, mutual fund front end fees of $0.8 million, UIT revenues of $0.7 million, and other revenues of $1.4 million. The increase in real estate acquisition and disposition fees primarily relates to a real estate acquisition fee from the launch of a new real estate investment trust recognized in the second quarter of 2014.
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses increased by $44.6 million (12.2%) in the three months ended June 30, 2014 to $410.6 million (three months ended June 30, 2013: $366.0 million). The impact of foreign exchange rate movements increased third-party distribution, service and advisory expenses by $9.0 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. After allowing for foreign exchange rate changes, the increase in third-party distribution, service and advisory expenses was $35.6 million, which includes increases in renewal

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commissions of $18.6 million, distribution fees of $13.1 million, external commissions of $1.6 million and transfer agent fees of $3.1 million, which were partially offset by a decrease in sub advisory fees of $0.8 million. The overall increase is reflective of the higher related retail management fees and front-end load fees (recorded in other revenues).
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
Management believes that the addition of our proportional share of revenues, net of third-party distribution expenses, from joint venture arrangements should be added to operating revenues to arrive at net revenues, as it is important to evaluate the contribution to the business that our joint venture arrangements are making. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues. The company's most significant joint venture arrangement is our 49% investment in Invesco Great Wall Fund Management Company Limited (the “Invesco Great Wall” joint venture).
Our proportional share of revenues, net of third-party distribution expenses, from joint venture investments increased by $1.3 million (11.0%) to $13.1 million for the three months ended June 30, 2014 (three months ended June 30, 2013: $11.8 million). The increase moved in line with our share of the Invesco Great Wall joint venture's average AUM for the three months ended June 30, 2014, which was $4.7 billion compared to $3.6 billion for the three months ended June 30, 2013.
Management, performance and other fees earned from CIP
Management believes that the consolidation of investment products may impact a reader's analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues for the impact of CIP in calculating net revenues. As management and performance fees earned by Invesco from the consolidated products are eliminated upon consolidation of the investment products, management believes that it is appropriate to add these operating revenues back in the calculation of net revenues. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.
The elimination of management and performance fees earned from CIP was $8.7 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $9.4 million), while other revenues from CIP were $0.1 million (three months ended June 30, 2013: $0.4 million).
Operating Expenses
The main categories of operating expenses, and the dollar and percentage changes between periods, are as follows:
 
 
 
 
 
Variance
 
Three months ended June 30,
 
2014 vs 2013
$ in millions
2014
 
2013
 
$ Change
 
% Change
Employee compensation
342.9

 
324.1

 
18.8

 
5.8
 %
Third-party distribution, service and advisory
410.6

 
366.0

 
44.6

 
12.2
 %
Marketing
30.2

 
23.8

 
6.4

 
26.9
 %
Property, office and technology
75.3

 
68.6

 
6.7

 
9.8
 %
General and administrative
76.1

 
77.3

 
(1.2
)
 
(1.6
)%
Transaction and integration
—

 
1.8

 
(1.8
)
 
(100.0
)%
Total operating expenses
935.1

 
861.6

 
73.5

 
8.5
 %

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The table below sets forth these expense categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expense.
$ in millions
June 30, 2014
 
% of Total Operating Expenses
 
% of Operating Revenues
 
June 30, 2013
 
% of Total Operating Expenses
 
% of Operating Revenues
Employee compensation
342.9

 
36.7
%
 
26.6
%
 
324.1

 
37.6
%
 
28.6
%
Third-party distribution, service and advisory
410.6

 
43.9
%
 
31.8
%
 
366.0

 
42.5
%
 
32.2
%
Marketing
30.2

 
3.2
%
 
2.3
%
 
23.8

 
2.7
%
 
2.1
%
Property, office and technology
75.3

 
8.1
%
 
5.8
%
 
68.6

 
8.0
%
 
6.0
%
General and administrative
76.1

 
8.1
%
 
5.9
%
 
77.3

 
9.0
%
 
6.8
%
Transaction and integration
—

 
—
%
 
—
%
 
1.8

 
0.2
%
 
0.2
%
Total operating expenses
935.1

 
100.0
%
 
72.5
%
 
861.6

 
100.0
%
 
75.9
%
During the three months ended June 30, 2014, operating expenses increased by $73.5 million (8.5%) to $935.1 million (three months ended June 30, 2013: $861.6 million). The impact of foreign exchange rate movements increased operating expenses by $18.3 million, or 2.0% of total operating expenses, during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.
Employee Compensation
Employee compensation increased $18.8 million (5.8%) to $342.9 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $324.1 million). The impact of foreign exchange rate movements increased employee compensation by $5.1 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. After allowing for foreign exchange rate changes, the increase in employee compensation was $13.7 million.
Direct compensation increased $18.5 million, primarily due to improved company performance. The increase includes higher base salaries and incentive compensation expenses of $22.8 million. The increases were partially offset by a decrease in commissions and other compensation costs of $4.3 million during the three months ended June 30, 2014 when compared to the three months ended June 30, 2013.
Headcount at June 30, 2014 was 6,070 (at June 30, 2013, on a continuing operations basis: 5,818).
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses are discussed above in the operating and net revenues section.
Marketing
Marketing expenses increased by $6.4 million (26.9%) in the three months ended June 30, 2014 to $30.2 million (three months ended June 30, 2013: $23.8 million). Excluding the impact of foreign exchange rate movements of $0.9 million, the increase in marketing expenses was $5.5 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase during the three months ended June 30, 2014 reflects increased advertising and other client related marketing expenditure across EMEA and particularly in the U.K.
Property, Office and Technology
Property, office and technology costs increased by $6.7 million (9.8%) to $75.3 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $68.6 million). The impact of foreign exchange rate movements increased property, office and technology expenses by $1.4 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. After allowing for foreign exchange rate movements, the increase was $5.3 million.
Property and office costs are generally trending upwards, due to market conditions. However, the business optimization initiative undertaken in the first quarter of 2014 has mitigated the increases in the current period, and therefore property and office costs have remained flat compared to the same period in 2013. The decrease in rent expense of $1.1 million was offset by increases in property management fees of $0.8 million and other property costs of $0.3 million.
Technology and communications expenses increased $5.3 million over the comparable 2013 period primarily due to increases in depreciation and maintenance of $3.3 million and increased outsourced administration and other costs of $2.0 million driven by continued increased Continental European sales activity.

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General and Administrative
General and administrative expenses decreased by $1.2 million (1.6%) to $76.1 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $77.3 million). The impact of foreign exchange rate movements increased general and administrative expenses by $1.9 million during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. After allowing for foreign exchange rate movements, general and administrative costs decreased $3.1 million compared to the same period in 2013.
General and administrative expenses decreased $6.8 million related to lower fund launch costs of our consolidated investment products, $0.4 million of amortization of intangibles, and $0.5 million of other general and administrative expense in the three months ended June 30, 2014 compared to the prior year. These decreases were partially offset by increases in mutual fund expenses of $3.1 million and VAT expenses of $1.5 million compared to the same period in 2013.
Transaction and integration
There were no transaction and integration charges in the three months ended June 30, 2014 (three months ended June 30, 2013: $1.8 million). Transaction and integration expenses during the three months ended June 30, 2013 relate to fund mergers and include professional services and shareholder communications costs. These costs ceased in the first half of 2013.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income increased by $80.9 million (29.5%) to $354.8 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $273.9 million). Operating margin (operating income divided by operating revenues), increased to 27.5% in the three months ended June 30, 2014 from 24.1% in the three months ended June 30, 2013. The increase in operating income and margin resulted from a higher relative increase in operating revenues (13.6%) than in operating expenses (8.5%) during the period. Adjusted operating income increased by $66.4 million (21.4%) to $377.0 million in the three months ended June 30, 2014 from $310.6 million in the three months ended June 30, 2013. Adjusted operating margin increased to 41.8% in the three months ended June 30, 2014 from 39.3% in the three months ended June 30, 2013. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues, a reconciliation of operating income to adjusted operating income and additional important disclosures regarding net revenues, adjusted operating income and adjusted operating margin.
Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes between periods are as follows:
 
 
 
 
 
Variance
 
Three months ended June 30,
 
2014 vs 2013
$ in millions
2014
 
2013
 
$ Change
 
% Change
Equity in earnings of unconsolidated affiliates
5.5

 
6.9

 
(1.4
)
 
(20.3
)%
Interest and dividend income
3.1

 
2.1

 
1.0

 
47.6
 %
Interest expense
(18.2
)
 
(10.0
)
 
(8.2
)
 
82.0
 %
Other gains and losses, net
16.2

 
0.4

 
15.8

 
N/A

Other income/(loss) of CSIP, net
7.7

 
—

 
7.7

 
N/A

Other income and expenses of CIP:
 
 
 
 


 


Interest and dividend income of CIP
48.0

 
50.7

 
(2.7
)
 
(5.3
)%
Interest expense of CIP
(30.3
)
 
(30.6
)
 
0.3

 
(1.0
)%
Other gains/(losses) of CIP, net
36.8

 
(1.6
)
 
38.4

 
N/A

Total other income and expenses
68.8

 
17.9

 
50.9

 
284.4
 %
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates decreased by $1.4 million (20.3%) to $5.5 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $6.9 million). The decrease is comprised of a $2.1 million reduction in our earnings of our investment in Invesco Mortgage Capital Inc., a $1.2 million net decrease in our private equity and certain other partnership investments, and a $0.6 million decrease in our joint venture investments in China. These decreases are partially offset by a $2.5 million increase in earnings from our real estate partnership investments.

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Interest and dividend income and interest expense
Interest and dividend income increased by $1.0 million (47.6%) to $3.1 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $2.1 million).
Interest expense increased by $8.2 million (82.0%) to $18.2 million in the three months ended June 30, 2014 (three months ended June 30, 2013: $10.0 million) primarily due to the changes in long-term financing arrangements made during the fourth quarter of 2013 which increased the overall borrowing costs versus the comparative period.
Other gains and losses, net
Other gains and losses, net were a gain of $16.2 million in the three months ended June 30, 2014 as compared to a net gain of $0.4 million in the three months ended June 30, 2013. Included within other gains and losses, net in the three months ended June 30, 2014 is a net realized gains from available-for-sale and other investments of $8.1 million (three months ended June 30, 2013: $0.2 million net gain), a net gain of $7.0 million resulting from the appreciation of investments held for our deferred compensation plans (three months ended June 30, 2013: $0.5 million net gain), and $0.8 million of unrealized gains from other trading investments (three months ended June 30, 2013: none). The three months ended June 30, 2013 also included a net loss of $0.3 million related to the mark-to-market of foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the Pound Sterling/U.S Dollar foreign exchange rate.
Other income/(loss) of CSIP
In the three months ended June 30, 2014, other income/(loss) of CSIP, net totaled $7.7 million in income and consists of $2.7 million of interest and dividend income and other gains/(losses) of $5.0 million on investment holdings. CSIP products were initially consolidated in the third quarter of 2013. See Part I, Item 1, Financial Statements - Notes 1, "Accounting Policies" and 12, “Consolidated Sponsored Investment Products,” for additional details.
Non-operating income and expense of CIP
In the three months ended June 30, 2014, interest and dividend income of CIP decreased by $2.7 million (5.3%) to $48.0 million (three months ended June 30, 2013: $50.7 million). Interest expense of CIP decreased by $0.3 million (1.0%) to $30.3 million (three months ended June 30, 2013: $30.6 million). The decline in interest income and interest expense of CIP in the 2014 period is due to the impact of CLO deconsolidation and paydowns of CLO notes issued prior to 2012 exceeding the impact of CLO notes issued subsequent to January 1, 2012.
Included in other gains/(losses) of CIP, net, are realized and unrealized gains and losses on the underlying investments and debt of CIP. In the three months ended June 30, 2014, other gains and losses of CIP were a net gain of $36.8 million, as compared to a net loss of $1.6 million in the three months ended June 30, 2013. The net gain in the 2014 period is primarily due to an increase in market value of private equity investments. The net loss in the 2013 period is primarily due to losses associated with the increase in market value of the long-term debt of CLOs exceeding gains associated with private equity and CLO investments.
Net impact of CIP and related noncontrolling interests in consolidated entities
As illustrated in the Summary of Income Statement Impact of CIP table at the beginning of this Results of Operations section, the consolidation of investment products during the three months ended June 30, 2014 resulted in an increase to net income of $36.7 million before attribution to noncontrolling interests. Invesco invests in only a portion of these products, and as a result this net gain is offset by noncontrolling interests of $38.7 million, resulting in a net decrease in net income of the company of $2.0 million.
The consolidation of investment products during the three months ended June 30, 2013 resulted in a decrease to net income of $2.4 million before attribution to noncontrolling interests. The addition of noncontrolling interest losses of $1.1 million, resulted in a total net decrease in net income of the company of $3.5 million.
Noncontrolling interests in consolidated entities represent the profit or loss amounts attributed to third party investors in CIP. Movements in amounts attributable to noncontrolling interests in consolidated entities on the company's Condensed Consolidated Statements of Income generally offset the gains and losses, interest income and interest expense of CIP.
Additionally, CIP represent less than 1% of the company's AUM. Therefore, the net gains or losses of CIP are not indicative of the performance of the company's aggregate assets under management.

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CIP are taxed at the investor level and not at the product level; therefore, there is no tax provision reflected in the net impact of CIP.
Income Tax Expense
The company's subsidiaries operate in several taxing jurisdictions around the world, each with its own statutory income tax rate. As a result, the blended average statutory tax rate will vary from year to year depending on the mix of the profits and losses of the company's subsidiaries.
Our effective tax rate decreased to 25.3% for the three months ended June 30, 2014 (three months ended June 30, 2013: 28.6%). The inclusion of income from non-controlling interests in consolidated entities decreased our effective tax rate by 2.8% in 2014 and 0.1% in 2013. 2014 included a 1.1% rate increase as a result of applying the legislation changes in New York (enacted in Q1) to a deferred tax asset recognized in Q2. The recognition of previously unrecognized tax benefits decreased our rate by 1.1%. See Part I, Item 1, Financial Statements - Note 9 "Taxation" for additional information. The remainder of the rate movement was primarily due to changes in the mix of pre-tax income.

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Assets Under Management movements for the six months ended June 30, 2014 compared with the six months ended June 30, 2013
The following presentation and discussion of AUM includes Passive and Active AUM. Passive AUM include ETFs, UITs, leveraged fund balances upon which we do not earn a fee, and other passive mandates. Active AUM are total AUM less Passive AUM.
The AUM tables and the discussion below refer to AUM as long-term and short-term. Short-term AUM include institutional money market and Invesco PowerShares QQQ AUM. Long-term AUM are total AUM less short-term AUM.
Changes in AUM were as follows:
 
For the six months ended June 30,
 
2014
 
2013
$ in billions
Total AUM
 
Active
 
Passive
 
Total AUM
 
Active
 
Passive
January 1
778.7

 
639.0

 
139.7

 
667.4

 
553.4

 
114.0

Long-term inflows
92.7

 
77.7

 
15.0

 
92.0

 
66.7

 
25.3

Long-term outflows
(93.1
)
 
(82.5
)
 
(10.6
)
 
(76.3
)
 
(58.7
)
 
(17.6
)
Long-term net flows
(0.4
)
 
(4.8
)
 
4.4

 
15.7

 
8.0

 
7.7

Net flows in Invesco Powershares QQQ fund
(4.3
)
 
—

 
(4.3
)
 
0.3

 
—

 
0.3

Net flows in institutional money market funds
(5.0
)
 
(5.0
)
 
—

 
4.1

 
4.1

 
—

Total net flows
(9.7
)
 
(9.8
)
 
0.1

 
20.1

 
12.1

 
8.0

Market gains and losses/reinvestment
29.3

 
23.3

 
6.0

 
29.2

 
26.8

 
2.4

Foreign currency translation
4.1

 
4.1

 
—

 
(11.1
)
 
(10.4
)
 
(0.7
)
June 30
802.4

 
656.6

 
145.8

 
705.6

 
581.9

 
123.7

Average AUM
 
 
 
 
 
 
 
 
 
 
 
Average long-term AUM
667.2

 
569.7

 
97.5

 
597.5

 
507.7

 
89.8

Average short-term AUM
117.7

 
73.9

 
43.8

 
108.2

 
75.0

 
33.2

Average AUM
784.9

 
643.6

 
141.3

 
705.7

 
582.7

 
123.0

Revenue yield
 
 
 
 
 
 
 
 
 
 
 
Gross revenue yield on AUM (1)
65.6

 
77.3

 
13.0

 
64.0

 
75.2

 
11.1

Gross revenue yield on AUM before performance fees (1)
64.7

 
76.1

 
13.0

 
62.8

 
73.6

 
11.1

Net revenue yield on AUM (2)
45.6

 
52.7

 
13.0

 
44.7

 
51.8

 
11.1

Net revenue yield on AUM before performance fees (2)
44.5

 
51.5

 
13.0

 
43.4

 
50.2

 
11.1

(1)
Gross revenue yield on AUM is equal to annualized total operating revenues divided by average AUM, excluding joint venture (JV) AUM. Our share of the average AUM in the six months ended June 30, 2014 for our JVs in China was $4.9 billion (June 30, 2013: $3.5 billion). It is appropriate to exclude the average AUM of our JVs for purposes of computing gross revenue yield on AUM, because the revenues resulting from these AUM are not presented in our operating revenues. Under U.S. GAAP, our share of the net income of the JVs is recorded as equity in earnings of unconsolidated affiliates on our Condensed Consolidated Statements of Income. Additionally, the numerator of the gross revenue yield measure, operating revenues, excludes the management fees earned from CIP; however, the denominator of the measure includes the AUM of these investment products. Therefore, the gross revenue yield measure is not considered representative of the company's true effective fee rate from AUM.
(2)
Net revenue yield on AUM is equal to annualized net revenues divided by average AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues.

Flows
AUM at June 30, 2014 were $802.4 billion (June 30, 2013: $705.6 billion). During the six months ended June 30, 2014, long-term net outflows decreased AUM by $0.4 billion. We experienced net outflows in institutional money market funds of $5.0 billion and net outflows in Invesco PowerShares QQQ fund of $4.3 billion during the six months ended June 30, 2014. During the six months ended June 30, 2013, net long-term inflows increased AUM by $15.7 billion. We experienced net inflows in institutional money market funds of $4.1 billion and net inflows of Invesco PowerShares QQQ fund of $0.3 billion during the six months ended June 30, 2013.
Net outflows during the six months ended June 30, 2014 included active net long-term outflows of $4.8 billion, offset by net long-term inflows of passive AUM of $4.4 billion. Net outflows were comprised of net outflows from our retail distribution

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channel of $0.6 billion, offset by inflows into our institutional channel of $0.2 billion. During the six months ended June 30, 2014, U.K. equity income AUM experienced net outflows of $12.9 billion. During the second quarter of 2014, U.K. AUM experienced a single client withdrawal of $13.1 billion which included $6.2 billion of U.K. equity income AUM, $1.3 billion of other equity AUM and $5.6 billion of balanced AUM.
Long-term net inflows during the six months ended June 30, 2013 were $15.7 billion, and included net long-term active inflows of $8.0 billion and passive inflows of $7.7 billion. Long-term net flows in 2013 were driven by net inflows of $15.2 billion into our retail distribution channel, primarily in the fixed income and balanced asset classes.
Average AUM during the six months ended June 30, 2014 were $784.9 billion, compared to $705.7 billion for the six months ended June 30, 2013.
Market Returns
During the six months ended June 30, 2014, positive market movement increased AUM by $29.3 billion, with $19.4 billion attributed to our equity asset class. Our fixed income, alternatives and balanced asset classes were also positively impacted by the change in market valuations during the period, with market returns of $4.2 billion, $3.5 billion and $2.3 billion, respectively. During the six months ended June 30, 2013, market gains increased AUM by $29.2 billion and included $31.6 billion in positive market movement of our equity asset class, which was partially offset by losses of $2.4 billion in our fixed income asset class.
Foreign Exchange Rates
The table below illustrates the spot foreign exchange rates used for translation of non-U.S. Dollar denominated AUM into U.S. Dollars:
Foreign Exchange Rates
June 30, 2014
 
December 31, 2013
 
June 30, 2013
 
December 31, 2012
Pound Sterling ($ per £)
1.710

 
1.655

 
1.518

 
1.625

Canadian Dollar (CAD per $)
1.066

 
1.063

 
1.054

 
0.996

Japan (¥ per $)
101.310

 
105.080

 
99.320

 
86.520

Euro ($ per Euro)
1.369

 
1.378

 
1.300

 
1.319

During the six months ended June 30, 2014, we experienced increases in AUM of $4.1 billion due to changes in foreign exchange rates. Changes in foreign exchange rates in the six months ended June 30, 2014 were driven primarily by the strengthening of the Pound Sterling relative to the U.S. Dollar, which was reflected in the translation of our Pound Sterling-based AUM into U.S. Dollars. The Japanese Yen also strengthened relative to the U.S. Dollar, which was reflected in the translation of our Yen-based AUM into U.S. Dollars, and was offset by the weakening of the Euro and the Canadian Dollar relative to the U.S. Dollar, which was reflected in the translation of Euro-based and Canadian Dollar-based AUM into U.S. Dollars.
In the six months ended June 30, 2013, AUM decreased by $11.1 billion due to foreign exchange rate changes impacted by the weakening of the Pound Sterling, the Euro, the Canadian Dollar and the Japanese Yen relative to the U.S. Dollar, which was reflected in the translation of our Sterling-based, Euro-based, Canadian Dollar-based and Japanese Yen-based AUM into U.S. Dollars.
Revenue Yield
Net revenue yield on AUM increased 0.9 basis points to 45.6 basis points in the six months ended June 30, 2014 as compared to the same period in 2013 (six months ended June 30, 2013: 44.7 basis points). Excluding performance fees, the net revenue yield increased 1.1 basis points to 44.5 basis points in the six months ended June 30, 2014 from the six months ended June 30, 2013 level of 43.4 basis points.
Changes in our AUM mix significantly impact our net revenue yield. For example, on an asset class basis, our equity and balanced AUM generally earn a higher net revenue rate than money market and fixed income AUM. The combination of average equity and average balanced AUM increased from 51.9% in the six months ended June 30, 2013 to 55.7% of total average AUM in the six months ended June 30, 2014. The comparable averages for money market and fixed income AUM both reduced. This change in asset class mix correlates with the increase in net revenue yield on AUM before performance fees in the six months ended June 30, 2014 when compared to the six months ended June 30, 2013.
Changes in the geographic mix of our AUM have also factored into the improved revenue yield. Sales have been strong in our Continental European business during recent quarters. As of June 30, 2014, the AUM attributable to clients domiciled in

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Continental Europe accounts for 8.8% of total AUM compared to 6.6% as of June 30, 2013. On average, the AUM in Continental Europe earn a higher fee rate than the company's average fee rate for existing total AUM.
The tables that follow analyze AUM into active and passive style. Passive AUM generally earn a lower effective fee rate than active asset classes. At June 30, 2014, passive AUM were $145.8 billion, representing 18.2% of total AUM at that date; whereas at June 30, 2013, passive AUM were $123.7 billion, representing 17.5% of our total AUM at that date. In the six months ended June 30, 2014, the net revenue yield on passive AUM was 13.0 basis points compared to 11.1 basis points in the six months ended June 30, 2013, an increase of 1.9 basis points, due to changes in mix of passive AUM including sales of the PowerShares ETFs. The increase in the average yield from passive AUM in the six months ended June 30, 2014 when compared to the six months ended June 30, 2013 has offset any reduction in total net revenue yield normally associated with the higher level of passive AUM as a percentage of total AUM.
The increase in passive AUM includes the movements in the Powershares QQQ Nasdaq-100 index tracking fund. The Powershares QQQ fund AUM increased to $44.0 billion at June 30, 2014 compared to $34.0 billion at June 30, 2013. The revenue yield for Invesco on this product is less than 1 basis point, reimbursing Invesco for the portfolio trading services provided to the fund, and flows into and out of this product therefore have a significant impact on the overall net revenue yield and are a significant factor in the year-over-year yield changes.
Gross revenue yield on AUM increased 1.6 basis points to 65.6 basis points in the six months ended June 30, 2014 from the six months ended June 30, 2013 level of 64.0 basis points. Management does not consider gross revenue yield, the most comparable U.S. GAAP-based measure to net revenue yield, to be a meaningful effective fee rate measure for the reasons outlined in footnote 1 to the Changes in AUM table above. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues (gross revenues) to net revenues.
Changes in our AUM by channel, asset class, and client domicile, and average AUM by asset class, are presented below:
Total AUM by Channel (1)
$ in billions
Total
 
Retail
 
Institutional
December 31, 2013 AUM
778.7

 
519.6

 
259.1

Long-term inflows
92.7

 
75.9

 
16.8

Long-term outflows
(93.1
)
 
(76.5
)
 
(16.6
)
Long-term net flows
(0.4
)
 
(0.6
)
 
0.2

Net flows in Invesco PowerShares QQQ fund
(4.3
)
 
(4.3
)
 
—

Net flows in institutional money market funds
(5.0
)
 
—

 
(5.0
)
Total net flows
(9.7
)
 
(4.9
)
 
(4.8
)
Market gains and losses/reinvestment
29.3

 
26.5

 
2.8

Foreign currency translation
4.1

 
3.6

 
0.5

June 30, 2014 AUM
802.4

 
544.8

 
257.6

 
 
 
 
 
 
December 31, 2012 AUM
667.4

 
425.8

 
241.6

Long-term inflows
92.0

 
73.9

 
18.1

Long-term outflows
(76.3
)
 
(58.7
)
 
(17.6
)
Long-term net flows
15.7

 
15.2

 
0.5

Net flows in Invesco PowerShares QQQ fund
0.3

 
0.3

 
—

Net flows in institutional money market funds
4.1

 
—

 
4.1

Total net flows
20.1

 
15.5

 
4.6

Market gains and losses/reinvestment
29.2

 
24.5

 
4.7

Foreign currency translation
(11.1
)
 
(8.1
)
 
(3.0
)
June 30, 2013 AUM
705.6

 
457.7

 
247.9

____________
See accompanying notes immediately following these AUM tables.

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Passive AUM by Channel (1)
$ in billions
Total
 
Retail
 
Institutional
December 31, 2013 AUM
139.7

 
118.2

 
21.5

Long-term inflows
15.0

 
13.5

 
1.5

Long-term outflows
(10.6
)
 
(9.5
)
 
(1.1
)
Long-term net flows
4.4

 
4.0

 
0.4

Net flows in Invesco PowerShares QQQ fund
(4.3
)
 
(4.3
)
 
—

Net flows in institutional money market funds
—

 
—

 
—

Total net flows
0.1

 
(0.3
)
 
0.4

Market gains and losses/reinvestment
6.0

 
6.0

 
—

Foreign currency translation
—

 
—

 
—

June 30, 2014 AUM
145.8

 
123.9

 
21.9

 
 
 
 
 
 
December 31, 2012 AUM
114.0

 
91.2

 
22.8

Long-term inflows
25.3

 
20.4

 
4.9

Long-term outflows
(17.6
)
 
(13.9
)
 
(3.7
)
Long-term net flows
7.7

 
6.5

 
1.2

Net flows in Invesco PowerShares QQQ fund
0.3

 
0.3

 
—

Net flows in institutional money market funds
—

 
—

 
—

Total net flows
8.0

 
6.8

 
1.2

Market gains and losses/reinvestment
2.4

 
2.0

 
0.4

Foreign currency translation
(0.7
)
 
—

 
(0.7
)
June 30, 2013 AUM
123.7

 
100.0

 
23.7

____________
See accompanying notes immediately following these AUM tables.

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Total AUM by Asset Class (2)
$ in billions
Total
 
Equity
 
Fixed Income
 
Balanced
 
Money Market
 
Alternatives(3)
December 31, 2013 AUM
778.7

 
383.1

 
171.7

 
53.3

 
82.7

 
87.9

Long-term inflows
92.7

 
48.8

 
18.0

 
9.3

 
1.4

 
15.2

Long-term outflows
(93.1
)
 
(55.5
)
 
(12.9
)
 
(12.8
)
 
(1.7
)
 
(10.2
)
Long-term net flows
(0.4
)
 
(6.7
)
 
5.1

 
(3.5
)
 
(0.3
)
 
5.0

Net flows in Invesco PowerShares QQQ fund
(4.3
)
 
(4.3
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
(5.0
)
 
—

 
—

 
—

 
(5.0
)
 
—

Total net flows
(9.7
)
 
(11.0
)
 
5.1

 
(3.5
)
 
(5.3
)
 
5.0

Market gains and losses/reinvestment
29.3

 
19.4

 
4.4

 
2.3

 
(0.3
)
 
3.5

Foreign currency translation
4.1

 
2.7

 
0.7

 
0.5

 
—

 
0.2

June 30, 2014 AUM
802.4

 
394.2

 
181.9

 
52.6

 
77.1

(4) 
96.6

Average AUM
784.9

 
384.5

 
177.1

 
52.9

 
78.2

 
92.2

% of total average AUM
100.0
%
 
49.0
%
 
22.6
%
 
6.7
%
 
10.0
%
 
11.7
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012 AUM
667.4

 
295.6

 
171.9

 
43.6

 
73.3

 
83.0

Long-term inflows
92.0

 
39.5

 
23.7

 
12.6

 
1.9

 
14.3

Long-term outflows
(76.3
)
 
(38.6
)
 
(18.6
)
 
(5.5
)
 
(1.5
)
 
(12.1
)
Long-term net flows
15.7

 
0.9

 
5.1

 
7.1

 
0.4

 
2.2

Net flows in Invesco PowerShares QQQ fund
0.3

 
0.3

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
4.1

 
—

 
—

 
—

 
4.1

 
—

Total net flows
20.1

 
1.2

 
5.1

 
7.1

 
4.5

 
2.2

Market gains and losses/reinvestment
29.2

 
31.6

 
(2.4
)
 
0.4

 
—

 
(0.4
)
Foreign currency translation
(11.1
)
 
(7.0
)
 
(1.5
)
 
(1.4
)
 
—

 
(1.2
)
June 30, 2013 AUM
705.6

 
321.4

 
173.1

 
49.7

 
77.8

 
83.6

Average AUM
705.7

 
317.2

 
175.6

 
49.3

 
79.1

 
84.5

% of total average AUM
100.0
%
 
44.9
%
 
24.9
%
 
7.0
%
 
11.2
%
 
12.0
%
____________
See accompanying notes immediately following these AUM tables.

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Passive AUM by Asset Class (2)
$ in billions
Total
 
Equity
 
Fixed Income
 
Balanced
 
Money Market
 
Alternatives(3)
December 31, 2013 AUM
139.7

 
85.6

 
39.5

 
—

 
—

 
14.6

Long-term inflows
15.0

 
9.7

 
3.6

 
—

 
—

 
1.7

Long-term outflows
(10.6
)
 
(6.8
)
 
(1.8
)
 
—

 
—

 
(2.0
)
Long-term net flows
4.4

 
2.9

 
1.8

 
—

 
—

 
(0.3
)
Net flows in Invesco PowerShares QQQ fund
(4.3
)
 
(4.3
)
 
—

 
—

 
—

 
—

Total net flows
0.1

 
(1.4
)
 
1.8

 
—

 
—

 
(0.3
)
Market gains and losses/reinvestment
6.0

 
4.8

 
0.7

 
—

 
—

 
0.5

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

June 30, 2014 AUM
145.8

 
89.0

 
42.0

 
—

 
—

 
14.8

Average AUM
141.3

 
85.9

 
40.9

 
—

 
—

 
14.5

% of total average AUM
100.0
%
 
60.8
%
 
28.9
%
 
—
%
 
—
%
 
10.3
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012 AUM
114.0

 
55.5

 
39.0

 
—

 
—

 
19.5

Long-term inflows
25.3

 
13.1

 
9.7

 
—

 
—

 
2.5

Long-term outflows
(17.6
)
 
(8.0
)
 
(4.6
)
 
—

 
—

 
(5.0
)
Long-term net flows
7.7

 
5.1

 
5.1

 
—

 
—

 
(2.5
)
Net flows in Invesco PowerShares QQQ fund
0.3

 
0.3

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
8.0

 
5.4

 
5.1

 
—

 
—

 
(2.5
)
Market gains and losses/reinvestment
2.4

 
4.8

 
(1.6
)
 
—

 
—

 
(0.8
)
Foreign currency translation
(0.7
)
 
—

 
—

 
—

 
—

 
(0.7
)
June 30, 2013 AUM
123.7

 
65.7

 
42.5

 
—

 
—

 
15.5

Average AUM
123.0

 
62.6

 
42.8

 
—

 
—

 
17.6

% of total average AUM
100.0
%
 
50.9
%
 
34.8
%
 
—
%
 
—
%
 
14.3
%
____________
See accompanying notes immediately following these AUM tables.

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Total AUM by Client Domicile (5)
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental Europe
 
Asia
December 31, 2013 AUM
778.7

 
521.3

 
27.1

 
114.8

 
60.9

 
54.6

Long-term inflows
92.7

 
44.4

 
2.0

 
11.2

 
21.7

 
13.4

Long-term outflows
(93.1
)
 
(40.6
)
 
(2.3
)
 
(26.8
)
 
(11.8
)
 
(11.6
)
Long-term net flows
(0.4
)
 
3.8

 
(0.3
)
 
(15.6
)
 
9.9

 
1.8

Net flows in Invesco PowerShares QQQ fund
(4.3
)
 
(4.3
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
(5.0
)
 
(4.1
)
 
—

 
2.0

 
(3.0
)
 
0.1

Total net flows
(9.7
)
 
(4.6
)
 
(0.3
)
 
(13.6
)
 
6.9

 
1.9

Market gains and losses/reinvestment
29.3

 
20.8

 
1.9

 
2.9

 
2.6

 
1.1

Foreign currency translation
4.1

 
—

 
—

 
3.5

 
—

 
0.6

June 30, 2014 AUM
802.4

 
537.5

 
28.7

 
107.6

 
70.4

 
58.2

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012 AUM
667.4

 
452.5

 
25.2

 
101.9

 
38.8

 
49.0

Long-term inflows
92.0

 
55.7

 
2.1

 
8.1

 
16.4

 
9.7

Long-term outflows
(76.3
)
 
(46.0
)
 
(2.6
)
 
(9.3
)
 
(8.9
)
 
(9.5
)
Long-term net flows
15.7

 
9.7

 
(0.5
)
 
(1.2
)
 
7.5

 
0.2

Net flows in Invesco PowerShares QQQ fund
0.3

 
0.3

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
4.1

 
4.2

 
—

 
0.3

 
(0.1
)
 
(0.3
)
Total net flows
20.1

 
14.2

 
(0.5
)
 
(0.9
)
 
7.4

 
(0.1
)
Market gains and losses/reinvestment
29.2

 
14.7

 
1.6

 
9.8

 
0.5

 
2.6

Foreign currency translation
(11.1
)
 
0.1

 
(1.5
)
 
(6.5
)
 
(0.3
)
 
(2.9
)
June 30, 2013 AUM
705.6

 
481.5

 
24.8

 
104.3

 
46.4

 
48.6

____________
See accompanying notes immediately following these AUM tables.

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Passive AUM by Client Domicile (5) 
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental Europe
 
Asia
December 31, 2013 AUM
139.7

 
135.2

 
0.1

 
—

 
1.8

 
2.6

Long-term inflows
15.0

 
14.8

 
—

 
—

 
0.2

 
—

Long-term outflows
(10.6
)
 
(9.9
)
 
—

 
—

 
(0.3
)
 
(0.4
)
Long-term net flows
4.4

 
4.9

 
—

 
—

 
(0.1
)
 
(0.4
)
Net flows in Invesco PowerShares QQQ fund
(4.3
)
 
(4.3
)
 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
0.1

 
0.6

 
—

 
—

 
(0.1
)
 
(0.4
)
Market gains and losses/reinvestment
6.0

 
5.9

 
—

 
—

 
0.1

 
—

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

June 30, 2014 AUM
145.8

 
141.7

 
0.1

 
—

 
1.8

 
2.2

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012 AUM
114.0

 
107.8

 
0.1

 
—

 
1.1

 
5.0

Long-term inflows
25.3

 
24.8

 
—

 
—

 
0.4

 
0.1

Long-term outflows
(17.6
)
 
(15.2
)
 
—

 
—

 
(0.2
)
 
(2.2
)
Long-term net flows
7.7

 
9.6

 
—

 
—

 
0.2

 
(2.1
)
Net flows in Invesco PowerShares QQQ fund
0.3

 
0.3

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Total net flows
8.0

 
9.9

 
—

 
—

 
0.2

 
(2.1
)
Market gains and losses/reinvestment
2.4

 
2.0

 
—

 
—

 
—

 
0.4

Foreign currency translation
(0.7
)
 
—

 
—

 
—

 
—

 
(0.7
)
June 30, 2013 AUM
123.7

 
119.7

 
0.1

 
—

 
1.3

 
2.6

(1)
Channel refers to the internal distribution channel from which the AUM originated. Retail AUM represents AUM distributed by the company's retail sales team. Institutional AUM represents AUM distributed by our institutional sales team. This aggregation is viewed as a proxy for presenting AUM in the retail and institutional markets in which the company operates.
(2)
Asset classes are descriptive groupings of AUM by common type of underlying investments.
(3)
There have been no significant changes to the managed objectives under the Alternatives asset class, which are disclosed in our most recent Form 10-K for the year ended December 31, 2013.
(4)
Ending Money Market AUM includes $73.1 billion in institutional money market AUM and $4.0 billion in retail money market AUM.
(5)
Client domicile disclosure groups AUM by the domicile of the underlying clients.

Results of Operations for the six months ended June 30, 2014 compared to the six months ended June 30, 2013
To assist in the comparisons, the discussion that follows will separate the impact of CIP from the overall consolidated results of operations. The impact is illustrated in the tables immediately below by a column which shows the dollar-value change in the consolidated figures, as caused by the consolidation of CIP. For example, the impact of CIP on total operating revenues for the six months ended June 30, 2014 was a reduction of $17.0 million. This indicates that the consolidation of CIP reduced consolidated revenues by $17.0 million, primarily reflecting the elimination upon consolidation of the revenues earned by Invesco for managing these investment products. The discussion below includes the use of non-GAAP financial measures. See “Schedule of Non-GAAP Information” for additional details and reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures.

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Summary of Income Statement Impact of CIP
 
Six months ended June 30,
 
2014
 
2013
$ in millions
Impact of CIP
 
Invesco Ltd. Consolidated
 
Impact of CIP
 
Invesco Ltd. Consolidated
Total operating revenues
(17.0
)
 
2,559.4

 
(17.8
)
 
2,247.7

Total operating expenses
14.3

 
1,960.3

 
11.8

 
1,706.8

Operating income
(31.3
)
 
599.1

 
(29.6
)
 
540.9

Equity in earnings of unconsolidated affiliates
(3.4
)
 
15.5

 
(1.2
)
 
15.0

Interest and dividend income
(1.5
)
 
6.0

 
(3.7
)
 
4.3

Interest expense
—

 
(36.9
)
 
—

 
(19.7
)
Other gains and losses, net
(4.7
)
 
22.8

 
—

 
18.1

Other income/(loss) of CSIP, net
—

 
15.9

 
—

 
—

Interest and dividend income of CIP
96.3

 
96.3

 
101.0

 
101.0

Interest expense of CIP
(60.6
)
 
(60.6
)
 
(63.3
)
 
(63.3
)
Other gains/(losses) of CIP, net
63.3

 
63.3

 
(22.7
)
 
(22.7
)
Income from continuing operations before taxes
58.1

 
721.4

 
(19.5
)
 
573.6

Income tax provision
—

 
(196.0
)
 
—

 
(169.8
)
Income from continuing operations, net of taxes
58.1

 
525.4

 
(19.5
)
 
403.8

Income/(loss) from discontinued operations, net of taxes
—

 
(1.8
)
 
—

 
(0.5
)
Net income
58.1

 
523.6

 
(19.5
)
 
403.3

Net (income)/loss attributable to noncontrolling interests in consolidated entities
(54.8
)
 
(61.3
)
 
19.1

 
21.5

Net income attributable to common shareholders
3.3

 
462.3

 
(0.4
)
 
424.8

Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods, are as follows:
 
 
 
 
 
Variance
 
Six months ended June 30,
 
2014 vs 2013
$ in millions
2014
 
2013
 
$ Change
 
% Change
Investment management fees
1,997.3

 
1,730.1

 
267.2

 
15.4
 %
Service and distribution fees
453.3

 
422.0

 
31.3

 
7.4
 %
Performance fees
36.1

 
42.1

 
(6.0
)
 
(14.3
)%
Other
72.7

 
53.5

 
19.2

 
35.9
 %
Total operating revenues
2,559.4

 
2,247.7

 
311.7

 
13.9
 %
Third-party distribution, service and advisory expenses
(816.0
)
 
(712.1
)
 
(103.9
)
 
14.6
 %
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
28.4

 
22.2

 
6.2

 
27.9
 %
CIP
17.0

 
17.8

 
(0.8
)
 
(4.5
)%
Other reconciling items
—

 
2.7

 
(2.7
)
 
(100.0
)%
Net revenues
1,788.8

 
1,578.3

 
210.5

 
13.3
 %
Operating revenues increased by 13.9% in the six months ended June 30, 2014 to $2,559.4 million (six months ended June 30, 2013: $2,247.7 million). Net revenues increased by 13.3% in the six months ended June 30, 2014 to $1,788.8 million (six months ended June 30, 2013: $1,578.3 million). Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of net revenues from joint venture arrangements, plus management and performance fees earned from, less other revenues recorded by, CIP, plus other reconciling items. See “ Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues.

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A significant portion of our business and AUM is based outside of the U.S. The strengthening or weakening of the U.S. Dollar against other currencies, primarily the Pound Sterling, Canadian Dollar, Euro and Japanese Yen will impact our reported revenues and expenses from period to period. The income statements of foreign currency subsidiaries are translated into U.S. Dollars, the reporting currency of the company, using average foreign exchange rates. The impact of foreign exchange rate movements increased operating revenues by $41.2 million, equivalent to 1.6% of total operating revenues, during the six months ended June 30, 2014 when compared to the six months ended June 30, 2013. Additionally, our revenues are directly influenced by the level and composition of our AUM. Therefore, movements in global capital market levels, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period. As illustrated in the Executive Overview, returns from capital markets were mixed in the six months ended June 30, 2014.
Investment Management Fees
Investment management fees increased by $267.2 million (15.4%) in the six months ended June 30, 2014, to $1,997.3 million (six months ended June 30, 2013: $1,730.1 million). In April 2014, our U.K. Invesco Perpetual business introduced a single Fund Management Fee (FMF) for their retail funds to replace the separate annual management fee and registration fee. This results in an increase in investment management fees of $29.6 million and a corresponding a reduction in service and distribution fees during the six months ended June 30, 2014. After adjusting for the introduction of the single FMF, the increase is equivalent to 13.7%. This compares to an 11.2% increase in average AUM and an 11.7% increase in average long-term AUM. As discussed above, the net revenue yield is higher in the six months ended June 30, 2014 when compared to the six months ended June 30, 2013 due to changes in the composition of our AUM. See the company's disclosures regarding the changes in AUM and revenue yields during the six months ended June 30, 2014 in the “Assets Under Management” section above for additional information regarding the movements in AUM. The impact of foreign exchange rate movements increased investment management fees by $38.0 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

Service and Distribution Fees
In the six months ended June 30, 2014, service and distribution fees increased by $31.3 million (7.4%) to $453.3 million (six months ended June 30, 2013: $422.0 million). The impact of foreign exchange rate movements increased service and distribution fees by $0.8 million during the six months ended June 30, 2014. Service and distribution fees increases in 2014 in line with increases in average AUM and revenue yields, as well as a new recurring asset-based service fee that began in 2014. These increases were partially offset by a decrease of $29.6 million driven by the introduction of a single FMF for several U.K. funds as noted above.
Performance Fees
In the six months ended June 30, 2014, performance fees decreased by $6.0 million (14.3%) to $36.1 million when compared to the performance fees in six months ended June 30, 2013 of $42.1 million. The performance fees generated in 2014 arose primarily due to products managed by the U.K. investment teams ($27.6 million) and the Global Quantitative Equity team ($3.5 million). During the six months ended June 30, 2014, U.K. performance fees included $8.0 million from Edinburgh Investment Trust PLC (six months ended June 30, 2013: $17.5 million). Future management fees receivable from the Trust will not include a performance fee component. In the six months ended June 30, 2013, performance fees were generated by a variety of products and were sourced from the U.K. and Europe ($33.8 million), Asia Pacific ($4.5 million) and the U.S. ($3.8 million).
Other Revenues
In the six months ended June 30, 2014, other revenues increased by $19.2 million (35.9%) to $72.7 million (six months ended June 30, 2013: $53.5 million). The impact of foreign exchange rate movements increased other revenues $0.4 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. After allowing for foreign exchange rate changes, the increase in other revenues was $18.8 million. The increase in other revenues during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 include increases in mutual funds front end fees of $6.9 million, real estate acquisition and disposition fees of $8.3 million, transaction commissions of $0.2 million generated by our private equity group, and other revenues of $2.7 million. The increase in front end fees relates to increased sales activity in Continental Europe.
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses increased by $103.9 million (14.6%) in the six months ended June 30, 2014 to $816.0 million (six months ended June 30, 2013: $712.1 million). The impact of foreign exchange rate movements increased third-party distribution, service and advisory expenses by $13.3 million during the six months ended June 30, 2014 as

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compared to the six months ended June 30, 2013. After allowing for foreign exchange rate changes, the increase in third-party distribution, service and advisory expenses was $90.6 million. The increase includes increases in renewal commissions of $42.0 million, distribution fees of $30.9 million, external commissions of $8.4 million and transfer agent fees of $9.3 million. The overall increase is reflective of the higher related retail management fees, service and distribution fees and front-end load fees (recorded in other revenues).
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
Our proportional share of revenues, net of third-party distribution expenses, from joint venture investments increased by $6.2 million (27.9%) to $28.4 million for the six months ended June 30, 2014 (six months ended June 30, 2013: $22.2 million). The increase moved in line with our share of the Invesco Great Wall joint venture's average AUM for the six months ended June 30, 2014, which increased 40% to $4.9 billion compared to $3.5 billion for the six months ended June 30, 2013.
Management, performance and other fees earned from CIP
The elimination of management and performance fees earned from CIP decreased by $0.7 million to $17.1 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $17.8 million) while other revenues of $0.1 million (six months ended June 30, 2013: $0.4 million) were recorded by CIP in the six months ended June 30, 2014. The decrease is primarily due to the impact of funds deconsolidated during the six months ended June 30, 2013. Once the funds are deconsolidated, the management and performance fees are no longer eliminated and are reflected in the respective revenue line items in the Condensed Consolidated Statements of Income.
Operating Expenses
The main categories of operating expenses, and the dollar and percentage changes between periods, are as follows:
 
Six months ended June 30,
 
Variance
$ in millions
2014
 
2013
 
$ Change
 
% Change
Employee compensation
705.0

 
665.6

 
39.4

 
5.9
 %
Third-party distribution, service and advisory
816.0

 
712.1

 
103.9

 
14.6
 %
Marketing
53.6

 
46.0

 
7.6

 
16.5
 %
Property, office and technology
188.0

 
135.1

 
52.9

 
39.2
 %
General and administrative
197.7

 
144.8

 
52.9

 
36.5
 %
Transaction and integration
—

 
3.2

 
(3.2
)
 
(100.0
)%
Total operating expenses
1,960.3

 
1,706.8

 
253.5

 
14.9
 %
The table below sets forth these expense categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expense.
$ in millions
Six months ended June 30, 2014
 
% of Total Operating Expenses
 
% of Operating Revenues
 
Six months ended June 30, 2013
 
% of Total Operating Expenses
 
% of Operating Revenues
Employee compensation
705.0

 
36.0
%
 
27.5
%
 
665.6

 
39.0
%
 
29.6
%
Third-party distribution, service and advisory
816.0

 
41.6
%
 
31.9
%
 
712.1

 
41.7
%
 
31.7
%
Marketing
53.6

 
2.7
%
 
2.1
%
 
46.0

 
2.7
%
 
2.0
%
Property, office and technology
188.0

 
9.6
%
 
7.3
%
 
135.1

 
7.9
%
 
6.0
%
General and administrative
197.7

 
10.1
%
 
7.7
%
 
144.8

 
8.5
%
 
6.5
%
Transaction and integration
—

 
—
%
 
—
%
 
3.2

 
0.2
%
 
0.1
%
Total operating expenses
1,960.3

 
100.0
%
 
76.6
%
 
1,706.8

 
100.0
%
 
75.9
%
During the six months ended June 30, 2014, operating expenses increased by $253.5 million (14.9%) to $1,960.3 million (six months ended June 30, 2013: $1,706.8 million). Excluding transaction and integration, all expense categories increased in 2014 when compared to 2013. The impact of foreign exchange rate movements increased operating expenses by $28.2 million, or 1.4% of total operating expenses, during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

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Employee Compensation
Employee compensation increased $39.4 million (5.9%) to $705.0 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $665.6 million). The impact of foreign exchange rate movements increased employee compensation by $7.0 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. After allowing for foreign exchange rate changes, the increase in employee compensation was $32.4 million.
Direct compensation increased $35.6 million, primarily due to improved company performance. The increase includes higher base salaries and incentive compensation of $40.6 million other direct compensation expense of $2.4 million. Other employee compensation decreased $5.1 million and includes a decrease in commissions and other compensation costs, offset by an increase in staff relocation costs during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. Both direct and other compensation include costs associated with staff severance, including the acceleration of share-based costs. The six months ended June 30, 2014 includes total severance costs of $7.2 million associated with a business optimization initiative undertaken during the first quarter.
Headcount at June 30, 2014 was 6,070 (at June 30, 2013, on a continuing operations basis: 5,818).
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses are discussed above in the operating and net revenues section.
Marketing
Marketing expenses increased by $7.6 million (16.5%) in the six months ended June 30, 2014 to $53.6 million (six months ended June 30, 2013: $46.0 million). Excluding the impact of foreign exchange rate movements that increased marketing expenses $1.0 million, the increase in marketing expenses was $6.6 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.
The increase during the six months ended June 30, 2014 includes increases in advertising expenses of $3.8 million, primarily in EMEA, client event expenses of $1.8 million, marketing travel expenses of $0.7 million and other marketing costs of $0.3 million.
Property, Office and Technology
Property, office and technology costs increased by $52.9 million (39.2%) to $188.0 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $135.1 million). The impact of foreign exchange rate movements increased property, office and technology expenses by $1.3 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. After allowing for foreign exchange rate movements, the increase was $51.6 million.
Property and office costs increased $39.0 million in the six months ended June 30, 2014 compared to the same period in 2013, due primarily to charges of $35.8 million associated with vacating leased properties in connection with a business optimization initiative undertaken during the period. Property and office costs are generally trending upwards, due to market conditions. However, the business optimization initiative undertaken in the first quarter of 2014 has partially mitigated the increases in the current period, and therefore property and office costs (excluding the business optimization charge) have remained comparable to the same period in 2013. Other increases in property and office costs in the six months ended June 30, 2014 as compared to 2013 include $2.4 million in operating service and property management fees.
Technology and communications expenses increased $12.6 million in the six months ended June 30, 2014 over the comparable 2013 period primarily due to increase in depreciation and maintenance of $5.2 million and increased outsourced administration costs of $7.6 million driven by increased European sales activity.
General and Administrative
General and administrative expenses increased by $52.9 million (36.5%) to $197.7 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $144.8 million). The impact of foreign exchange rate movements increased general and administrative expenses by $5.6 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. After allowing for foreign exchange rate movements, the increase was $47.3 million.
The increase in general and administrative expense is primarily due to an FCA penalty of £18.6 million ($31.1 million) and related legal costs of $0.5 million that were incurred in the six months ended June 30, 2014. Other increases include $14.8 million of mutual fund expenses due in part to a $5.3 million fund reimbursement settlement cost associated with historical

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management fees in the six months ended June 30, 2014, as well as increases of $0.9 million in product launch costs and other general and administrative costs. The six months ended June 30, 2013 included a $2.5 million legal settlement credit.
Transaction and integration
There were no transaction and integration charges in the six months ended June 30, 2014 (six months ended June 30, 2013:$3.2 million). Transaction and integration expenses during the six months ended June 30, 2013 relate to fund mergers and include professional services and shareholder communications costs. These costs ceased in the first half of 2013.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income increased by $58.2 million (10.8%) to $599.1 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $540.9 million). Operating margin (operating income divided by operating revenues), decreased to 23.4% in the six months ended June 30, 2014 from 24.1% in the six months ended June 30, 2013. The decrease in operating margin resulted from a lower relative increase in operating revenues (13.9%) than in operating expenses (14.9%) during the period. Adjusted operating income increased by $123.2 million (20.0%) to $740.0 million in the six months ended June 30, 2014 from $616.8 million in the six months ended June 30, 2013. Adjusted operating margin increased to 41.4% in the six months ended June 30, 2014 from 39.1% in the six months ended June 30, 2013. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues, a reconciliation of operating income to adjusted operating income and additional important disclosures regarding net revenues, adjusted operating income and adjusted operating margin.
Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes between periods are as follows:
 
 
 
 
 
Variance
 
Six months ended June 30,
 
2014 vs 2013
$ in millions
2014
 
2013
 
$ Change
 
% Change
Equity in earnings of unconsolidated affiliates
15.5

 
15.0

 
0.5

 
3.3
 %
Interest and dividend income
6.0

 
4.3

 
1.7

 
39.5
 %
Interest expense
(36.9
)
 
(19.7
)
 
(17.2
)
 
87.3
 %
Other gains and losses, net
22.8

 
18.1

 
4.7

 
26.0
 %
Other income/(loss) of CSIP, net
15.9

 
—

 
15.9

 
N/A

Other income and expenses of CIP:
 
 
 
 


 


Interest and dividend income of CIP
96.3

 
101.0

 
(4.7
)
 
(4.7
)%
Interest expense of CIP
(60.6
)
 
(63.3
)
 
2.7

 
(4.3
)%
Other gains/(losses) of CIP, net
63.3

 
(22.7
)
 
86.0

 
N/A

Total other income and expenses
122.3

 
32.7

 
89.6

 
274.0
 %
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates increased by $0.5 million (3.3%) to $15.5 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $15.0 million). The increase in equity in earnings is comprised of a $2.7 million increase in our share of earnings of our joint venture investments in China, $1.4 million in net increases in our share of the market-driven valuation change in the underlying holdings of our private equity partnership investments, $2.6 million increase in earnings from our real estate partnership investments, partially offset by decreases of $5.6 million in our investment in Invesco Mortgage Capital Inc. and $0.6 million in certain other partnerships.
Interest and dividend income and interest expense
Interest and dividend income increased by $1.7 million (39.5%) to $6.0 million in the six months ended June 30, 2014 (three months ended June 30, 2013: $4.3 million).
Interest expense increased by $17.2 million (87.3%) to $36.9 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $19.7 million) primarily due to the changes in long-term financing arrangements made during the fourth quarter of 2013 which increased the overall borrowing costs versus the comparative period.

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Other gains and losses, net
Other gains and losses, net were a gain of $22.8 million in the six months ended June 30, 2014 as compared to a net gain of $18.1 million in the six months ended June 30, 2013. Included within other gains and losses, net in the six months ended June 30, 2014 is a net gain of $10.9 million resulting from the appreciation of investments held for our deferred compensation plans (six months ended June 30, 2013: $18.5 million net gain) and net realized gains from available-for-sale and other investments of $10.8 million (six months ended June 30, 2013: $1.9 million net gain). The six months ended June 30, 2013 also included a net loss of $0.7 million related to the mark-to-market of foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the Pound Sterling/U.S Dollar foreign exchange rate and $1.6 million in net foreign exchange losses on the revaluation of intercompany foreign currency denominated loans into the various functional currencies of our subsidiaries.
Other income/(loss) of CSIP
In the six months ended June 30, 2014, other income/(loss) of CSIP, net totaled $15.9 million in income and consists of $4.4 million of interest and dividend income and other gains/(losses) of $11.5 million on investment holdings. CSIP products were initially consolidated in the third quarter of 2013. See Part I, Item 1, Financial Statements - Notes 1, "Accounting Policies" and 12, “Consolidated Sponsored Investment Products,” for additional details.
Non-operating income and expense of CIP
In the six months ended June 30, 2014, interest and dividend income of CIP decreased by $4.7 million (4.7%) to $96.3 million (six months ended June 30, 2013: $101.0 million). Interest expense of CIP decreased by $2.7 million (4.3%) to $60.6 million (six months ended June 30, 2013: $63.3 million). The decline in interest income and interest expense of CIP in the 2014 period is due to the impact of CLO deconsolidation and paydowns of CLO notes issued prior to 2012 exceeding the impact of CLO notes issued subsequent to January 1, 2012.
Included in other gains/(losses) of CIP, net, are realized and unrealized gains and losses on the underlying investments and debt of CIP. In the six months ended June 30, 2014, other gains and losses of CIP were a net gain of $63.3 million, as compared to a net loss of $22.7 million in the six months ended June 30, 2013. The net gain in the 2014 period is primarily associated with an increase in market value of private equity investments exceeding losses associated with an increase in the market value of the long-term debt of CLOs. The net loss in the 2013 period is primarily due to losses associated with the increase in market value of the long-term debt of CLOs exceeding gains associated with private equity and CLO investments.
Net impact of CIP and related noncontrolling interests in consolidated entities
As illustrated in the Summary of Income Statement Impact of CIP table at the beginning of this Results of Operations section, the consolidation of investment products during the six months ended June 30, 2014 resulted in an increase to net income of $58.1 million before attribution to noncontrolling interests. Invesco invests in only a portion of these products, and as a result this net gain is offset by noncontrolling interests of $54.8 million, resulting in a net increase in net income of the company of $3.3 million.
The consolidation of investment products during the six months ended June 30, 2013 resulted in a decrease to net income of $19.5 million before attribution to noncontrolling interests. This net loss is offset by noncontrolling interests of $19.1 million, resulting in a net decrease in net income of the company of $0.4 million.
Income Tax Expense
Our effective tax rate decreased to 27.2% for the six months ended June 30, 2014 (six months ended June 30, 2013: 29.6%). The inclusion of income from non-controlling interests in consolidated entities decreased our effective tax rate by 2.5% in 2014, whereas the inclusion of losses increased our rate by 1.1% in 2013. 2014 includes a 1.1% rate increase as result of tax legislation changes in New York and a 1.2% rate increase as a result of the FCA settlement referenced above. The recognition of previously unrecognized tax benefits decreased our rate by 0.7%. See Part I, Item 1, Financial Statements - Note 9 "Taxation" for additional information. The remainder of the rate movement was primarily due to changes in the mix of pre-tax income.
Income from Discontinued Operations
On December 31, 2013, the company completed the sale of Atlantic Trust. The operating results and the gain associated with the sale are reflected as discontinued operations in the Condensed Consolidated Statements of Income and are therefore excluded from the continuing operations of Invesco. See Part I, Item 1. Financial Statements, Note 15, "Discontinued Operations."

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Schedule of Non-GAAP Information
We are presenting the following non-GAAP performance measures: net revenues (and by calculation, net revenue yield on AUM), adjusted operating income (and by calculation, adjusted operating margin), adjusted net income attributable to common shareholders (and by calculation, adjusted diluted earnings per share (EPS)). We believe these non-GAAP measures provide greater transparency into our business on an ongoing operations basis and allow more appropriate comparisons with industry peers. Management uses these performance measures to evaluate the business, and they are consistent with internal management reporting. The most directly comparable U.S. GAAP measures are operating revenues (and by calculation, gross revenue yield on AUM), operating income (and by calculation, operating margin), and net income attributable to common shareholders (and by calculation, diluted EPS). Each of these measures is discussed more fully below.
These non-GAAP measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate. The tax effect related to reconciling items that are presented net of tax have been calculated based on the tax rate attributable to the jurisdiction to which the transaction relates.
The following are reconciliations of operating revenues, operating income (and by calculation, operating margin), and net income attributable to common shareholders (and by calculation, diluted EPS) on a U.S. GAAP basis to net revenues, adjusted operating income (and by calculation, adjusted operating margin), and adjusted net income attributable to common shareholders (and by calculation, adjusted diluted EPS). Notes to the reconciliations follow the tables.
Reconciliation of Operating revenues to Net revenues:
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Operating revenues, U.S. GAAP basis
1,289.9

 
1,135.5

 
2,559.4

 
2,247.7

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments (1)
13.1

 
11.8

 
28.4

 
22.2

Third party distribution, service and advisory expenses (2)
(410.6
)
 
(366.0
)
 
(816.0
)
 
(712.1
)
CIP (3)
8.6

 
9.0

 
17.0

 
17.8

Other reconciling items (6)
—

 
—

 
—

 
2.7

Net revenues
901.0

 
790.3

 
1,788.8

 
1,578.3

Reconciliation of Operating income to Adjusted operating income:
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Operating income, U.S. GAAP basis
354.8

 
273.9

 
599.1

 
540.9

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments (1)
4.8

 
6.5

 
14.4

 
10.4

CIP (3)
10.3

 
18.3

 
31.3

 
29.6

Acquisition/disposition related adjustments (4)
3.4

 
5.6

 
7.2

 
13.4

Compensation expense related to market valuation changes in deferred compensation plans (5)
3.7

 
3.0

 
8.1

 
10.5

Other reconciling items (6)
—

 
3.3

 
79.9

 
12.0

Adjusted operating income
377.0

 
310.6

 
740.0

 
616.8

 
 
 
 
 
 
 
 
Operating margin*
27.5
%
 
24.1
%
 
23.4
%
 
24.1
%
Adjusted operating margin**
41.8
%
 
39.3
%
 
41.4
%
 
39.1
%

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Reconciliation of Net income attributable to common shareholders to Adjusted net income attributable to common shareholders:
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions, except per share data
2014
 
2013
 
2014
 
2013
Net income attributable to common shareholders, U.S. GAAP basis
274.5

 
202.6

 
462.3

 
424.8

CIP, eliminated upon consolidation (3)
2.0

 
3.5

 
(3.3
)
 
0.4

Acquisition/disposition related adjustments, net of tax (4)
8.2

 
14.4

 
19.1

 
22.6

Deferred compensation plan market valuation changes and dividend income less compensation expense, net of tax (5)
(2.3
)
 
1.0

 
(2.6
)
 
(7.5
)
Other reconciling items, net of tax (6)
—

 
2.2

 
68.5

 
8.9

Adjusted net income attributable to common shareholders
282.4

 
223.7

 
544.0

 
449.2

 
 
 
 
 
 
 
 
Average shares outstanding - diluted
436.4

 
450.1

 
436.9

 
449.6

Diluted EPS

$0.63

 

$0.45

 

$1.06

 

$0.94

Adjusted diluted EPS***

$0.65

 

$0.50

 

$1.25

 

$1.00

___________________________
*
Operating margin is equal to operating income divided by operating revenues.
**
Adjusted operating margin is equal to adjusted operating income divided by net revenues.
***
Adjusted diluted EPS is equal to adjusted net income attributable to common shareholders divided by the weighted average shares outstanding amount used in the calculation of diluted EPS.
(1)
Proportional share of net revenues and operating income from joint venture investments
The company's two joint venture investments in China are proportionately consolidated in the company's non-GAAP measures. Enhancing our operations in China is one effort that we believe could improve our competitive position over time. Accordingly, we believe that it is appropriate to evaluate the contribution of our joint venture investments to the operations of the business.
(2)
Third-party distribution, service and advisory expenses
Third-party distribution, service and advisory expenses include renewal commissions, management fee rebates and distribution costs (12b-1 and marketing support) paid to brokers and independent financial advisors, and other service and administrative fees paid to third parties. While the terms used for these types of expenses vary by geography, they are all expense items that are closely linked to the value of AUM and the revenue earned by Invesco from AUM. Since the company has been deemed to be the principal in the third-party arrangements, the company must reflect these expenses gross of operating revenues under U.S. GAAP.
Management believes that the deduction of third-party distribution, service and advisory expenses from operating revenues in the computation of net revenues (and by calculation, net revenue yield on AUM) and the related computation of adjusted operating income (and by calculation, adjusted operating margin) appropriately reflects the nature of these expenses as revenue-sharing activities, as these costs are passed through to external parties who perform functions on behalf of, and distribute, the company’s managed funds. Further, these expenses vary extensively by geography due to the differences in distribution channels. The net presentation assists in identifying the revenue contribution generated by the business, removing distortions caused by the differing distribution channel fees and allowing for a fair comparison with U.S. peer investment managers and within Invesco’s own investment units. Additionally, management evaluates net revenue yield on AUM, which is equal to net revenues divided by average AUM during the reporting period. This financial measure is an indicator of the basis point net revenues we receive for each dollar of AUM we manage and is useful when evaluating the company’s performance relative to industry competitors and within the company for capital allocation purposes.

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(3)
CIP
See Part I, Item 1, Financial Statements, Note 13 - “Consolidated Investment Products” for a detailed analysis of the impact to the company’s Condensed Consolidated Financial Statements from the consolidation of CIP. The reconciling items add back the management and performance fees earned by Invesco from the consolidated products and remove the revenues and expenses recorded by the consolidated products that have been included in the U.S. GAAP Condensed Consolidated Statements of Income.
Management believes that the consolidation of investment products may impact a reader's analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues, operating income and net income for the impact of CIP in calculating the respective net revenues, adjusted operating income and adjusted net income.
CIP Revenue:
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions, except per share data
2014
 
2013
 
2014
 
2013
Management fees earned from CIP, eliminated upon consolidation
6.4

 
6.4

 
12.3

 
12.7

Performance fees earned from CIP, eliminated upon consolidation
2.3

 
3.0

 
4.8

 
5.5

Other revenues recorded by CIP
(0.1
)
 
(0.4
)
 
(0.1
)
 
(0.4
)
CIP related adjustments in arriving at net revenues
8.6

 
9.0

 
17.0

 
17.8

(4)
Acquisition/disposition related adjustments
Acquisition/disposition related adjustments include transaction and integration expenses, intangible asset amortization, employee severance expenses associated with the cessation of activities related to a previous acquisition, tax cash flow benefits resulting from tax amortization of goodwill and indefinite-lived intangible assets, and all related tax effects.
While finite-lived intangible assets are amortized under U.S. GAAP, there is no amortization charge on goodwill and indefinite-lived intangibles. In certain qualifying situations, these can be amortized for tax purposes, generally over a 15-year period, as is the case in the U.S. These cash flows (in the form of reduced taxes payable) represent tax benefits that are not included in the Condensed Consolidated Statements of Income absent an impairment charge or the disposal of the related business. The company receives these cash flow benefits but does not anticipate a sale or impairment of these assets in the foreseeable future, and therefore the deferred tax liability recognized under U.S. GAAP is not expected to be used either through a credit in the Condensed Consolidated Statements of Income or through settlement of tax obligations.
In addition, the results of the discontinued operations of Atlantic Trust have been excluded in arriving at adjusted net income attributable to common shareholders, which is the basis of calculating adjusted diluted EPS. Accordingly, the company's non-GAAP financial measures reflect only the continuing business of Invesco. Management believes this presentation assists in evaluating the ongoing business performance and aids comparability with peer companies that may not have similar discontinued operations.
Transaction and integration expenses reflect the legal, regulatory, advisory, valuation, integration-related employee incentive awards and other professional or consulting fees, general and administrative costs, including travel costs related to transactions and the costs of temporary staff involved in executing the transaction, and the post-closing costs of integrating the acquired business into the company’s existing operations, including incremental costs associated with achieving synergy savings. Additionally, transaction and integration expenses include legal costs related to the defense of legal challenges to auction rate preferred securities redemptions with respect to various closed-end funds included in a prior acquisition. See Part I, Item 1, Financial Statements, Note 11 - “Commitments and Contingencies” for additional information related to this matter.
Management believes it is useful to investors and other users of our Condensed Consolidated Financial Statements to adjust for these acquisition/disposition related adjustments in arriving at adjusted operating income, adjusted operating margin and adjusted diluted EPS, as this will aid comparability of our results period to period, and aid comparability with peer companies that may not have similar acquisition and disposition related charges.

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See table below for a reconciliation of acquisition/disposition related items:
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Acquisition/disposition related:
 
 
 
 
 
 
 
Intangible amortization expense
3.4

 
3.8

 
7.2

 
7.8

Employee compensation expense
—

 
—

 
—

 
2.4

Transaction and integration expense
—

 
1.8

 
—

 
3.2

Adjustments to operating income
3.4

 
5.6

 
7.2

 
13.4

Taxation:
 
 
 
 
 
 
 
Taxation on amortization
(0.4
)
 
(0.4
)
 
(0.8
)
 
(0.8
)
Deferred taxation
5.4

 
5.4

 
10.9

 
10.8

Taxation on transaction and integration
—

 
(0.8
)
 
—

 
(1.3
)
(Income)/loss from discontinued operations, net of taxes
(0.2
)
 
4.6

 
1.8

 
0.5

Adjustments to net income attributable to common shareholders
8.2

 
14.4

 
19.1

 
22.6

(5)
Market movement on deferred compensation plan liabilities
Certain deferred compensation plan awards involve a return to the employee linked to the appreciation (depreciation) of specified investments, typically the funds managed by the employee. Invesco hedges economically the exposure to market movements by holding these investments on its balance sheet. U.S. GAAP requires the appreciation (depreciation) in the compensation liability to be expensed over the award vesting period in proportion to the vested amount of the award as part of compensation expense. The full value of the investment appreciation (depreciation) is immediately recorded below operating income in other gains and losses. This creates a timing difference between the recognition of the compensation expense and the investment gain or loss impacting net income attributable to common shareholders and diluted EPS which will reverse over the life of the award and net to zero at the end of the multi-year vesting period. During periods of high market volatility these timing differences impact compensation expense, operating income and operating margin in a manner which, over the life of the award, will ultimately be offset by gains and losses recorded below operating income on the Condensed Consolidated Statements of Income. The non-GAAP measures exclude the mismatch created by differing U.S. GAAP treatments of the market movement on the liability and the investments.
Since these plans are hedged economically, management believes it is useful to reflect the offset ultimately achieved from hedging the investment market exposure in the calculation of adjusted operating income (and by calculation, adjusted operating margin) and adjusted net income attributable to common shareholders (and by calculation, adjusted diluted EPS), to produce results that will be more comparable period to period. The related fund shares will have been purchased on or around the date of grant, eliminating any ultimate cash impact from market movements that occur over the vesting period.
Additionally, dividend income from investments held to hedge economically deferred compensation plans is recorded as dividend income and as compensation expense on the company’s Condensed Consolidated Statements of Income on the record dates. This dividend income is passed through to the employee participants in the plan and is not retained by the company. The non-GAAP measures exclude this dividend income and related compensation expense.

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(6)
Other reconciling items
Each of these other reconciling items has been adjusted from U.S. GAAP to arrive at the company's non-GAAP financial measures for the reasons either outlined in the paragraphs above, due to the unique character and magnitude of the reconciling item, or because the item represents a continuation of a reconciling item adjusted from U.S. GAAP in a prior period.
 
Three months ended June 30,
 
Six months ended June 30,
$ in millions
2014
 
2013
 
2014
 
2013
Other non-GAAP adjustments:
 
 
 
 
 
 
 
Third party distribution, service and advisory expenses - European infrastructure initiative (a)
—

 
—

 
—

 
2.7

Adjustment to net revenues
—

 
—

 
—

 
2.7

Business optimization charges: (b)
 
 
 
 
 
 
 
Employee compensation
—

 
—

 
7.2

 
—

Property, office and technology
—

 
—

 
35.8

 
—

Regulatory charge (c)
—

 
—

 
31.1

 
—

Legal fees for regulatory charge (c)
—

 
—

 
0.5

 
—

Fund reimbursement settlement costs (d)
—

 
—

 
5.3

 
—

European infrastructure initiative (a)
—

 
3.3

 
—

 
6.3

U.K. FSCS levy true-up (e)
—

 
—

 
—

 
3.0

Adjustments to operating income
—

 
3.3

 
79.9

 
12.0

Foreign exchange hedge amortization (f)
—

 
(0.6
)
 
(0.2
)
 
(0.8
)
Taxation:
 
 
 
 
 
 
 
Taxation on European infrastructure initiative (a)
—

 
(0.6
)
 
—

 
(1.7
)
Taxation on business optimization charges (b)
—

 
—

 
(9.0
)
 
—

Taxation on regulatory charges (c)
—

 
—

 
(0.1
)
 
—

Taxation on fund reimbursement settlement costs (d)
—

 
—

 
(2.1
)
 
—

Taxation on U.K. FSCS levy true-up (e)
—

 
—

 
—

 
(0.7
)
Taxation on foreign exchange hedge amortization (f)
—

 
0.1

 
—

 
0.1

Adjustments to net income attributable to common shareholders
—

 
2.2

 
68.5

 
8.9

a.
European infrastructure transformational initiative: The company outsourced its European transfer agency and made certain structural changes to product and distribution platforms. This initiative was completed in 2013.
b.
Business optimization: Operating expenses for six months ended June 30, 2014 include property related charges of $35.8 million associated with vacating leased properties as part of a business optimization initiative undertaken during the first quarter of 2014. Employee compensation expenses also includes severance costs of $7.2 million related to the initiative.
c.
Operating expenses for six months ended June 30, 2014 include a charge of £18.6 million ($31.1 million) in the first quarter 2014 in respect of the penalty under the settlement of an enforcement proceeding reached with the U.K. Financial Conduct Authority (FCA) pertaining to the company's compliance with certain FCA rules and regulations for the period from May 2008 to November 2012. This charge, together with settlement-related legal costs of $0.5 million, has been recorded in general and administrative expenses.
d.
General and administrative expenses for the six months ended June 30, 2014 include a $5.3 million fund reimbursement settlement cost in the first quarter of 2014 associated with historical management fees.
e.
Included within general and administrative expenses for the six months ended June 30, 2013 was a charge relating to a prior year levy from the U.K. Financial Services Compensation Scheme.
f.
Included within other gains and losses, net is the mark-to-market of foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the Pound Sterling/U.S. Dollar foreign exchange rate. These contracts provided coverage through March 25, 2014. The adjustment from U.S. GAAP to non-GAAP earnings removes the impact of market volatility; therefore, the company's non-GAAP results include only the amortization of the cost of the contracts during the contract period.

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Balance Sheet Discussion
A summary of the balance sheet impact of CIP is presented below. The impact is illustrated in the tables immediately below by a column which shows the dollar-value change in the consolidated figures, as caused by the consolidation of CIP. For example, the impacts of CIP on accounts receivable and investments at June 30, 2014 were reductions of $2.8 million and $63.6 million, respectively. This indicates that the consolidation of CIP reduced accounts receivable and investments by these amounts, reflecting the elimination upon consolidation of the underlying net interests in CIP held by the company.
The majority of the company’s CIP are CLO-related. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Likewise, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be a company liability. As demonstrated by the balance sheet data that follows in this section and in the "Liquidity and Capital Resources" section, inclusion of the long-term debt of consolidated investment products within liquidity measures, such as debt-to-equity measures, causes the company to appear far more indebted than is the case.

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Summary of Balance Sheet Impact of CIP
 
 
June 30, 2014
 
December 31, 2013
 
June 30, 2013
$ in millions
 
Impact of CIP
 
Consolidated Total
 
Impact of CIP
 
Consolidated Total
 
Impact of CIP
 
Consolidated Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
—

 
1,196.0

 
—

 
1,331.2

 
—

 
916.2

Unsettled fund receivables
 
—

 
1,228.8

 
—

 
932.4

 
—

 
1,058.7

Accounts receivable
 
(2.8
)
 
517.8

 
(3.4
)
 
500.8

 
(5.9
)
 
457.6

Investments
 
(63.6
)
 
919.1

 
(55.3
)
 
839.7

 
(92.8
)
 
723.4

Assets of CSIP
 
—

 
326.8

 
—

 
108.5

 
—

 
—

Assets of CIP:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of CIP
 
292.4

 
292.4

 
583.6

 
583.6

 
360.6

 
360.6

Accounts receivable of CIP
 
121.7

 
121.7

 
58.3

 
58.3

 
140.4

 
140.4

Investments of CIP
 
4,971.4

 
4,971.4

 
4,734.7

 
4,734.7

 
4,531.3

 
4,531.3

Assets held for policyholders
 
—

 
1,539.9

 
—

 
1,416.0

 
—

 
1,229.4

Prepaid assets
 
—

 
108.2

 
—

 
101.4

 
—

 
102.1

Other assets
 
—

 
144.2

 
—

 
182.1

 
—

 
178.7

Property and equipment, net
 
—

 
354.8

 
—

 
350.8

 
—

 
328.8

Intangible assets, net
 
—

 
1,258.3

 
—

 
1,263.7

 
—

 
1,270.4

Goodwill
 
—

 
6,920.1

 
—

 
6,867.3

 
—

 
6,739.8

Total assets
 
5,319.1

 
19,899.5

 
5,317.9

 
19,270.5

 
4,933.6

 
18,138.6

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
Accrued compensation and benefits
 
—

 
463.2

 
—

 
676.4

 
—

 
442.5

Accounts payable and accrued expenses
 
—

 
755.6

 
—

 
763.1

 
—

 
594.2

Liabilities of CIP:
 
 
 
 
 
 
 
 
 
 
 
 
Debt of CIP
 
4,301.5

 
4,301.5

 
4,181.7

 
4,181.7

 
4,044.3

 
4,044.3

Other liabilities of CIP
 
201.0

 
201.0

 
461.8

 
461.8

 
208.2

 
208.2

Policyholder payables
 
—

 
1,539.9

 
—

 
1,416.0

 
—

 
1,229.4

Unsettled fund payables
 
—

 
1,219.6

 
—

 
882.0

 
—

 
1,060.1

Long-term debt
 
—

 
1,588.9

 
—

 
1,588.6

 
—

 
1,445.6

Deferred tax liabilities, net
 
—

 
351.9

 
—

 
323.6

 
—

 
360.3

Total liabilities
 
4,502.5

 
10,421.6

 
4,643.5

 
10,293.2

 
4,252.5

 
9,384.6

TEMPORARY EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests in CSIP
 
—

 
155.0

 
—

 
—

 
—

 
—

PERMANENT EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Equity attributable to common shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
Common shares
 
—

 
98.1

 
—

 
98.1

 
—

 
98.1

Additional paid-in-capital
 
—

 
6,068.8

 
—

 
6,100.8

 
—

 
6,046.2

Treasury shares
 
—

 
(1,807.5
)
 
—

 
(1,700.4
)
 
—

 
(1,369.4
)
Retained earnings
 
15.8

 
3,617.1

 
12.5

 
3,361.9

 
20.7

 
3,047.7

Retained earnings appropriated for investors in CIP
 
63.3

 
63.3

 
104.3

 
104.3

 
98.0

 
98.0

Accumulated other comprehensive income, net of tax
 
(15.7
)
 
509.9

 
(12.7
)
 
427.9

 
(25.0
)
 
243.9

Total equity attributable to common shareholders
 
63.4

 
8,549.7

 
104.1

 
8,392.6

 
93.7

 
8,164.5

Equity attributable to nonredeemable noncontrolling interests in consolidated entities
 
753.2

 
773.2

 
570.3

 
584.7

 
587.4

 
589.5

Total permanent equity
 
816.6

 
9,322.9

 
674.4

 
8,977.3

 
681.1

 
8,754.0

Total liabilities, temporary and permanent equity
 
5,319.1

 
19,899.5

 
5,317.9

 
19,270.5

 
4,933.6

 
18,138.6

Cash and cash equivalents
Cash and cash equivalents decreased by $135.2 million from $1,331.2 million at December 31, 2013 to $1,196.0 million at June 30, 2014. See “Cash Flows” in the following section within this Management's Discussion and Analysis for additional discussion regarding the movements in cash flows during the period.

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Unsettled fund receivables and payables
Unsettled fund receivables increased by $296.4 million from $932.4 million at December 31, 2013 to $1,228.8 million at June 30, 2014, due primarily to higher transaction activity between funds and investors in late June 2014 when compared to late December 2013 in our UITs, together with U.K. and cross-border funds. In the company's capacity as sponsor of UITs, the company records receivables from brokers, dealers, and clearing organizations for unsettled sell trades of securities and UITs in addition to receivables from customers for unsettled sell trades of UITs. In our U.K. and cross-border operations, unsettled fund receivables are created by the normal settlement periods on transactions initiated by certain clients. The presentation of the unsettled fund receivables and substantially offsetting payables ($1,219.6 million at June 30, 2014 up from $882.0 million at December 31, 2013) at trade date reflects the legal relationship between the underlying investor and the company.
Investments
As of June 30, 2014 we had $919.1 million in total investments (December 31, 2013: $839.7 million). Included in investments are $283.3 million of seed money investments in affiliated funds used to seed funds as we launch new products, and $246.9 million of investments related to assets held for deferred compensation plans, which are also held primarily in affiliated funds. Seed investments increased by $49.5 million during the six months ended June 30, 2014, primarily due to seed money funding and positive market activity, partially offset by the redemption of seed money. Investments related to deferred compensation awards decreased by $2.8 million during the period, primarily due to redemptions of investments in affiliated funds to hedge economically employee plan awards, partially offset by new purchases of investments.
Included in investments are $313.2 million in equity method investments in our Chinese and Indian joint ventures and in certain of the company’s private equity partnerships, real estate partnerships and other co-investments (December 31, 2013: $308.2 million). The increase of $5.0 million in equity method investments was primarily driven by an increase of $10.6 million in our partnership investments due to capital calls in co-investments of $24.8 million, including $23.8 million into real estate funds, $12.7 million due to earnings and valuation adjustments and $0.4 million due to positive foreign exchange movement. The increases in partnership investments were offset by distributions and capital returns of $27.3 million during the period. The remaining change in equity method investments is due to a $5.6 million decrease in our joint venture investments resulting from $18.3 million of dividends earned, partially offset by an increase in funding of $2.0 million, current period earning of $10.4 million and an increase of $0.3 million due to foreign exchange rate movement.
Assets of CSIP
Assets of Consolidated Sponsored Investment Products (CSIP) consist of cash, investments and other assets of consolidated sponsored investment products in which Invesco holds the majority of the voting rights or partnerships in which the company has substantive equity at risk but in which the other investors lack removal or liquidation rights. At June 30, 2014, CSIP assets include $306.4 million in investments (December 31, 2013: $93.2 million), $13.7 million in cash and cash equivalents (December 31, 2013: $12.7 million), and $6.7 million in accounts receivable and other assets (December 31, 2013: $2.6 million). The increase in CSIP investments is primarily driven by new invested cash in the underlying funds and reflects the deployment of invested cash into fund investments. See Part I, Item 1, Financial Statements, Note 1, "Accounting Policies," and Note 12, "Consolidated Sponsored Investment Products," for additional information.
Assets held for policyholders and policyholder payables
One of our subsidiaries, Invesco Perpetual Life Limited, is an insurance company that was established to facilitate retirement savings plans in the U.K. The entity holds assets that are managed for its clients on its balance sheet with an equal and offsetting liability. The increase in the balance of these accounts from $1,416.0 million at December 31, 2013 to $1,539.9 million at June 30, 2014 was the result of an increase in the market values of these assets and liabilities and increases in foreign exchange movements.
Intangible assets, net
Intangible assets reflect a net decrease of $5.4 million from $1,263.7 million at December 31, 2013, to $1,258.3 million at June 30, 2014. The decrease in intangible assets, net is due to amortization of $7.2 million, partially offset by positive foreign exchange movements of $1.8 million.
Goodwill
Goodwill increased from $6,867.3 million at December 31, 2013, to $6,920.1 million at June 30, 2014. The increase is due to foreign exchange movements of $52.8 million. The company's annual goodwill impairment review is performed as of October 1 of each year.

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Long-term debt
Long-term debt increased from $1,588.6 million at December 31, 2013, to $1,588.9 million at June 30, 2014, an increase of $0.3 million related to the amortization of the difference between public offering price and the par value that will be paid on maturity.
Liquidity and Capital Resources
Our capital structure, together with available cash balances, cash flows generated from operations, existing capacity under our credit facility and further capital market activities, if necessary, should provide us with sufficient resources to meet present and future cash needs, including operating, debt and other obligations as they come due and anticipated future capital requirements.
Our capital management priorities have evolved with the growth and success of our business and include:
•reinvestment in the business;
•moderate annual growth of dividends (as further discussed in the "Dividends" section below);
•share repurchase; and
•establishment of an approximate $1 billion cash buffer in excess of regulatory requirements.
During the three and six months ended June 30, 2014 we repurchased 1.3 million and 4.9 million common shares in the open market at a cost of $50.0 million and $169.6 million, respectively.
These priorities are executed in a manner consistent with our desire to maintain a strong, investment-grade credit rating. As of the filing of this Report, Invesco held credit ratings of A-/Positive and A3/Stable from Standard & Poor's Ratings Services ("S&P") and Moody's respectively. Furthermore, S&P considers our risk management to be strong. S&P rates companies' enterprise risk management capabilities on a scale of Fair, Adequate, Strong, and Excellent. Our ability to continue to access the capital markets in a timely manner depends on a number of factors, including our credit ratings, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted.
Certain of our subsidiaries are required to maintain minimum levels of capital. These and other similar provisions of applicable law may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends by such entities. A sub-group of Invesco subsidiaries, including all of our regulated EU subsidiaries, is subject to consolidated capital requirements under applicable European Union (EU) directives, and capital is maintained within this sub-group to satisfy these regulations. These requirements mandate the retention of liquid resources in those jurisdictions, which we meet in part by holding cash and cash equivalents. This retained cash can be used for general business purposes in the European sub-group or in the countries where it is located. Due to the capital restrictions, the ability to transfer cash between certain jurisdictions may be limited. In addition, transfers of cash between international jurisdictions may have adverse tax consequences. At June 30, 2014, the European sub-group had cash and cash equivalent balances of $777.5 million (December 31, 2013: $632.3 million). We are in compliance with all regulatory minimum net capital requirements. As of June 30, 2014, the company's minimum regulatory capital requirement was $287.8 million. The total amount of non-U.S. cash and cash equivalents was $901.3 million at June 30, 2014 (December 31, 2013: $740.5 million).
In addition, the company is required to hold cash deposits with clearing organizations or to otherwise segregate cash to maintain compliance with federal and other regulations in connection with its UIT broker dealer entity. At June 30, 2014, these cash deposits totaled $11.4 million (December 31, 2013: $11.3 million).
The consolidation of $4.7 billion and $4.4 billion of total assets and long-term debt of certain CLO products as of June 30, 2014, respectively, did not impact the company’s liquidity and capital resources. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, these products, which are eliminated upon consolidation. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Likewise, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be an obligation of the company. See Part I, Item 1, Financial Statements - Note 13, “Consolidated Investment Products,” for additional details.

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Selected balance sheet information is reflected in the table below:
 
Excluding CIP (Non-GAAP) (1)
 
Including CIP (U.S. GAAP)
$ in millions
June 30, 2014
 
December 31, 2013
 
June 30, 2013
 
June 30, 2014
 
December 31, 2013
 
June 30, 2013
Cash and cash equivalents
1,196.0

 
1,331.2

 
916.2

 
1,196.0

 
1,331.2

 
916.2

Investments of CIP
—

 
—

 
—

 
4,971.4

 
4,734.7

 
4,531.3

Total assets (1)
14,580.4

 
13,952.6

 
13,205.0

 
19,899.5

 
19,270.5

 
18,138.6

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
1,588.9

 
1,588.6

 
1,445.6

 
1,588.9

 
1,588.6

 
1,445.6

Long-term debt of CIP
—

 
—

 
—

 
4,301.5

 
4,181.7

 
4,044.3

Long-term debt / Long-term debt plus CIP debt
1,588.9

 
1,588.6

 
1,445.6

 
5,890.4

 
5,770.3

 
5,489.9

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities (1)
5,919.1

 
5,649.7

 
5,132.1

 
10,421.6

 
10,293.2

 
9,384.6

 
 
 
 
 
 
 
 
 
 
 
 
Total permanent equity (1)
8,506.3

 
8,302.9

 
8,072.9

 
9,322.9

 
8,977.3

 
8,754.0

 
 
 
 
 
 
 
 
 
 
 
 
Debt/Equity % (1,2)
18.7
%
 
19.1
%
 
17.9
%
 
63.2
%
 
64.3
%
 
62.7
%
____________
(1)
The balance sheet line items excluding CIP are non-GAAP financial measures. To calculate total assets excluding CIP at June 30, 2014, use U.S. GAAP total assets of $19,899.5 million (December 31, 2013: $19,270.5 million; June 30, 2013: $18,138.6 million) and subtract total assets of CIP of $5,319.1 million (December 31, 2013: $5,317.9 million; June 30, 2013: $4,933.6 million). To calculate total liabilities excluding CIP at June 30, 2014, use U.S. GAAP total liabilities of $10,421.6 million (December 31, 2013: $10,293.2 million; June 30, 2013: $9,384.6 million) and subtract total liabilities of CIP of $4,502.5 million (December 31, 2013: $4,643.5 million, June 30, 2013: $4,252.5 million). To calculate total permanent equity excluding CIP at June 30, 2014, use U.S. GAAP total permanent equity of $9,322.9 million (December 31, 2013: $8,977.3 million; June 30, 2013: $8,754.0 million) and subtract total permanent equity of CIP of $816.6 million (December 31, 2013: $674.4 million; June 30, 2013: $681.1 million). See the "Balance Sheet Discussion" section for a fully expanded balance sheet illustrating the impact of consolidation of investment products for June 30, 2014, December 31, 2013 and June 30, 2013.
(2)
The debt-to-equity ratio excluding CIP is a non-GAAP financial measure. The debt-to-equity ratio is calculated as long-term debt divided by total permanent equity for the balance sheet excluding CIP and long-term debt plus long-term debt of CIP divided by total permanent equity for the balance sheet including CIP. Management believes that it is important to illustrate for users of our Condensed Consolidated Financial Statements that calculating a balance sheet measure, such as the debt-to-equity ratio, including the impact of CIP causes the company to appear far more indebted than is the case. As disclosed above, the debt of CIP is not the company's debt, nor do the noteholders of the CIP debt have any recourse to the company.

Cash Flows Discussion
The ability to consistently generate free cash flow from operations in excess of dividend payments, share repurchases, capital expenditures, and ongoing operating expenses is one of our company's fundamental financial strengths. Operations continue to be financed from current earnings and borrowings. Our principal uses of cash, other than for operating expenses, include dividend payments, capital expenditures, acquisitions, purchase of our shares in the open market and investments in certain new investment products.
Cash flows of CIP (discussed in Item 1, Financial Statements - Note 13, “Consolidated Investment Products”) are reflected in Invesco's cash provided by or used in operating activities, investing activities and financing activities. Cash held by CIP is not available for general use by Invesco, nor is Invesco cash available for general use by its CIP. Accordingly, the table below presents the consolidated total cash flows of the company and separately presents the impact to the cash flows from CIP. The impact is illustrated in the tables immediately below by a column which shows the dollar-value change in the consolidated figures, as caused by the consolidation of CIP. For example, the impact of CIP on net cash provided by/(used in) operating activities for the six months ended June 30, 2014 reflects a provision of cash of $236.6 million; however, this was not a provision of the company's corporate cash balances. Excluding the impact of CIP, cash provided by operations was $313.7

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million during the six months ended June 30, 2014. Also as illustrated in the table below, the sum of the operating, investing and financing cash flows of CIP offsets to a zero impact to the company's change in cash and cash equivalent balances from period to period. The cash flows of CIP do not form part of the company’s cash flow management processes, nor do they form part of the company’s significant liquidity evaluations and decisions for the reasons noted. The discussion that follows the table focuses on the company’s cash flows.
Summary of Cash Flow Statement Impact of CIP
 
Six months ended June 30, 2014
 
Six months ended June 30, 2013
$ in millions
 Impact of CIP
 
Invesco Ltd. Consolidated
 
 Impact of CIP
 
Invesco Ltd. Consolidated
Operating activities:
 
 
 
 
 
 
 
Net income
58.1

 
523.6

 
(19.5
)
 
403.3

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
 
 
 
 
 
 
 
Amortization and depreciation
—

 
45.8

 
—

 
44.2

Share-based compensation expense
—

 
70.0

 
—

 
69.4

(Gain)/loss on disposal of business, property and equipment, net
—

 
—

 
—

 
0.5

Other (gains)/losses, net
4.7

 
(22.8
)
 
—

 
(18.1
)
Other (gains)/losses of CSIP, net
—

 
(11.5
)
 
—

 
—

Other (gains)/losses of CIP, net
(63.3
)
 
(63.3
)
 
22.7

 
22.7

Equity in earnings of unconsolidated affiliates
3.4

 
(15.5
)
 
1.3

 
(15.0
)
Dividends from unconsolidated affiliates
—

 
15.4

 
—

 
1.9

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
(Increase)/decrease in cash held by CIP
260.1

 
260.1

 
(76.0
)
 
(76.0
)
(Increase)/decrease in cash held by CSIP
—

 
(1.0
)
 
—

 
—

(Purchase)/sale of trading investments, net
—

 
(10.4
)
 
—

 
0.6

(Increase)/decrease in receivables
(17.0
)
 
(402.7
)
 
4.9

 
(711.9
)
Increase/(decrease) in payables
(9.4
)
 
162.6

 
33.5

 
534.0

Net cash provided by/(used in) operating activities
236.6

 
550.3

 
(33.1
)
 
255.6

Investing activities:
 
 
 
 
 
 
 
Purchase of property and equipment
—

 
(49.8
)
 
—

 
(40.3
)
Purchase of available-for-sale investments
33.7

 
(112.5
)
 
6.6

 
(25.2
)
Sale of available-for-sale investments
(37.5
)
 
75.1

 
(3.1
)
 
23.0

Purchase of investments by CIP
(2,848.8
)
 
(2,848.8
)
 
(2,504.3
)
 
(2,504.3
)
Sale of investments by CIP
2,108.5

 
2,108.5

 
2,584.6

 
2,584.6

Purchase of investments by CSIP
—

 
(476.1
)
 
—

 
—

Sale of investments by CSIP
—

 
274.3

 
—

 
—

Purchase of other investments
2.2

 
(67.5
)
 
—

 
(164.6
)
Sale of other investments
—

 
40.3

 
—

 
39.7

Returns of capital and distributions from unconsolidated partnership investments
(2.0
)
 
25.9

 
(1.8
)
 
9.9

Acquisition earn-out payments
—

 
—

 
—

 
(1.2
)
Sale of business
—

 
60.8

 
—

 
—

Net cash provided by/(used in) investing activities
(743.9
)
 
(969.8
)
 
82.0

 
(78.4
)
Financing activities:
 
 
 
 
 
 
 
Proceeds from exercises of share options
—

 
5.2

 
—

 
10.8

Purchases of treasury shares
—

 
(169.6
)
 
—

 
(120.5
)
Dividends paid
—

 
(207.1
)
 
—

 
(178.4
)
Excess tax benefits from share-based compensation
—

 
17.6

 
—

 
16.7

Repayment on unsettled fund account
—

 
(35.7
)
 
—

 
—

Third-party capital invested into CIP
155.8

 
155.8

 
34.5

 
34.5

Third-party capital distributed by CIP
(68.0
)
 
(68.0
)
 
(128.1
)
 
(128.1
)
Third-party capital invested into CSIP
—

 
152.5

 
—

 
—

Third-party capital distributed by CSIP
—

 
(1.4
)
 
—

 
—

Borrowings of debt by CIP
715.0

 
715.0

 
409.4

 
409.4

Repayments of debt by CIP
(295.5
)
 
(295.5
)
 
(364.7
)
 
(364.7
)
Net borrowings/(repayments) under credit facility
—

 
—

 
—

 
259.5

Net cash provided by/(used in) financing activities
507.3

 
268.8

 
(48.9
)
 
(60.8
)
Increase/(decrease) in cash and cash equivalents
—

 
(150.7
)
 
—

 
116.4

Foreign exchange movement on cash and cash equivalents
—

 
15.5

 
—

 
(35.7
)
Cash and cash equivalents, beginning of period
—

 
1,331.2

 
—

 
835.5

Cash and cash equivalents, end of period
—

 
1,196.0

 
—

 
916.2


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Operating Activities
Operating cash flows include the receipt of investment management and other fees generated from AUM, offset by operating expenses and changes in operating assets and liabilities. Although some receipts and payments are seasonal, particularly bonus payments, in general, after allowing for the change in cash held by CIP, our operating cash flows move in the same direction as our operating income.
During the six months ended June 30, 2014, cash provided by operating activities increased $294.7 million to $550.3 million from $255.6 million during the six months ended June 30, 2013. As shown in the tables above, the impact of CIP to cash provided by operating activities was $236.6 million of cash provided during the six months ended June 30, 2014 compared to $33.1 million of cash used during the six months ended June 30, 2013. Excluding the impact of CIP, cash provided by operations was $313.7 million during the six months ended June 30, 2014 compared to $288.7 million of cash provided by operating activities during the six months ended June 30, 2013. Excluding the impact of CIP, the increase in cash provided by operations in 2014 correlates with the increase in operating income, as compared to the same period in 2013. Cash provided by or used in operating activities includes seasonal payroll payments related to annual staff bonus, related payroll taxes, payroll taxes on annual share award vestings, and annual retirement plan contributions which were comparable between the periods. In addition, there were no significant non-cash items that impacted the comparison between the periods of operating income to net cash provided by operations.
Investing Activities
Net cash used in investing activities totaled $969.8 million for the six months ended June 30, 2014 (six months ended June 30, 2013: net cash used in $78.4 million). As shown in the tables above, the impact of CIP on investing activities, including investment purchases, sales and returns of capital, was $743.9 million used (six months ended June 30, 2013: $82.0 million contributed). Excluding the impact of CIP cash flows, net cash used in investing activities was $225.9 million (six months ended June 30, 2013: net cash used of $160.4 million).
For the six months ended June 30, 2014, excluding the impact of CIP, cash outflows include purchases of investments by CSIP of $476.1 million (six months ended June 30, 2013: none) and available-for-sale and other investments of $215.9 million (six months ended June 30, 2013: $196.4 million). These outflows were partially offset by collected proceeds of $274.3 million from sales of investments by CSIP (six months ended June 30, 2013: none), $180.8 million from sales and returns of capital of available-for-sale and other investments (six months ended June 30, 2013: $77.5 million), and $60.8 million received during the second quarter 2014 as part of the final consideration for the sale of the Atlantic Trust business on December 31, 2013.
During the six months ended June 30, 2014 the company had capital expenditures of $49.8 million (six months ended June 30, 2013: $40.3 million). Our capital expenditures related principally in each period to technology initiatives, including enhancements to platforms from which we maintain our portfolio management systems and fund accounting systems, improvements in computer hardware and software desktop products for employees, new telecommunications products to enhance our internal information flow, and back-up disaster recovery systems. Also, in each period, a portion of these costs related to leasehold improvements made to the various buildings and workspaces used in our offices. These projects have been funded with proceeds from our operating cash flows.
Financing Activities
Net cash provided by financing activities totaled $268.8 million for the six months ended June 30, 2014 (six months ended June 30, 2013: net cash used of $60.8 million). As shown in the tables above, the impact of CIP on financing activities provided cash of $507.3 million (six months ended June 30, 2013: cash used of $48.9 million). Excluding the impact of the CIP, financing activities used cash of $238.5 million in the six months ended June 30, 2014 (six months ended June 30, 2013: cash used of $11.9 million).
Financing cash outflows during the six months ended June 30, 2014 included $207.1 million of dividend payments for the dividends declared in January and April (six months ended June 30, 2013: dividends paid of $178.4 million) and the purchase of treasury shares through market transactions totaling $169.6 million (six months ended June 30, 2013: $120.5 million).
Other financing cash inflows include net cash of $151.1 million invested into CSIP by third-party investors (six months ended June 30, 2013: none), cash received from the exercise of options of $5.2 million (six months ended June 30, 2013: $10.8 million), and excess tax benefits from share-based compensation of $17.6 million (six months ended June 30, 2013: $16.7 million). The six months ended June 30, 2013 also included net cash inflows from net borrowings under the credit facility of $259.5 million.

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Dividends
Invesco declares and pays dividends on a quarterly basis in arrears. On July 31, 2014, the company declared a second quarter 2014 cash dividend 25.0 cents per share to holders of common shares, which will be paid on September 5, 2014, to shareholders of record as of August 21, 2014 with an ex-dividend date of August 19, 2014.
The declaration, payment and amount of any future dividends will be declared by our board of directors and will depend upon, among other factors, our earnings, financial condition and capital requirements at the time such declaration and payment are considered. The board has a policy of managing dividends in a prudent fashion, with due consideration given to profit levels, overall debt levels, and historical dividend payouts.
Share Repurchase Plan
During the three and six months ended June 30, 2014, the company repurchased 1.3 million and 4.9 million shares, respectively, in the market at a cost of $50.0 million and $169.6 million (three and six months ended June 30, 2013: 2.2 million and 3.8 million shares at a cost of $75.5 million and $120.5 million, respectively). Separately, an aggregate of 1.9 million shares were withheld on vesting events during the six months ended June 30, 2014 to meet employees' withholding tax obligations (six months ended June 30, 2013: 2.2 million). The fair value of these shares withheld at the respective withholding dates was $62.3 million (six months ended June 30, 2013: $57.7 million). Approximately $1,326.8 million remained authorized under the company's share repurchase plan at June 30, 2014 (June 30, 2013: $346.5 million).
Long-term debt
Our long-term debt at June 30, 2014 was $1,588.9 million (December 31, 2013: $1,588.6 million) and was comprised of the following:
$ in millions
June 30, 2014
 
December 31, 2013
Unsecured Senior Notes:
 
 
 
$600 million 3.125% - due November 30, 2022
599.6

 
599.6

$600 million 4.000% - due January 30, 2024
596.0

 
595.8

$400 million 5.375% - due November 30, 2043
393.3

 
393.2

Long-term debt
1,588.9

 
1,588.6

For the six months ended June 30, 2014, the company's weighted average cost of debt was 4.01% (six months ended June 30, 2013: 2.09%).
The company's $1.25 billion unsecured credit facility expires on December 17, 2018. Financial covenants under the credit agreement include: (i) the quarterly maintenance of a debt/EBITDA leverage ratio, as defined in the credit agreement, of not greater than 3.25:1.00, (ii) a coverage ratio (EBITDA, as defined in the credit agreement/interest payable for the four consecutive fiscal quarters ended before the date of determination) of not less than 4.00:1.00. As of June 30, 2014, we were in compliance with our financial covenants. At June 30, 2014, our leverage ratio was 0.98:1.00 (December 31, 2013: 1.05:1.00), and our interest coverage ratio was 26.96:1.00 (December 31, 2013: 35.49:1.00).

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The June 30, 2014, coverage ratio calculations are as follows:
$ millions
Total
 
Q2 2014
 
Q1 2014
 
Q4 2013
 
Q3 2013
Net income attributable to common shareholders
977.8

 
274.5

 
187.8

 
287.4

 
228.1

Net (income)/loss attributable to common shareholders arising from CIP
5.0

 
2.0

 
(5.3
)
 
(1.1
)
 
9.4

Tax expense
398.7

 
107.1

 
87.8

 
111.7

 
92.1

Amortization/depreciation/impairment
101.7

 
22.4

 
23.4

 
34.1

 
21.8

Interest expense
61.8

 
18.2

 
18.7

 
15.2

 
9.7

Share-based compensation expense
133.7

 
33.5

 
36.5

 
30.1

 
33.6

Unrealized gains and losses from investments, net*
(12.5
)
 
(4.8
)
 
(0.3
)
 
(3.7
)
 
(3.7
)
EBITDA**
1,666.2

 
452.9

 
348.6

 
473.7

 
391.0

Adjusted debt**

$1,625.0

 
 
 
 
 
 
 
 
Leverage ratio (Debt/EBITDA - maximum 3.25:1.00)
0.98

 
 
 
 
 
 
 
 
Interest coverage (EBITDA/Interest Expense - minimum 4.00:1.00)
26.96

 
 
 
 
 
 
 
 
____________
*
Adjustments for unrealized gains and losses from investments, as defined in our credit facility, may also include non-cash gains and losses on investments to the extent that they do not represent anticipated future cash receipts or expenditures.
**
EBITDA and Adjusted debt are non-GAAP financial measures; however management does not use these measures for anything other than these debt covenant calculations. The calculation of EBITDA above (a reconciliation from net income attributable to common shareholders) is defined by our credit agreement, and therefore net income attributable to common shareholders is the most appropriate GAAP measure from which to reconcile to EBITDA. The calculation of Adjusted debt is defined in our credit facility and equals total debt of $1,588.9 million plus $36.1 million in letters of credit.
The discussion that follows identifies risks associated with the company's liquidity and capital resources. The Executive Overview of this Management's Discussion and Analysis of Financial Condition and Results of Operations section contains a broader discussion of the company's overall approach to risk management.
Credit and Liquidity Risk
Capital management involves the management of the company's liquidity and cash flows. The company manages its capital by reviewing annual and projected cash flow forecasts and by monitoring credit, liquidity and market risks, such as interest rate and foreign currency risks (as discussed in Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk”), through measurement and analysis. The company is primarily exposed to credit risk through its cash and cash equivalent deposits, which are held by external firms. The company invests its cash balances in its own institutional money market products, as well as with external high credit-quality financial institutions. These arrangements create exposure to concentrations of credit risk.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The company is subject to credit risk in the following areas of its business:
•
All cash and cash equivalent balances are subject to credit risk, as they represent deposits made by the company with external banks and other institutions. As of June 30, 2014, our maximum exposure to credit risk related to our cash and cash equivalent balances is $1,196.0 million. See Item 1, Financial Statements - Note 14, “Related Parties,” for information regarding cash and cash equivalents invested in affiliated money market funds.
•
Certain subsidiaries of the company accept deposits and place deposits with other institutions on behalf of our customers. As of June 30, 2014, our exposure to credit risk related to these transactions is $2.9 million.
The company does not utilize credit derivatives or similar instruments to mitigate the maximum exposure to credit risk. The company does not expect any counterparties to its financial instruments to fail to meet their obligations.

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Liquidity Risk
Liquidity risk is the risk that the company will encounter difficulty in meeting obligations associated with its financial liabilities. The company is exposed to liquidity risk through its $1,588.9 million in total debt. The company actively manages liquidity risk by preparing cash flow forecasts for future periods, reviewing them regularly with senior management, maintaining a committed credit facility, scheduling significant gaps between major debt maturities and engaging external financing sources in regular dialog.
Effects of Inflation
Inflation can impact our organization primarily in two ways. First, inflationary pressures can result in increases in our cost structure, especially to the extent that large expense components such as compensation are impacted. To the degree that these expense increases are not recoverable or cannot be counterbalanced through pricing increases due to the competitive environment, our profitability could be negatively impacted. Secondly, the value of the assets that we manage may be negatively impacted when inflationary expectations result in a rising interest rate environment. Declines in the values of these AUM could lead to reduced revenues as management fees are generally calculated based upon the size of AUM.
Off Balance Sheet Commitments
See Part I, Item 1, Financial Statements - Note 11, “Commitments and Contingencies - Off Balance Sheet Commitments,” for more information regarding undrawn capital commitments and support agreements.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, financing and operating leases, long-term defined benefit pension and post-retirement medical plans, and acquisition contracts. During the six months ended June 30, 2014, there were no material changes to the company's contractual obligations.
Critical Accounting Policies and Estimates
There have been no significant changes to the accounting policies that we believe are the most critical to an understanding of our results of operations and financial condition, which are disclosed in our most recent Form 10-K for the year ended December 31, 2013.
Recent Accounting Standards
See Part I, Item 1, Financial Statements - Note 1, “Accounting Policies - Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements.”
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, the company is primarily exposed to market risk in the form of AUM market price risk, securities market risk, interest rate risk, and foreign exchange rate risk. There have not been any material changes to the company's exposures to market risks during the period ended June 30, 2014 that would require an update to the disclosures provided in the most recent Form 10-K.
AUM Market Price Risk
The company's investment management revenues are comprised of fees based on the value of AUM. Declines in the market prices of equity and fixed income securities, commodities and derivatives, or other similar financial instruments held in client portfolios could cause revenues to decline because of lower investment management fees by:
•
Causing the value of AUM to decrease.
•
Causing the returns realized on AUM to decrease (impacting performance fees).
•
Causing clients to withdraw funds in favor of investments in markets that they perceive to offer greater opportunity and that the company does not serve.
•
Causing clients to rebalance assets away from investments that the company manages into investments that the company does not manage.
•
Causing clients to reallocate assets away from products that earn higher revenues into products that earn lower revenues.

Underperformance of client accounts relative to competing products could exacerbate these factors.

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Securities Market Risk
The company has investments in managed investment products that invest in a variety of asset classes. Investments are generally made to establish a track record for a new fund or investment vehicle or to hedge economically exposure to certain deferred compensation plans. The company's exposure to market risk from financial instruments measured at fair value arises from its investments.
Interest Rate Risk
Interest rate risk relates to the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The company is exposed to interest rate risk primarily through its external debt and cash and cash equivalent investments. On June 30, 2014, the interest rates on 100.0% of the company's borrowings were fixed for a weighted average period of 14.1 years, and the company had a zero balance on its floating rate credit facility.
Foreign Exchange Rate Risk
The company has transactional currency exposures that occur when any of the company’s subsidiaries receive or pay cash in a currency different from its functional currency. Such exposure arises from sales or purchases by operating subsidiaries in currencies other than the subsidiaries’ functional currencies. These exposures are not actively managed.
The company also has certain investments in foreign operations, whose net assets and results of operations are exposed to foreign currency translation risk when translated into U.S. dollars upon consolidation into Invesco Ltd. The company generally does not hedge these exposures.
The company is exposed to foreign exchange revaluation into the Condensed Consolidated Statements of Income on monetary assets and liabilities that are held by subsidiaries in different functional currencies than the subsidiaries' functional currencies. Net foreign exchange revaluation losses were $1.2 million in the six months ended June 30, 2014 (six months ended June 30, 2013: $1.5 million of losses), and are included in general and administrative expenses and other gains and losses, net on the Condensed Consolidated Statements of Income. We continue to monitor our exposure to foreign exchange revaluation.
Item 4.  Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information the company is required to disclose in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of June 30, 2014. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated any change in our internal control over financial reporting that occurred during the six months ended June 30, 2014 and have concluded that there was no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
Item 1.  Legal Proceedings
See Part I, Item I, Note 11, "Commitments and Contingencies - Legal Proceedings," for information regarding legal proceedings.
Item 1A.  Risk Factors
The company has had no significant changes in its risk factors from those previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
The following table sets forth information regarding purchases of our common shares by us and any affiliated purchases during the three months ended June 30, 2014:
Month
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans or Programs(2)
 
Maximum Number at end of period (or Approximate
Dollar Value) of Shares
that May Yet Be Purchased
Under the Plans
or Programs(2) (millions)
April 1-30, 2014
3,289

 
$
36.35

 
—

 
1,376.8

May 1-31, 2014
762,801

 
$
36.01

 
690,200

 
1,352.0

June 1-30, 2014
752,116

 
$
37.57

 
670,700

 
1,326.8

Total
1,518,206

 
 
 
1,360,900

 
 

(1)
An aggregate of 157,306 shares were surrendered to us by Invesco employees to satisfy tax withholding obligations or loan repayments in connection with the vesting of equity awards.
(2)
On October 11, 2013, the company's board of directors authorized an additional $1.5 billion for the existing share repurchase program with no stated expiration date. As of June 30, 2014, $1,326.8 million remained authorized under this plan
Item 4.  Mine Safety Disclosures
Not applicable
Item 5.  Other Information
None

93

Table of Contents    

                                    

Item 6. Exhibits
Exhibit Index
(Note: References herein to “AMVESCAP,” or “AMVESCAP PLC” are to the predecessor registrant to Invesco Ltd.)
3.1
Memorandum of Association of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007
3.2
Second Amended and Restated Bye-Laws of Invesco Ltd., incorporating amendments up to and including May 15, 2014
31.1
Certification of Martin L. Flanagan pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Loren M. Starr pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Martin L. Flanagan pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Loren M. Starr pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Definition Linkbase Document
101.PRE
XBRL Taxonomy Extension Labels Linkbase Document
101.DEF
XBRL Taxonomy Extension Presentation Linkbase Document


94

Table of Contents    

                                    

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

 
INVESCO LTD.
July 31, 2014
/s/ MARTIN L. FLANAGAN  
 
Martin L. Flanagan 
 
President and Chief Executive Officer 
 
 
July 31, 2014
/s/ LOREN M. STARR  
 
Loren M. Starr 
 
Senior Managing Director and Chief Financial Officer 

95

IVZ.2Q.2014.EX.3.2

 Exhibit 3.2
 
 













SECOND AMENDED AND RESTATED

B Y E - L A W S

OF

INVESCO LTD.
(effective as of May 15, 2014)



























 
 



TABLE OF CONTENTS
 
 
 
 
 
 
 
Page
 
INTERPRETATION
 
 
 
 
 
1. Interpretation
 
 
1
 
 
 
 
 
 
BOARD OF DIRECTORS
 
 
 
 
 
2. Board of Directors
 
 
2
 
3. Powers of the Board
 
 
3
 
4. Power to Delegate to a Committee
 
 
3
 
5. Power to Appoint and Dismiss Employees
 
 
3
 
6. Power to Borrow and Charge Property
 
 
3
 
7. Exercise of Power to Purchase Shares of or Discontinue the Company
 
 
3
 
8. Board Size; Term of Directors
 
 
3
 
9. Defects in Appointment of Directors
 
 
5
 
10. Shareholder Proposals and Nominations
 
 
5
 
11. Removal of Directors
 
 
7
 
12. Vacancies on the Board
 
 
7
 
13. Notice of Meetings of the Board
 
 
7
 
14. Quorum at Meetings of the Board
 
 
8
 
15. Meetings of the Board
 
 
8
 
16. Unanimous Written Resolutions
 
 
8
 
17. Contracts and Disclosure of Directors’ Interests
 
 
8
 
18. Remuneration of Directors
 
 
8
 
 
 
 
 
 
OFFICERS
 
 
 
 
 
19. Officers of the Company
 
 
8
 
20. Remuneration of Officers
 
 
9
 
21. Duties of Officers
 
 
9
 
22. Chairperson and Secretary of Meetings
 
 
9
 
23. Register of Directors and Officers
 
 
9
 
 
 
 
 
 
MINUTES
 
 
 
 
 
24. Obligations of Board to Keep Minutes
 
 
9
 
 
 
 
 
 
INDEMNITY
 
 
 
 
 
25. Indemnification and Exculpation of Directors of the Company and Others
 
 
9
 
26. Waiver of Certain Claims
 
 
10
 
 
 
 
 
 
MEETINGS
 
 
 
 
 
27. Notice of Annual General Meeting of Shareholders
 
 
11
 



i


 
 
Page
 
28. Notice of Special General Meeting
 
 
11
 
29. Accidental Omission of Notice of General Meeting
30. Short Notice
 
 
11
 
31. Postponement of Meetings
 
 
11
 
32. Quorum for General Meeting
 
 
11
 
33. Adjournment of Meetings
34. Attendance at Meetings
 
 
12
 
35. Written Resolutions
 
 
12
 
36. Attendance of Directors
 
 
12
 
37. Voting at Meetings
 
 
12
 
38. Voting by Hand or by Poll
 
 
12
 
39. Decision of Chairperson
 
 
14
 
40. Instrument of Proxy
 
 
14
 
41. Representation of Corporations at Meetings
 
 
14
 
 
 
 
 
 
VOTES OF SHAREHOLDERS
 
 
 
 
 
42. General
 
 
15
 
 
 
 
 
 
SHARE CAPITAL AND SHARES
 
 
 
 
 
43. Share Capital
 
 
15
 
44. Rights of Shares
 
 
15
 
45. Modification of Rights
 
 
16
 
46. Shares
 
 
17
 
47. Registered Holder of Shares
48. Death of a Joint Holder
 
 
17
 
49. Share Certificates
 
 
17
 
50. Calls on Shares
 
 
18
 
51. Forfeiture of Shares
 
 
18
 
 
 
 
 
 
INTERESTED SHAREHOLDERS
 
 
 
 
 
52. Limitations on Business Combinations
53. Certain Definitions
 
 
19
 
 
 
 
 
 
REGISTER OF SHAREHOLDERS
 
54. Contents of Register of Shareholders
 
 
20
 
55. Inspection of Register of Shareholders
 
 
20
 
56. Determination of Record Dates
 
 
20
 
 
 
 
 
 
TRANSFER OF SHARES
 
 
 
 
 
57. Instrument of Transfer
 
 
21
 
58. Restrictions on Transfer
 
 
21
 
 

ii


 
 
Page
 
 
 
 
 
 
TRANSMISSION OF SHARES
 
 
 
 
 
59. Representative of Deceased Shareholder
 
 
21
 
60. Registration on Death or Bankruptcy
 
 
21
 
 
 
 
 
 
DIVIDENDS AND OTHER DISTRIBUTIONS
 
 
 
 
 
61. Declaration of Dividends by the Board
 
 
22
 
62. Other Distributions
 
 
22
 
63. Reserve Fund
 
 
22
 
64. Deduction of Amounts Due to the Company
 
 
22
 
 
 
 
 
 
CAPITALIZATION
 
 
 
 
 
65. Issue of Bonus Shares: Capitalization of Profits
 
 
22
 
 
 
 
 
 
ACCOUNTS AND FINANCIAL STATEMENTS
 
 
 
 
 
66. Records of Account
 
 
23
 
67. Financial Year End
 
 
23
 
68. Financial Statements
 
 
23
 
 
 
 
 
 
AUDIT
 
 
 
 
 
69. Appointment of Auditor
 
 
23
 
70. Remuneration of Auditor
 
 
23
 
71. Report of the Auditor
 
 
23
 
 
 
 
 
 
NOTICES
 
 
 
 
 
72. Notices to Shareholders of the Company
 
 
23
 
73. Notices to Joint Shareholders
 
 
24
 
74. Service and Delivery of Notice
 
 
24
 
 
 
 
 
 
SEAL OF THE COMPANY
 
 
 
 
 
75. The Seal
 
 
24
 
76. Manner in which Seal is to be Affixed
 
 
24
 
 
 
 
 
 
WINDING-UP
 
 
 
 
 
77. Winding-Up/Distribution by Liquidator
 
 
24
 
 
 
 
 
 
ALTERATION OF BYE-LAWS
 
 
 
 
 
78. Alteration of Bye-Laws
 
 
24
 

 iii





INTERPRETATION
1. Interpretation
     (1) In these Bye-Laws the following words and expressions shall have the following meanings, respectively:
         (a) “Act” means the Companies Act 1981 of Bermuda as amended from time to time;
         (b) “Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with such Person. For the purposes of this definition, “control”, with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise;
      (c) “Associate” has the meaning set forth in Bye-Law 53(1);
         (d) “Audit Committee” means the committee appointed by the Board in accordance with these Bye-Laws;
         (e) “Auditor” includes any individual, partnership or other entity appointed in accordance with the Act to audit the accounts of the Company;
         (f) “beneficially own” has the meaning set forth in Bye-Law 53(2);
         (g) “beneficially owned” has the meaning set forth in Bye-Law 10(3);
         (h) “Beneficial Owner” has the meaning set forth in Bye-Law 53(2);
        (i) “Board” means the Board of Directors appointed or elected pursuant to these Bye-Laws and acting pursuant to the Act and these Bye-Laws;
         (j) “Business Combination” has the meaning set forth in Bye-Law 53(3);
         (k) “Business Day” means any day other than a Saturday, a Sunday, any day on which commercial banking institutions in Hamilton, Bermuda or Atlanta, Georgia are authorized or obligated by law to close or any day on which the New York Stock Exchange is not open for trading;
         (l) “Cause” means (1) willful misconduct or gross negligence which is materially injurious to the Company, (2) fraud or embezzlement or (3) a conviction of, or a plea of “guilty” or “no contest” to, a felony;
         (m) “Chairperson” means the person designated by the Board as the chairperson of the Board;
         (n) “Common Shares” has the meaning set forth in Bye-Law 43;
        (o) “Company” means the company for which these Bye-Laws are approved and confirmed;
         (p) “Director” means a director of the Company;
         (q) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended;
         (r) “Interested Shareholder” has the meaning set forth in Bye-Law 53(4);
         (s) “legal proceeding” has the meaning set forth in Bye-Law 59;
         (t) “legal representative” has the meaning set forth in Bye-Law 59.
        (u) “Nomination and Corporate Governance Committee” means the committee appointed by the Board in accordance with these Bye-Laws as such;
         (v) “notice” means written notice as further defined in these Bye-Laws unless otherwise specifically stated;
         (w) “Officer” means any person appointed by the Board to hold an office in the Company;
         (x) “Person” means an individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization or government or political subdivision thereof;
         (y) “Preferred Shares” has the meaning set forth in Bye-Law 44(3);
         (z) “proceeding” has the meaning set forth in Bye-Law 25(1);

1


         (aa) “public announcement” has the meaning set forth in Bye-Law 10(3);
        (bb) “Register of Directors and Officers” means the Register of Directors and Officers referred to in these Bye-Laws and shall be the same “register of directors and officers” required to be kept by the Company under the Act;
         (cc) “Register of Shareholders” means the Register of Shareholders referred to in these Bye-Laws and shall be the same “register of members” required to be kept by the Company under the Act;
         (dd) “Resident Representative” means any Person appointed to act as resident representative of the Company in accordance with the Act;
         (ee) “Secretary” means the person appointed to perform any or all of the duties of secretary of the Company and includes any deputy or assistant or acting secretary;
         (ff) “Securities Act” means the U.S. Securities Act of 1933, as amended;
         (gg) “Shareholder” shall have the same meaning as the term “Member” in the Act and means the Person registered in the Register of Shareholders as the holder of shares (sometimes referred to in these Bye-Laws as the direct holder) of the Company or, when two or more Persons are so registered as joint holders of shares, means the Person whose name stands first in the Register of Shareholders as one of such joint holders or all of such Persons as the context so requires;
         (hh) “Undesignated Shares” has the meaning set forth in Bye-Law 43;
         (ii) “United States of America” or “U.S.” means the United States of America and dependent territories or any part thereof;
         (jj) “Voting Commitment” has the meaning set forth in Bye-Law 8(4).
     (2) In these Bye-Laws, where not inconsistent with the context:
        (a) words denoting the plural number include the singular number and vice versa;
         (b) words denoting the masculine gender include the feminine and neuter gender;
         (c) the words:
             (i) “may” shall be construed as permissive;
             (ii) “shall” shall be construed as imperative;
         (d) references to particular laws, rules and regulations (including references to particular Sections of, Rules under and filings pursuant to the Exchange Act), shall be deemed to refer to any applicable successor laws, rules, regulations or filings as may be enacted or promulgated from time to time; and
         (e) unless otherwise provided herein, words or expressions defined in the Act shall bear the same meaning in these Bye-Laws.
     (3) Expressions referring to writing or its cognates shall, unless the contrary intention appears, include facsimile, printing, lithography, photography, electronic mail and other modes of representing words in a visible form.
     (4) Headings used in these Bye-Laws are for convenience only and are not to be used or relied upon in the construction hereof.
BOARD OF DIRECTORS
2. Board of Directors
     The Board shall have the full power and authority provided to it by the Act and these Bye-Laws.

2


3. Powers of the Board
     (1) In exercising such power and authority, the Board may exercise all such powers of the Company as are not, by statute or by these Bye-Laws, required to be exercised by the Company in a general meeting subject, nevertheless, to these Bye-Laws and the provisions of any statute.
     (2) No regulation or alteration to these Bye-Laws made by the Company in a general meeting shall invalidate any prior act of the Board that would have been valid if such regulation or alteration had not been made.
     (3) The Board may procure that the Company pays all expenses incurred in promoting and incorporating the Company.
     (4) The Board may from time to time and at any time by power of attorney appoint any company, firm, person or body of persons, whether nominated directly or indirectly by the Board, to be an attorney of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board) and for such period and subject to such conditions as it may think fit and any such power of attorney may contain such provisions for the protection and convenience of Persons dealing with any such attorney as the Board may think fit and may also authorize any such attorney to sub-delegate all or any of the powers, authorities and discretions so vested in the attorney. Such attorney may, if so authorized by the power of attorney, execute any deed or instrument or other document on behalf of the Company under hand or under its common seal.
4. Power to Delegate to a Committee
     The Board may delegate any of its powers to a committee appointed by the Board (including the power to sub-delegate) and every such committee shall conform to such directions as the Board shall impose on them. Committees may consist of one or more Directors.
     The meetings and proceedings of any such committee shall be governed by the provisions of these Bye-Laws regulating the meetings and proceedings of the Board, so far as the same are applicable and are not superseded by directions imposed by the Board, and in that connection the Board may authorize a committee to adopt such rules for its meetings.
5. Power to Appoint and Dismiss Employees
     The Board may appoint, suspend or remove any Officer, employee, agent or representative of the Company and may determine their duties.
6. Power to Borrow and Charge Property
     The Board may exercise all of the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and may issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or any third party.
7. Exercise of Power to Purchase Shares of or Discontinue the Company
     (1) The Board may exercise all of the powers of the Company to purchase (sometimes referred to in these Bye-Laws as “repurchase”) all or any part of its own shares pursuant to the Act.
     (2) The Board may exercise all of the powers of the Company to discontinue or redomesticate the Company to a named country or jurisdiction outside Bermuda pursuant to the Act.
8. Board Size; Term of Directors
     (1) Subject to the rights of the holders of any class or series of preference shares, the Board shall consist of such number of Directors (not less than 3) as the Board may determine from time to time by resolution adopted by the affirmative vote of at least a majority of the Board then in office. Any increase in the number of Directors on the Board pursuant to this Bye-Law 8 shall be deemed to be a vacancy and may be filled in accordance with Bye-Law 12 hereof. A decrease in the number of Directors shall not shorten the term of any Director then in office.

3


     (2) Subject to the rights of the holders of any class or series of preference shares, Directors shall be elected, except in the case of a vacancy (as provided for in Bye-Law 11 or 12, as the case may be), by the Shareholders in the manner set forth in these Bye-Laws at an annual general meeting of Shareholders or any special general meeting called for such purpose and shall hold office for the term set forth in paragraph (3) of this Bye-Law 8.
     (3)  Commencing at the annual general meeting of Shareholders in 2015 and each succeeding annual general meeting of Shareholders, Directors shall be elected annually for a one-year term expiring at the next annual general meeting of Shareholders; provided however, each Director elected at the annual general meeting of Shareholders in 2013 shall hold office until the annual general meeting of shareholders in 2016, and each Director elected at the annual general meeting of Shareholders in 2014 shall hold office until the annual general meeting of Shareholders in 2017. A Director shall hold office until such Director’s successor shall have been duly elected and qualified or until such Director is removed from office pursuant to Bye-Law 11 or such Director’s office is otherwise earlier vacated.
     (4) No person may be appointed, nominated or elected a Director unless such person, at the time such person is nominated and appointed or elected, would then be able to serve as a Director without conflicting in any material respect with any law or regulation applicable to the Company, as determined in good faith by the Board of Directors. In addition, to be eligible to be a nominee for election or reelection as a Director, a person must deliver (in accordance with the time periods prescribed for delivery of notice under Bye-Law 10) to the Secretary at the principal executive offices of the Company a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request) and a written representation and agreement (in the form provided by the Secretary upon written request) that such person (i) will abide by the requirements of these Bye-Laws, (ii) is not and will not become a party to (a) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a Director, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Company or (b) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a Director, with such person’s fiduciary duties under applicable law, (iii) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Company with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a Director that has not been disclosed therein, and (iv) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a Director, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Company.
     (5) Subject to the rights of the holders of any class or series of preference shares, at any meeting for the election of Directors at which a quorum is present, each nominee shall be elected by the vote of the majority of the votes cast with respect to the Director, provided that if the number of nominees exceeds the number of positions available for the election of Directors, the Directors so elected shall be those nominees who have received the greatest number of votes and at least a majority of the votes cast in person or by proxy at any such meeting. For purposes of this Bye-Law 8(5), a majority of the votes cast means that the number of shares voted “for” a Director must exceed 50% of the votes cast with respect to that Director. Votes cast with respect to the election of a Director shall include only votes cast with respect to stock present in person or represented by proxy at the meeting and entitled to vote and shall exclude abstentions.
     (6) If a nominee for Director who is an incumbent Director is not elected and no successor has been elected at such meeting, the Director will promptly tender his or her resignation to the Board. The Nomination and Corporate Governance Committee shall make a recommendation to the Board as to whether to accept or reject the tendered resignation, or whether other actions should be taken. The Board shall act on the tendered resignation, taking into account the Nomination and Corporate

4


Governance Committee’s recommendation, and publicly disclose (by a press release, a filing with the U.S. Securities and Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. The Nomination and Corporate Governance Committee in making its recommendation, and the Board in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The Director who tenders his or her resignation shall not participate in the recommendation of the Nomination and Corporate Governance Committee or the decision of the Board with respect to his or her resignation. If such incumbent Director’s resignation is not accepted by the Board, such Director shall continue to serve until the next annual meeting and until his or her successor is duly elected, or his or her earlier resignation or removal. If a Director’s resignation is accepted by the Board pursuant to these Bye-Laws, or if a nominee for Director is not elected and the nominee is not an incumbent Director, then the Board, in its sole discretion, may fill any resulting vacancy pursuant to Bye-Law 12 or may decrease the size of the Board pursuant to this Bye-Law 8.
9. Defects in Appointment of Directors
     All acts done by any meeting of the Board or by a committee of the Board shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any person as a Director, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director.
10. Shareholder Proposals and Nominations
(1) Annual General Meeting
         (a) At any annual general meeting of Shareholders, nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the Shareholders may be made (i) pursuant to the Company’s notice of meeting, (ii) by or at the direction of a majority of the Board or (iii) by any Shareholder who was a Shareholder of record at the time of giving of notice provided for in these Bye-Law, who is entitled to vote at the meeting and who complies with the procedures set forth in these Bye-Laws. To be properly brought before a meeting of Shareholders, business must be of a proper subject for action by Shareholders under applicable law and must not, if implemented, cause the Company to violate any applicable law or regulation, each as determined in good faith by the Board.
         (b) For nominations or other business to be properly brought before an annual general meeting by a Shareholder pursuant to these Bye-Laws, the Shareholder must have given timely notice thereof in writing to the Secretary and such other business must otherwise be a proper matter for Shareholder action. Notice shall be considered timely only if given to the Secretary of the Company not less than 90 nor more than 120 days prior to the first anniversary of the date of the preceding year’s annual general meeting of Shareholders; provided, however, that if the date of the annual general meeting is more than 30 days before or more than 60 days after such anniversary date, any notice by the Shareholder of business or the nomination of Directors for election or reelection to be brought before the annual general meeting to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual general meeting and not later than the close of business on the later of the 90th day prior to such annual general meeting and the 10th day following the day on which public announcement of the date of such meeting is first made. Notwithstanding the foregoing, in the event that the number of Directors to be elected to the Board at the applicable annual general meeting is increased and there is no public announcement by the Company naming all of the nominees for Director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year’s annual general meeting, a Shareholder’s notice required by this Bye-Law 10 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company.

5


         (c) Any Shareholder who gives notice of any such proposal shall deliver therewith, in writing: the text of the proposal to be presented and a brief statement of the reasons why such Shareholder and the beneficial owner, if any, on whose behalf the proposal is made favors the proposal; the name and address, as they appear on the Company’s books, of any such Shareholder and the name and address of any such beneficial owner; the number and class of all shares of each class of stock of the Company beneficially owned by such Shareholder and any such beneficial owner and evidence thereof reasonably satisfactory to the Secretary of the Company; a description of any material interest in the proposal of such Shareholder and any such beneficial owner (other than any interest as a Shareholder) and of all arrangements or understandings between such Shareholder and any such beneficial owner and any other Person or Persons in connection with the proposal of such business; and a representation that such Shareholder intends to appear in person or by proxy at the annual general meeting to bring such business before the meeting.
         (d) Any Shareholder desiring to nominate any person for election as a Director shall deliver with such notice a statement in writing setting forth: the name of the person to be nominated; the number and class of all shares of each class of stock of the Company beneficially owned by such person; the information regarding such person required by paragraphs (d), (e) and (f) of Item 401 of Regulation S-K adopted by the U.S. Securities and Exchange Commission; all other information relating to such person that is required to be disclosed in solicitations of proxies for Directors pursuant to Regulation 14A under the Exchange Act (including such person’s signed consent to serve as a Director if elected); a certification by each Shareholder nominee that such nominee is as of the time of nomination and will be as of the time of the applicable meeting eligible to serves as a Director in accordance with this Bye-Law 10 and (in both such person’s individual capacity and on behalf of any Person for whom such person may be a representative), has complied with Bye-Law 8 and has complied and will comply with all applicable corporate governance, conflicts, confidentiality and stock ownership and trading policies of the Company; the name and address, as they appear on the Company’s books, of such Shareholder and the name and address of any such beneficial owner, if any, on whose behalf the nomination is made; the number and class of all shares of each class of stock of the Company beneficially owned by such Shareholder or any such beneficial owner; and a description of all arrangements or understandings between such Shareholder or any such beneficial owner and each nominee and any other Person or Persons (including their names) pursuant to which the nomination or nominations are to be made. The Company may require any proposed nominee to furnish such other information as may be reasonably required by the Company to determine the qualifications of such proposed nominee to serve as a Director.
(2) Special General Meeting
         (a) The Chairperson, the Chief Executive Officer or the Board acting by vote of a majority of the Board may convene a special general meeting of the Company whenever in its judgment such a meeting is necessary or desirable. Subject to the next sentence and subject to the rights of the holders of any class or series of preference shares, special general meetings of the Company may only be called as provided in the preceding sentence. In addition, the Board shall, (i) on the requisition of the holders of any class or series of preference shares as may have express rights to requisition special general meetings, and (ii) on the requisition of Shareholders holding at the date of the deposit of the requisition not less than one-tenth of such of the paid-up capital of the Company as at the date of the deposit carries the right to vote in general meetings of the Company, forthwith proceed to convene a special general meeting of the Company (or the applicable class(es) of shares) and the provisions of Section 74 of the Act shall apply. Special general meetings may be held at such place as may from time to time be designated by the Board and stated in the notice of the meeting. In any special general meeting of the Company only such business shall be conducted as is set forth in the notice thereof.
         (b) Nominations of persons for election to the Board may be made at a special general meeting at which Directors are to be elected pursuant to the Company’s notice of meeting (i) by or at the direction of the Board or (ii) provided that the Board

6


has determined that Directors shall be elected at such meeting, by any Shareholder who is a Shareholder of record at the time of giving of notice provided for in this Bye-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in these Bye-Laws. In the event the Company calls a special general meeting for the purpose of electing one or more Directors to the Board, any such Shareholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Company’s notice of meeting, if the Shareholder’s notice containing the information specified in Bye-Laws 10(1)(d) and 8(4) shall be delivered to the Secretary at the principal executive offices of the Company not earlier than the close of business on the 120th day prior to such special general meeting and not later than the close of business on the later of the 90th day prior to such special general meeting and the 10th day following the day on which public announcement of the date of such meeting is first made and of the nominees proposed by the Board to be elected at such meeting.
     (3) General. As used in this Bye-Law 10, shares “beneficially owned” shall mean all shares as to which such Person, together with such Person’s affiliates and associates (as defined in Rule 12b-2 under the Exchange Act), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Exchange Act, as well as all shares as to which such Person, together with such Person’s affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been so given. For purposes of this by-law, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the U.S. Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. In no event shall the public announcement of an adjournment or postponement of an annual meeting or a special meeting commence a new time period for the giving of a Shareholder’s notice as described above.
     (4) The chairperson of the annual general meeting of Shareholders or special general meeting shall, if the facts warrant, refuse to acknowledge a proposal or nomination not made in compliance with the foregoing procedure and any such proposal or nomination not properly brought before the meeting shall not be considered.
11. Removal of Directors
     (1) Subject to the rights of the holders of any class or series of preference shares, the Shareholders may, at any annual general or special general meeting convened and held in accordance with these Bye-Laws, remove a Director before the stated expiry of his term only for Cause by the affirmative vote of at least a majority of the total combined voting power of all of the issued and outstanding shares of the Company entitled to vote on the election of Directors.
     (2) Subject to the rights of the holders of any class or series of preference shares, a vacancy on the Board created by the removal of a Director under the provisions of paragraph (1) of this Bye-Law 11 may be filled by the Shareholders at the meeting at which such Director is removed, acting by the affirmative vote of Shareholders holding at least a majority of the total combined voting power of all of the issued and outstanding shares of the Company entitled to vote on the election of Directors, and, in the absence of such election or appointment, the Board may fill the vacancy. A Director so elected or appointed shall hold office until the next annual general meeting of Shareholders.
     (3) Subject to the rights of the holders of any class or series of preference shares, the Board may, at any meeting of the Board convened and held in accordance with these Bye-Laws, remove a Director before the stated expiry of his term only for Cause by a resolution of the Board carried by the affirmative vote of at least a two-thirds majority of the Board then in office.
12. Vacancies on the Board

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     (1) Subject to the rights of the holders of any class or series of preference shares, the Board shall have the power from time to time and at any time to appoint any person as a Director to fill a vacancy on the Board occurring as the result of any of the events listed in paragraph (3) of this Bye-Law 12 or from an increase in the size of the Board pursuant to Bye-Law 8. The Board shall also have the power from time to time to fill any vacancy left unfilled at a general meeting. A Director appointed by the Board to fill a vacancy shall hold office until the next annual general meeting of shareholders.
     (2) The Board may act notwithstanding any vacancy in its number but, if and so long as its number is reduced below the number fixed by these Bye-Laws as the quorum necessary for the transaction of business at meetings of the Board, the continuing Directors or Director may act, notwithstanding the absence of a quorum, for the purpose of (i) summoning a general meeting of the Company or (ii) preserving the assets of the Company.
     (3) The office of a Director shall be vacated if the Director:
         (a) is removed from office pursuant to these Bye-Laws or is prohibited from being a Director by law;
         (b) is or becomes bankrupt or makes any arrangement or composition with his creditors generally;
         (c) is or becomes disqualified, disabled, of unsound mind, or dies; or
         (d) resigns his or her office by notice in writing to the Company.
     (4) Notwithstanding anything contained herein to the contrary, the provisions of Bye-Law 11, this Bye-Law 12 and all other provisions contained in these Bye-Laws related to the filling of vacancies on the Board shall be subject to any contractual or other legally binding obligation hereafter created by the Company and approved by the Board to provide any third party with the ability to nominate persons for election as Directors.
13. Notice of Meetings of the Board
     (1) The Chairperson may, and the Chairperson on the requisition of the Chief Executive Officer or a majority of the Directors then in office shall, at any time, upon two days’ notice (or such shorter notice as may be reasonable under the circumstances), summon a meeting of the Board.
     (2) Notice of a meeting of the Board shall be deemed to be duly given to a Director if it is sent to such Director by mail, courier service, facsimile, email or other mode of representing words in a legible form at such Director’s last known address or any other address given by such Director to the Company for this purpose.
14. Quorum at Meetings of the Board
     The quorum necessary for the transaction of business at a meeting of the Board shall be as fixed by the Board from time to time and, unless so fixed at any other level, shall be at least one-half of the total number of the Directors then in office, present in person or represented by a duly authorized representative appointed in accordance with the Act. The Directors present at a duly called meeting at which a quorum is present may continue to transact business until adjournment or termination, notwithstanding the withdrawal of enough Directors to leave less than a quorum.
15. Meetings of the Board
     (1) The Board may meet for the transaction of business, adjourn and otherwise regulate its meetings as it sees fit.
     (2) Directors may participate in any meeting of the Board by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting shall constitute presence in person at such meeting.
     (3) Unless otherwise provided in these Bye-Laws, a resolution put to the vote at a meeting of the Board shall be carried by the affirmative votes of a majority of the Directors present.
16. Unanimous Written Resolutions

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     A resolution in writing signed by all of the Directors then in office, which may be in counterparts, shall be as valid as if it had been passed at a meeting of the Board duly called and constituted, such resolution to be effective on the date on which the last Director signs the resolution.
17. Contracts and Disclosure of Directors’ Interests
     (1) Any Director, or any Director’s firm, partner or any company with whom any Director is associated, may act in any capacity for, be employed by or render services to the Company and such Director or such Director’s firm, partner or company shall be entitled to remuneration as if such Director were not a Director. Nothing herein contained shall authorize a Director or Director’s firm, partner or company to act as Auditor to the Company.
     (2) A Director who is directly or indirectly interested in a contract or proposed contract or arrangement with the Company or any of its subsidiaries shall declare the nature of such interest to the Board or any duly appointed committee thereof, whether or not such declaration is required by law.
     (3) Following a declaration being made pursuant to this Bye-Law 17, and unless disqualified by the chairperson of the relevant Board meeting or recused, a Director may vote in respect of any contract or proposed contract or arrangement in which such Director is interested and may be counted in the quorum for such meeting.
18. Remuneration of Directors
     The remuneration and benefits (if any) of the Directors shall be determined by the Board or any duly appointed committee thereof in accordance with applicable law and securities exchange rules. The Directors may also be paid or reimbursed for all travel, hotel and other expenses incurred by them in attending and returning from meetings of the Board, any committee appointed by the Board, general or special meetings of the Company or in connection with the business of the Company or their duties as Directors generally.
OFFICERS
19. Officers of the Company
     The Officers of the Company, who may or may not be Directors, may be appointed at any time by the Board or by such other persons as may be designated by the Board. Any person appointed pursuant to this Bye-Law 19 shall hold office for such period and upon such terms as the Board or, in the case of Officers other than the Chief Executive Officer, as the Chief Executive Officer may determine and the Board (or the Chief Executive Officer unless otherwise directed by the Board) may revoke or terminate any such appointment. Any such revocation or termination shall be without prejudice to any claim for damages that such Officer may have against the Company or the Company may have against such Officer for any breach of any contract of service between him and the Company which may be involved in such revocation or termination.
20. Remuneration of Officers
     The Officers shall receive such remuneration and benefits as the Board or any duly appointed committee thereof (or, in the case of Officers who are not “executive officers” as defined under applicable Rules promulgated under the Exchange Act, as management acting under authority duly delegated by the Board) may from time to time determine in accordance with applicable law and securities exchange rules.
21. Duties of Officers
     The Officers shall have such powers and perform such duties in the management, business and affairs of the Company as may be delegated to them from time to time by the Board or, in the case of Officers other than the Chief Executive Officer, by the Chief Executive Officer (or by any other Officer or employee of the Company acting, directly or indirectly, under his direction).
22. Chairperson and Secretary of Meetings

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     (1) The Chairperson shall act as chairperson at all meetings of the Shareholders and of the Board at which he or she is present. In the Chairperson’s absence, the Chief Executive Officer or any other Director or Officer designated in writing by the Chairperson, the Chief Executive Officer or a majority of the Board shall act as chairperson of the applicable meeting.
     (2) The Secretary shall act as secretary at all meetings of the Shareholders and of the Board and any committee thereof at which he or she is present. In the Secretary’s absence, a secretary shall be appointed by the chairperson of such meeting.
23. Register of Directors and Officers
     The Board shall cause to be kept in one or more books at the registered office of the Company a Register of Directors and Officers and shall enter therein the particulars required by the Act.
MINUTES
24. Obligations of Board to Keep Minutes
     (1) The Board shall cause minutes to be duly entered in books provided for the purpose:
         (a) of all elections and appointments of Officers;
         (b) of the names of the Directors present at each meeting of the Board and of any committee appointed by the Board; and
         (c) of all resolutions and proceedings of general meetings of the Shareholders, meetings of the Board and meetings of committees appointed by the Board.
     (2) Minutes prepared in accordance with the Act and these Bye-Laws shall be kept by the Secretary at the registered office of the Company.
INDEMNITY
25. Indemnification and Exculpation of Directors of the Company and Others
     (1) The Company shall indemnify in accordance with and to the full extent now or (if greater) hereafter permitted by Bermuda law, each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of the Company) (hereinafter, a “proceeding”), by reason of the fact that he or she is or was a Director or Officer (or is or was a director or officer of any subsidiary or any predecessor of the Company or any subsidiary) or is or was serving at the request of the Company (or any subsidiary of the Company or any predecessor of the Company or any subsidiary) as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (or any predecessor of any of such entities), including without limitation any service with respect to employee benefit plans maintained or sponsored by the Company (or any subsidiary of the Company or any predecessor of the Company or any subsidiary), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, against any liability or expense actually and reasonably incurred by such person in respect thereof. For the avoidance of doubt, the indemnity provided in this Bye-Law 25 shall extend, without limitation, to any matter in which an indemnified party may be guilty of negligence, default, breach of duty or breach of trust in relation to the Company or any of its subsidiaries, but shall not extend to any matter as to which such indemnified party admits that he is guilty, or is found, by a court of competent jurisdiction in a final judgment or decree not subject to appeal, guilty, of any fraud or dishonesty in relation to the Company or any such subsidiary. In connection with the foregoing, the Company shall advance the expenses of Directors and Officers in defending any such act, suit or proceeding; provided that such advancement shall be subject to reimbursement to the extent such person shall be found not to be entitled to such advancement of expenses under Bermuda law. In addition to the foregoing, the Company shall have the power, to the extent and in the manner permitted by Bermuda law, to indemnify each of its other employees and agents against any liability or expense (including advancement of expenses) incurred in connection with any proceeding arising by reason of the fact that such person is or was an employee or

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agent of the Company (or is or was an employee or agent of any subsidiary or any predecessor of the Company or any subsidiary) or is or was serving at the request of the Company (or any subsidiary of the Company or any predecessor of the Company or any subsidiary) as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (or any predecessor of any of such entities), including without limitation any service with respect to employee benefit plans maintained or sponsored by the Company (or any subsidiary of the Company or any predecessor of the Company or any subsidiary).
     (2) The Board may authorize the Company to purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee or agent of the Company, or is or was serving at the request of the Company as a Director, Officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, or in a fiduciary or other capacity with respect to any employee benefit plan maintained by the Company (or any subsidiary of the Company or any predecessor of the Company or any subsidiary), against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Bye-Law 25.
     (3) Directors, Officers and employees of the Company shall have no personal liability to the Company or its Shareholders for any action or failure to act to the fullest extent now or (if greater) hereafter permitted by Bermuda law.
     (4) The indemnification, expense reimbursement, exculpation and other provisions provided by this Bye-Law 25 shall not be deemed exclusive of any other rights to which the persons identified in this Bye-Law 25 may be entitled under any bye-law, agreement, vote of Shareholders or Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office; shall continue as to a person who has ceased to be a Director, Officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person; and shall be deemed to be a contractual right of such benefited Persons.
26. Waiver of Certain Claims
     (1) Each present and future Shareholder agrees to waive any claim or right of action such Shareholder might have, whether individually or by or in the right of the Company, against any Director, Officer or employee on account of any action taken by such Director, Officer or employee, or the failure of such Director, Officer or employee to take any action, in the performance of his duties with or for the Company (including, for the avoidance of doubt, with respect to the approval or disapproval of any transaction between the Company and one or more of its Affiliates or the pursuit of corporate opportunities), in each case to the fullest extent now or (if greater) hereafter permitted by Bermuda law.
     (2) The provisions of this Bye-Law 26 shall apply to, and for the benefit of, any person acting as (or with the reasonable belief that he or she will be appointed or elected as) a Director, Officer or employee in the reasonable belief that he or she has been so appointed or elected notwithstanding any defect in such appointment or election and to any person who is no longer, but at one time was, a Director, Officer or employee.
MEETINGS
27. Notice of Annual General Meeting of Shareholders
     The annual general meeting of Shareholders shall be held in each year other than the year of incorporation at such time and place as the Chairperson or the Chief Executive Officer may determine. At least 20 days’ notice of such meeting shall be given to each Shareholder, stating the date, place and time at which the meeting is to be held, that the election of Directors will take place thereat and such additional information as may be required by the Act.
28. Notice of Special General Meeting

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     Special general meetings may be called as specified in Bye-Law 10 upon not less than twenty days’ notice (or as otherwise prescribed by the Act), which notice shall state the date, time, place and such additional information as may be required by the Act or Bye-Law 10.
29. Accidental Omission of Notice of General Meeting
     The accidental omission to give notice of a general meeting to, or the non-receipt of notice of a general meeting by, any Person entitled to receive notice shall not invalidate the proceedings at that meeting.
30. Short Notice
     Subject to any applicable requirements of the New York Stock Exchange (or any other applicable stock exchange), a general meeting of the Company shall, notwithstanding that it is called by shorter notice than that specified in these Bye-Laws, be deemed to have been properly called if it is so agreed by (i) all of the Shareholders entitled to attend and vote thereat, in the case of an annual general meeting of Shareholders or (ii) by a majority in number of the Shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving a right to attend and vote thereat, in the case of a special general meeting.
31. Postponement of Meetings
     The Chairperson or the Chief Executive Officer may, and the Secretary on instruction from the Chairperson or the Chief Executive Officer shall, postpone any general meeting called in accordance with the provisions of these Bye-Laws, provided that notice of postponement is given to each Shareholder before the time for such meeting. Fresh notice of the date, time and place for the postponed meeting shall be given to each Shareholder in accordance with the provisions of these Bye-Laws.
32. Quorum for General Meeting
     At the commencement of any general meeting of the Company, two or more Persons present in person and representing in person or by proxy more than fifty percent (50%) of the issued and outstanding shares entitled to vote at the meeting shall form a quorum for the transaction of business, provided that, if the Company shall at any time have only one Shareholder, such one Shareholder present in person or by proxy shall form a quorum for the transaction of business at any general meeting of the Company held during such time. If the holders of the number of shares necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed in accordance with these Bye-Laws for any annual or special general meeting, the chairperson or a majority in interest of the Shareholders present, in person or by proxy, may adjourn from time to time without notice other than announcement at the meeting until the holders of the amount of shares requisite to constitute a quorum shall attend; provided that in the case of any such meeting convened pursuant to requisition of Shareholders, the meeting shall be cancelled. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. The Shareholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum.
33. Adjournment of Meetings
     (1) The chairperson of a general meeting may, with the consent of the majority of the Shareholders present at any general meeting at which a quorum is present (and shall if so directed), adjourn the meeting. In addition, the chairperson may adjourn the meeting to another time and place without such consent or direction if it appears to him that:
         (a) it is likely to be impracticable to hold or continue that meeting because of the number of Shareholders wishing to attend who are not present;
         (b) the unruly conduct of persons attending the meeting prevents, or is likely to prevent, the orderly continuation of the business of the meeting; or

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         (c) an adjournment is otherwise in the best interests of the Company or is necessary so that the business of the meeting may be properly conducted.
     (2) Unless the meeting is adjourned to a specific date, place and time announced at the meeting being adjourned, fresh notice of the date, place and time for the resumption of the adjourned meeting shall be given to each Shareholder entitled to attend and vote thereat in accordance with the provisions of these Bye-Laws.
34. Attendance at Meetings
     (1) If a majority of the Board shall so determine, Shareholders may participate in any general meeting by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and participation in such a meeting shall constitute presence in person at such meeting.
     (2) The Board may, and at any general meeting the chairperson of such meeting may, make any arrangement and impose any requirement or restriction as may be considered appropriate to ensure the security of a general meeting including, without limitation, requirements for evidence of identity to be produced by those attending the meeting, the searching of their personal property and the restriction of items that may be taken into the meeting place. The Board is, and at any general meeting the chairperson of such meeting is, entitled to refuse entry to a person who refuses to comply with any such arrangements, requirements or restrictions.
35. Written Resolutions
     (1) Subject to paragraph (4) of this Bye-Law 35, anything that may be done by resolution of the Company in a general meeting or by resolution of a meeting of any class of the Shareholders of the Company may, without a meeting and without any previous notice being required, be done by resolution in writing signed by all of the Shareholders who at the date of the resolution would be entitled to attend the meeting and vote on the resolution, in as many counterparts as may be necessary.
     (2) A resolution in writing made in accordance with this Bye-Law 35 is as valid as if it had been passed by the Company in a general meeting or by a meeting of the relevant class of Shareholders, as the case may be, and any reference in any Bye-Law to a meeting at which a resolution is passed or to Shareholders voting in favor of a resolution shall be construed accordingly.
     (3) A resolution in writing made in accordance with this Bye-Law 35 shall constitute minutes for the purposes of the Act.
36. Attendance of Directors
     The Directors of the Company shall be entitled to receive notice of and to attend any general meeting.
37. Voting at Meetings
     Subject to the provisions of the Act and except as otherwise provided under these Bye-Laws, any question proposed for the consideration of the Shareholders at any general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the provisions of these Bye-Laws and, in the case of an equality of votes, the resolution shall fail.
38. Voting by Hand or by Poll
     (1) At any general meeting, a resolution put to the vote of the meeting shall be decided on a show of hands or by a count of votes received in the form of electronic records, unless (before or on the declaration of the result of the show of hands or count of votes received as electronic records or on the withdrawal of any other demand for a poll) a poll is demanded by:
         (a) the chairman of the meeting or a majority of the Board; or
         (b) at least three (3) Shareholders present in person or represented by proxy; or
         (c) any Shareholder or Shareholders present in person or represented by proxy and holding between them not less than one tenth (1/10) of the total voting rights of all the Shareholders having the right to vote at such meeting; or

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         (d) any Shareholder or Shareholders present in person or represented by proxy holding shares conferring the right to vote at such meeting, being shares on which an aggregate sum has been paid up equal to not less than one tenth (1/10) of the total sum paid up on all such shares conferring such right.
     (2) The demand for a poll may, before the poll is taken, be withdrawn but only with the consent of the chairman and a demand so withdrawn shall not be taken to have invalidated the result of a show of hands or count of votes received as electronic records declared before the demand was made. If the demand for a poll is withdrawn, the chairman or any other Shareholder entitled may demand a poll.
     (3) Unless a poll is so demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has, on a show of hands or count of votes received as electronic records, been carried or carried unanimously or by a particular majority or not carried by a particular majority or lost shall be final and conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence of the fact without proof of the number or proportion of votes recorded for or against such resolution.
     (4) If a poll is duly demanded, the result of the poll shall be deemed to be the resolution of the meeting at which the poll is demanded.
     (5) A poll demanded on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken in such manner consistent with the Act as the chairman shall direct.
     (6) The demand for a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which the poll has been demanded and it may be withdrawn at any time before the close of the meeting or the taking of the poll, whichever is the earlier.
     (7) On a poll, votes may be cast either personally or by proxy.
     (8) A Person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way.
     (9) Where a vote is taken by poll, each Person present and entitled to vote shall be furnished with a ballot paper on which such Person shall record his or her vote in such manner as shall be determined at the meeting having regard to the nature of the question on which the vote is taken, and each ballot paper shall be signed or initialed or otherwise marked so as to identify the voter and the registered holder in the case of a proxy.
     (10) At the conclusion of any poll, the ballot papers shall be examined and counted by a committee of one or more inspectors appointed by the Board or the Chief Executive Officer of the Company prior to the general meeting to act at such meeting as provided hereunder and to make a written report thereof. If no inspector (or any alternate previously designated by the Board or the Chief Executive Officer) is able to act at the meeting, the chairperson of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. In connection with the applicable poll, the inspectors shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons to assist them in the performance of their duties. The date and time of the opening and closing of the polls during the meeting for each matter upon which the Shareholders will vote by poll at a meeting shall be announced at the meeting. No ballot, proxy or vote, nor any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of (i) the proxies, any envelopes submitted therewith, any information provided by a Shareholder who submits a proxy by telegram, cablegram or other electronic transmission from which it can be

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determined that the proxy was authorized by the Shareholder and (ii) the ballots and (iii) the regular books and records of the Company.
     In addition, the inspectors may also consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar Persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the Shareholder holds of record. If the inspectors consider such other reliable information for such purpose, they shall, at the time they make their certification, specify the precise information considered by them, including the Person or Persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.
39. Decision of Chairperson
     (1) At any general meeting if an amendment shall be proposed to any resolution under consideration and the chairperson of the meeting shall rule on whether the proposed amendment is out of order, the proceedings on the substantive resolution shall not be invalidated by any error in such ruling.
     (2) At any general meeting a declaration by the chairperson of the meeting that a question proposed for consideration has been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in a book containing the minutes of the proceedings of the Company shall be conclusive evidence of that fact.
40. Instrument of Proxy
     (1) Every Shareholder entitled to vote has the right to do so either in person or by one or more persons authorized by a proxy executed and delivered in accordance with these Bye-Laws.
     (2) A person so authorized as a proxy shall be entitled to exercise the same power on behalf of the grantor of the proxy as the grantor could exercise at a general meeting of the Company.
     (3) No proxy shall be valid after eleven months from its date, unless the proxy provides for a longer period. A proxy shall be revocable unless expressly provided therein to be irrevocable and the proxy is coupled with an interest sufficient in law to support an irrevocable power.
     (4) Subject to paragraph (3) of this Bye-Law 40, the instrument appointing a proxy, together with such other evidence as to its due execution as the Board may from time to time require, shall be delivered at the registered office of the Company (or at such place or places as may be specified in the notice convening the meeting or in any notice of any adjournment or, in either case, in any document sent therewith) prior to the holding of the relevant meeting or adjourned meeting at which the individual named in the instrument proposes to vote and, if not so delivered, the instrument of proxy shall not be treated as valid.
     (5) Instruments of proxy shall be in such form as the Board may approve (including, without limitation, written or electronic form) and the Board may, if it thinks fit, send out with the notice of any meeting forms of instruments of proxy for use at the meeting. The instrument of proxy shall be deemed to confer authority to vote on any amendment of a resolution put to the meeting for which it is given as the proxy thinks fit. The instrument of proxy shall, unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates.
     (6) A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the death or unsoundness of mind of the principal subsequent to giving the proxy but before the vote or revocation of the instrument of proxy or of the authority under which it was executed.
     (7) The decision of the chairperson of any general meeting as to the validity of any appointment of a proxy shall be final.
41. Representation of Corporations at Meetings
     A corporation or other Person that is not an individual that is a Shareholder may, by written instrument, authorize any person as it thinks fit to act as its representative at any meeting of the Shareholders or for all meetings of the Shareholders or for all

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meetings of the Shareholders for a certain or determinable period or until revocation and such person so authorized shall be entitled to exercise the same powers on behalf of such corporation or other such Person as such corporation or other such Person could exercise if it were an individual Shareholder and such corporation or other such Person shall be deemed to be present in person as a Shareholder at any such meeting attended by its authorized representative or representatives. Notwithstanding the foregoing, the chairperson of the meeting may accept such assurances as he or she thinks fit as to the right of any person to attend and vote at general meetings on behalf of a corporation or other such Person that is a Shareholder.
VOTES OF SHAREHOLDERS
42. General
     Subject to the rights of the holders of any class or series of preference shares, at any general meeting of the Company, each Shareholder present in person shall be entitled to one vote on any question to be decided on a show of hands and each Shareholder present in person or by proxy shall be entitled on a poll to one vote for each share held by him in his name in the Register of Shareholders.
SHARE CAPITAL AND SHARES
43. Share Capital
     The authorised share capital of the Company is 1,070,000,000 divided into 1,050,000,000 common shares of par value $0.20 each (“Common Shares”) and 20,000,000 undesignated shares of par value $0.20 each, which may be issued, without any prior Shareholder approval, as Common Shares or Preference Shares (“Undesignated Shares”).
44. Rights of Shares
(1) Common Shares
     The Common Shares shall, subject to the other provisions of these Bye-Laws, entitle the holders thereof to the following rights:
         (a) as regards dividend: after making all necessary provisions, where relevant, for payment of any preferred dividend in respect of any preference shares in the Company then outstanding, the Company shall apply any profits or reserves which the Board resolves to distribute in paying such profits or reserves to the holders of the Common Shares in respect of their holding of such shares pari passu and pro rata to the number of Common Shares held by each of them;
         (b) as regards capital: on a return of assets on liquidation, reduction of capital or otherwise, the holders of the Common Shares shall be entitled to be paid the surplus assets of the Company remaining after payment of its liabilities (subject to the rights of holders of any preferred shares in the Company then in issue having preferred rights on the return of capital) in respect of their holdings of Common Shares pari passu and pro rata to the number of Common Shares held by each of them;
        (c) as regards voting in general meetings: the holders of the Common Shares shall be entitled to receive notice of, and to attend and vote at, general meetings of the Company; every holder of Common Shares present in person or by proxy shall on a poll have one vote for each Common Share held by him.
(2) Undesignated Shares
The rights attaching to the Undesignated Shares, subject to these Bye-Laws, shall be as follows:
         (a) each Undesignated Share shall have attached to it such preferred, qualified or other special rights, privileges and conditions and be subject to such restrictions, whether in regard to dividend, return of capital, redemption, conversion into Common Shares or voting or otherwise, as the Board may determine on or before its allotment;
         (b) the Board may allot the Undesignated Shares in more than one series and, if it does so, may name and designate each series in such manner as it deems appropriate to reflect the particular rights and restrictions attached to that series, which may differ in all or any respects from any other series of Undesignated Shares;

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         (c) the particular rights and restrictions attached to any Undesignated Shares shall be recorded in a resolution of the Board. The Board may at any time before the allotment of any Undesignated Share by further resolution in any way amend such rights and restrictions or vary or revoke its designation. A copy of any such resolution or amending resolution for the time being in force shall be annexed as an appendix to (but shall not form part of) these Bye-Laws; and
         (d) the Board shall not attach to any Undesignated Share any rights or restrictions which would alter or abrogate any of the special rights attached to any other class of series of shares for the time being in issue without such sanction as is required for any alteration or abrogation of such rights, unless expressly authorised to do so by the rights attaching to or by the terms of issue of such other class or series.
(3) Preference Shares
     Without limiting the foregoing and subject to the Act, the Company may issue preference shares (“Preference Shares”) without any prior Shareholder approval which:
        (a) are liable to be redeemed on the happening of a specified event or events or on a given date or dates and/or;
         (b) are liable to be redeemed at the option of the Company and/or, if authorised by the Memorandum of Association of the Company, at the option of the holder.
     The terms and manner of the redemption of any redeemable shares created pursuant to this Bye-Law 44(3) shall be as the Board may by resolution determine. The terms of any redeemable preference shares may provide for the whole or any part of the amount due on redemption to be paid or satisfied otherwise than in cash, to the extent permitted by the Act.
     In addition, subject to any special rights conferred on the holders of any share or class of shares, any Preference Shares may be issued with or have attached thereto such preferred, deferred, qualified or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise, as the Board may determine pursuant to Bye-Law 44(2).
     (4) The Board may, at its discretion and without the sanction of a resolution of the Shareholders, authorise the purchase or acquisition by the Company of its own shares, of any class, at any price (whether at par or above or below par), and any shares to be so purchased or acquired may be selected in any manner whatsoever, upon such terms as the Board may in its discretion determine, provided always that such purchase or acquisition is effected in accordance with the provisions of the Act. The whole or any part of the amount payable on any such purchase may be paid or satisfied otherwise than in cash, to the extent permitted by the Act. Any shares acquired may be held as treasury shares in accordance with and subject to the Act.
45. Modification of Rights
     (1) Subject to the Act, all or any of the special rights attached to any class of shares issued may from time to time (whether or not the Company is being wound up) be altered or abrogated with the consent in writing of the holders of not less than three-quarters of the issued shares of that class or with the sanction of a resolution passed by the holders of not less than three-quarters of the issued shares of that class at a separate general meeting of the holders of such shares voting in person or by proxy. To any such separate general meeting, all the provisions of these Bye-Laws as to general meetings of the Company shall mutatis mutandis apply, but so that the necessary quorum shall be two (2) or more persons holding or representing by proxy at least three-quarters of the shares of the relevant class, that every holder of shares of the relevant class shall be entitled on a poll to one vote for every such share held by him and that any holder of shares of the relevant class present in person or by proxy may demand a poll; provided, however, that if the Company or a class of Shareholders shall have only one Shareholder, such one Shareholder present in person or by proxy shall constitute the necessary quorum.
     (2) For the purposes of this Bye-Law, unless otherwise expressly provided by the rights attached to any shares or class of shares, those rights attaching to any class of shares for the time being shall not be deemed to be altered by:
         (a) the creation or issue of further shares ranking pari passu with them;

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         (b) the creation or issue for full value (as determined by the Board) of further shares ranking as regards participation in the profits or assets of the Company or otherwise in priority to them; or
         (c) the purchase or redemption by the Company of any of its own shares.
46. Shares
     (1) Subject to the provisions of these Bye-Laws, the unissued shares of the Company (whether forming part of the original capital or any increased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or otherwise dispose of them to such Persons, at such times and for such consideration and upon such terms and conditions as the Board may determine.
     (2) Subject to the provisions of these Bye-Laws, any shares of the Company held by the Company as treasury shares shall be at the disposal of the Board, which may hold all or any of the shares, dispose of or transfer all or any of the shares for cash or other consideration, or cancel all or any of the shares.
     (3) The Board may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by law. Subject to the provisions of the Act, any such commission or brokerage may be satisfied by the payment of cash or by the allotment of fully or partly paid shares or partly in one way and partly in the other.
     (4) Shares may be issued in fractional denominations and in such event the Company shall deal with such fractions to the same extent as its whole shares, so that a share in a fractional denomination shall have, in proportion to the fraction of a whole share that it represents, all the rights of a whole share, including (but without limiting the generality of the foregoing) the right to vote, to receive dividends and distributions and to participate in a winding-up.
47. Registered Holder of Shares
     (1) The Company shall be entitled to treat the registered holder of any share as the absolute owner thereof and, accordingly, shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other Person.
     (2) Any dividend, interest or other moneys payable in cash in respect of shares may be paid by check or draft sent through the post directed to the Shareholder at such Shareholder’s address as recorded in the Register of Shareholders or, in the case of joint holders, to such address of the holder first named in the Register of Shareholders, or (subject to applicable law) to such Person and to such address as such holder or joint holders may in writing direct. If two or more Persons are registered as joint holders of any shares, any one can give an effectual receipt for any dividend paid in respect of such shares.
48. Death of a Joint Holder
     Where two or more Persons are registered as joint holders of a share or shares then, in the event of the death of any joint holder or holders, the remaining joint holder or holders shall be absolutely entitled to such share or shares and the Company shall recognize no claim in respect of the estate of any joint holder except in the case of the last survivor of such joint holders.
49. Share Certificates
     (1) Every Shareholder shall be entitled to a certificate under the seal of the Company (or a facsimile thereof) specifying the number and, where appropriate, the class or series of shares held by such Shareholder and whether the same are fully paid up and, if not, how much has been paid thereon. The Company may determine, either generally or in a particular case, that any or all signatures on certificates may be printed thereon or affixed by mechanical means. Notwithstanding Bye-Law 76, the Company may determine that a share certificate need not be signed on behalf of the Company or that the seal of the Company need not be attested.
     (2) The Company shall be under no obligation to complete and deliver a share certificate unless specifically called upon to do so by the Person to whom such shares have been allotted.
     (3) If any such certificate shall be proved to the satisfaction of the Company to have been worn out, lost, mislaid or destroyed, the Company may cause a new certificate to be issued and request an indemnity for the lost certificate if it sees fit.

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50. Calls on Shares
     (1) The Board may from time to time make such calls as it thinks fit upon the Shareholders in respect of any monies unpaid on the shares allotted to or held by such Shareholders and, if a call is not paid on or before the day appointed for payment thereof, the Shareholder may, at the discretion of the Board, be liable to pay the Company interest on the amount of such call at such rate as the Board may determine, from the date when such call was payable up to the actual date of payment. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof.
     (2) The Board may, on the issue of shares, differentiate between the holders as to the amount of calls to be paid and the times of payment of such calls.
     (3) Any sum that, by the terms of allotment of a share, becomes payable upon issue or at any fixed date, whether on account of the nominal value of the share or by way of premium, shall for all of the purposes of these Bye-Laws be deemed to be a call duly made and payable, on the date on which, by the terms of issue, the same becomes payable and, in case of non-payment, all of the relevant provisions of these Bye-Laws as to payment of interest, costs, charges and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.
     (4) The Company may accept from any Shareholder the whole or a part of the amount remaining unpaid on any shares held by him, although no part of that amount has been called up.
51. Forfeiture of Shares
     (1) If any Shareholder fails to pay, on the day appointed for payment thereof, any call in respect of any share allotted to or held by such Shareholder, the Board may, at any time thereafter during such time as the call remains unpaid, direct the Secretary to forward to such Shareholder a notice in the form (or as near thereto as circumstances admit) set forth in Schedule A hereto.
     (2) If the requirements of such notice are not complied with, any such share may at any time thereafter before the payment of such call and the interest due in respect thereof be forfeited by a resolution of the Board to that effect, and such share shall thereupon become the property of the Company and may be disposed of as the Board shall determine.
     (3) A Shareholder whose share or shares have been forfeited as aforesaid shall, notwithstanding such forfeiture, be liable to pay to the Company all calls owing on such share or shares at the time of the forfeiture and all interest due thereon.
     (4) The Board may accept the surrender of any shares that it is in a position to forfeit on such terms and conditions as may be agreed. Subject to those terms and conditions, a surrendered share shall be treated as if it has been forfeited.
INTERESTED SHAREHOLDERS
52. Limitations on Business Combinations.
     Notwithstanding anything contained herein to the contrary, the Company shall not engage in any Business Combination with any Interested Shareholder for a period of 3 years following the time that such Shareholder became an Interested Shareholder, unless: (a) prior to such time the Board approved either the Business Combination or the transaction which resulted in the Shareholder becoming an Interested Shareholder; (b) upon consummation of the transaction which resulted in the Shareholder becoming an Interested Shareholder, the Interested Shareholder Beneficially Owned at least 85% of the total voting stock of the Company outstanding at the time the transaction commenced, excluding for purposes of determining the total voting stock outstanding (but not the outstanding voting stock Beneficially Owned by the Interested Shareholder) those shares Beneficially Owned (i) by persons who are Directors and also Officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (c) at or subsequent to such time the Business Combination is approved by the Board and authorized at an annual general meeting or special general meeting of Shareholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not Beneficially Owned by the Interested Shareholder.

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53. Certain Definitions
     (1) “Associate” has the meaning ascribed to such term in Rule 12b-2 of the Exchange Act.
     (2) As used in Bye-Laws 52-53, a Person shall be deemed the “Beneficial Owner” of and shall be deemed to “beneficially own” any securities:
         (a) which such Person or any of such Person’s Affiliates or Associates beneficially owns, directly or indirectly;
         (b) which such Person or any of such Person’s Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (ii) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (x) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (y) is not also then reportable on Schedule 13D under the Exchange Act; or
         (c) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person’s Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to clause (ii) of the preceding subsection (b)) or disposing of any securities of the Company.
         (d) Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase “then outstanding,” when used with reference to a Person’s Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder.
     (3) “Business combination” means any:
         (a) merger, amalgamation, scheme of arrangement or consolidation of the Company or any direct or indirect majority-owned subsidiary of the Company with (i) the Interested Shareholder, or (ii) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the Interested Shareholder;
         (b) sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a Shareholder, to or with the Interested Shareholder, whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary of the Company which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Company determined on a consolidated basis or the aggregate market value of all the outstanding stock of the Company;
         (c) transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned subsidiary of the Company of any stock of the Company or of such subsidiary to the Interested Shareholder, except (i) Pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which securities were outstanding prior to the time that the Interested Shareholder became such, (ii) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of such corporation or any such subsidiary which security is distributed, pro rata

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to all holders of a class or series of stock of such corporation subsequent to the time the Interested Shareholder became such; (iii) pursuant to an exchange offer by the Company to purchase stock made on the same terms to all holders of said stock; or (iv) any issuance or transfer of stock by the Company; provided however, that in no case under items (i)-(iv) of this subparagraph shall there be an increase in the Interested Shareholder’s proportionate share of the stock of any class or series of the Company or of the voting stock of the Company;
         (d) transaction involving the Company or any direct or indirect majority-owned subsidiary of the Company which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the Company or of any such subsidiary which is Beneficially Owned by the Interested Shareholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the Interested Shareholder; or
         (e) receipt by the Interested Shareholder of the benefit, directly or indirectly (except proportionately as a Shareholder of such corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in subparagraphs (a)-(d) of this paragraph) provided by or through the Company or any direct or indirect majority-owned subsidiary.
     (4) “Interested Shareholder” means any Person (other than the Company and any direct or indirect majority-owned subsidiary of the Company) that (i) is the Beneficial Owner of 15% or more of the outstanding voting stock of the Company, or (ii) is an Affiliate or Associate of the Company and was the Beneficial Owner of 15% or more of the outstanding voting stock of the Company at any time within the 3-year period immediately prior to the date on which it is sought to be determined whether such Person is an Interested Shareholder, and the Affiliates and Associates of such Person; provided, however, that the term “Interested Shareholder” shall not include (x) any Person who becomes an Interested Shareholder inadvertently and (i) as soon as practicable divests itself of Beneficial Ownership of sufficient shares so that the Shareholder ceases to be an Interested Shareholder and (ii) would not, at any time within the 3-year period immediately prior to a Business Combination between the Company and such Shareholder, have been an Interested Shareholder but for the inadvertent acquisition of ownership; or (y) any Person whose Beneficial Ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the Company; provided that such Person shall be an Interested Shareholder if thereafter such Person acquires additional shares of voting stock of the Company, except as a result of further corporate action not caused, directly or indirectly, by such Person; provided further that no savings, profit sharing, stock bonus or employee stock ownership plan or plans established or sponsored by the Company (or any subsidiary of the Company or any predecessor of the Company or any subsidiary) and qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, or any comparable provisions of any non-U.S. law, which holds Common Shares on behalf of participating employees and their beneficiaries with the right to instruct the trustee how to vote such Common Shares with respect to all matters submitted to Shareholders shall not be deemed to be an “Interested Shareholder.”
REGISTER OF SHAREHOLDERS
54. Contents of Register of Shareholders
     The Board shall cause to be kept in one or more books a Register of Shareholders and shall enter therein the particulars required by the Act.
55. Inspection of Register of Shareholders
     The Register of Shareholders shall be open to inspection at the registered office of the Company on every Business Day, subject to such reasonable restrictions as the Company may impose, so that not less than two hours in each Business Day be allowed for inspection. The Register of Shareholders may, after notice has been given by advertisement in an appointed newspaper to that effect, be closed for any time or times not exceeding in the whole thirty days in each year.

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56. Determination of Record Dates
     Notwithstanding any other provision of these Bye-Laws, the Board may fix any date as the record date for:
     (a) determining the Shareholders entitled to receive any dividend or distribution; and
     (b) determining the Shareholders entitled to receive notice of and to vote at any general meeting of the Company.
TRANSFER OF SHARES
57. Instrument of Transfer
     (1) Subject to paragraph (4) of Bye-Law 58, an instrument of transfer shall be in the form (or as near thereto as circumstances admit) set forth in Schedule B hereto or in such other common form as the Company may accept. Such instrument of transfer shall be signed by or on behalf of the transferor and transferee, provided that, in the case of a fully paid share, the Company may accept the instrument signed by or on behalf of the transferor alone. The transferor shall be deemed to remain the holder of such share until the same has been transferred to the transferee in the Register of Shareholders.
     (2) The Company may refuse to recognize any instrument of transfer unless it is accompanied by the certificate in respect of the shares to which it relates and by such other evidence as the Company may reasonably require to show the right of the transferor to make the transfer.
58. Restrictions on Transfer
     (1) Unless otherwise required by any applicable requirements of the New York Stock Exchange (or any other applicable stock exchange), the Company (i) may decline to approve or to register any transfer of any share if a written opinion from counsel acceptable to the Company shall not have been obtained to the effect that registration of such shares under the U.S. Securities Act of 1933, as amended, is not required and (ii) shall decline to approve or to register any transfer of any share if the transferee shall not have been approved by applicable governmental authorities if such approval is required or if not in compliance with applicable consent, authorization or permission of any governmental body or agency in Bermuda.
     (2) If the Company refuses to register a transfer of any share, the Secretary shall send, or procure that there shall be sent, within one month after the date on which the transfer was lodged with the Company, to the transferor and transferee notice of the refusal.
     (3) The registration of transfers may be suspended at such times and for such periods as the Company may from time to time determine, provided always that such registration shall not be suspended for more than 45 days in any year.
     (4) Shares may be transferred without a written instrument if transferred by an appointed agent or otherwise in accordance with the Act.
TRANSMISSION OF SHARES
59. Representative of Deceased Shareholder
     In the case of the death of a Shareholder, the survivor or survivors where the deceased Shareholder was a joint holder, and the legal personal representatives of the deceased Shareholder where the deceased Shareholder was a sole holder, shall be the only persons recognized by the Company as having any title to the deceased Shareholder’s interest in the shares. Nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share that had been jointly held by such deceased Shareholder with other persons. Subject to the provisions of the Act, for the purpose of this Bye-Law 59, “legal personal representative” means the executor or administrator of a deceased Shareholder or such other Person as the Company may decide as being properly authorized to deal with the shares of a deceased Shareholder.
60. Registration on Death or Bankruptcy
     Any Person becoming entitled to a share in consequence of the death or bankruptcy of any Shareholder may be registered as a Shareholder upon such evidence as the Company may deem sufficient or may elect to nominate another Person to be registered as a transferee of such share, and in such case such Person becoming entitled shall execute in favor of such nominee

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an instrument of transfer in the form (or as near thereto as circumstances admit) set forth in Schedule C hereto. On the presentation thereof to the Company, accompanied by such evidence as the Company may require to prove the title of the transferor, the transferee shall be registered as a Shareholder, provided that the Company shall, in either case, have the same right to decline or suspend registration as it would have had in the case of a transfer of the share by such Shareholder before such Shareholder’s death or bankruptcy, as the case may be.
DIVIDENDS AND OTHER DISTRIBUTIONS
61. Declaration of Dividends by the Board
     (1) The Board may, subject to these Bye-Laws and in accordance with the Act, declare a dividend to be paid to the Shareholders in proportion to the number of shares held by them, and such dividend may be paid in cash or wholly or partly in specie in which case the Board may fix the value for distribution in specie of any assets. No unpaid dividend shall bear interest as against the Company.
     (2) The Company may pay dividends in proportion to the amount paid up on each share where a larger amount is paid up on some shares than on others.
62. Other Distributions
     The Board may declare and make such other distributions (in cash or in specie) to the Shareholders as may be lawfully made out of the assets of the Company. No unpaid distribution shall bear interest as against the Company.
63. Reserve Fund
     The Board may from time to time before declaring a dividend set aside, out of the surplus or profits of the Company, such sum as it thinks proper as a reserve to be used to meet contingencies or for equalizing dividends or for any other special purpose.
64. Deduction of Amounts Due to the Company
     The Board may deduct from the dividends or distributions payable to any Shareholder all monies due from such Shareholder to the Company on account of calls.
CAPITALIZATION
65. Issue of Bonus Shares: Capitalization of Profits
     (1) The Board may resolve to capitalize any part of the amount for the time being standing to the credit of any of the Company’s share premium or other reserve accounts or to the credit of the profit and loss account or otherwise available for distribution by applying such sum in paying up unissued shares to be allotted as fully paid bonus shares pro rata to the Shareholders.
     (2) The Board may from time to time resolve to capitalise all or any part of any amount for the time being standing to the credit of any reserve or fund which is available for distribution or to the credit of any share premium account and accordingly that such amount be set free for distribution amongst the Shareholders or any class of Shareholders who would be entitled thereto if distributed by way of dividend and in the same proportions, on the footing that the same be not paid in cash but be applied either in or towards paying up amounts for the time being unpaid on any shares in the Company held by such Shareholders respectively or in payment up in full of unissued shares, debentures or other obligations of the Company, to be allotted and distributed credited as fully paid amongst such Shareholders, or partly in one way and partly in the other, provided that for the purpose of this Bye-Law 65, a share premium account may be applied only in paying up of unissued shares to be issued to such Shareholders credited as fully paid. Where any difficulty arises in regard to any distribution under this Bye-Law 65, the Board may settle the same as it thinks expedient and, in particular, may authorise any Person to sell and transfer any fractions or may resolve that the distribution should be as nearly as may be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments should be made to any Shareholders in order to

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adjust the rights of all parties, as may seem expedient to the Board. The Board may appoint any person to sign on behalf of the Persons entitled to participate in the distribution any contract necessary or desirable for giving effect thereto and such appointment shall be effective and binding upon the Shareholders.
ACCOUNTS AND FINANCIAL STATEMENTS
66. Records of Account
     The Board shall cause to be kept proper records of account with respect to all transactions of the Company and in particular with respect to:
     (a) all sums of money received and expended by the Company and the matters in respect of which the receipt and expenditure relates;
     (b) all sales and purchases of goods by the Company; and
     (c) the assets and liabilities of the Company.
     Such records of account shall be kept at the registered office of the Company or, subject to the Act, at such other place as the Company may determine and shall be available for inspection by the Directors during normal business hours.
67. Financial Year End
     The financial year end of the Company may be determined by resolution of the Board and failing such resolution shall be 31st December of each year.
68. Financial Statements
     Subject to any rights to waive laying of accounts pursuant to the Act, financial statements as required by the Act shall be laid before the Shareholders at the annual general meeting of Shareholders.
AUDIT
69. Appointment of Auditor
     The Company shall appoint Auditors to hold office for such period and otherwise as in accordance with the Act. Whenever a casual vacancy occurs in the office of the Auditors, the Audit Committee may appoint Auditors to hold office until the close of the next annual general meeting. No Auditor may be a Shareholder and no Director, Officer or employee of the Company shall, during his or her continuance in office, be eligible to act as an Auditor of the Company.
70. Remuneration of Auditor
     Unless fixed by the Company in a general meeting, the remuneration of the Auditor shall be as determined by the Audit Committee.
71. Report of the Auditor
     Subject to any rights to waive laying of accounts or appointment of an Auditor pursuant to provisions of the Act, the accounts of the Company shall be audited by the Auditor at least once in every year.
NOTICES
72. Notices to Shareholders of the Company
     A notice may be given by the Company to any Shareholder either by delivering it to such Shareholder in person or by sending it to such Shareholder’s address in the Register of Shareholders or to such other address given for the purpose. For the purposes of this Bye-Law 72, a notice may be sent by mail, courier service, facsimile, email or other mode of representing words in a legible form.

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73. Notices to Joint Shareholders
     Any notice required to be given to a Shareholder shall, with respect to any shares held jointly by two or more Persons, be given to whichever of such Persons is named first in the Register of Shareholders and notice so given shall be sufficient notice to all of the holders of such shares.
74. Service and Delivery of Notice
     Any notice shall be deemed to have been served at the time when the same would be delivered in the ordinary course of transmission (which shall be deemed to be two calendar days from deposit in the case of mail) and, in proving such service, it shall be sufficient to prove that the notice was properly addressed and prepaid, if mailed, and the time when it was mailed, delivered to the courier or transmitted by facsimile, email, or such other method, as the case may be.
SEAL OF THE COMPANY
75. The Seal
     The seal of the Company shall be in such form as the Board may from time to time determine. The Board may adopt one or more duplicate seals.
76. Manner in which Seal is to be Affixed
     Subject to Bye-Law 48, the seal of the Company shall not be affixed to any instrument except attested by the signature of a Director and the Secretary or any two Directors, or any person appointed by the Board for the purpose, provided that any Director, Officer or Resident Representative, may affix the seal of the Company attested by such Director, Officer or Resident Representative’s signature to any authenticated copies of these Bye-Laws, the incorporating documents of the Company, the minutes of any meetings or any other documents required to be authenticated by such Director, Officer or Resident Representative. Any such signature may be printed or affixed by mechanical means on any share certificate, debenture, share or other security certificate.
WINDING-UP
77. Winding-Up/Distribution by Liquidator
     If the Company shall be wound up, the liquidator may, with the sanction of a resolution of the Shareholders, divide amongst the Shareholders in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may, for such purpose, set such value as he deems fair upon any property to be divided as aforesaid. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts as the liquidator shall think fit for the benefit of the Shareholders, provided that no Shareholder shall be compelled to accept any shares or other securities or assets whereon there is any liability.
ALTERATION OF BYE-LAWS
78. Alteration of Bye-Laws
     No Bye-Law shall be rescinded, altered or amended and no new Bye-Law shall be made until the same has been approved by a resolution of the Board and by a resolution of the Shareholders; provided that (i) the approval of such resolution of the Shareholders with respect to any such rescission, alteration or amendment of, or the adoption of any Bye-Law or provision inconsistent with, Bye-Laws 8, 10, 11, 12, 35, 44, 52 and 53, this Bye-Law 78 or any material defined term used in any such Bye-Laws shall require the affirmative vote of the holders of at least three-quarters of the total combined voting power of all issued and outstanding shares of the Company, and (ii) any such rescission, alteration or amendment of, or the adoption of any Bye-Law or provision inconsistent with, Bye-Law 25 or 26 or any material defined term used in such Bye-Laws shall not affect the waiver of any claim or right of action with respect to past acts or omissions.



25



Schedule A
(Bye-Law 51)
NOTICE OF LIABILITY TO FORFEITURE FOR NON PAYMENT OF CALL
     You have failed to pay the call of [amount of call] made on the            day of      , 20 , in respect of the [number] share(s) ([numbers in figures]) standing in your name in the Register of Shareholders of the Company, on the day of      , 20 , the day appointed for payment of such call. You are hereby notified that unless you pay such call together with interest thereon at the rate of ___% per annum computed from the said day of      , 20         , on or before the day of
     , 20    at the place of business of the Company, the share(s) will be liable to be forfeited.
Dated this            day of      , 20
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
[Signature of Secretary]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By order of the Board
 
 
 


 

26



Schedule B
(Bye-Law 57)
TRANSFER OF A SHARE OR SHARES
     FOR VALUE RECEIVED
[amount]
[transferor]
     Hereby sell assign and transfer unto
[transferee]
     Of
[address]
[number of shares]
     shares of
[name of Company]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Transferor)
 
 
In the presence of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                    (Witness)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Transferor)
 
 
In the presence of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                    (Witness)
 
 
 
 
 
 
 

27




 
Schedule C
(Bye-Law 60)
TRANSFER BY A PERSON
BECOMING ENTITLED ON DEATH/BANKRUPTCY OF A SHAREHOLDER
     I/We having become entitled in consequence of the [death/bankruptcy] of [name of the Shareholder] to [number] share(s) standing in the register of Shareholders of [Company] in the name of the said [name of Shareholder] instead of being registered myself/ourselves elect to have [name of transferee] (the “Transferee”) registered as a transferee of such share(s) and I/we do hereby accordingly transfer the said share(s) to the Transferee to hold the same unto the Transferee his or her executors administrators and assigns subject to the conditions on which the same were held at the time of the execution thereof; and the Transferee does hereby agree to take the said share(s) subject to the same conditions.
WITNESS our hands this     day of           , 20
Signed by the above-named
[Person or Persons entitled]
in the presence of:
Signed by the above-named
[transferee] in the presence of:
 


28
IVZ.2Q.2014.EX 31.1
Exhibit 31.1

Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Martin L. Flanagan, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Invesco Ltd.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
July 31, 2014
 
/s/  MARTIN L. FLANAGAN 
 
 
Martin L. Flanagan
 
 
President and Chief Executive Officer



IVZ.2Q.2014.EX 31.2
Exhibit 31.2

Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Loren M. Starr, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Invesco Ltd.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
July 31, 2014
 
/s/  LOREN M. STARR 
 
 
Loren M. Starr
 
 
Senior Managing Director and Chief Financial Officer



IVZ.2Q.2014.EX.32.1
Exhibit 32.1

CERTIFICATION OF MARTIN L. FLANAGAN
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Invesco Ltd.'s (the “Company”) Quarterly Report on Form 10-Q for the period ended June 30, 2014 (the “Report”), I, Martin L. Flanagan, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  
July 31, 2014
 
/s/  MARTIN L. FLANAGAN 
 
 
Martin L. Flanagan
 
 
President and Chief Executive Officer



IVZ.2Q.2014.EX.32.2
Exhibit 32.2

CERTIFICATION OF LOREN M. STARR
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Invesco Ltd.'s (the “Company”) Quarterly Report on Form 10-Q for the period ended June 30, 2014 (the “Report”), I, Loren M. Starr, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  
July 31, 2014
 
/s/  LOREN M. STARR
 
 
Loren M. Starr
 
 
Senior Managing Director and Chief Financial Officer



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ivz-20140630.xsd
Attachment: XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT

ivz-20140630_cal.xml
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ivz-20140630_def.xml
Attachment: XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT

ivz-20140630_lab.xml
Attachment: XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT

ivz-20140630_pre.xml
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