| PRICE T ROWE GROUP INC Item 1A Risk Factors |
| An investment in our common stock involves various risks, including those mentioned below and those that are discussed from time-to-time in our other periodic filings with the SEC Investors should carefully consider these risks, along with the other information contained in this report, before making an investment decision regarding our common stock |
| There may be additional risks of which we are currently unaware, or which we currently consider immaterial |
| All of these risks could have a material adverse effect on our financial condition, results of operations, and value of our common stock |
| RISKS RELATING TO OUR BUSINESS AND THE FINANCIAL SERVICES INDUSTRY Our revenues are based on the market value and composition of the assets under our management, all of which are subject to fluctuation caused by factors outside of our control |
| We derive our revenues primarily from investment advisory services provided by our subsidiaries to individual and institutional investors in the T Rowe Price mutual funds and other investment portfolios |
| Our investment advisory fees typically are calculated as a percentage of the market value of the assets under our management |
| We generally earn higher fees on assets invested in our equity funds and equity investment portfolios than we earn on assets invested in our fixed income funds and portfolios |
| Among equity investments, there is a significant variation in fees earned from index-based investments at the low end and emerging markets funds and portfolios at the high end |
| Fees also vary across the fixed income funds and portfolios, though not as widely as equity investments, with money market securities at the low end and non-US bonds at the high end |
| As a result, our revenues are dependent on the value and composition of the assets under our management, all of which are subject to substantial fluctuation due to many factors, including: • Investor Mobility |
| Our investors generally may withdraw their funds at any time, on very short notice and without any significant penalty |
| • General Market Declines |
| A general downturn in stock or bond prices would cause the value of assets under our management to decrease, and may also cause investors to withdraw their investments, thereby further decreasing the level of assets under our management |
| • Investment Performance |
| If the investment performance of our managed portfolios is less than that of our competitors or applicable third-party benchmarks, we could lose existing and potential customers and suffer a decrease in assets under management |
| Institutional investors in particular consider changing investment advisors based upon poor relative investment performance |
| Individual investors in contrast are more likely to react to poor absolute investment performance |
| • Global Economies |
| National and international political and economic events may cause financial market declines that lower the value of assets under our management, and may cause investors to withdraw funds |
| Changes in investing trends and, in particular, retirement savings trends may reduce interest in our funds and portfolios and may alter our mix of assets |
| • Interest Rate Changes |
| Investor interest in and the valuation of our fixed income investment funds and portfolios are affected by changes in interest rates |
| • Tax Regulation Changes |
| Changes in the status of tax deferred retirement plan investments and tax-free municipal bonds, the capital gains and corporate dividend tax rates, and other individual and corporate tax rates and regulations could adversely affect investor behavior and may cause investors to view certain investment offerings less favorably and withdraw their investment assets, thereby decreasing the level of assets under our management |
| A decrease in the value of assets under our management, or adverse change in their composition, could have a material adverse effect on our investment advisory fees and revenues |
| -8- _________________________________________________________________ A significant majority of our revenues are based on contracts with the Price funds that are subject to termination without cause and on short notice |
| We provide investment advisory, distribution and other administrative services to the Price funds under various agreements |
| Investment advisory services are provided to each Price fund under individual investment management agreements |
| The board of each Price fund must annually approve the terms of the investment management and service agreements and can terminate the agreement upon 60-day notice |
| If a Price fund seeks to lower the fees that we receive or terminate its contract with us, we would experience a decline in fees earned from the Price funds, which could have a material adverse effect on our revenues and net income |
| We operate in an intensely competitive industry, which could cause a loss of customers and their assets, thereby reducing our assets under management and our revenues and net income |
| We are subject to competition in all aspects of our business from: • asset management firms, • mutual fund companies, • commercial banks and thrift institutions, • insurance companies, • hedge funds, • exchange traded funds, • brokerage and investment banking firms, and • other financial institutions including multinational firms and subsidiaries of diversified conglomerates |
| Many of these financial institutions have substantially greater resources than we do and may offer a broader range of products or operate in more markets |
| Some operate in a different regulatory environment than we do which may give them certain competitive advantages in the investment products and portfolio structures that they offer |
| We compete with other providers of investment advisory services primarily based on the availability and objectives of the investment portfolios offered, our investment performance, and the scope and quality of our investment advice and other client services |
| Some institutions have proprietary products and distribution channels that make it more difficult for us to compete with them |
| We believe that competition within the investment management industry will increase as a result of consolidation and acquisition activity and because new competitors face few barriers to entry |
| Most of our investment portfolios are available without sales or redemption fees, which means that investors may be more willing to transfer assets to competing funds |
| If current or potential customers decide to use one of our competitors, we could face a significant decline in market share, assets under management, revenues, and net income |
| If we are required to lower our fees in order to remain competitive, our net income could be significantly reduced because some of our expenses are fixed, especially over shorter periods of time, and others may not decrease in proportion to the decrease in revenues |
| Our success depends on our key personnel and our financial performance could be negatively affected by the loss of their services |
| Our success depends on our highly skilled personnel, including our portfolio and fund managers, investment analysts, management and client relationship personnel, and corporate officers, many of whom have specialized expertise and extensive experience in our industry |
| Financial services professionals are in high demand, and we face significant competition for qualified employees |
| Our key employees do not have employment contracts, and generally can terminate their employment with us at any time |
| We cannot assure that we will be able to retain or replace key personnel |
| In order to retain or replace our key personnel, we may be required to increase compensation, which would decrease net income |
| The loss of key personnel could damage our reputation and make it more difficult to retain and attract new employees and investors |
| Losses of assets from our client investors would decrease our revenues and net income, possibly materially |
| Certain of the Price funds and other investment portfolios are vulnerable to market-specific risks that could adversely affect investment performance, our reputation and our revenues |
| Several of the Price funds and investment portfolios, particularly the emerging market and non-US investments, are subject to political and economic instability, exchange-rate fluctuations, illiquid and highly volatile markets, and other risks that could materially decrease the investment returns available in foreign markets |
| A significant decrease in the investment return or net asset value of any Price fund or investment portfolio could harm our reputation and cause a decrease in assets under management, including from client asset withdrawals |
| -9- _________________________________________________________________ Our operations are complex and a failure to perform operational tasks or the misrepresentation of products and services could have an adverse affect on our reputation and subject us to regulatory sanctions, fines, penalties, and litigation |
| Operating risks include: • failure to properly perform fund or portfolio recordkeeping responsibilities, including portfolio accounting, security pricing, corporate actions, investment restrictions compliance, daily net asset value computations, account reconciliations, required distributions to fund shareholders to comply with tax regulations; • failure to properly perform transfer agent and participant recordkeeping responsibilities, including transaction processing, tax reporting and record retention; and failure to identify excessive trading in mutual funds by our customers or plan participants; • sales and marketing risks, including the intentional or unintentional misrepresentation of products and services in advertising materials, public relations information, or other external communications, and failure to properly calculate and present investment performance data accurately and in accordance with established guidelines and regulations |
| Any damage to our reputation could harm our business and lead to a loss of revenues and net income |
| We have spent many years developing our reputation for integrity, strong investment performance, and superior client services |
| Our brand is a valuable intangible asset, but it is vulnerable to a variety of threats that can be difficult or impossible to control, and costly or even impossible to remediate |
| Regulatory inquiries and rumors can tarnish or substantially damage our reputation, even if they are satisfactorily addressed |
| Any damage to our brand could impede our ability to attract and retain customers and key personnel, and reduce the amount of assets under our management, any of which could have a material adverse effect on our revenues and net income |
| Our expenses are subject to significant fluctuations that could materially decrease net income |
| Our operating results are dependent on the level of our expenses, which can vary significantly for many reasons, including: • changes in the level of our advertising expenses, including the costs of expanding investment advisory services to investors outside of the United States and further penetrating US distribution channels, • variations in the level of total compensation expense due to, among other things, bonuses, stock option grants, stock awards, changes in employee benefit costs due to regulatory or plan design changes, changes in our employee count and mix, and competitive factors, • a future impairment of goodwill recognized in our balance sheet, • material fluctuation in foreign currency exchange rates applicable to the costs of our operations abroad, • expenses and capital costs incurred to enhance our administrative and operating services infrastructure, such as technology assets, depreciation, amortization, and research and development, • unanticipated costs incurred to protect investor accounts and client goodwill, and • disruptions of third-party services such as communications, power, and mutual fund transfer agent and accounting systems |
| Under our agreements with our mutual funds, we charge our mutual funds certain administrative and other expenses based upon contracted terms |
| If we fail to accurately estimate our underlying expense levels or otherwise are required to incur expenses relating to the mutual funds that are not paid by the funds, our operating results will be adversely affected |
| -10- _________________________________________________________________ We have contracted with third-party financial intermediaries that distribute our investment portfolios, and such relationships may not be available or profitable to us in the future |
| About 30prca of our assets under management are sourced from third-party financial intermediaries that distribute our managed investment portfolios in the US and abroad |
| These intermediaries generally offer their clients various investment products in addition to, and in competition with, our investment offerings, and have no contractual obligation to encourage investment in our portfolios |
| It would be difficult for us to acquire or retain the management of those assets without the assistance of the intermediaries, and we cannot assure that we will be able to maintain an adequate number of successful distribution relationships |
| In addition, some investors rely on third party financial planners, registered investment advisers, and other consultants or financial professionals to advise them on the choice of investment adviser and investment portfolio |
| These professionals and consultants can favor a competing investment portfolio as better meeting their particular client’s needs |
| We cannot assure that our investment offerings will be among their recommended choices in the future |
| Further, their recommendations can change over time and we could lose their recommendation and the related client assets under management |
| Mergers, acquisitions, and other ownership or management changes could also adversely impact our relationships with these third party intermediaries |
| The presence of any of the adverse conditions discussed above would reduce revenues and net income, possibly by material amounts |
| Natural disasters and other unpredictable events could adversely affect our operations |
| Armed conflict, terrorist attacks, power failures, and natural disasters could adversely affect our revenues, expenses and net income by: • decreasing investment returns on our portfolios, • causing disruptions in national or global economies that decrease investor confidence and make investment products generally less attractive, • inflicting losses in human capital, • interrupting our business operations, • triggering technology delays or failures, and • requiring substantial capital expenditures and operating expenses to remediate damage, replace facilities, and restore operations |
| We have developed various backup systems and contingency plans to deal with these possible events but we cannot be assured that they will be adequate in all circumstances that could arise or that material interruptions and disruptions will not occur |
| In addition, we rely to varying degrees on outside vendors for disaster contingency support, and we cannot be assured that these vendors will be able to perform in an adequate and timely manner |
| If we lose any employees, or if we are unable to respond adequately to such an event in a timely manner, we may be unable to continue our business operations, which could lead to a tarnished reputation and loss of customers that results in a decrease in assets under management, lower revenues and materially reduced net income |
| Our investment income and asset levels may be negatively impacted by fluctuations in our investment portfolio |
| We currently have a substantial portion of our assets invested in our money market, stock, and bond mutual funds |
| All of these investments are subject to investment market risk and our income from these investments could be adversely affected by a decline in value |
| In addition, related investment income has fluctuated significantly over the years depending upon the performance of our investment portfolio, including the impact of market conditions, liquid corporate positions, and the size of our longer-term investment portfolio |
| Fluctuations in other investment income can be expected to occur in the future |
| The investment performance of our savings bank subsidiary could adversely affect our assets and results of operations |
| We have a propriety savings bank subsidiary, which accepts deposits from our customers, pays a fixed rate of interest to our depositors and invests in fixed income securities |
| Although we generally hold our fixed income investments to maturity on a basis which correlates to the maturities of our customer deposits, fluctuations in interest rates could result in losses in these fixed income investments and could result in a mismatch between the interest rate return on our investment portfolio and the interest paid on our customer deposits |
| To the extent that this occurs, our assets and results of operations could be adversely affected |
| -11- _________________________________________________________________ We may elect to pursue growth in the United States and abroad through acquisitions or joint ventures, which exposes us to risks inherent in assimilating new operations and in expanding into new jurisdictions |
| In order to maintain and enhance our competitive position, we may review and pursue acquisition and venture opportunities |
| We cannot assure that we will identify and consummate any such transactions on acceptable terms or have sufficient resources to accomplish such a strategy |
| In addition, any strategic transaction can involve a number of risks, including: additional demands on our staff; unanticipated problems regarding integration of investor account and investment security recordkeeping, different facilities and technologies, and new employees; adverse affects in the event acquired intangible assets or goodwill become impaired; and the existence of liabilities or contingencies not disclosed to or otherwise known by us prior to closing a transaction |
| LEGAL AND REGULATORY RISKS Compliance with a complex regulatory environment imposes significant financial and strategic costs on our business, and non-compliance could result in fines and penalties |
| We are subject to extensive regulation by foreign and domestic governments, regulatory agencies such as the SEC in the United States and the FSA in United Kingdom, and self-regulatory organizations such as the NASD Our ability to conduct our business is in large part dictated by such regulation, including federal laws such as the Sarbanes-Oxley Act of 2002, the USA Patriot Act of 2001, the Employee Retirement Income Security Act of 1974 (ERISA), regulations relating to the mutual fund industry specifically and securities laws generally, accounting rules, and banking and tax laws |
| Compliance with these complex regulations and our disclosure and financial reporting obligations requires significant investments of time and money and could limit our ability to enter into new lines of business |
| Further, the regulations imposed by one jurisdiction may conflict with the regulations imposed by another, and these differences may be difficult or impossible to reconcile |
| Our regulatory environment is frequently altered by new regulations and by revisions to, and evolving interpretations of, existing regulations |
| Future changes could require us to modify or curtail our investment offerings and business operations |
| If we are unable to maintain compliance with applicable laws and regulations, we could be subject to criminal and civil liability, the suspension of our employees, fines, penalties, sanctions, injunctive relief, exclusion from certain markets, or temporary or permanent loss of licenses or registrations necessary to conduct our business |
| A regulatory proceeding, even if it does not result in a finding of wrongdoing or sanctions, could consume substantial expenditures of time and capital |
| Any regulatory investigation, and any failure to maintain compliance with applicable laws and regulations, could severely damage our reputation, adversely affect our ability to conduct business, and decrease revenue and net income |
| Legal and regulatory developments in the mutual fund and investment advisory industry could increase our regulatory burden, cause a loss of mutual fund investors, and reduce our revenues |
| Because of trading abuses at several investment management firms, regulators have shown increasing interest in the oversight of the mutual fund and investment advisory industry |
| Federal agencies have adopted regulations designed to strengthen controls and restore investor confidence in the industry and more rules are expected in the future |
| These new and proposed rules will place greater compliance and administrative burdens on us, which could increase our expenses without increasing revenues |
| In addition, proposed regulations could require the Price funds to reduce the level of certain mutual fund fees paid to us or require us to bear additional expenses, which would affect our operating results |
| Further, adverse results of regulatory investigations of mutual fund and investment advisory firms could tarnish the reputation of mutual funds and investment advisers generally, causing investors to avoid further fund investments or redeem their balances |
| Redemptions would decrease the assets under our management, which would reduce our advisory revenues and net income |
| We may in the future be involved in legal and regulatory proceedings that may not be covered by insurance |
| We are subject to regulatory and governmental inquiries and civil litigation |
| An adverse outcome of any such proceeding could involve substantial financial penalties |
| There has been increased incidence of litigation and regulatory investigations in the financial services industry in recent years, including customer claims and class action suits alleging substantial monetary damages |
| From time to time, various claims against us arise in the ordinary course of business, including employment-related claims |
| -12- _________________________________________________________________ We carry insurance in amounts and under terms that we believe are appropriate |
| We cannot assure that our insurance will cover all liabilities and losses to which we may be exposed, or that our insurance policies will continue to be available on acceptable terms |
| Certain insurance coverage may not be available or may be prohibitively expensive in future periods |
| As our insurance policies come up for renewal, we may need to assume higher deductibles or other co-insurance liability, or pay higher premiums, which would increase our expenses and reduce our net income |
| Net capital requirements may impede the business operations of our subsidiaries |
| Certain of our subsidiaries are subject to net capital requirements imposed by various federal, state, and foreign authorities |
| Our subsidiaries’ net capital meets or exceeds all minimum requirements; however, a significant operating loss or extraordinary charge against net capital could adversely affect the ability of our subsidiaries to expand or even maintain their operations if we were unable to make additional investments in them |
| TECHNOLOGY RISKS We require specialized technology to operate our business and would be adversely affected if our technology became inoperative or obsolete |
| We depend on highly specialized and, in many cases, proprietary technology to support our business functions, including, among other functions: • securities analysis, • securities trading, • portfolio management, • customer service, • accounting and internal financial processes and controls, and • regulatory compliance and reporting |
| All of our technology systems are vulnerable to disability or failures due to hacking, viruses, natural disasters, power failures, acts of war or terrorism, and other causes |
| A suspension or termination of these licenses or the related support, upgrades and maintenance could cause system delays or interruption |
| If our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of customers and could harm our reputation |
| Technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our customers |
| In addition, our continued success depends on our ability to effectively integrate operations across many countries, and to adopt new or adapt existing technologies to meet client, industry and regulatory demands |
| We might be required to make significant capital expenditures to maintain competitive technology |
| If we are unable to upgrade our technology in a timely fashion, we might lose customers and fail to maintain regulatory compliance, which could affect our results of operations and severely damage our reputation |
| We could be subject to losses if we fail to properly safeguard sensitive and confidential information |
| As part of our normal operations, we maintain and transmit confidential information about our clients as well as proprietary information relating to our business operations |
| Our systems could be victimized by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information |
| Such disclosure could, among other things: • seriously damage our reputation, • allow competitors access to our proprietary business information, • subject us to liability for a failure to safeguard client data, • result in the termination of contracts by our existing customers, • subject us to regulatory action, and • require significant capital and operating expenditures to investigate and remediate the breach |