SEI Investments Co: Form 10-Q for the period ended Mar 31, 2024

(In thousands, except asset balances and per share data)

This discussion reviews and analyzes the consolidated financial condition, the consolidated results of operations and other key factors that may affect future performance. This discussion should be read in conjunction with the Consolidated Financial Statements, the Notes to the Consolidated Financial Statements and the Annual Report on Form 10-K for the year ended December 31, 2023.

Overview

Consolidated Summary

SEI delivers technology and investment solutions that connect the financial services industry. With capabilities across investment processing, operations, and asset management, SEI works with corporations, financial institutions and professionals, and ultra-high-net-worth families to help drive growth, make confident decisions, and protect futures. Investment processing fees are earned as either monthly fees for contracted services or as a percentage of the market value of our clients' assets processed on our platforms. Investment operations and investment management fees are earned as a percentage of assets under management, administration or advised assets. As of March 31, 2024, through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer $1.5 trillion in hedge, private equity, mutual fund and pooled or separately managed assets.

Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023 were:

* Variances noted "NM" indicate the percent change is not meaningful.

The following items had a significant impact on our financial results for the three months ended March 31, 2024 and 2023:

• Revenue from Assets under management, administration, and distribution fees increased in the first three months of 2024 primarily from higher assets under administration due to sales to new and existing alternative investment clients of the Investment Managers segment. Average assets under administration increased $121.0 billion, or 14%, to $961.7 billion during the first quarter 2024, as compared to $840.7 billion during the first quarter 2023.
• Revenue from Asset management, administration and distribution fees also increased during the first quarter from market appreciation and positive cash flows into separately managed account programs and Strategist programs of the Investment Advisors segment. Negative cash flows from SEI fund programs in the Investment Advisors segment and client losses in the Institutional Investors segment partially offset the increase in revenues. Average assets under management in equity and fixed income programs, excluding LSV, increased $8.1 billion, or 5%, to $175.9 billion in the first quarter of 2024 as compared to $167.8 billion during the first quarter of 2023.
• Fees from the SEI Integrated Cash Program of the Investment Advisors segment launched in December 2023 were $9.6 million during the first quarter of 2024.
• Revenue from Information processing and software servicing fees increased in the first quarter of 2024 primarily from higher assets from new and existing clients processed on the SEI Wealth PlatformSM (SWP).
• Earnings from LSV increased to $31.6 million in the first quarter of 2024 as compared to $28.9 million in the first quarter of 2023 due to higher performance fees and market appreciation. Negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV.
• Operating expenses increased from higher personnel costs due to business growth, primarily in the Investment Managers segment, severance costs of $6.2 million, and the impact of inflation on wages and services. Cost

containment measures related to consulting and other outsourced vendor costs partially offset the increase in operating expenses in the first quarter of 2024.

• Capitalized software development costs were $6.3 million in the first quarter of 2024, of which $3.8 million was for continued enhancements to SWP. Capitalized software development costs also include $2.5 million of software development costs in the first quarter of 2024 for a new platform for the Investment Managers segment.
• Amortization expense related to SWP was $6.8 million in the first quarter of 2024 as compared to $6.2 million in the first quarter of 2023.
• Effective tax rates were 22.9% in the first quarter of 2024 and 23.6% in the first quarter of 2023.
• SEI repurchased 808 thousand shares of its common stock for $56.0 million in the first quarter of 2024.

Ending Asset Balances

(In millions)

27

(A) Collective trust fund program assets are included in assets under management since SEI is the trustee. Fees earned on this product are less than fees earned on customized asset management programs.

(B) Equity and fixed-income programs include $2.0 billion of assets managed by LSV in which fees are based solely on performance and are not calculated as an asset-based fee (as of March 31, 2024).

(C) Equity and fixed-income programs include $6.4 billion of assets invested in various asset allocation funds at March 31, 2024.

(D) In addition to the assets presented, SEI also administers an additional $11.0 billion in Funds of Funds assets on which SEI does not earn an administration fee (as of March 31, 2024).

(E) Due to the reorganization of business segments, client assets under administration were reclassified from Investment Managers to Investments in New Businesses (See Note 9 to the Consolidated Financial Statements).

Average Asset Balances

(In millions)

29

(A) Collective trust fund program average assets are included in assets under management since SEI is the trustee. Fees earned on this product are less than fees earned on customized asset management programs.

(B) Equity and fixed-income programs include assets managed by LSV in which fees are based solely on performance and are not calculated as an asset-based fee. The average value of these assets for the three months ended March 31, 2024 was $1.9 billion.

(C) Equity and fixed-income programs include $6.3 billion of average assets invested in various asset allocation funds for the three months ended March 31, 2024.

(D) In addition to the assets presented, SEI also administers an additional $11.1 billion of average assets in Funds of Funds assets for the three months ended March 31, 2024 on which SEI does not earn an administration fee.

(E) Due to the reorganization of business segments, client assets under administration were reclassified from Investment Managers to Investments in New Businesses (See Note 9 to the Consolidated Financial Statements).

In the preceding tables, assets under management are total assets of our clients or their customers invested in our equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services through our subsidiaries and partnerships in which we have a significant interest. Advised assets include assets for which we provide advisory services through a subsidiary to the accounts but do not manage the underlying assets. Assets under administration include total assets of our clients or their customers for which we provide administrative services, including client fund balances for which we provide administration and/or distribution services through our subsidiaries and partnerships in which we have a significant interest. Platform-only assets-deposit program include assets of our clients in the SEI Integrated Cash program for which we provide custody services through our federal thrift subsidiary. The assets presented in the preceding tables do not include assets processed on SWP and are not included in the accompanying Consolidated Balance Sheets because we do not own them.

Business Segments

Revenues, Expenses and Operating Profit (Loss) for our business segments for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 were as follows:

For additional information pertaining to our business segments, see Note 9 to the Consolidated Financial Statements.

Private Banks

Revenues increased $9.3 million, or 8%, in the three month period ended March 31, 2024 and were primarily affected by:

• Increased investment processing fees from new SWP client conversions and growth from existing SWP clients due to market appreciation and increased transaction volumes; and
• Increased investment management fees from existing international clients due to market appreciation; partially offset by
• Lower investment processing fees earned on our mutual fund trading solution.

Operating margins increased to 13% compared to 7% in the three month period. Operating income increased by $8.7 million, or 103%, in the three month period and was primarily affected by:

• An increase in revenues; and
• Decreased costs, mainly consulting and other outsourced vendor costs from cost containment measures.

Investment Advisors

Revenues increased $16.2 million, or 15%, in the three month period ended March 31, 2024 and were primarily affected by:

• Increased fees from separately managed account programs and Strategist programs due to growth from existing clients and market appreciation; and
• New fee revenue of $9.6 million from the SEI Integrated Cash Program launched in December 2023; partially offset by
• Decreased investment management fees from SEI fund programs resulting from the continued shift out of SEI fund programs into separately managed accounts and other investment products.

Operating margin increased to 45% compared to 40% in the three month period. Operating income increased $12.8 million, or 30%, in the three month period and was primarily affected by:

• An increase in revenues;
• Decreased non-capitalized consulting costs; and
• Decreased stock-based compensation costs; partially offset by
• Increased direct expenses associated with the increase in separately managed account fees.

Institutional Investors

Revenues decreased $2.5 million, or 3%, in the three month period ended March 31, 2024 and were primarily affected by:

• Decreased investment management fees from client losses; partially offset by
• Increased investment management fees from existing clients due to higher assets under management due to market appreciation.

Operating margin decreased to 44% compared to 45% in the three month period. Operating income decreased $1.8 million, or 5%, in the three month period and was primarily affected by:

• A decrease in revenues; partially offset by
• Decreased direct expenses associated with investment management fees; and
• Decreased personnel costs.

Investment Managers

Revenues increased $18.2 million, or 12%, in the three month period ended March 31, 2024 and were primarily affected by:

• Increased revenues from additional services provided to our largest alternative fund clients; and
• Positive cash flows into alternative and traditional funds from new and existing clients; partially offset by
• Client losses and fund closures.

Operating margin increased to 37% compared to 34% in the three month period. Operating income increased $10.3 million, or 19%, in the three month period and was primarily affected by:

• An increase in revenues; and
• Decreased non-capitalized investment spending, mainly consulting costs; partially offset by
• Increased costs associated with new business, primarily personnel expenses and third-party vendor costs; and
• Costs to enhance, support and maintain technologies and investment service capabilities.

Investments in New Businesses

Revenues increased $1.4 million, or 11% in the three month period ended March 31, 2024 and were primarily affected by:

• Increased revenues from hosted technology offerings through SEI Family Office Services due to higher assets under administration and increased non-recurring implementation fees.

Other

Corporate overhead expenses

Corporate overhead expenses primarily consist of general and administrative expenses and other costs not directly attributable to a reportable business segment. Corporate overhead expenses were $37.8 million and $31.2 million in the three months ended March 31, 2024 and 2023, respectively. The increase in corporate overhead expenses is primarily due to severance costs of $6.2 million and investments in upgrading and enhancing various technologies utilized by corporate overhead units. Additionally, personnel costs increased from enhancements to further build our compliance infrastructure.

Other income and expense

Other income and expense items on the accompanying Consolidated Statements of Operations consist of:

33

Net gain from investments

Net gain from investments in the three months ended March 31, 2024 were primarily due to unrealized mark-to-market gains recorded in current earnings associated with LSV-sponsored investment funds and Company-sponsored investment funds from market appreciation (See Note 5).

Interest and dividend income

Interest and dividend income is earned based upon the amount of cash that is invested daily. The increase in interest and dividend income in the three months ended March 31, 2024 was due to an overall increase in interest rates.

Equity in earnings of unconsolidated affiliate

Equity in earnings of unconsolidated affiliate reflects our ownership interest in LSV. As of March 31, 2024, our total partnership interest in LSV was 38.6%. The table below presents the revenues and net income of LSV and the proportionate share in LSV's earnings.

The increase in earnings from LSV in the three months ended March 31, 2024 was primarily due to higher performance fees and market appreciation. Negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV. Average assets under management by LSV increased $3.7 billion to $90.7 billion during the three months ended March 31, 2024 as compared to $87.0 billion during the three months ended March 31, 2023, an increase of 4%.

Amortization

Amortization expense on the accompanying Consolidated Statements of Operations consists of:

Capitalized software development costs

The increase in amortization expense related to capitalized software development costs during the three months ended March 31, 2024 was primarily due significant enhancements to SWP (See Note 1 to the Consolidated Financial Statements).

Income Taxes

The effective income tax rates for the three months ended March 31, 2024 and 2023 differ from the federal income tax statutory rate due to the following:

Stock-Based Compensation

We recognized $11.1 million and $8.1 million in stock-based compensation expense during the three months ended March 31, 2024 and 2023, respectively. The increase in expense was primarily due to new equity awards granted during the fourth quarter 2023. The amount of stock-based compensation expense recognized is primarily based upon management's estimate of when the financial vesting targets of outstanding stock options may be achieved. Any change in the estimate could result in the amount of stock-based compensation expense to be accelerated, spread out over a longer period, or reversed. This may cause volatility in the recognition of stock-based compensation expense in future periods and could materially affect earnings (See Note 7 to the Consolidated Financial Statements).

We expect to recognize approximately $42.5 million in stock-based compensation expense during the remainder of 2024.

Fair Value Measurements

The fair value of financial assets and liabilities, except for the investment funds sponsored by LSV, is determined in accordance with the fair value hierarchy. The fair value of the investment funds sponsored by LSV is measured using the net asset value per share (NAV) as a practical expedient. The fair value of all other financial assets are determined using Level 1 or Level 2 inputs and consist mainly of investments in equity or fixed-income mutual funds that are quoted daily and Government National Mortgage Association (GNMA) and other U.S. government agency securities that are single issuer pools that are valued based on current market data of similar assets. Level 3 financial liabilities at March 31, 2024 and December 31, 2023 consist entirely of the estimated fair value of the contingent consideration resulting from an acquisition (See Note 12 to the Consolidated Financial Statements).

Regulatory Matters

Like many firms operating within the financial services industry, we are experiencing a complex and changing regulatory environment across our markets. Our current scale and reach as a provider to the financial services industry, the introduction and implementation of new solutions for our financial services industry clients, the increased regulatory oversight of the financial services industry generally, new laws and regulations affecting the financial services industry and ever-changing regulatory interpretations of existing laws and regulations, and a greater propensity of regulators to pursue enforcement actions and other sanctions against regulated entities, have made this an increasingly challenging and costly regulatory environment in which to operate.

SEI and some of our regulated subsidiaries have undergone or been scheduled to undergo a range of periodic or thematic reviews, examinations or investigations by numerous regulatory authorities around the world, including the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Financial Conduct Authority of the United Kingdom (FCA), the Central Bank of Ireland and others. These regulatory activities typically result in the identification of matters or practices to be addressed by us or our subsidiaries and, in certain circumstances, the regulatory authorities require remediation activities or pursue enforcement proceedings against us or our subsidiaries. From time to time, the regulators in different jurisdictions will elevate their level of scrutiny of our operations as our business expands or is deemed critical to the operations of the relevant financial markets. As described under the caption “Regulatory Considerations” in our Annual Report on Form 10-K, the range of possible sanctions that are available to regulatory authorities include limitations on our ability to engage in business for specified periods of time, the revocation of registration, censures and fines. The direct and indirect costs of responding to these regulatory activities and of complying with new or modified regulations, as well as the potential financial costs and potential reputational impact against us of any enforcement proceedings that might result, is uncertain but could have a material adverse impact on our operating results or financial position.

Liquidity and Capital Resources

Our credit facility provides for borrowings up to $325.0 million and is scheduled to expire in April 2026 (See Note 6 to the Consolidated Financial Statements). As of April 11, 2024, we had outstanding letters of credit of $4.9 million which reduced the amount available under the credit facility. These letters of credit were primarily issued for the expansion of the corporate headquarters and are due to expire in late 2024. As of April 11, 2024, the amount of the credit facility available for corporate purposes was $320.1 million.

The availability of the credit facility is subject to compliance with certain covenants set forth in the agreement. The credit facility contains covenants which restrict our ability to engage in transactions with affiliates other than wholly-owned subsidiaries or to incur liens or certain types of indebtedness as defined in the agreement. In the event of a default under the credit facility, we would also be restricted from paying dividends on, or repurchasing our common stock. Currently, our ability to borrow from the credit facility is not limited by any covenant of the agreement (See Note 6 to the Consolidated Financial Statements).

The majority of excess cash reserves are primarily placed in accounts located in the United States that invest entirely in SEI-sponsored money market mutual funds denominated in the U.S. dollar. We also utilize demand deposit accounts or money market accounts at several large, well-established financial institutions located in the United States. The institutions we utilize have not indicated any stability issues regarding the ability to honor current or future deposit obligations to their customers. Accounts used to manage these excess cash reserves do not impose any restrictions or limitations that would prevent us from being able to access such cash amounts immediately. As of April 11, 2024, the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was $497.5 million.

Cash and cash equivalents include accounts managed by subsidiaries that are used in their operations or to cover specific business and regulatory requirements. The availability of this cash for other purposes beyond the operations of these subsidiaries may be limited. We therefore do not include accounts of foreign subsidiaries in the calculation of free and immediately accessible cash for other general corporate purposes. A portion of the undistributed earnings of foreign subsidiaries are deemed repatriated. Any subsequent transfer of available cash related to the repatriated earnings of foreign subsidiaries could significantly increase free and immediately accessible cash.

Cash flows from operations decreased $2.1 million in the first three months of 2024 compared to the first three months of 2023 primarily from the negative impact from the change in working capital accounts. The increase in net income partially offset the decline in cash flows from operations.

Net cash used in investing activities includes:

• Purchases, sales and maturities of marketable securities. Purchases, sales and maturities of marketable securities in the first three months of 2024 and 2023 were as follows:

See Note 5 to the Consolidated Financial Statements for more information related to marketable securities.

• The capitalization of costs incurred in developing computer software. We capitalized $6.3 million of software development costs in the first three months of 2024 as compared to $9.0 million in the first three months of 2023. Software development costs are principally related to significant enhancements for the expanded functionality of the SEI Wealth Platform and a new platform for the Investment Managers segment.
• Capital expenditures. Capital expenditures in the first three months of 2024 were $13.1 million as compared to $10.6 million in the first three months of 2023. Expenditures in 2024 and 2023 include capital outlays for purchased software and equipment for data center operations. We continue to evaluate improvements to our information technology infrastructure which, if implemented, will result in additional expenditures for purchased software and equipment for data center operations.
• Other investing activities. In February 2024, we made a strategic investment of $10.0 million in an innovation platform for wealth management.

Net cash used in financing activities includes:

• The repurchase of common stock. Our Board of Directors has authorized the repurchase of common stock through multiple authorizations. Currently, there is no expiration date for the common stock repurchase program. We had total capital outlays of $46.8 million during the first three months of 2024 and $81.2 million during the first three months of 2023 for the repurchase of common stock.
• Proceeds from the issuance of common stock. We received $45.0 million and $21.4 million in proceeds from the issuance of common stock during the first three months of 2024 and 2023, respectively. These proceeds were primarily from stock option exercise activity.
• Dividend payments. Cash dividends paid were $60.4 million in the first three months of 2024 as compared to $57.8 million in the first three months of 2023.

Cash Requirements

Cash requirements and liquidity needs are primarily funded through cash flow from operations and our capacity for additional borrowing. At March 31, 2024, unused sources of liquidity consisted of cash and cash equivalents and the amount available under our credit facility.

We are obligated to make payments in connection with the credit facility, operating leases, maintenance contracts and other commitments. We believe our operating cash flow, available borrowing capacity, and existing cash and cash equivalents will provide adequate funds for these obligations and ongoing operations. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs and fund our stock repurchase program for at least the next 12 months and for the foreseeable future.

Forward-Looking Information and Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. We have no obligation to publicly update or revise any forward-looking statements.

Among the risks and uncertainties which may affect our future operations, strategies, financial results or other developments are those risks described in our latest Annual Report on Form 10-K in Part I, Item 1A. These risks include the following:

• changes in capital markets and significant changes in the value of financial instruments that may affect our revenues and earnings;
• product development risk;
• risk of failure by a third-party service provider;
• pricing pressure from increased competition, disruptive technology and poor investment performance;
• the affect on our earnings and cashflows from the performance of LSV Asset Management;
• consolidation within our target markets;
• external factors affecting the fiduciary management market;
• software defects, development delays or installation difficulties, which would harm our business and reputation and expose us to potential liability;
• data and cyber security risks;
• risk of the disclosure and misuse of personal data;
• risk of outages, data losses, and disruptions of services;
• intellectual property risks;
• third-party service providers in our operations;
• poor investment performance of our investment products or a client preference for products other than those which we offer or for products that generate lower fees;
• investment advisory contracts which may be terminated or may not be renewed on favorable terms;
• the effect of governmental regulation;
• our ability to meet competing and/or conflicting regulatory requirements of the different jurisdictions;
• our ability to address conflicts of interest appropriately;
• fiduciary or other legal liability for client losses from our investment management operations;
• the results of commercial disputes, litigation and regulatory examinations and investigations;
• effective business strategies;
• our ability to capture the expected value from acquisitions, divestitures, joint ventures, minority investments or strategic alliances;
• increased costs and regulatory risks from the growth of our business;
• operational risks associated with the processing of investment transactions;
• disruptions of operations of other participants in the global financial system;
• our ability to hire and retain qualified employees;
• the competence and integrity of our employees and third-parties;
• our ability to receive dividends or other payments in needed amounts from our subsidiaries;
• changes in, or interpretation of, accounting principles or tax rules and regulations;
• fluctuations in foreign currency exchange rates;
• fluctuations in interest rates affecting the value of our fixed-income investment securities;
• financial and non-financial covenants which may restrict our ability to manage liquidity needs;
• stockholder activism efforts;
• retention of executive officers and senior management personnel;
• the effectiveness of our business, risk management and business continuity strategies, models and processes;
• unforeseen or catastrophic events, including the emergence of pandemic, extreme weather events or other natural disasters;
• geopolitical unrest and other events;
• climate change concerns and incidents; and
• environmental, social, and governance (ESG) matters.

We conduct operations through many regulated wholly-owned subsidiaries. These subsidiaries include:

• SEI Investments Distribution Co., or SIDCO, a broker-dealer registered with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority, Inc., or FINRA;
• SEI Investments Management Corporation, or SIMC, an investment advisor registered with the SEC under the Investment Advisers Act of 1940 and with the Commodity Futures Trading Commission, or CFTC, under the Commodity Exchange Act;
• SEI Private Trust Company, or SPTC, a limited purpose federal thrift chartered and regulated by the Office of the Comptroller of the Currency;
• SEI Trust Company, or STC, a Pennsylvania trust company, regulated by the Pennsylvania Department of Banking and Securities;
• SEI Institutional Transfer Agent, Inc., or SITA, a transfer agent registered with the SEC under the Securities Exchange Act of 1934;
• SEI Investments (Europe) Limited, or SIEL, an investment manager and financial institution subject to regulation by the Financial Conduct Authority of the United Kingdom;
• SEI Investments Canada Company, or SEI Canada, an investment fund manager that has various other capacities that is regulated by the Ontario Securities Commission and various provincial authorities;
• SEI Investments Global, Limited, or SIGL, a management company for Undertakings for Collective Investment in Transferable Securities, or UCITS, and for Alternative Investment Funds, or AIFs, that is regulated primarily by the Central Bank of Ireland, or CBI;
• SEI Investments - Global Fund Services, Ltd., or GFSL, an authorized provider of administration services for Irish and non-Irish collective investment schemes that is regulated by the CBI;
• SEI Investments - Depositary and Custodial Services (Ireland) Limited, or D&C, an authorized provider of depositary and custodial services that is regulated by the CBI;
• SEI Investments - Luxembourg S.A., or SEI Lux, a professional of the specialized financial sector subject to regulation by the Commission de Surveillance du Secteur Financier of the Grand Duchy of Luxembourg;
• SEI Investments Global (Cayman), Ltd., a full mutual fund administrator that is regulated by the Cayman Island Monetary Authority; and
• SEI Investments (South Africa) (PTY) Limited, a Private Company that is a licensed Financial Service Provider regulated by the Financial Sector Conduct Authority.

In addition to the regulatory authorities listed above, our subsidiaries are subject to the jurisdiction of regulatory authorities in other foreign countries. In addition to our wholly-owned subsidiaries, we also own a minority interest of approximately 38.6% in LSV, which is also an investment advisor registered with the SEC.

The Company, its regulated subsidiaries, their regulated services and solutions and their customers are all subject to extensive legislation, regulation, and supervision that recently has been subject to, and continues to experience, significant change and increased regulatory activity. These changes and regulatory activities could have a material adverse effect on us and our clients.

The various governmental agencies and self-regulatory authorities that regulate or supervise the Company and its subsidiaries have broad administrative powers. In the event of a failure to comply with laws, regulations, and requirements of these agencies and authorities, the possible business process changes required or sanctions that may be imposed include the suspension of individual employees, limitations on our ability to engage in business for specified periods of time, the revocation of applicable registration as a broker-dealer, investment advisor or other regulated entity, and, as the case may be, censures and fines. Additionally, certain securities and banking laws applicable to us and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial and non-financial consequences including monetary judgments and the requirement to take action or limit activities that could ultimately affect our business.

Governmental scrutiny from regulators, legislative bodies, and law enforcement agencies with respect to matters relating to our regulated subsidiaries and their activities, services and solutions, our business practices, our past actions and other matters has increased dramatically in the past several years. Responding to these examinations, investigations, actions, and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the time and effort of our senior management from our business. Penalties, fines and changes to business processes sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. We continue to be subject to inquiries from examinations and investigations by supervisory and enforcement divisions of regulatory authorities and expect this to continue in the future. We believe this is also the case with many of our regulated clients. Governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation, our relationship with clients and prospective clients, and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.

We are subject to U.S. and foreign anti-money laundering and financial transparency laws that require implementation of regulations applicable to financial services companies, including standards for verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. We offer investment and banking solutions that also are subject to regulation by the federal and state securities and banking authorities, as well as foreign regulatory authorities, where applicable. Existing or future regulations that affect these solutions could lead to a reduction in sales of these solutions or require modifications of these solutions.

We must comply with economic sanctions and embargo programs administered by the Office of Foreign Assets Control (OFAC) and similar national and multinational bodies and governmental agencies outside the United States, as well as anti-corruption and anti-money laundering laws and regulations throughout the world. We can incur higher costs and face greater compliance risks in structuring and operating our businesses to comply with these requirements. Furthermore, a violation of a sanction or embargo program or anti-corruption or anti-money laundering laws and regulations could subject us and our subsidiaries, and individual employees, to regulatory enforcement actions as well as significant civil and criminal penalties.

Our businesses are also subject to privacy and data protection information security legal requirements concerning the use and protection of certain personal information. These include those adopted pursuant to the Gramm-Leach-Bliley Act and the Fair and Accurate Credit Transactions Act of 2003 in the United States, the General Data Protection Regulation (GDPR) in the EU, Canada’s Personal Information Protection and Electronic Documents Act, the Cayman Islands' Data Protection Law, and various other laws. Privacy and data security legislation is a priority issue in many states and localities in the United States, as well as foreign jurisdictions outside of the EU. For example, California enacted the California Consumer Privacy Act (CCPA) which broadly regulates the sale of the consumer information of California residents and grants California residents certain rights to, among other things, access and delete data about them in certain circumstances. Other states are considering similar proposals. Such attempts by the states to regulate have the potential to create a patchwork of differing and/or conflicting state regulations. Ensuring compliance under ever-evolving privacy legislation, such as GDPR and CCPA, is an ongoing commitment, which involves substantial costs.

Compliance with existing and future regulations and responding to and complying with recent increased regulatory activity affecting broker-dealers, investment advisors, investment companies, financial institutions, and their service providers could have a significant impact on us. We periodically undergo regulatory examinations and respond to regulatory inquiries and document requests. In addition, recent and continuing legislative activity in the United States and in other jurisdictions (including the European Union and the United Kingdom) have made and continue to make extensive changes to the laws regulating financial services firms. As a result of these examinations, inquiries, and requests, as a result of increased civil litigation activity, and as a result of these new laws and regulations, we engage legal counsel and other subject matter experts, review our compliance procedures, solution and service offerings, and business operations, and make changes as we deem necessary or as may be required by the applicable authority. These additional activities and required changes may result in increased expense or may reduce revenues.

Our bank clients are subject to supervision by federal, state, and foreign banking and financial services authorities concerning the manner in which such clients purchase and receive our products and services. Our plan sponsor clients and our subsidiaries providing services to those clients are subject to supervision by the Department of Labor and compliance with employee benefit regulations. Investment advisor and broker-dealer clients are regulated by the SEC, state securities authorities, or FINRA. Existing or future regulations applicable to our clients may affect our clients’ purchase of our products and services.

In addition, see the discussion of governmental regulations in Item 1A “Risk Factors” in our latest Annual Report on Form 10-K for a description of the risks that the current regulatory regimes and proposed regulatory changes may present for our business.

Information required by this item is set forth under the captions "Our revenues and earnings are affected by changes in capital markets and significant changes in the value of financial instruments" and "Changes in interest rates may affect the value of our fixed-income investment securities" in Item 1A Risk Factors and under the caption "Sensitivity of our revenues and earnings to capital market fluctuations" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to this information as it is disclosed in our Annual Report on Form 10-K for 2023.

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective in ensuring that information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Information regarding risk factors appears in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for 2023.