GAMCO INVESTORS, INC. ET AL - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2019

or

For the transition period from ______ to ______

Commission File No. 001-14761

GAMCO INVESTORS, INC.

(Exact name of Registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes □ No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes □ No ⌧

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 ⌧ No □

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No □

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □

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

The aggregate market value of the class A and class B common stock held by non-affiliates of the registrant as of June 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was $106,010,177.

As of February 29, 2020, 8,305,806 shares of class A common stock (including 660,950 restricted stock awards) and 19,024,117 shares of class B common stock were outstanding. 18,313,741 shares of class B common stock were held by a subsidiary of GGCP, Inc.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement relating to the 2020 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.

Unless indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “the Firm,” “GBL,” “we,” “us,” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors, and its subsidiaries.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this Form 10-K contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets that adversely affects our assets under management; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees (“teammates”); unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations; and the ongoing impacts of the Tax Cuts and Jobs Act with respect to tax rates and the non-deductibility of certain portions of named executive officer compensation. We are providing these statements as permitted by the Private Litigation Reform Act of 1995. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Part I, Item 1A of and elsewhere in this Form 10-K. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.

PART I

ITEM 1: BUSINESS

Overview

GAMCO (New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware,  is a widely-recognized provider of investment advisory services to open-end funds, closed-end funds, a société d’investissement à capital variable (“SICAV”) and approximately 1,700 institutional and private wealth management (“Institutional and PWM”) investors principally in the United States (“U.S.”). We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles including value, growth, non-market correlated, and convertible securities. Our revenues are based primarily on the Company’s level of assets under management (“AUM”) and fees associated with our various investment products.

Since our inception in 1977, our value assets are identified with our research-driven approach to equity investing and our Private Market Value (PMV) with a Catalyst^TM investment approach.

As of December 31, 2019, we had $36.5 billion of AUM. We conduct our investment advisory business principally through two subsidiaries, which are registered investment advisors: Gabelli Funds, LLC (open-end and closed-end funds) (“Gabelli Funds”) and GAMCO Asset Management Inc. (Institutional and PWM) (“GAMCO Asset”). G.distributors, LLC (“G.distributors”), our broker-dealer subsidiary, acts as an underwriter and distributor of our open-end funds.

Our AUM are organized into three groups:

  

Portfolio managers oversee our AUM and are supported by in-depth analysis across numerous industries by our research analyst teammates. These analysts are internationally domiciled with an average of 15 years of industry experience.

GBL is a holding company incorporated in April 1998 in advance of our initial public offering (“IPO”) in February 1999. GGCP Holdings, LLC, a subsidiary of GGCP, Inc. (“GGCP”), which is majority-owned by Mr. Mario J. Gabelli (“Mr. Gabelli”), owns a majority of the outstanding shares of Class B common stock (“Class B Stock”) of GBL. As of December 31, 2019, such ownership represented approximately 92% of the combined voting power of the outstanding common stock and approximately 67% of the equity interest. As of December 31, 2019, through publicly traded AC (NYSE: AC), which was spun-off from GBL on November 30, 2015, AC owns 2,935,401 shares of Class A common stock (“Class A Stock”) representing approximately 1% of the combined voting power and approximately 11% of the equity interest. AC is majority-owned by GGCP Holdings, LLC. Accordingly, Mr. Gabelli is deemed to control GBL.

At the time of the spin-off, AC owned and operated the alternatives and the institutional research businesses previously owned and operated by GBL. At the time of the distribution, the stock price of AC was $29.50 per share. As of December 31, 2019, the stock price of AC was $39.20 per share.

Our executive offices are located at 191 Mason Street, Greenwich, CT 06830 and One Corporate Center, Rye, NY 10580. Our telephone number is (203) 629-2726. We post or provide a link on our website (www.gabelli.com) to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”): our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All such filings on our website are available free of charge.

On March 20, 2009, we distributed our ownership in Teton Advisors, Inc. (“Teton”), the advisor to the TETON Westwood funds, to our shareholders. At the time of the distribution the stock price of Teton was $2.75 per share. At December 31, 2019, the stock price of Teton was $47.15 per share.

During 2019, we returned $39.6 million to shareholders through dividends and our stock buyback program. We paid $2.2 million, or $0.08 per share, in cash dividends to our common shareholders and repurchased 1,834,434 shares at an average investment of $20.36 per share, or $37.4 million.

Since the IPO in February 1999, when 6 million GBL shares were sold at $17.50 per share and total shares outstanding were 30 million for a market capitalization of $525 million, we have returned to shareholders $2.0 billion in total, of which $1.0 billion was in the form of the spin-offs of AC and Teton, $501.1 million was through our stock buyback program, and $495.6 million was from dividends, as well as $57 million to charities on their behalf.

Environmental, Social, and Governance (ESG)

As part of GAMCO’s stewardship of investments on behalf of clients, we have historically viewed governance, active ownership, proxy voting, and engagement as important ways to protect shareholder value. To that end, the Firm has been a leading voice on certain governance matters since May 1988 when it initiated its “Magna Carta of Shareholder Rights.”  We actively vote our own proxies and file shareholder proposals on issues that we believe increase shareholder value. Such activity is part of our incorporation of environmental, social, and governance (“ESG”) considerations as long term investors.

Since its formation in April 1989, the Proxy Voting Committee of the Company has formulated guidelines and reviewed proxy statements for the purpose of determining how to vote proxies related to portfolio securities held by our clients. The main driver of these guidelines is to vote in the best economic interest of our clients. As we state in our Magna Carta of Shareholder Rights, we are neither for nor against management. We are for shareholders. We do not consider any issue routine. We take into consideration all of our research on the company, its directors, and their short and long-term goals for the company. In cases where issues that we generally do not approve of are combined with other issues, the negative aspects of the issues will be factored into the evaluation of the overall proposals, but will not necessitate a vote in opposition to the overall proposals.

Additionally, across various investment products, we use ESG criteria, which include certain sustainable themes such as water scarcity, health and wellness, and renewable energy.

Past and Future - Giving Back to Society

Generating returns for our stakeholders is not the sole gauge we use in measuring our success. Since the inception of our shareholder-designated charitable contribution (“SDCC”) program in 2013, shareholders have designated contributions of approximately $27 million to over 150 501(c)(3) initiatives. As a result of the board of directors (the “Board of Directors”) most recent SDCC approval, $4.5 million was designated by shareholders to 501(c)(3) organizations in November 2019. This program underscores our commitment to managing socially responsible portfolios since 1987, which has evolved to include integrating ESG factors into the analysis of companies and the structuring of portfolios.

Since our IPO in February 1999, approximately $57 million will have been donated to charities by us, including the current year’s SDCC.

Business Strategy

Our business strategy targets global growth of the franchise by leveraging our proven asset management strengths, including our brands, long-term performance record, diverse product offerings, and experienced investment, research, and client relationship professionals. To achieve performance and growth in AUM and profitability, we are deploying a strategy which includes several factors:

 

 

 

We believe that our growth to date is traceable to the following factors:

 ^(a) Source: Birinyi Associates, LLC

Business Description

Our AUM’s are clustered in two groups:  Funds and Institutional and PWM.

Funds: At December 31, 2019, we had $21.3 billion of AUM in Fund AUM, representing 58.4% of our total AUM. Our equity Funds were $18.5 billion in AUM on December 31, 2019, 5.7% above the $17.5 billion on December 31, 2018. We also are the investment advisor to a SICAV with AUM of $594 million at December 31, 2019, compared to the $507 million in AUM at December 31, 2018.

Open-end Funds

As of December 31, 2019, we had $10.5 billion of AUM in 23 open-end equity Funds and $2.8 billion in our Gabelli U.S. Treasury Money Market Fund. We market our open-end Funds primarily through third party distribution programs, including no-transaction fee (“NTF”) programs, and have developed additional share classes for many of our funds for distribution through these third party distribution channels. As of December 31, 2019, third party distribution programs accounted for approximately 73% of our AUM in open-end equity funds and approximately 27% of our AUM in open-end equity funds were sourced through direct sales relationships.

Closed-end Funds

We act as investment advisor to 16 closed-end funds, 14 of which trade on the NYSE or its affiliated exchange. These funds cannot be redeemed by the fund’s shareholders, except in limited cases. The trading price of the shares is determined by supply and demand in the marketplace and, as a result, the shares may trade at a premium or discount to the net asset value of the fund. The closed-end funds are: Gabelli Equity Trust (GAB), GDL Fund (GDL), Gabelli Multimedia Trust (GGT), Gabelli Healthcare & Wellness ^Rx Trust (GRX), Gabelli Convertible and Income Securities Fund (GCV), Gabelli Utility Trust (GUT), Gabelli Dividend & Income Trust (GDV), Gabelli Global Utility & Income Trust (GLU), GAMCO Global Gold, Natural Resources & Income Trust (GGN), GAMCO Natural Resources, Gold & Income Trust (GNT), The Gabelli Global Small and Mid Cap Value Trust (GGZ), the Bancroft Fund Ltd. (BCV), the Ellsworth Growth and Income Fund Ltd. (ECF), and the Gabelli Go Anywhere Trust (GGO). We launched the Gabelli Value Plus+ Trust Plc (GVP) in 2015 and the Gabelli Merger Plus⁺ Trust Plc (GMP) in 2017, both of which trade on the London Stock Exchange. As of December 31, 2019, the 16 closed-end funds had total assets of $8.0 billion, representing 37.6% of the total assets in our Funds business.

SICAV

We provide investment advisory services to the GAMCO International SICAV, which has two sub-fund strategies, the GAMCO Merger Arbitrage Fund and the GAMCO All Cap Value Fund. Total AUM in the SICAV was $594 million at December 31, 2019.

Institutional and Private Wealth Management: At December 31, 2019, we had $14.6 billion of AUM in approximately 1,700 Institutional and PWM accounts, representing 40% of our total AUM. As of December 31, 2019, the PWM clients, generally defined as individuals having minimum investable assets of $2.5 million, comprised approximately 82% of the total number of Institutional and PWM accounts and approximately $4.5 billion, or 31%, of the Institutional and PWM AUM. We believe that PWM clients are attracted to us by our returns and the tax efficient nature of the underlying investment process for the taxable portion of their assets. As of December 31, 2019, institutional client accounts comprised approximately 8% of the total number of Institutional and PWM accounts and approximately $4.2 billion, or 29%, of the Institutional and PWM AUM. As of December 31, 2019, foundation and endowment fund assets comprised approximately 9% of the total number of Institutional and PWM accounts and approximately $1.2 billion, or 8%, of the Institutional and PWM AUM. As of December 31, 2019, the sub-advisory clients, where we act as sub-advisor to third party investment funds, comprised approximately 1% of the total number of Institutional and PWM accounts and approximately $4.7 billion, or 32%, of total Institutional and PWM AUM.

The ten largest Institutional and PWM relationships comprised approximately 49% of GAMCO Asset AUM and 19% of our total AUM as of December 31, 2019, and approximately 32% of GAMCO Asset revenues and 9% of our total revenues for the year ended December 31, 2019.

Investment advisory agreements for our Institutional and PWM clients are typically subject to termination by the client without penalty on 30 days’ notice or less.

Assets Under Management

The following table sets forth total AUM by product type as of the dates shown:

Assets Under Management

By Product Type

(dollars in millions)

 

Summary of Investment Products

We manage assets in the following wide spectrum of investment products and strategies:

Additional Information on Mutual Funds

Through Gabelli Funds, we act as the investment advisor to all of the Funds.

Shareholders of the open-end Funds are allowed to exchange shares among the same class of shares of the other open-end Funds as economic and market conditions and investor needs change at no additional cost. However, certain open-end Funds impose a 2% redemption fee on shares redeemed within seven days or less after a purchase. We periodically introduce new funds designed to complement and expand our investment product offerings, respond to competitive developments in the financial marketplace, and meet the changing needs of investors.

Our marketing efforts for the open-end Funds are currently focused on increasing the distribution and sales of our existing funds as well as creating new products for sale through our distribution channels. We believe that our marketing efforts for the Funds will continue to generate additional revenues from investment advisory fees. We had traditionally distributed most of our open-end Funds by using a variety of direct response marketing techniques, including telemarketing and advertising, and, as a result, we maintain direct relationships with many of our no-load open-end Fund shareholders. Beginning in late 1995, we expanded our product distribution by offering several of our open-end Funds through third party distribution programs, including NTF programs. In 1998 and 1999, we further expanded these efforts to include substantially all of our open-end Funds in third party distribution programs. Approximately 27% of the AUM in the open-end equity funds are still attributable to our direct response marketing efforts. Third party distribution programs have become an increasingly important source of asset growth for us. Of the $10.5 billion of AUM in the open-end equity Funds as of December 31, 2019, approximately 73% were generated through third party distribution programs. We are responsible for paying the distribution fees charged by many of the third party distribution programs, although a portion of such distribution fees under certain circumstances are payable by the Funds. The multi-class shares are available in all of the Funds, with the exception of the Gabelli Capital Asset Fund. We believe that the use of multi-class shares expands the distribution of our open-end Funds into the advised sector of the mutual fund investment community. We introduced Class I shares, which are no-load shares with higher minimum initial investment and without distribution fees, available directly through G.distributors or through brokers that have entered into selling agreements with respect to Class I shares. The no-load shares are designated as Class AAA shares and are available for new and current investors. In general, distribution through third party programs has greater variable cost components and lower fixed cost components than distribution through our traditional direct sales methods.

We provide investment advisory and management services pursuant to an investment management agreement with each fund (“Fund IMAs”). The Fund IMAs generally provide that we are responsible for the overall investment and administrative services, subject to the oversight of each fund’s board of directors or trustees and in accordance with each fund’s fundamental investment objectives and policies. The Fund IMAs permit us to enter into separate agreements for sub-administrative and accounting services on behalf of the respective funds.

Our affiliated advisor provides the Funds with administrative services pursuant to the Fund IMAs. Such services include, without limitation, supervision of the calculation of net asset value, preparation of financial reports for shareholders of the funds, internal accounting, tax accounting and reporting, regulatory filings, and other services. Most of these administrative services are provided through sub-contracts with independent third parties. Transfer agency and custodial services are provided directly to the funds by independent third parties.

Each of our Fund IMAs may continue in effect from year to year only if specifically approved at least annually by (i) the fund’s board of directors or trustees or (ii) the fund’s shareholders and, in either case, the vote of a majority of the fund’s independent or non-interested directors or trustees who are not parties to the agreement or “interested persons” of any such party, within the meaning of the Investment Company Act of 1940, as amended (“Company Act”). Each fund may terminate its Fund IMA at any time upon 60 days’ written notice by (i) a vote of the majority of the board of directors or trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy (if at least 50% of the shares are present at the meeting) or 50% of the outstanding voting shares of such fund. Each Fund IMA automatically terminates in the event of its assignment, as defined in the Company Act. We may terminate a Fund IMA without penalty on 60 days’ written notice.

Open-End Fund Distribution

G.distributors, a wholly-owned subsidiary of GBL, is a broker-dealer registered under the Exchange Act, and is regulated by the Financial Industry Regulatory Authority (“FINRA”). G.distributors’ revenues are derived primarily from the distribution of our open-end Funds. G.distributors distributes our open-end Funds pursuant to distribution agreements with each Fund. It also distributes funds managed by Teton and its affiliates. Under each distribution agreement with an open-end Fund, G.distributors offers and sells such open-end Fund’s shares on a continuous basis and pays the majority of the costs of marketing and selling the shares, including printing and mailing prospectuses and sales literature, advertising, maintaining sales and customer service teammates and sales and services fulfillment systems, and payments to the sponsors of third party distribution programs, financial intermediaries, and G.distributors’ sales teammates. G.distributors receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 (“12b-1”) of the Company Act. Distribution fees from the open-end Funds are computed daily based on average net assets. For the years ended December 31, 2019 and 2018, distribution fees from the open-end Funds amounted to $29.2 million and $35.1 million, respectively, while payments to third-parties for selling the open-end Funds totaled $27.2 million and $32.3 million, respectively. G.distributors is the principal underwriter for the Funds distributed in multiple classes of shares, which carry either a front-end, back-end or no sales charge. For the years ended December 31, 2019 and 2018, underwriting fees and sales charges retained amounted to $1.3 million and $0.9 million, respectively.

Under the distribution plans, the Class AAA shares of the open-end Funds (except The Gabelli U.S. Treasury Money Market Fund, Gabelli Capital Asset Fund and The Gabelli ABC Fund) and the Class A and ADV shares of certain funds pay G.distributors a distribution fee of 0.25% per year (except the Class A shares of the TETON Westwood funds which pay 0.50% per year, except for the TETON Westwood Intermediate Bond Fund which pays 0.35%, and the Class A shares of the Gabelli Enterprise Mergers and Acquisitions Fund which pay 0.45% per year) on the average daily net assets of the fund. Class C shares have a 12b-1 distribution plan with a distribution fee totaling 1.00%. 

G.distributors’ distribution agreements with each fund may continue in effect from year to year only if specifically approved at least annually by (i) the fund’s board of directors or trustees or (ii) the fund’s shareholders and, in either case, the vote of a majority of the fund’s board of directors or trustees who are not parties to the agreement or “interested persons” of any such party, within the meaning of the Company Act. Each fund may terminate its distribution agreement, or any agreement thereunder, at any time upon 60 days’ written notice by (i) a vote of the majority of its board of directors or trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy (if at least 50% of the shares are present at the meeting) or 50% of the outstanding voting shares of such fund. Each distribution agreement automatically terminates in the event of its assignment, as defined in the Company Act. G.distributors may terminate a distribution agreement without penalty upon 60 days’ written notice.

 

G.distributors also offers our open-end Fund products through our website, www.gabelli.com, where directly registered investors can access their personal account information and buy, sell, and exchange fund shares. Fund prospectuses, quarterly reports, fund applications, daily net asset values, and performance charts are all available online.

Competition

We compete with other investment management firms and mutual fund companies, insurance companies, banks, brokerage firms, and other financial institutions that offer products that have similar features and investment objectives. Many of these investment management firms are subsidiaries of large diversified financial companies. Many others are much larger in terms of AUM and revenues and, accordingly, have much larger sales organizations and marketing budgets. Historically, we have competed primarily on the basis of the long-term investment performance of many of our investment products in addition to brand recognition of the Firm and market awareness of its founder, Mr. Gabelli. We have taken steps to increase our distribution channels, brand consistency and marketing communications and thought-leadership efforts. Other trends affecting the investment management business include the widespread popularity of index mutual funds and exchange-traded funds (“ETFs”), which have tax and cost advantages over traditional investment companies.

The market for providing investment management services to Institutional and PWM clients is also highly competitive. Approximately 30% of our investment advisory fee revenue for the year ended December 31, 2019 was derived from our Institutional and PWM business. Selection of investment advisors by U.S. institutional investors is often subject to a screening process and favorable recommendations by investment industry consultants. Many of these investors require their investment advisors to have a successful and sustained performance record, often five years or longer with focus also on one-year and three-year performance records. We have significantly increased our AUM on behalf of U.S. institutional investors since our entry into the institutional asset management business in 1977.

Intellectual Property

Service marks and brand name recognition are important to our business. We have rights to the service marks under which our products are offered. We have registered certain service marks in the U.S. and will continue to do so as new trademarks and service marks are developed or acquired. We have rights to use the “Gabelli” name, the “GAMCO” name, and other names. Pursuant to an assignment agreement, Mr. Gabelli has assigned to us all of his rights, title, and interests in and to the “Gabelli” name for use in connection with investment management services, mutual funds and securities brokerage services. However, under the agreement, Mr. Gabelli will retain any and all rights, title, and interests he has or may have in the “Gabelli” name for use in connection with (i) charitable foundations controlled by Mr. Gabelli or members of his family and (ii) entities engaged in private investment activities for Mr. Gabelli or members of his family. In addition, the funds managed by Mr. Gabelli outside GBL have entered into a license agreement with us permitting them to continue limited use of the “Gabelli” name under specified circumstances.

Regulation

Virtually all aspects of our businesses are subject to various federal, state, and foreign laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of investment funds. Under such laws and regulations, agencies that regulate investment advisors and broker-dealers have broad powers, including the power to limit, restrict or prohibit such an advisor or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations. In such an event, the possible sanctions that may be imposed include civil and criminal liability, the suspension of individual employees, injunctions, limitations on engaging in certain lines of business for specified periods of time, revocation of the investment advisor, and other registrations, censures, and fines.

Our business is subject to extensive regulation at the federal, state, and foreign level by the SEC and other regulatory bodies. Certain of our subsidiaries are registered with the SEC under the Investment Advisers Act of 1940, as amended (“Advisers Act”), and the funds are registered with the SEC under the Company Act. We also have a subsidiary that is registered as a broker-dealer with the SEC and is subject to regulation by FINRA and various states.

 

The subsidiaries of GBL that are registered with the SEC under the Advisers Act (Gabelli Funds, GAMCO Asset and Gabelli Fixed Income L.L.C.) are regulated by and subject to examination by the SEC. The Advisers Act imposes numerous obligations on registered investment advisors, including fiduciary duties, disclosure obligations, and record keeping, operational, and marketing requirements. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment advisor’s registration. The failure of an advisory subsidiary to comply with the requirements of the SEC could have a material adverse effect on us.

We derive a substantial majority of our revenues from investment advisory services through our various investment management agreements. Under the Advisers Act, our investment management agreements may not be assigned without the client’s consent. Under the Company Act, advisory agreements with registered investment companies such as our Funds terminate automatically upon assignment. The term “assignment” is broadly defined and includes direct as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in GBL.

In its capacity as a broker-dealer, G.distributors is required to maintain certain minimum net capital amounts. These requirements also provide that equity capital may not be withdrawn, advances to affiliates may not be made, and cash dividends may not be paid if certain minimum net capital requirements are not met. G.distributors’ net capital, as defined, met or exceeded all minimum requirements as of December 31, 2019. As a registered broker-dealer, G.distributors is also subject to periodic examination by FINRA, the SEC, and the states.

Subsidiaries of GBL are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to regulations promulgated thereunder, insofar as they are “fiduciaries” under ERISA with respect to certain of their clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving ERISA plan clients. Our failure to comply with these requirements could have a material adverse effect on us.

Investments by GBL and on behalf of our Funds and Institutional and PWM clients often represent a significant equity ownership position in an issuer’s class of stock. As of December 31, 2019, we had five percent or more beneficial ownership with respect to 98 equity securities. This activity raises frequent regulatory, legal, and disclosure issues regarding our aggregate beneficial ownership level with respect to portfolio securities, including issues relating to issuers’ shareholder rights plans or “poison pills,” and various federal and state regulatory limitations, including state gaming laws and regulations, federal communications laws and regulations, and federal and state public utility laws and regulations, as well as federal proxy rules governing shareholder communications and federal laws and regulations regarding the reporting of beneficial ownership positions. Foreign country regulations may have different levels of ownership limitations. Our failure to comply with these requirements could have a material adverse effect on us.

The USA Patriot Act of 2001 contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers, mutual funds and other financial services companies, including standards for verifying client identification at account opening and obligations to monitor client transactions and report suspicious activities. Anti-money laundering laws outside of the U.S. contain some similar provisions. Our failure to comply with these requirements could have a material adverse effect on us.

We and certain of our affiliates are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies. In connection with our office in London and our plans to market certain products in Europe, we are required to comply with the laws of the United Kingdom and other European countries regarding these activities. Our subsidiary, GAMCO Asset Management (UK) Limited, is regulated by the Financial Conduct Authority. In connection with our registration in the United Kingdom, we have minimum capital requirements that have been consistently met or exceeded. We opened offices in Hong Kong, Shanghai, and Tokyo and, therefore, are subject to national and local laws in those jurisdictions. We are subject to requirements in numerous jurisdictions regarding reporting of beneficial ownership positions in securities issued by companies whose securities are publicly-traded in those countries.

Regulatory matters

The investment management industry is likely to continue facing a high level of regulatory scrutiny and become subject to additional rules designed to increase disclosure, tighten controls, and reduce potential conflicts of interest. In addition, the SEC has substantially increased its use of focused inquiries, which request information from investment advisors and a number of fund complexes regarding particular practices or provisions of the securities laws. We participate in some of these inquiries in the normal course of our business. Changes in laws, regulations, and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material adverse impact. Although we have installed procedures and utilize the services of experienced administrators, accountants, and lawyers to assist us in adhering to regulatory guidelines and satisfying these requirements, and maintain insurance to protect ourselves in the case of client losses, there can be no assurance that the precautions and procedures that we have instituted and installed, or the insurance that we maintain to protect ourselves in case of client losses, will protect us from all potential liabilities.

See Legal Proceedings in Part I, Item 3 of this Form 10-K for additional information.

Teammates

As of February 29, 2020, we had a full-time staff of 189 teammates, of whom 64 served in the portfolio management, portfolio management support, and trading areas (including 25 portfolio managers for the Funds and Institutional and PWM), 66 served in the marketing and shareholder servicing areas, and 59 served in the administrative area.

Status as a Smaller Reporting Company

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K. As a result, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies.” We will, in general, remain a smaller reporting company unless the market value of GBL common stock that is held by non-affiliates exceeds $250 million as of the last business day of our most recently completed second fiscal quarter.

We may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as a smaller reporting company.

ITEM 1A: RISK FACTORS

We caution the reader that the following risks and those risks described elsewhere in this report and in our other SEC filings could have a material adverse effect on our business, prospects, financial condition, results of operations, or cash flows or could cause a decline in the Company’s stock price.

Risks Related to Our Industry

We earn substantially all of our revenue based on assets under management and, therefore, a reduction in assets under management would reduce our revenues and profitability. Assets under management fluctuate based on many factors including market conditions, investment performance, and terminations of investment contracts.

Substantially all of our revenues are directly related to the amount of our AUM. Under our investment advisory contracts with our clients, the investment advisory fees we receive are typically based on the market value of AUM. In addition, we receive asset-based distribution fees with respect to the open-end Funds managed by Gabelli Funds or Teton and its affiliates over time pursuant to distribution plans adopted under provisions of Rule 12b-1 under the Company Act. Rule 12b-1 fees typically are based on the average AUM and represented approximately 9.4% and 10.3% of our total revenues for the years ended December 31, 2019 and 2018, respectively. Accordingly, a decline in the prices of securities generally may cause our revenues and net income to decline by either causing the value of our AUM to decrease, which would result in lower investment advisory and Rule 12b-1 fees, or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower risk, which would also result in lower fees. The securities markets are highly volatile, and securities prices may decrease for many reasons beyond our control, including, but not limited to, economic and political events, war (whether or not directly involving the U.S.), acts of terrorism, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, defaults by derivative counterparties, bond default risks, sovereign debt crisis, and other factors that are difficult or impossible to predict. If a decline in securities prices caused our revenues to decline, it could have a material adverse effect on our earnings. Lastly, as we are a traditional asset manager, we do not receive additional revenue streams from alternative asset strategies such as hedge funds, private equity, or venture capital.

Changes in laws or regulations or in governmental policies and compliance with existing laws or regulations could limit the sources and amounts of our revenues, increase our costs of doing business, decrease our profitability, and materially and adversely affect our business.

Our business is subject to extensive regulation in the U.S., primarily at the federal level, including regulation by the SEC under the Company Act and the Advisers Act as well as other securities laws, by the Department of Labor under ERISA, and regulation by FINRA and state regulators. The Funds managed by Gabelli Funds are registered with the SEC as investment companies under the Company Act. The Advisers Act imposes numerous obligations on investment advisors, including record-keeping, advertising and operating requirements, fiduciary and disclosure obligations, custodial requirements, and prohibitions on fraudulent activities. The Company Act imposes similar obligations, as well as additional detailed operational requirements, on registered investment companies and investment advisors. In addition, our businesses are also subject to regulation by the Financial Services Authority in the United Kingdom, and we are also subject to the laws of other non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies.

Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of teammates, or other sanctions, including revocation of our subsidiaries’ registrations as an investment advisor or broker-dealer. Industry regulations are designed to protect our clients and investors in our funds and other third parties who deal with us and to ensure the integrity of the financial markets. Our industry is frequently altered by new laws or regulations and by revisions to, and evolving interpretations of, existing laws and regulations, both in the U.S. and in other nations. Changes in laws or regulations or in governmental policies could limit the sources and amounts of our revenues including but not limited to distribution revenue under the Company Act, increase our costs of doing business, decrease our profitability, and materially and adversely affect our business.

To the extent that provisions of the Tax Cuts and Jobs Act (the “Act”) affect the deductibility of named executive officer (“NEO”) compensation, we may be impacted.

The Act eliminates the performance based compensation exception for NEO compensation deductibility, limiting the amount of deductible NEO compensation to $1 million annually per NEO. To the extent that some of the compensation of our NEOs is affected by this change, we would have a lower amount of deductible compensation and a higher effective tax rate than we would have had without this loss of deductibility.

To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.

The investment management business is highly competitive and has relatively low barriers to entry. To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure. Although our investment advisory fees vary from product to product, historically we have competed primarily on the performance of our products and not on the level of our investment advisory fees relative to those of our competitors. In recent years, however, there has been a trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that make investors willing to pay our fees. In addition, the board of directors or trustees of each Fund managed by Gabelli Funds must make certain findings as to the reasonableness of its fees. We cannot be assured that we will succeed in providing investment returns and service that will allow us to maintain our current fee structure. Fee reductions on existing or new business could have an adverse effect on our profit margins and results of operations.

We derive a substantial portion of our revenues from investment advisory contracts that may be terminated on short notice or may not be renewed by clients.

A substantial majority of our revenues are derived from investment management agreements and distribution arrangements. Investment management agreements and distribution arrangements with the Funds are terminable without penalty on 60 days’ notice (subject to certain additional procedural requirements in the case of termination by a Fund) and must be specifically approved at least annually, as required by law. Such annual renewal requires, among other things, approval by the disinterested members of each Fund’s board of directors or trustees. Investment advisory agreements with our Institutional and PWM clients are typically terminable by the client without penalty on 30 days’ notice or less. Any failure to renew or termination of a significant number of these agreements or arrangements would have a material adverse effect on us.

Investors in the open-end Funds can redeem their investments in these Funds at any time without prior notice, which could adversely affect our earnings.

Open-end Fund investors may redeem their investments in those Funds at any time without prior notice. Investors may reduce the aggregate amount of AUM for any number of reasons, including investment performance, changes in prevailing interest rates, and financial market performance. In a declining stock market, the pace of mutual fund redemptions could accelerate. Poor performance relative to other asset management firms tends to result in decreased purchases of open-end fund shares and increased redemptions of open-end fund shares. The redemption of investments in the Funds managed by Gabelli Funds would adversely affect our revenues, which are substantially dependent upon the AUM in our Funds. If redemptions of investments in the open-end Funds caused our revenues to decline, it could have a material adverse effect on our earnings.

Certain changes in control of our company would automatically terminate our investment management agreements with our clients, unless our Institutional and PWM clients consent and, in the case of Fund clients, the Funds’ boards of directors and shareholders vote to continue the agreements, and could prevent us for a two-year period from increasing the investment advisory fees we are able to charge our mutual fund clients.

Under the Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board and shareholders must vote to continue the agreement following its assignment, the cost of which ordinarily would be borne by us. Under the Advisers Act, a client’s investment management agreement may not be assigned by the investment advisor without the client’s consent. An investment management agreement is considered to be assigned to another party when a controlling block of the advisor’s ownership is transferred. In our case, an assignment of our investment management agreements may occur if, among other things, we sell or issue a certain number of additional common shares in the future. We cannot be certain that our clients will consent to assignments of our investment management agreements or approve new agreements with us if an assignment occurs. Under the Company Act, if a fund’s investment advisor engages in a transaction that results in the assignment of its investment management agreement with the fund, the advisor may not impose an unfair burden on that fund as a result of the transaction for a two-year period after the transaction is completed. The term “unfair burden” has been interpreted to include certain increases in investment advisory fees. This restriction may discourage potential purchasers from acquiring a controlling interest in our company.

Catastrophic and unpredictable events could have a material adverse effect on our business.

A terrorist attack, political unrest, war (whether or not directly involving the U.S.), power failure, cyber-attack, technology failure, natural disaster, or many other possible catastrophic or unpredictable events could adversely affect our future revenues, expenses, and earnings by, among other things: causing disruptions in U.S., regional or global economic conditions; interrupting our normal business operations; inflicting teammate casualties, including loss of our key executives; requiring substantial expenditures and expenses to repair, replace, and restore normal business operations; and reducing investor confidence.

We have a disaster recovery plan to address certain contingencies, but it cannot be assured that this plan will be effective or sufficient in responding to, eliminating, or ameliorating the effects of all disaster scenarios. If our teammates or vendors we rely upon for support in a catastrophic event are unable to respond adequately or in a timely manner, we may lose clients resulting in a decrease in AUM, which may have a material adverse effect on revenues and net income.

The soundness of other financial institutions could adversely affect our business.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We and the investments we manage may have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, clearing organizations, mutual and hedge funds, and other institutions. Many of these transactions expose us, or the accounts we manage, to credit risk in the event of the counterparty’s default. There is no assurance that any such losses would not materially and adversely impact the Company’s revenues and earnings.

Risks Related to Our Business

Control by Mr. Gabelli of a majority of the combined voting power of our common stock may give rise to conflicts of interests.

Since our IPO in 1999, Mr. Gabelli, through his control and majority ownership of GGCP, has beneficially owned a majority of our outstanding Class B Stock, currently representing approximately 92% of voting control. As long as Mr. Gabelli indirectly beneficially owns a majority of the combined voting power of our common stock, he will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on the common stock. In addition, Mr. Gabelli will be able to determine the outcome of matters submitted to a vote of our shareholders for approval and will be able to cause or prevent a change in control of our company. As a result of Mr. Gabelli’s control, none of our agreements with Mr. Gabelli and other companies controlled by him can be assumed to have been arrived at through arm’s-length negotiations, although we believe that the parties endeavor to implement market-based terms. There can be no assurance that we would not have received more favorable terms, or offered less favorable terms to, an unaffiliated party.

We depend on Mr. Gabelli and other key teammates.

We are dependent on the efforts of Mr. Gabelli, our Chairman of the Board, Chief Executive Officer, Co-Chief Investment Officer of the Value team (along with Christopher Marangi and Kevin Dreyer), and the primary portfolio manager for a significant majority of our AUM. The loss of Mr. Gabelli’s services could have a material adverse effect on us.

On February 6, 2008, Mr. Gabelli entered into an amended and restated employment agreement (as amended, the “2008 Employment Agreement”) with the Company, which was initially approved by the Company’s shareholders on November 30, 2007 and approved again on May 6, 2011 and May 5, 2015, and which limits his activities outside of the Company. Under the 2008 Employment Agreement, the manner of computing Mr. Gabelli’s remuneration from GAMCO is unchanged.

Mr. Gabelli has agreed that while he is employed by us he will not provide investment management services outside of GAMCO, AC, and GGCP, except for certain permitted accounts. These permitted accounts, excluding personal accounts, held assets at December 31, 2019 and 2018 of approximately $264.1 million and $239.0 million, respectively. Mr. Gabelli continues to be a member of the team that manages the TETON Westwood Mighty Mites^SM Fund, whose advisor, Teton, was spun-off from GBL in March 2009. Effective February 27, 2017, Gabelli Funds became the sub-advisor to the TETON Westwood Mighty Mites^SM Fund. The assets in the TETON Westwood Mighty Mites^SM Fund at December 31, 2019 and 2018 were $1.0 billion and $1.1 billion, respectively. The 2008 Employment Agreement may not be amended without approval by the committee of our Board of Directors responsible for administering compensation and Mr. Gabelli.

In addition to Mr. Gabelli, our future success depends to a substantial degree on our ability to retain and attract other qualified teammates to conduct our investment management business, including Messrs. Marangi and Dreyer, the other Co-Chief Investment Officers of the Value team. The market for qualified portfolio managers is extremely competitive. We anticipate that it will be necessary for us to add portfolio managers and investment analysts as we further diversify our investment products and strategies. There can be no assurance, however, that we will be successful in our efforts to recruit and retain teammates. In addition, our investment professionals and senior marketing teammates have direct contact with our Institutional and PWM clients, which can lead to strong client relationships. The loss of these teammates could jeopardize our relationships with certain Institutional and PWM clients, and result in the loss of such accounts. The loss of key management professionals or the inability to recruit and retain sufficient portfolio managers and marketing teammates could have a material adverse effect on our business.

There may be adverse effects on our business from a decline in the performance of the securities markets.

Our results of operations are affected by many economic factors, including the performance of the securities markets. The securities markets in general have experienced significant volatility, and such volatility may continue or increase in the future. At December 31, 2019, approximately 92% of our AUM was invested in portfolios consisting primarily of equity securities. Any decline in the securities markets, in general, and the equity markets, in particular, could reduce our AUM and consequently reduce our revenues. In addition, any such decline in the equity markets, failure of these markets to sustain their prior levels of growth, or continued short-term volatility in these markets could result in investors withdrawing from the equity markets or decreasing their rate of investment, either of which would be likely to adversely affect us. Also, from time to time, a relatively high proportion of the assets we manage may be concentrated in particular economic or industry sectors. A general decline in the performance of securities in those industry sectors could have an adverse effect on our AUM and revenues.

Since the separation, certain of our directors and officers may have actual or potential conflicts of interest because of their positions or relationships with AC.

Since the separation of AC from GAMCO, Mario J. Gabelli has continued to serve as our Chairman and Chief Executive Officer and also serves as Executive Chairman of AC. Marc Gabelli, a son of Mario J. Gabelli, continues to have responsibilities relating to GAMCO and AC. Kevin Handwerker, GAMCO’s Executive Vice President, General Counsel and Secretary, also serves AC in the same capacities. Douglas R. Jamieson has continued to serve as President and Director of GAMCO Asset and also serves as Chief Executive Officer, President, and Director of AC. In addition, certain of our portfolio managers and teammates provide services to AC pursuant to the Transitional Services Agreement with AC and are officers or employees of AC. Such dual assignments could create, or appear to create, potential conflicts of interest when our and AC’s officers and directors face decisions that could have different implications for the two companies.

Also, some of our directors, executive officers, portfolio managers, and teammates own shares of AC common stock as well as GGCP.

Mario J. Gabelli is deemed to control AC by his control of GGCP Holdings, LLC, an intermediate subsidiary of GGCP, a private company controlled by Mario J. Gabelli. Marc Gabelli is President of GGCP.

In addition, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between GAMCO and AC regarding the terms of the agreements governing the separation and the relationship thereafter between the companies. The executive officers and other personnel of AC who serve as directors or executive management of GAMCO may interpret these agreements in their capacity as AC employees in a manner that would adversely affect the business of GAMCO.

Also, certain subsidiaries of AC are investment advisers. The executive officers and other personnel of AC who also serve as directors or executive management of GAMCO may be confronted with the possibility of making decisions in their AC capacity that would adversely affect the business of GAMCO.

Both GAMCO and AC expect to be vigilant in attempting to identify and resolve any potential conflicts of interest, including, but not limited to, the types described above at the earliest possible time. However, there can be no guarantee that the interests of GAMCO may not be adversely affected at some point by such a conflict.

Our reputation is critical to our success.

Our reputation is critical to acquiring, maintaining, and developing relationships with our clients, Fund shareholders, and third party intermediaries. Misconduct by our teammates, or even unsubstantiated allegations, could result not only in direct financial harm but also in harm to our reputation, causing injury to the value of our brands and our ability to retain or attract AUM. Moreover, reputational harm may cause us to lose current teammates and we may be unable to attract new teammates with similar qualification or skills. Damage to our reputation could substantially reduce our AUM and impair our ability to maintain or grow our business, which could have a material adverse effect on us.

There is a possibility of losses associated with proprietary investment activities.

Currently, we maintain a proprietary investment position in a few securities. Market fluctuations and other factors may result in substantial losses in our proprietary accounts, which could have an adverse effect on our balance sheet, reduce our ability or willingness to make new investments, or impair our credit ratings.

Future investment performance could reduce revenues and other income.

Success in the investment management and mutual fund businesses is dependent on investment performance as well as distribution and client servicing. Good performance generally stimulates sales of our investment products and tends to keep withdrawals and redemptions low, which generates higher advisory fees (which are based on the amount of AUM). Conversely, poor performance, both in absolute terms and/or relative to peers and industry benchmarks, tends to result in decreased sales, increased withdrawals and redemptions in the case of the open-end Funds, and in the loss of Institutional and PWM clients, with corresponding decreases in revenues to us. Many analysts of the mutual fund industry believe that investment performance is the most important factor for the growth of open-end and closed-end funds, such as those we offer. Failure of our investment products to perform well or failure of the Funds to maintain ratings or rankings could, therefore, have a material adverse effect on us.

In addition, when our investment products experience strong results relative to the market or other asset classes, clients’ investments in our products may increase beyond their target levels, and we could, therefore, suffer withdrawals as our clients rebalance their investments to fit their asset allocation preferences.

Loss of significant Institutional and PWM accounts could affect our revenues.

We had approximately 1,700 Institutional and PWM accounts as of December 31, 2019, of which the ten largest accounts generated approximately 9% of our total revenues during the year ended December 31, 2019. Account turnover for any reason would have an adverse effect on our revenues. Notwithstanding performance, we have, from time to time, experienced account turnover of large Institutional and PWM accounts as a result of corporate mergers and restructurings, and we could continue to lose accounts under these or other circumstances.

A decline in the market for closed-end funds could reduce our ability to raise future assets to manage.

Market conditions may preclude us from increasing the assets we manage in our closed-end Funds. A significant portion of our growth in the assets we manage resulted from public offerings of the common and preferred shares of the closed-end Funds. We raised approximately $6.1 billion in gross assets through closed-end Fund offerings since January 2004. The market conditions for these offerings may not be as favorable in the future, which could adversely impact our ability to grow our AUM and our revenue.

We rely on third party distribution programs.

A significant share of sales of our open-end Funds come through third party distribution programs, which are programs sponsored by third party intermediaries that offer their mutual fund customers a variety of competing products and administrative services. A substantial component of sales growth is from third party distribution programs with no transaction fees payable by the customer, which we refer to as NTF programs. Approximately $3.0 billion of our AUM in the open-end equity Funds as of December 31, 2019 are held through NTF programs. The cost of participating in third party distribution programs is higher than our direct distribution costs, and it is anticipated that the cost of third party distribution programs will increase in the future. Any increase would be likely to have an adverse effect on our profit margins and results of operations. In addition, there can be no assurance that the third party distribution programs will continue to distribute the Funds on their platforms. Consolidation may result in the reduction of distributors or increased competition to access third party channels, as well as increased distribution costs. At December 31, 2019, approximately 91% of the NTF program net assets in the Gabelli/GAMCO families of Funds are attributable to two NTF programs. The decision by these third party distribution programs to discontinue distribution of our Funds, or a decision by us to withdraw one or more of the Funds from the programs, could have an adverse effect on our growth of AUM.

Operational risks may disrupt our businesses, result in regulatory action against us, or limit our growth.

We face operational risk arising from errors made in the execution, confirmation, or settlement of transactions or from transactions not being properly recorded, evaluated, or accounted for. Our business is highly dependent on our ability to process, on a daily basis, transactions across markets in an efficient and accurate manner. Consequently, we rely heavily on our financial, accounting, and other data processing systems. Despite the reliability of these systems, and the training and skill of our teammates and third parties we rely on, it remains likely that errors may occasionally occur due to the extremely large number of transactions we process. In addition, if systems we use are unable to accommodate an increasing volume of transactions, our ability to expand our businesses could be constrained. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or reputational damage.

Failure to maintain adequate infrastructure could impede the Company’s productivity and growth. Additionally, failure to implement effective information and cyber security policies, procedures, and capabilities could disrupt operations and cause financial losses that could result in a decrease in the Company’s earnings or stock price.

Our infrastructure, including our information systems and technology, is vital to the competitiveness of our business. The failure to maintain an adequate infrastructure commensurate with the size and scope of our business could impede our productivity and growth, which could cause our earnings or stock price to decline. We outsource a significant portion of our information systems operations to third parties who are responsible for providing the management, maintenance, and updating of such systems. Technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced technology platforms for their products than we do for ours. In addition, there can be no assurance that the cost of maintaining such outsourcing arrangements will not increase from its current level, which could have a material adverse effect on us.

In addition, any inaccuracies, delays, system failures, or security breaches in these and other systems could subject us to client dissatisfaction and losses. Breach of our technology systems could result in the loss of valuable information, liability for stolen assets or information, remediation costs to repair damage caused by the breach, additional security costs to mitigate against future incidents, and litigation costs resulting from the incident. Moreover, loss of confidential customer identification information could harm our reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or loss of revenues. Further, although we take precautions to password protect and encrypt our laptops, tablets, smartphones, and other mobile electronic hardware, if such hardware is stolen, misplaced or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us.

Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. We may be the target of cyber-attacks, including denial-of-service attacks, and must continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software, and networks may be vulnerable to unauthorized access, misuse, computer viruses, or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in our, our clients’, our counterparties’, or third parties’ operations, which could impact their ability to transact with us or otherwise result in significant losses or reputational damage. The increased use of mobile technologies can heighten these and other operational risks. We expect to expend additional resources on an ongoing basis to modify our protective measures and to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

We routinely transmit and receive personal, confidential, and proprietary information by email and other electronic means. We have discussed and worked with clients, vendors, service providers, counterparties, and other third parties to develop secure transmission capabilities and protect against cyber-attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties, and other third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. An interception, misuse, or mishandling of personal, confidential, or proprietary information being sent to or received from a client, vendor, service provider, counterparty, or other third party could result in legal liability, regulatory action, and reputational harm.

The failure of one of our vendors to fulfill its obligations to us could have a material adverse effect on the Company and its products.

The Company depends on a number of key vendors for various fund administration, accounting, custody, and transfer agent roles and other operational needs. The failure or inability of the Company to diversify its sources for key services or the failure of any key vendors to fulfill their obligations could lead to operational issues for the Company and in certain products, which could result in financial losses for the Company and its clients.

Our ability to meet cash needs may be adversely affected by a number of factors.

Our ability to meet anticipated cash needs is affected by factors such as the market value of our assets, our operating cash flows, and our creditworthiness as perceived by lenders. Adverse developments in any of these areas could have significantly adverse effects on our business. If we are unable to obtain funds and financing in a timely manner or on acceptable terms, we may be forced to incur unanticipated costs or revise our business plans. Further, our access to the capital markets depends significantly on our credit ratings. A reduction in our credit ratings could increase our future borrowing costs and limit our access to the capital markets. Volatility in the U.S., regional, or global financing markets may also impact our ability to access the capital markets should we seek to do so, and we may be forced to incur unanticipated costs or experience other adverse effects on our business. We currently have a credit rating of investment grade with one rating agency and one below investment grade with another rating agency. We believe that if our credit rating was below investment grade with both credit agencies it would increase our long-term borrowing costs, on future borrowings, by approximately 50 basis points, while a two notch downgrade would increase our long-term borrowing costs, on future borrowings, by approximately 100 basis points. Our current outstanding debt issuances would not be impacted by any changes in our ratings.

We face exposure to legal actions, including litigation and arbitration claims and regulatory and governmental examinations and/or investigations. Insurance coverage for these matters may be inadequate.

The volume of litigation and arbitration claims against financial services firms and the amount of damages claimed has increased over the past several years. The types of claims that we may face are varied. For example, we may face claims against us for purchasing securities that are inconsistent with a client’s investment objectives or guidelines, in connection with the operation of the Funds, or arising from an employment dispute. The risk of litigation is difficult to predict, assess, or quantify, and may occur years after the activities or events at issue. In addition, from time to time we may become the subject of governmental or regulatory investigations and/or examinations. Even if we prevail in a legal or regulatory action, the costs alone of defending against the action or the harm to our reputation could have a material adverse effect on us. The insurance coverage that we maintain with respect to legal and regulatory actions may be inadequate or may not cover certain proceedings.

Compliance failures could adversely affect us.

Our investment management activities are subject to client guidelines, and our mutual fund business involves compliance with numerous investment, asset valuation, liquidity, distribution, and tax requirements. A failure to comply with these guidelines or contractual requirements could result in damage to the Company’s reputation or in its clients seeking to recover losses, withdrawing their AUM, or terminating their contracts, any of which could cause the Company’s revenues and earnings to decline. There can be no assurance that the precautions and procedures that we have instituted and installed or the insurance we maintain to protect ourselves in case of client losses will protect us from potential liabilities.

We face strong competition from numerous and, in many instances, larger companies.

The asset management business is intensely competitive. We compete with numerous investment management companies, stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations, and other financial institutions. The periodic establishment of new investment management companies and other competitors increases the competition that we face. At the same time, consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships, and fees charged. Our competitive success in any or all of these areas cannot be assured. Additionally, competing securities dealers whom we rely upon to distribute our open-end Funds also sell their own proprietary funds and investment products, which could limit the distribution of our investment products. To the extent that existing or potential customers, including securities dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues, and net income could decline.

Investors are choosing to invest in passive strategies such as index funds and ETFs.

 

Our actively managed investment strategies compete against passive strategies. The trend in market demand for investors towards passive products such as index funds and ETFs, which favor our competitors in the asset management business, reduces opportunities for active managers. Investors are increasingly attracted to these lower fee passive products, which have gained, and may continue to gain, market share at the expense of active products like those managed by us.

Fee pressures could reduce our profit margins.

There has been a trend toward lower fees in some segments of the investment management industry. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. Expense limitations and reimbursements have been put in place for certain classes of certain Funds. Accordingly, there can be no assurance that we will be able to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.

Launch of new strategies and products may negatively impact our results of operations.

We may support the development of new investment strategies and products by waiving a portion of the management fees we are entitled to receive or by subsidizing expenses. Additionally, the costs with establishing new strategies and products can exceed the revenues generated, which could have an adverse effect on our profit margins and results of operations. Also, we may provide seed capital to new strategies and products, which could have an adverse effect on our consolidated financial statements, reduce our ability or willingness to make new investments, or impair our credit ratings.

Risks Related to our Common Stock

The disparity in the voting rights among the classes of shares may have a potential adverse effect on the price of our Class A Stock.

The holders of Class A Stock and Class B Stock have identical rights except that (i) holders of Class A Stock are entitled to one vote per share, while holders of Class B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general, and (ii) holders of Class A Stock are not eligible to vote on matters relating exclusively to Class B Stock and vice versa. Since our IPO in 1999, Mr. Gabelli, through his control and majority ownership of GGCP, has beneficially owned a majority of our outstanding Class B Stock, currently representing approximately 92% of voting control. As long as Mr. Gabelli indirectly beneficially owns a majority of the combined voting power of our common stock, he will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs, including, among other things, any determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on the common stock. The differential in voting rights and the ability of our company to issue additional Class B Stock could adversely affect the value of the Class A Stock to the extent the investors, or any potential future purchaser of our company, view the superior voting rights of the Class B Stock to have value. On May 3, 2017, Class A Stock shareholders approved an advisory proposal for the Board of Directors to consider the conversion and reclassification of our shares of Class B Stock into Class A Stock at a ratio in the range of 1.15 to 1.25 shares of Class A Stock for each share of Class B Stock. The Board of Directors has made no decision on this matter.

Future sales of our Class A Stock in the public market or sales or distributions of our Class B Stock could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute our stockholders’ ownership in us.

We may sell additional shares of Class A Stock in subsequent public offerings. We also may issue additional shares of Class A Stock or convertible debt securities. On March 5, 2018, AC completed a tender offer in which tendering AC shareholders received an aggregate of approximately 660,000 shares of our registered Class A Stock constituting approximately 7% of the Class A Stock outstanding. On October 29, 2018, AC completed another tender offer in which tendering AC shareholders received an aggregate of approximately 710,000 shares of our registered Class A Stock constituting approximately 7% of the Class A Stock outstanding. The market price of our Class A Stock could decline as a result of sales of Class A Stock by such shareholders. Any such sales, as well as sales by our other current shareholders, could be perceived negatively.

No prediction can be made as to the effect, if any, that future sales or distributions of Class B Stock owned by GGCP Holdings LLC will have on the market price of the Class A Stock from time to time. Sales or distributions of substantial amounts of Class A Stock or Class B Stock, or the perception that such sales or distributions are likely to occur, could adversely affect the prevailing market price for the Class A Stock.

Our common stock has relatively limited trading volume, and ownership of a large percentage is concentrated with a small number of shareholders, which could increase the volatility in our stock trading and dramatically affect our share price.

A large percentage of our common stock is held by a limited number of shareholders. If our larger shareholders decide to liquidate their positions, it could cause significant fluctuation in the share price of our common stock.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

Our principal offices are located at One Corporate Center, Rye, NY, consisting of a single 60,000 square foot building under a lease agreement which expires on December 31, 2028 from an entity controlled by members of Mr. Gabelli's immediate family, and at 191 Mason Street, Greenwich, CT, under a lease agreement from an affiliate. In addition, we lease office space in Morristown, NJ; Palm Beach, FL; Reno, NV; and St. Louis, MO and, internationally, in London, Hong Kong, Shanghai, and Tokyo.

ITEM 3: LEGAL PROCEEDINGS

From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions, or other relief. For any such matters, the consolidated financial statements in Part II, Item 8 of this Form 10-K include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and, if material, makes the necessary disclosures. However, management believes such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s consolidated  financial condition, operations, or cash flows at December 31, 2019. See also Note 10, Commitments and Contingencies, to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our shares of Class A Stock are traded on the New York Stock Exchange under the symbol GBL.

As of February 29, 2020, there were 455 Class A stockholders of record and 19 Class B stockholders of record. These figures do not include approximately 2,600 stockholders with shares held under beneficial ownership in nominee name.

As of December 31, 2019, since the IPO, we have returned to shareholders $2.0 billion in total, of which $1.0 billion was in the form of the spin-offs of AC and Teton, $501.1 million was through our stock buyback program, and $495.6 million was from dividends, as well as $57 million to charities on their behalf.

The following table provides information regarding purchases of Class A Stock made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the fourth quarter of 2019:

The following table shows information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2019.

The number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column above) is 1,385,080.

ITEM 6: SELECTED FINANCIAL DATA

Smaller reporting companies are not required to provide the information required by this item.

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto included in Part II, Item 8 of this Form 10-K “Financial Statements and Supplementary Data.”  This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of this Form 10-K “Risk Factors.”  Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-K.

OVERVIEW

GAMCO (New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware,  is a widely-recognized provider of investment advisory services to 24 open-end funds, 16 closed-end funds, one société d’investissement à capital variable (“SICAV”), and approximately 1,700 institutional and private wealth management (“Institutional and PWM”) investors principally in the United States (“U.S.”). We generally manage assets on a fully discretionary basis and invest in a variety of U.S. and international securities through various investment styles including value, growth, non-market correlated, and convertible securities. Our revenues are based primarily on the Company’s level of assets under management (“AUM”) and fees associated with our various investment products.

Since our inception in 1977, our value assets are identified with our research-driven approach to equity investing and our Private Market Value (PMV) with a Catalyst^TM investment approach.

As of December 31, 2019, we had $36.5 billion of AUM. We conduct our investment advisory business principally through two subsidiaries, which are registered investment advisors: Gabelli Funds, LLC (open-end and closed-end funds) (“Gabelli Funds”) and GAMCO Asset Management Inc. (Institutional and PWM) (“GAMCO Asset”). G.distributors, LLC (“G.distributors”), our broker-dealer subsidiary, acts as an underwriter and distributor of our open-end funds.

Organizational Chart

This is the current organizational chart of the Company:

2019 Business and Investment Highlights

·

We announced that Howard M. Green, C.P.A. joined GAMCO as Senior Vice President of Corporate Development on March 18, 2019. Howard Green has more than 25 years of experience in leadership roles as a senior financial executive in wealth management, FinTech and international financial firms, including broker-dealers and asset managers.

·	The transition of the majority of the client portfolios of Trevor, Stewart, Burton & Jacobsen was completed and was reflected in our AUM as of March 31, 2019.

·	We introduced the Gabelli Innovations Trust to launch two funds, the Gabelli Media MogulTM Fund and the Gabelli Pet Parents’TM Fund which began operating as traditional open-end mutual funds under the new trust on April 1, 2019.

·	GAMCO repurchased 1.2 million shares of GBL Class A Stock in a private transaction on April 16, 2019, reducing the shares of Class A Stock outstanding by 12.4% to 8.6 million and total shares outstanding from 28.8 million to 27.6 million.

·

GAMCO Asset Management hosted its 34th Annual Client Symposium with over 350 investors in attendance. 2019 Inductees to our Hall of Fame were Denise Ramos (ITT), Jay Hooley (State Street), Amin Khoury (KLX), and Cristina Stenbeck (Kinnevik AB). Bruce Greenwald was honored as the 15th recipient of the Graham and Dodd, Murray, Greenwald Prize for Value Investing.

·	The Gabelli Dividend & Income Trust completed an offering of $50 million of 5.375% Series H Cumulative Preferred Shares on June 4, 2019. The preferred stock is perpetual, non-callable for five years, and was issued at $25 per share.

·	Peter Tcherepnine officially joined GAMCO from Loeb Partners Corporation and the assets were reflected in our AUM as of June 30, 2019.

·	GAMCO hosted a conference on Rule 852(b)(6), the Dynamics and Implications for the Fund Industry on July 11, 2019. Industry participants and members from the academic community covered a number of topics including “heartbeat trades” and innovations in the active ETF market.

·	Dennis J. DeCore was named Managing Director of Gabelli Fund’s ETF business on August 29, 2019. Gabelli Funds is a licensee of the Precidian Investments ActiveShares, the first non-transparent, actively-managed ETF.

·	As of the November 15, 2019 record date for the shareholder-designated charitable contribution (“SDCC”) program, approximately 82% of all shares were registered and eligible to designate a total of $4.5 million in contributions ($0.20 per share) to be paid in 2020.

·	Our 43rd Annual Automotive Symposium took place on November 4, 2019 in Las Vegas, Nevada. The meeting featured presentations by senior management of several leading automotive companies with an emphasis on industry dynamics, technical innovation, EV, and macroeconomic trends.

·	The Gabelli Dividend & Income Trust (NYSE: GDV) successfully completed its first transferable rights offering on November 18, 2019. GDV issued 8.2 million common shares for gross proceeds of $165 million.

·

Gabelli Funds and Columbia Business School’s Healthcare and Pharmaceutical Management Program co-hosted a symposium at the Paley Center for Media entitled Healthcare at a Crossroads: What’s the Path Forward? on November 22, 2019. The symposium topics included the impact of the 2020 election on healthcare access and coverage, drug pricing, and leveraging data and technology to transform care.

·	The Gabelli Equity Trust Inc. (NYSE: GAB) completed a $100 million offering of 5.00% Series K Cumulative Preferred Stock on December 16, 2019. The Series K Preferred is perpetual, non-callable for five years, and was issued with a liquidation preference of $25 per share.

·	The Gabelli Multimedia Trust Inc. (NYSE: GGT) successfully completed the issuance of $50 million of Series G Cumulative Preferred Stock on December 20, 2019. The Series G Preferred is perpetual, non-callable for five years, and was issued with a liquidation preference of $25 per share.

Past and Future - Giving Back to Society

Generating returns for our stakeholders is not the sole gauge we use in measuring our success. Since the inception of GAMCO’s SDCC program in 2013, shareholders have designated contributions of approximately $27 million to over 150 501(c)(3) initiatives. As a result of the Board of Directors most recent SDCC approval, $4.5 million was designated by shareholders to 501(c)(3) organizations in November 2019. This program underscores our commitment to managing socially responsible portfolios since 1987, which has evolved to include integrating environmental, social, and governance (ESG) factors into the analysis of companies and the structuring of portfolios.

Since our initial public offering (“IPO”) in February 1999, approximately $57 million will have been donated to charities by us, including the current year’s SDCC.

Shareholder Compensation and Initiatives

During 2019, we returned $39.6 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2019 totaling $2.2 million. During 2018, we returned $12.9 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2018 totaling $2.3 million.

Through our stock buyback program (the “Stock Repurchase Program”), including routine open market purchases under Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended and opportunistic private transactions, we repurchased 1,834,434 shares and 419,995 shares in 2019 and 2018, respectively, for approximately $37.4 million and $10.6 million, respectively, or $20.36 per share and $25.25 per share, respectively. At December 31, 2019, the total shares available under the Stock Repurchase Program to be repurchased in the future were 1,243,135. The Stock Repurchase Program is not subject to an expiration date.

Assets Under Management

AUM was $36.5 billion as of December 31, 2019, an increase of $2.1 billion, or 6.1%, from the December 31, 2018 AUM of $34.4 billion. The activity for 2019 consisted of $6.3 billion of market appreciation, net cash outflows of $3.5 billion and recurring distributions, net of reinvestments, from open-end and closed-end funds (the “Funds”) of $616 million. Average total AUM was $36.4 billion in 2019 versus $40.3 billion in 2018, a decrease of 9.7%.

We earn incentive fees for certain institutional client assets, assets attributable to certain preferred issues for our closed-end Funds, our GDL Fund (NYSE: GDL), the Gabelli Merger Plus⁺ Trust Plc (LSE: GMP), and the GAMCO Merger Arbitrage Fund. As of December 31, 2019, assets with incentive based fees were $1.7 billion, 5.6% below the $1.8 billion on December 31, 2018. The majority of these assets have calendar year-end measurement periods; therefore, our incentive fees are primarily recognized in the fourth quarter when the uncertainty is removed at the end of the annual measurement period.

Roll-forward of AUM (in millions)

(a) Includes $215 million and $247 million of 100% U.S. Treasury Fund AUM at December 31, 2019 and 2018, respectively.

RESULTS OF OPERATIONS

Investment advisory and incentive fees, which are based on the amount and composition of AUM in our Funds and Institutional and PWM accounts, and distribution fees represent our largest source of revenues. In addition to the general level and trends of the stock market, growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. A majority of our cash inflows to mutual fund products have come through third party distribution programs, including no-transaction fee programs. We have also been engaged to act as a sub-advisor for other much larger financial services companies with much larger sales distribution organizations. These sub-advisory clients are subject to business combinations that may result in the termination of the relationship. The loss of a sub-advisory relationship could have a significant impact on our financial results in the future.

Advisory fees from the Funds, and sub-advisory accounts are computed daily or weekly based on average net assets. Advisory fees from Institutional and PWM clients are generally computed quarterly based on account values as of the end of the preceding quarter. These revenues are based on AUM which is highly correlated to the stock market and can vary in direct proportion to movements in the stock market and the level of sales compared with redemptions, financial market conditions, and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher advisory fee rates than fixed income portfolios.

We also receive incentive fees from certain Institutional and PWM clients, which are based upon meeting or exceeding a specific benchmark index or indices. These fees are recognized at the end of the stipulated contract period, which may be quarterly or annually, for the respective account. Advisory fees on assets attributable to certain of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period.

Distribution fees and other income primarily include distribution fee revenue earned in accordance with Rule 12b-1 of the Investment Company Act of 1940, as amended (“Company Act”), along with sales charges and underwriting fees associated with the sale of the mutual funds plus other revenues. Distribution fees fluctuate based on the level of AUM and the amount and type of mutual funds sold directly by G.distributors or through various distribution channels.

Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research, and all other professional staff (“teammates”). Variable compensation paid to sales teammates and portfolio management generally represents 40% of revenues and is the largest component of total compensation costs. Distribution costs include marketing, product distribution, and promotion costs. The management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits, which is paid to Mr. Mario J. Gabelli (“Mr. Gabelli”) or his designee for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devotes the substantial majority of his working time to the business. Other operating expenses include general and administrative operating costs.

Non-operating income/(loss) includes gain/(loss) from investments, net (which includes both realized and unrealized gains and losses from securities), interest and dividend income, and interest expense. The gain/(loss) from investments, net is derived from our proprietary investment portfolio consisting of various public investments.

The following table (in thousands, except per share data) and discussion of our results of operations are based upon data derived from the consolidated statements of income contained in our consolidated financial statements and should be read in conjunction with those statements included in Part II, Item 8 of this Form 10-K.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net income for 2019 was $81.9 million, or $2.98 per fully diluted share, versus $117.2 million, or $4.07 per fully diluted share, in 2018. The year to year comparison was impacted by lower revenues and higher variable compensation offset by higher non-operating income.

Total revenues were $312.4 million in 2019, $29.1 million or 8.5% lower than the total revenues of $341.5 million in 2018. The change in total revenues by component was as follows (dollars in millions):

Investment advisory fees excluding incentive fees, which comprised 84.7% of total revenues in 2019, are directly influenced by the level and mix of average AUM. Average total AUM decreased 9.7% to $36.4 billion in 2019 as compared to $40.3 billion in 2018. Average equity AUM decreased 11.5% to $33.9 billion in 2019 from $38.3 billion in 2018, primarily from net outflows. Incentive fees, which comprised 4.6% of total revenues in 2019, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another. Incentive fees were higher in 2019 as a larger number of portfolios exceeded their respective benchmarks as compared to 2018.

Fund revenues decreased $11.1 million or 5.7%, to $183.6 million, driven by lower average AUM. Revenue from open-end Funds decreased $17.8 million, or 14.0%, to $109.5 million from the prior year as average AUM in 2019 decreased $1.5 billion, or 9.3%, to $14.6 billion from the $16.1 billion in 2018. Closed-end fund revenues increased $6.7 million, or 9.9%, to $74.1 million from the prior year and were comprised of an increase of $8.5 million in incentive fees on certain closed-end fund AUM, offset by a decrease of $1.8 million in investment advisory fees attributable to lower average AUM. Revenue from Institutional and PWM accounts, excluding incentive fees, which are generally billed on beginning quarter AUM, decreased $15.4 million, or 15.5%, principally due to lower billable AUM levels throughout the course of 2019. There were no incentive fees earned in 2019 and $1.7 million earned in 2018. In 2019, average AUM in our equity Institutional and PWM business decreased $2.2 billion, or 13.8%, for the year to $13.7 billion. SICAV revenues were $11.7 million in 2019, including $6.0 million of incentive fees, up from $7.1 million in 2018, including $1.5 million in incentive fees.

Distribution fees and other income decreased $5.5 million, or 14.2%, to $33.3 million in 2019 from $38.8 million in 2018 primarily from lower average open-end equity Fund AUM which declined 14.4%. Distribution fees were $29.2 million in 2019 versus $35.1 million in 2018 while other income was $4.1 million in 2019 versus $3.7 million in 2018.

Total compensation costs, which are largely variable in nature, increased $39.7 million, or 47.4%, to $123.5 million in 2019 from $83.8 million in 2018. Variable compensation costs, which are tied to revenues and principally consist of portfolio manager and relationship manager fees, increased $34.3 million to $83.1 million in 2019 from $48.8 million in 2018 and increased as a percent of revenues to 26.6% in 2019 from 14.3% in 2018. The decrease of waived compensation by the CEO to $23.0 million in 2019, as compared to $46.6 million in 2018, was the main driver of the increased variable compensation costs. During 2019, the CEO elected to irrevocably waive all of his compensation for a total of six months (January 1, 2019 to March 31, 2019 and September 1, 2019 to November 30, 2019) as compared to ten months in 2018 (March 1, 2018 to December 31, 2018). Additionally, the accounting for the vesting of the deferred cash compensation agreements (“DCCAs”) increased 2019 compensation by $14.8 million, consisting of $17.0 million from expensing the original DCCA values less a $2.2 million reduction for the DCCA indexing to the GBL stock price. 2018 compensation was reduced by $3.6 million consisting of a $32.0 million reduction for the DCCA indexing to the GBL stock price less $28.4 million from expensing the original DCCA values. Fixed compensation costs increased to $37.6 million in 2019 from $33.4 million in 2018. Stock based compensation was $2.8 million in 2019, an increase of $1.2 million, as compared to $1.6 million in 2018.

In 2019, management fee expense increased to $10.0 million versus $9.0 million in 2018. Management fee expense is incentive-based and entirely variable in the amount of 10% of the aggregate pre-tax profits, which is paid to Mr. Gabelli (or his designee) in accordance with his 2008 Employment Agreement. During 2019 and 2018, the CEO compensation waiver reduced management fee expense by $4.2 million and $9.9 million, respectively, while the amortization of the DCCAs increased it by $4.5 million and $7.2 million, respectively.

Distribution costs, which include marketing, promotion, and distribution costs decreased $5.0 million, or 12.8%, to $34.2 million in 2019 from $39.2 million in 2018, driven by a decrease in average open-end equity mutual funds AUM of 14.4%.

Other operating expenses were $26.7 million in 2019 compared to $22.7 million in 2018, an increase of $4.0 million or 17.6%. The increase primarily resulted from a $4.4 million increase in sub-advisory fee expense relating to higher incentive fees of $4.5 million from the SICAV less a $0.5 million decline in research services fees.

Operating income decreased $68.8 million, or 36.8%, to $118.0 million for 2019 versus $186.8 million in 2018. This decrease primarily resulted from lower revenues of $29.1 million, a lower CEO compensation waiver of $29.3 million, and higher DCCA amortization expense of $15.7 million in 2019 as compared to 2018. Operating margin was 37.8% for the year ended December 31, 2019, versus 54.7% in the prior year period. The decrease in operating margin was due primarily to higher variable compensation costs and management fee expense related to the reduced CEO compensation waiver and higher DCCA amortization 2019 as compared to in 2018.

Operating income before management fee was $128.0 million for the year ended of 2019, versus $195.8 million in the prior year. Operating margin before management fee was 41.0% in the 2019 period versus 57.3% in the 2018 period. The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures, to their respective generally accepted accounting principles (“GAAP”) measures is provided at the end of this section.

Total non-operating loss was $9.3 million for the year ended December 31, 2019, compared to a loss of $32.1 million in 2018. This is comprised of net loss from investments of $5.4 million in 2019 as compared to a net loss from investments of $25.2 million in 2018; interest and dividend income of $3.2 million in 2019 versus $2.2 million in 2018; interest expense of $2.6 million in 2019 as compared to $3.5 million in 2018; and shareholder-designated contributions of $4.5 million in 2019 and $5.7 million in 2018.

The effective tax rate was 24.6% for the year ended December 31, 2019, versus 24.2% for the year ended December 31, 2018.

Non-GAAP information and reconciliation

Reconciliation of GAAP financial measures to non-GAAP (in thousands):

DEFERRED COMPENSATION

The Company deferred, through DCCAs, the cash compensation of the CEO relating to all of 2016 (“2016 DCCA”), the first half of 2017 (“First Half 2017 DCCA”), and the fourth quarter of 2017 (“Fourth Quarter 2017 DCCA”) to provide the Company with flexibility to pay down debt and enhance our ability to execute lift-outs, make acquisitions, and seed new products. We have made substantial progress toward this objective, having reduced our debt since the November 2015 spin-off of Associated Capital Group, Inc., resulting in Standard & Poor’s March 2019 reaffirmation of our investment grade rating of BBB- and stable outlook.

The DCCAs deferred the CEO’s compensation expense by amortizing it over each DCCA’s respective vesting period. The CEO was not entitled to receive the compensation until the end of each respective vesting period, so U.S. GAAP specifies that the expense is amortized over the vesting period. The 2016 DCCA was expensed ratably over 4 years, the First Half 2017 DCCA was expensed ratably over 18 months, and the Fourth Quarter 2017 DCCA was expensed ratably over 18 months. In addition to the ratable vesting, the expense was marked to market at each reporting period as the DCCA expense was indexed to GBL’s stock price.

Notwithstanding its ability to settle these agreements in stock, GAMCO made a cash payment to the CEO on each respective vesting date. While the agreements did not change the original calculation of the CEO’s compensation, our reporting under U.S. GAAP for his compensation did change due to the ratable vesting and the indexing to the GBL stock price. The original value of the DCCAs was based on the compensation earned in the period divided by the volume weighted average price (“VWAP”) of the GBL stock price for the period (“Original VWAP”) to calculate the number of restricted stock units (“RSUs”) granted. Upon vesting, each DCCA was paid out based on the lesser of the VWAP of GBL’s stock price on the vesting date (“Vesting Date VWAP”) and the Original VWAP multiplied by the number of RSUs. The table below shows a summary of the DCCAs (in millions, except RSUs and VWAPs):

In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In the first six months of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period. The CEO’s third quarter 2017 compensation was not deferred so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vesting of the 2016 DCCA and the First Half 2017 DCCA. This resulted in a compounding effect in periods when non-deferred current period compensation was incurred and prior period deferred compensation was ratably vested. On May 23, 2018, the CEO waived receipt of $6 million of the First Half 2017 DCCA and a reduction in expense was recognized in 2018. On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO. This payment was after the waiver of $6.0 million by the CEO and a reduction of $2.6 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($27.1837) versus the Original VWAP over the first half of 2017 ($29.6596). On April 1, 2019, the Fourth Quarter 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $11.0 million was made to the CEO. This payment was reduced by $4.5 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($20.7916) versus the Original VWAP over the fourth quarter of 2017 ($29.1875). Subsequent to December 31, 2019, on January 2, 2020, the 2016 DCCA vested in accordance with the terms of the agreement and a cash payment of $43.7 million was made to the CEO. This payment was reduced by $32.3 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($18.8812) versus the Original VWAP over 2016 ($32.8187).

Accordingly, this vesting schedule resulted in an $18.4 million increase in compensation expense in 2019 versus 2018 as well as a $2.7 million decrease in management fee expense in 2019 as compared to 2018.

The following tables show the amortization and earnings per share (“EPS”) impact, inclusive of the indexing to the GBL stock price, of the DCCAs by quarter (in thousands, except per share data):

The following tables (in thousands, except per share data) show a reconciliation of our results for the years ended December 31, 2019 and 2018 between the U.S. GAAP basis and a non-GAAP adjusted basis (“as adjusted”) as if all of the 2016 DCCA was recognized in 2016 and the First Half 2017 DCCA and the Fourth Quarter 2017 DCCA expense was recognized in 2017 without regard to the vesting schedule. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing results with prior period results, and to enable more appropriate comparisons with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies.

LIQUIDITY AND CAPITAL RESOURCES

Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, and securities held for investment purposes. Cash and cash equivalents are comprised primarily of a 100% U.S. Treasury money market fund managed by GAMCO (The Gabelli U.S. Treasury Money Market Fund).

Summary cash flow data for the years ended December 31, 2019 and 2018 was as follows (in thousands):

Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity. We filed a “shelf” registration statement with the Securities and Exchange Commission (“SEC”) that was declared effective in April 2018. The shelf provides us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $500 million. The shelf is available through April 2021, at which time it may be renewed.

On February 23, 2018, the Company announced that its CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from March 1, 2018 through December 31, 2018. On December 26, 2018, the Company announced that the CEO elected to continue to waive all of his compensation that he would otherwise have been entitled to for the period from January 1, 2019 to March 31, 2019. On August 27, 2019, the CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from September 1, 2019 to November 30, 2019. As a result of these waivers, there was $27.2 million and $56.5 million of compensation and management fee waived by the CEO for the years ended December 31, 2019 and 2018, respectively. Additionally, on May 23, 2018, the CEO irrevocably waived receipt of $6.0 million of the First Half 2017 DCCA, and a commensurate reduction in compensation expense was recognized in the year ended December 31, 2018. On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO. On April 1, 2019, the Fourth Quarter 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $11.0 million was made to the CEO. Subsequent to December 31, 2019, on January 2, 2020, the 2016 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $43.7 million was made to the CEO.

As of December 31, 2019, we had cash and cash equivalents of $86.1 million, an increase of $44.9 million from the prior year-end balance of $41.2 million primarily due to the Company’s operating activities described below. Total debt outstanding at December 31, 2019 and 2018 was $24.2 million, which consisted of 5.875% senior notes due 2021.

Cash provided by operating activities was $90.0 million in 2019 and $117.9 million in 2018. Our largest source of cash comes from net income. In 2019, this totaled $81.9 million versus $117.2 million in 2018. Positive adjustments to reconcile net income to net cash provided by operating activities included an increase in compensation payable of $26.4 million, a decrease in investments in trading securities of $10.4 million, a decrease in receivable from brokers of $4.3 million, an increase in income taxes payable of $3.8, an increase in stock based compensation expense of $1.2 million, and $3.3 million from other changes in net assets and liabilities. Negative adjustments included an increase in investment advisory fees receivable of $23.5 million, an increase in unrealized value for securities of $13.9 million, and an increase in deferred income taxes of $4.5 million.

Net cash used by investing activities of $4.8 million in 2019 was due to purchases of securities of $5.1 million less $0.3 million in proceeds from sales of securities. Net cash used in investing activities of $2.4 million in 2018 was due to purchases of securities of $2.4 million.

Net cash used in financing activities of $40.3 million in 2019 principally resulted from the $37.4 million of repurchases of our Class A Stock under the Stock Repurchase Program and $2.8 million paid in dividends. Net cash used in financing activities of $92.0 million in 2018 principally resulted from the $50 million in prepayments of our AC 4% PIK Note due November 30, 2020, $25.1 million in margin loan payments, $15 million in prepayments of our AC 1.6% Note due February 28, 2018, $10.6 million of repurchases of our Class A Stock under the Stock Repurchase Program, and $2.3 million in dividends paid offset partially by $11.0 million in margin loan borrowings.

Under the terms of the lease of our Rye, New York office, we are obligated to make minimum total payments of $11.0 million through December 2028.

On November 25, 2015, Moody’s Investors Services downgraded the Company to Ba1 from Baa3. We continue to maintain an investment grade rating of BBB- with Standard and Poor’s Ratings Services. We believe that our ability to maintain our investment grade rating will provide greater access to the capital markets, enhance liquidity, and lower overall borrowing costs.

We have one broker-dealer subsidiary, G.distributors, which is subject to certain net capital requirements. G.distributors computes its net capital under the alternative method permitted, which requires minimum net capital of the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3 promulgated under the Securities Exchange Act of 1934, as amended. The requirement was $250,000 for the broker-dealer at December 31, 2019 and 2018. At December 31, 2019 and 2018, G.distributors had net capital, as defined, of approximately $4.3 million and $3.7 million, respectively, exceeding the regulatory requirement by approximately $4.1 million and $3.4 million, respectively. Net capital requirements for our affiliated broker-dealer may increase in accordance with the rules and regulations applicable to broker-dealers to the extent G.distributors engages in other business activities.

Contractual Obligations

We are obligated to make future payments under various contracts such as debt agreements and finance and operating lease agreements. The following table sets forth our significant contractual cash obligations as of December 31, 2019 (in thousands):

The finance lease contains an escalation clause tied to the change in the New York Metropolitan Area Consumer Price Index which may cause the future minimum payments for finance lease obligations to exceed $1,080,000 annually. Any increases to the base rental will be accounted for prospectively.

Off-Balance Sheet Arrangements

We do not invest in any other off-balance sheet vehicles that provide financing, liquidity, market, or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected on the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods presented. We base our estimates on historical experience, when available, and on other various assumptions that are believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates.

The critical accounting policies should be read in connection with our “Risk Factors” in Part I, Item 1A of this Form 10-K.

Major Revenue-Generating Services and Revenue Recognition

The Company’s revenues are derived primarily from investment advisory and incentive fees and distribution fees.

Investment advisory and incentive fees are directly influenced by the level and mix of AUM, as fees are derived from a contractually-determined percentage of AUM for each account as well as incentive fees earned on certain accounts. Advisory fees from the Funds and sub-advisory accounts are computed daily or weekly based on average net assets and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. Advisory fees from Institutional and PWM accounts are generally computed quarterly based on account values as of the end of the preceding quarter, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. The Company derived approximately 89% of its total revenues from advisory fees, including incentive fees, for the periods ended December 31, 2019 and 2018. These revenues vary depending upon the level of sales compared with redemptions, financial market conditions, performance, and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher advisory fee rates than fixed income portfolios.

The Company earns incentive fees from certain Institutional and PWM accounts, which are based upon meeting or exceeding a specific benchmark index or indices. Incentive fees refer to fees earned when the return generated for the client exceeds the benchmark and can be earned even if the return to the client is negative as long as the return exceeds the benchmark. These fees are recognized, for each respective account, at the end of the stipulated contract period which is either quarterly or annually and varies by account. Receivables due for incentive fees earned are included in investment advisory fees receivable on the consolidated statements of financial condition. There were no incentive fees receivable as of December 31, 2019 or 2018.

For The GDL Fund, there is an incentive fee earned as of the end of the calendar year which varies to the extent the total return of the fund is in excess of the ICE Bank of America Merrill Lynch 3 Month U.S. Treasury Bill Index total return. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis. Receivables due on incentive fees relating to The GDL Fund are included in investment advisory fees receivable on the consolidated statements of financial condition and were $2.2 million as of December 31, 2019. There were no incentive fees receivable as of December 31, 2018.

For the Gabelli Merger Plus⁺ Trust Plc, there is an incentive fee which is earned and recognized at the end of the measurement period, June 30^th and varies to the extent the total return of the fund is in excess of twice the rate of return of the 13 week Treasury Bills over the performance period. There were no incentive fees receivable as of December 31, 2019 or 2018.

Advisory fees on certain of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period, which is annually. Receivables due for advisory fees on closed-end preferred shares are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $5.8 million in advisory fees receivable on the closed-end preferred shares as of December 31, 2019. There were no advisory fees receivable on closed-end preferred shares as of December 31, 2018.

For the GAMCO Merger Arbitrage SICAV, there is an incentive fee earned as of the end of the calendar year equal to twenty percent of the gross return of the fund. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis, or earlier if there is a redemption. Receivables due on incentive fees relating to the GAMCO Merger Arbitrage SICAV are included in investment advisory fees receivable on the consolidated statements of financial condition and were $5.2 million and $1.3 million as of December 31, 2019 and 2018, respectively.

Distribution fees revenues are derived primarily from the distribution of Gabelli and GAMCO open-end Funds as well as the affiliated TETON Westwood and Keeley open-end funds advised by either a subsidiary of GBL (Gabelli Funds), a subsidiary of GGCP, Inc. (Teton), or a subsidiary of Teton (Keeley-Teton Advisors, Inc.). G.distributors distributes the open-end Funds pursuant to distribution agreements with each Fund. Under each distribution agreement with an open-end Fund, G.distributors offers and sells such open-end Fund shares on a continuous basis and pays all of the costs of marketing and selling the shares, including printing and mailing prospectuses and sales literature, advertising and maintaining sales and customer service teammates and sales and services fulfillment systems, and payments to the sponsors of third party distribution programs, financial intermediaries, and G.distributors’ sales teammates. G.distributors receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 of the Company Act. G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry front-end or back-end sales charge or no-load to certain investors.

Under the distribution plans, the Class AAA shares of the open-end Funds (except The Gabelli U.S. Treasury Money Market Fund, Gabelli Capital Asset Fund, and The Gabelli ABC Fund) and the Class A and ADV shares of certain Funds pay G.distributors a distribution fee of 0.25% per year (except the Class A shares of the TETON Westwood funds which pay 0.50% per year, except for the TETON Westwood Intermediate Bond Fund which pays 0.35%, and the Class A shares of the Gabelli Enterprise Mergers and Acquisitions Fund which pay 0.45% per year) on the average daily net assets of the Fund. Class C shares have a 12b-1 distribution plan with a distribution fee totaling 1.00%.

Distribution fees from the open-end Funds are computed daily based on average net assets. The amounts receivable for distribution fees are included in receivables from affiliates on the consolidated statements of financial condition.

Investments in Securities

Securities owned are recorded at fair value in the statements of financial condition in accordance with U.S. GAAP. Securities that are not readily marketable are stated at their estimated fair values in accordance with U.S. GAAP. Securities transactions and any related gains and losses are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the specific identified cost basis and are included in gain/(loss) from investments, net on the consolidated statements of income.

Equity securities, effective January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, are stated at fair value with any unrealized gains or losses reported in current period earnings in gain/(loss) from investments, net on the consolidated statements of income.

Management determines the appropriate classification of securities at the time of purchase. Government debt with maturities of greater than three months at the time of purchase are considered investments in debt securities. Investments in debt securities are accounted for as either trading, available for sale (“AFS”), or held-to-maturity. The Company does not hold any investments in debt securities accounted for as trading or AFS. The Company’s investments in debt securities are classified as held-to-maturity, as the Company has the intent and ability to hold these securities until maturity, and represent fixed income securities recorded at amortized cost. Discounts from and premiums to par value on held-to-maturity investments are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any. Held-to-maturity securities are evaluated for other than temporary impairment each reporting period and any impairment charges are recorded in gain/(loss) from investments, net on the consolidated statements of income. As of December 31, 2019 and 2018, there were no impairments on the Company’s investments in debt securities classified as held-to-maturity.

Income Taxes

We operate in numerous states and countries through our subsidiaries and therefore must allocate our income, expenses, and earnings to these taxing jurisdictions taking into account the various laws and regulations in each jurisdiction. Each year, we file tax returns in each jurisdiction and settle our tax liabilities, which may be subject to audit by the taxing authorities. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC 740”), for each tax position taken or expected to be taken in a tax return, we determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. We recognize the accrual of interest on uncertain tax positions and penalties in income tax provision on the consolidated statements of income.

We do not believe our operations are subject to significant seasonal fluctuations. We do not believe inflation will significantly affect our compensation costs, as they are substantially variable in nature. However, the rate of inflation may affect our expenses, such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets, it may adversely affect our financial position and results of operations by reducing our AUM, revenues, or otherwise.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of its business, GAMCO is exposed to the risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing, and managing market and other risks.

Our exposure to pricing risk in equity securities is directly related to our role as a financial intermediary and advisor for AUM in our affiliated Funds and Institutional and PWM accounts, as well as our proprietary investment and trading activities. At December 31, 2019, we had equity investments of $27.7 million. We may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. The equity securities investment portfolio is at fair value and may move in line with the equity markets. The equity securities investment portfolio changes are recorded as gain/(loss) from investments, net in the consolidated statements of income included in Part II, Item 8 of this Form 10-K.

Market Risk

Our primary market risk exposure is to changes in equity prices and interest rates. Since approximately 92% of our AUM is equities, our financial results are subject to equity market risk, as revenues from our investment management services are sensitive to stock market dynamics. In addition, returns from our proprietary investment portfolios are exposed to interest rate and equity market risk.

The Company’s Chief Investment Officer oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies. The Chief Investment Officer and the Company’s Board of Directors review the proprietary investment portfolios throughout the year. Additionally, the Company monitors its proprietary investment portfolios to ensure that they are in compliance with the Company’s guidelines.

Equity Price Risk

The Company earns substantially all of its revenue as advisory and incentive fees and distribution fees from affiliated Funds and Institutional and PWM assets. Such fees represent a percentage of AUM, and the majority of these assets are in equity investments. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in equity markets overall may have a corresponding effect on the Company’s revenues.

Related to our proprietary investment activities, we had investments in equity securities of $27.7 million at December 31, 2019, which included investments in common stocks of $26.5 million, investments in open-end Funds of $0.7 million, and investments in closed-end Funds of $0.5 million, and at December 31, 2018, we had investments in securities of $33.8 million, which included investments in common stocks of $32.4 million and investments in closed-end Funds of $1.3 million. Of the $26.5 million and $32.4 million invested in common stocks at December 31, 2019 and 2018, respectively, $16.4 million and $18.8 million, respectively, was related to our investment in Westwood Holdings Group Inc. (NYSE: WHG).

The following table provides a sensitivity analysis for our investments in equity securities as of December 31, 2019 and 2018 (in thousands). The sensitivity analysis assumes a 10% increase or decrease in the value of these equity investments:

Interest Rate Risk

Our exposure to interest rate risk results, principally, from our investment of excess cash in a sponsored money market fund that holds U.S. government securities. These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value. Based on the December 31, 2019 cash and cash equivalents balance of $86.1 million, a 1% increase in interest rates would increase our interest income by $0.9 million annually, while a 1% decrease would reduce our interest income by $0.9 million annually.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GAMCO INVESTORS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of GAMCO Investors, Inc.

Rye, New York

 

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of GAMCO Investors, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Stamford, Connecticut

March 6, 2020

We have served as the Company’s auditor since 2009.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of GAMCO Investors, Inc.

Rye, New York

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of GAMCO Investors, Inc. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019 of the Company and our report dated March 6, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

We conducted our audit in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Deloitte & Touche LLP

 

Stamford, Connecticut

March 6, 2020

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share data)

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share data)