GAMCO INVESTORS, INC. ET AL - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2021

or

For the transition period from ______ to ______

Commission File No. 001-14761

(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, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter) was $137,117,912.

As of February 28, 2022, 7,590,811 shares of class A common stock (including 407,700 restricted stock awards and 2,424,892 shares held by Associated Capital Group, Inc. and subsidiaries) 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. In addition, there were 377,800 Phantom RSAs outstanding as of February 28, 2022.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s definitive proxy statement relating to the 2022 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”); and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. 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.

Environmental, Social, and Governance (ESG)

Giving Back to Society – (Y)our “S” in ESG

The Board of Directors of GAMCO approved a $0.50 per share SDCC for all shareholders of record on December 21, 2021, doubling the prior year’s $0.25 per share designation under the program, totaling approximately $11.3 million. Since the inception of GAMCO’s SDCC program in 2013, and counting this current amount, shareholders will have designated charitable gifts of $48 million to approximately 350 charitable organizations. Since our initial public offering in February 1999, our firm’s combined charitable donations total approximately $74 million.

This charitable program is just one aspect of our firm’s commitment to ESG investing at both the firm level as well as within our portfolios - where we have been managing dedicated mandates since 1987.

Governance – (Y)our “G” in ESG

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

ITEM 1: BUSINESS

(Y)our Business

 

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, actively managed semi-transparent exchange traded funds (“ETFs”), a société d’investissement à capital variable (“SICAV”) and approximately 1,400 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. Our revenues are based primarily on the Company’s level of assets under management (“AUM”) and fees associated with our various investment products. GAMCO serves a broad client base, including institutions, intermediaries, offshore investors, private wealth, and direct retail investors. In recent years, GAMCO has successfully attracted and integrated new teams of RIAs, by providing a strong combination of corporate culture, reputation, and compensation arrangements.

GAMCO offers a wide range of solutions for clients across Value and Growth Equity, ESG, Convertibles, sector-focused strategies including Gold and Utilities, Merger Arbitrage, and Fixed Income. In 1977, GAMCO launched its flagship All Cap Value strategy, Gabelli Value, and in 1986 entered the mutual fund business.

As of December 31, 2021, we had $35.0 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 and actively managed semi-transparent ETFs.

Our AUM are organized into three groups:

  

Portfolio managers oversee our AUM and are supported by in-depth analysis by our research analyst teammates who have accumulated compound knowledge across numerous industries. Our research team, located in the U.S. and abroad, has an average of 17 years of industry experience.

The principal executive office is located at 191 Mason Street, Greenwich, CT 06830. 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.

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”), owns a majority of the outstanding shares of Class B common stock (“Class B Stock”) of GBL. As of December 31, 2021, such ownership represented approximately 93% of the combined voting power of the outstanding common stock and approximately 69% of the equity interest. AC, which was spun-off from GBL on November 30, 2015 and is publicly traded on the NYSE under the ticker symbol AC, owns 2,424,892 shares of Class A common stock (“Class A Stock”) representing approximately 1% of the combined voting power and approximately 9% of the equity interest of GBL as of December 31, 2021. AC is majority-owned by GGCP Holdings, LLC.

•

Gabelli Private Market Value (PMV) with a CatalystTM Investment Approach is at the core of our business. This methodology has evolved from the value investing principles articulated by Graham & Dodd in 1934 and enhanced by Roger Murray and Bruce Greenwald. Mr. Mario J. Gabelli (“Mr. Gabelli”) contribution to their principles was the introduction of the Private Market Value (PMV) with a CatalystTM value investment methodology in 1979.

Private Market Value (PMV) with a CatalystTM investing is a disciplined, research-driven approach based on intensive security analysis. In this process, select stocks are identified with an intrinsic value based on our estimate of current asset value, future growth, and earnings power that is significantly different from the value reflected in the public market. We then calculate the stock’s PMV, defined as the price an informed industrial buyer would likely pay to acquire the business. We then look for a catalyst: a company specific event or industry-wide phenomena, such as a change in regulations that will help realize returns.   For the value process we employ which underscores value appeal, in general, our Institutional and PWM AUM are managed to meet the specific needs and objectives of each client by utilizing investment strategies that are within our areas of expertise: “all cap value”, “small cap value”, “small and mid (SMID) cap value”, “ESG,” and “gold”.

•

Increasing Presence in and Marketing for Private Wealth Management Market. Our private wealth management business focuses, generally, on client relationships of $2.5 million or greater. According to industry estimates, the number of households with over $2.5 million in investable assets will continue to experience rapid growth, subject to ups and downs in the equity and fixed income markets. We believe the firm is well positioned to take advantage of this market opportunity, given its over four decades history of serving the needs of private high net worth clients, with tax sensitive investment management across a breadth of strategies, long performance history, and reputational standing. Our objective is to deepen long-term client relationships and, addressing the holistic needs of new clients over a sole equity management focus.   In recent years, GAMCO has successfully attracted and integrated new teams of RIAs, by providing a strong combination of corporate culture, reputation, and compensation arrangements.

•

Increasing Marketing for Institutional Market.Our dedicated team of institutional marketing professionals engages with a variety of clients and prospects across institutional and intermediary channels and are responsible for new business development and client relationship management. The institutional sales effort is focused on corporate and public pension plans, unions, endowments, foundations, and financial intermediaries. GAMCO augmented the institutional team with the addition of staff dedicated to marketing to investment consultants as they advise institutional plan sponsors on investment manager selection, asset allocation, and a wide range of investment matters. Expansion of the team serving regional, national, and global consultants provides greater breadth and depth of our firm’s engagement and sales efforts with the institutional community.

•

Attracting and Retaining Experienced Professionals. We offer competitive variable compensation that provides opportunities to our staff. The ability to attract and retain highly experienced investment and other professionals with a long-term commitment to our clients and us has been, and will continue to be, a significant factor in our long-term growth.

•

Launch of actively managed semi-transparent ETFs. We received approval for the Gabelli ETF Trust and are launching up to nine licensed Precidian ActiveShares actively managed semi-transparent ETFs. This innovative product combines the characteristics of an actively managed mutual fund with the intra-day pricing and tax benefits of an ETF, including the benefits from § 852(b)(6), which allows a fund to deliver appreciated securities to redeeming shareholders without recognizing any gains and enables shareholders to defer capital gains until they sell their shares. On February 1, 2021, the Gabelli Love Our Planet & People ETF began trading on the New York Stock Exchange under the symbol LOPP. This ETF underscores our belief that an investment focus on the environment is essential to the future of the Planet. On February 16, 2021, the Gabelli Growth Innovators ETF began trading on the New York Stock Exchange under the symbol GGRW. This ETF provides an investment opportunity in businesses both enabling and benefitting from digital acceleration. On January 3, 2022, the Gabelli Asset ETF began trading on the New York Stock Exchange under the symbol GAST. This ETF focuses on companies that use automation equipment, related technology, software, or processes, and firms that use those services to automate their productivity.

•

Expanding Fund Distribution. We continue to expand our distribution network, primarily through national and regional brokerage firms, and have developed additional classes of shares for most of our open-end Funds for sale through these firms and other third party distribution channels. We have increased our wholesale distribution efforts to market the multi-class shares, which have been designed to meet the needs of investors seeking advice through financial consultants. We also seek relationships with financial intermediaries that manage discretionary fund models in order to have our funds placed within such models.

•

Incentive Fees. As of December 31, 2021, approximately $1.3 billion of our AUM were managed on a performance fee basis including $831 million of SICAV assets, $148 million of preferred issues of closed-end funds, $180 million in The GDL Fund, and $100 million in the Gabelli Merger Plus+ Trust Plc. Incentive fees are recognized at end of measurement period and upon redemption.

•

Establishing Relationship Offices Internationally. We have eleven offices, comprised of seven domestic offices located in Charleston, SC; Greenwich, CT; Morristown, NJ; Palm Beach, FL; Reno, NV; Rye, NY; and St. Louis, MO, and four international offices located in Hong Kong, London, Shanghai, and Tokyo. We will continue to evaluate adding additional offices in order to serve our clients and meet global research requirements.

-2021	“The Future of Alzheimer’s Care and Treatment,” “New Technologies in Biopharma,” and “Data Mining and Artificial Intelligence in Patient Care”
-2020	“COVID-19: Vaccines, Therapeutics, and Impact on the Healthcare System”
-2019	“Healthcare at a Crossroads: What’s the Path Forward?”
-2019	“Rule 852(b)(6), the Dynamics and Implications for the Fund Industry” -
-2017 -2015	“Digital Evolution in Financial Services” “Capital Allocation – The Tug of War”
-2013	“Value Investing 20 Years Later: A Celebration of the Roger Murray Lecture Series”
-2006	“Closed-End Funds: Premiums vs. Discounts, Dividends and Distributions”
-2003	“Dividends, Taxable versus Non-Taxable Issues”
-2001 -1998	“Virtues of Value Investing” “The Role of Hedge Funds as a Way of Generating Absolute Returns”
-1997	“Active vs. Passive Stock Selection”

•	Hosting of Conferences. Gabelli Funds sponsors a series of industry conferences, which are well known within their respective industries for the intellectual content and for providing insight into investment decisions made on behalf of our clients.

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Capitalizing on Acquisitions, Alliances, and Lift-outs. We intend to selectively and opportunistically pursue acquisitions, alliances, and lift-outs that broaden our product offerings, add new sources of distribution, and augment organic growth. On March 11, 2008, Gabelli Funds assumed the role of investment advisor to the AXA Enterprise Mergers and Acquisitions Fund, subsequently renamed Gabelli Enterprise Mergers and Acquisitions Fund, a fund that had been sub-advised by GAMCO since its inception on February 28, 2001. On August 1, 2010, the clients of Florida-based NMF Asset Management became part of the Institutional and PWM operation of GAMCO Asset. On November 2, 2015, the investment team of Dinsmore Capital, a specialist in convertible bond investing and formerly the manager of The Bancroft Fund and the Ellsworth Growth & Income Fund joined Gabelli Funds. During 2018, the clients of Trevor, Stewart, Burton & Jacobsen and Loeb Partners Management, Inc. joined GAMCO.

•

Solutions For Our Wealth Management Clients With Fixed Income. We look to increase our competitive ability to attract new clients interested in wealth management and fixed income vehicles. The Gabelli U.S. Treasury Money Market Fund has an investment objective of high current income consistent with the preservation of principal and liquidity.

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Strong Industry Fundamentals: According to data compiled by the U.S. Federal Reserve, the investment management industry has grown faster than more traditional segments of the financial services industry, including the banking and insurance industries. Since GBL began managing assets for Institutional and PWM clients in 1977, based on data generated by Birinyi Associates, LLC, world equity markets have grown at a 10.3% compound annual growth rate through December 31, 2021 to approximately $121.5 trillion. The U.S. equity market comprises about $53.8 trillion, or roughly 44% of world equity markets. We believe that demographic trends and the growing role of money managers in the placement of capital compared to the traditional role played by banks and life insurance companies will result in continued growth of the investment management industry.

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Long-Term Performance: We have a superior long-term record of achieving relatively high returns for our Institutional and PWM clients. We believe that our performance record represents a competitive advantage and a recognized component of our franchise.

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Widely-Recognized “Gabelli” and “GAMCO” Brand Names: For much of our history, our CEO, portfolio managers, investment style, and investment products have been featured in a variety of print and digital media publications, including U.S. and international publications such as The Wall Street Journal, Financial Times, Money Magazine, Barron’s, Fortune, Business Week, Nikkei Financial News, Forbes, and Investor’s Business Daily. We have published Deals…Deals…and More Deals written by our investment professionals. It examines the history and current practice of merger arbitrage and has been translated into Japanese, Chinese, Italian, and Spanish. Global Convertible Investing: The Gabelli Way is a comprehensive guide to effective investing in convertible securities. We most recently published Merger Masters: Tales of Arbitrage, which presents revealing profiles of monumentally successful merger investors based on exclusive interviews with some of the greatest minds to practice the art of arbitrage. Our investment professionals also appear on leading financial news programs, including CNBC, Fox, Yahoo Finance, and Bloomberg, and we are active on numerous digital platforms, including Gabelli TV on YouTube and Twitter (@MarioGabelli, @InvestGabelli, and @InvestESG), among others. We have launched a podcast series whereby our portfolio managers and research analysts discuss their views on various industries and topical issues. https://www.gabelli.com/media/podcast

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Diversified Product Offerings: Since the inception of our investment management activities, we have sought to expand the breadth of our product offerings. We currently offer a wide spectrum of investment products and strategies, including product offerings in U.S. equities, U.S. fixed income, international equities, and convertible securities.

Institutional and Private Wealth Management:   At December 31, 2021, we had $13.5 billion of AUM in approximately 1,400 Institutional and PWM accounts, representing 38.7% of our total AUM. As of December 31, 2021, the PWM clients, generally defined as individuals having minimum investable assets of $1.0 million, comprised approximately 83% of the total number of Institutional and PWM accounts and approximately $4.6 billion, or 34%, 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, 2021, institutional client accounts comprised approximately 7% of the total number of Institutional and PWM accounts and approximately $2.8 billion, or 21%, of the Institutional and PWM AUM. As of December 31, 2021, foundation and endowment fund assets comprised approximately 9% of the total number of Institutional and PWM accounts and approximately $1.1 billion, or 8%, of the Institutional and PWM AUM. As of December 31, 2021, 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 $5.0 billion, or 37%, of total Institutional and PWM AUM.

The ten largest Institutional and PWM relationships comprised approximately 47% of GAMCO Asset AUM and 18% of our total AUM as of December 31, 2021, and approximately 33% of GAMCO Asset revenues and 8% of our total revenues for the year ended December 31, 2021.

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

		2021				2020				2019
Open-end Funds		$	46			$	66			$	93
Closed-end Funds			522				518				523
Total distributions		$	584			$	616			$	594

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 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 domestic 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, 2021 and 2020, distribution fees from the open-end Funds amounted to $23.7 million and $23.1 million, respectively, while payments to third-parties for selling the open-end Funds totaled $21.8 million and $21.0 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, 2021 and 2020, underwriting fees and sales charges retained amounted to $0.9 million and $1.0 million, respectively.

Under the distribution plans, the Class AAA shares of the open-end Funds (except The Gabelli U.S. Treasury Money Market 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 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 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 27% of our investment advisory fee revenue for the year ended December 31, 2021 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 and GAMCO Asset) 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 in Rule 15c3-3 promulgated under the Securities Exchange Act of 1934, as amended, met or exceeded all minimum requirements as of December 31, 2021. 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, 2021, we had five percent or more beneficial ownership with respect to 80 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.

Human Capital

GAMCO is a dynamic firm that seeks and employs bright and energetic teammates with entrepreneurial attitudes, experience in the financial services industry, and who are guided by the same ESG principles that guide the firm.

Teammates

We provide a variety of benefits to promote retention and growth of our teammates. We strive to offer competitive compensation packages to our teammates, comprised of base pay, variable compensation, annual bonuses, as well as equity grants to promote a sense of ownership and aligned interests to our public shareholders. We offer a comprehensive benefits package that gives a robust collection of rewards and benefits, including healthcare and other insurance benefits and retirement savings plans. Additionally, we provide annual training and teammate reviews in order to promote growth and self-reflection.

As of February 28, 2022, we had a full-time staff of 168 teammates, of whom 63 served in the portfolio management, portfolio management support, and trading areas (including 21 portfolio managers for the Funds and Institutional and PWM), 50 served in the marketing and shareholder servicing areas, and 55 served in the administrative area.

Diversity and Inclusion

As a company, we are committed to and actively striving to ensure we have a diverse workforce. We recognize our teammates are the most valuable asset we have and we embrace the differences amongst our teammates that make them unique, including race, ethnicity, sexual orientation, gender identity, disability, religion, and socio-economic status.

We put this into practice via our diversity initiatives that are guided by our diversity and inclusion policy and applied via our practices and policies on recruitment and selection, compensation and benefits, professional development, training, promotions, and transfers.

Status as a Smaller Reporting Company

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.

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 7.9% and 8.9% of our total revenues for the years ended December 31, 2021 and 2020, 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, natural disasters, 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.

Events outside of our control, including public health crises, could negatively affect the portfolios we manage and our results of our operations.

Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and the portfolios that we manage. For example, in December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread globally, which has resulted in restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning in March 2020, in the U.S. In addition to these developments having adverse consequences for us and the portfolios that we manage, the operations of GAMCO could be adversely impacted, including through quarantine measures and travel restrictions imposed on its personnel or service providers based in affected countries, or any related health issues of such personnel or service providers. The ongoing impact of COVID-19 remains difficult to predict, including the extent to which COVID-19 could negatively affect our and our portfolio companies’ operating results or the duration of any potential business disruption. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and new virus variants and the actions taken by authorities and other entities to contain it or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results.

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 domestic 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, cyber-attack, political unrest, war (whether or not directly involving the U.S.), power failure, 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 96% 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 (“CIO”) of the Value team (along with the two other Value Co-CIOs 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 the Company.

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, May 5, 2015, and June 5, 2020, 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, Teton, AC, and GGCP, except for certain permitted accounts. These permitted accounts, excluding personal accounts, held assets at December 31, 2021 and 2020 of approximately $295.8 million and $263.9 million, 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.

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, 2021, approximately 95% 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, Mr. 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 Mr. Gabelli, continues to have responsibilities relating to GAMCO and AC. Peter Goldstein, GAMCO’s General Counsel and Secretary, serves as the Chief Legal Officer and Secretary of AC. Douglas R. Jamieson has continued to serve as President and Director of GAMCO Asset, a Director of GAMCO, 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 GGCP as well as AC common stock.

Mr. Gabelli is deemed to control AC by his control of GGCP Holdings, LLC, an intermediate subsidiary of GGCP, a private company controlled by Mr. 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 will work 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 proprietary investment positions in 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 1,400 Institutional and PWM accounts as of December 31, 2021, of which the ten largest accounts generated approximately 8% of our total revenues during the year ended December 31, 2021. 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 and other circumstances, including the performance of our small cap and value mandates.

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 $6.7 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.

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. 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 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, including actively managed semi-transparent ETFs, 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 or reduce our ability or willingness to make new investments.

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 96% 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. During 2021 and 2020, AC sold 339,376 shares and 178,525 shares, respectively, of our Class A Stock constituting approximately 4% and 2%, respectively, 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.

General Risk Factors

The risk factors described above are those that we think may be material with regard to an investment in us that are not applicable generally to all business enterprises. However, we are subject to the many risks that affect all or most business enterprises in the U.S. or internationally, and our business or financial condition could be materially affected by those risks.

None.

ITEM 2:          PROPERTIES

Our principal office is located at 191 Mason Street, Greenwich, CT. In addition, we lease office space in Rye, NY; Charleston, SC; 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 in the normal course of business. 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. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial condition, operations, or cash flows at December 31, 2021. 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 28, 2022, there were 235 Class A stockholders of record and 19 Class B stockholders of record. These figures do not include approximately 3,000 stockholders with shares held under beneficial ownership in nominee name.

As of December 31, 2021, since the IPO, we have returned to shareholders $2.1 billion in total, of which $1.0 billion was in the form of the spin-offs of AC and Teton, $521.5 million was through our stock buyback program, and $579.6 million was from dividends, as well as $74 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 2021:

The following table shows information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2021.

The number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column above) is 2,974,725.

ITEM 6:          [Reserved]

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, 14 closed-end funds, actively managed semi-transparent ETFs, one société d’investissement à capital variable (“SICAV”), and approximately 1,400 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. Our revenues are based primarily on the Company’s level of assets under management (“AUM”) and fees associated with our various investment products. GAMCO serves a broad client base, including institutions, intermediaries, offshore investors, private wealth, and direct retail investors. In recent years, GAMCO has successfully integrated new teams of RIAs by providing attractive compensation arrangements and paying finder’s fees.

GAMCO offers a wide range of solutions for clients across Value and Growth Equity, ESG, Convertibles, actively managed semi-transparent ETFs, sector-focused strategies including Gold and Utilities, Merger Arbitrage, and Fixed Income. In 1977, GAMCO launched its flagship All Cap Value strategy, Gabelli Value, and in 1986 entered the mutual fund business.

As of December 31, 2021, we had $35.0 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 and actively managed semi-transparent ETFs.

In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread globally. On March 11, 2020, COVID-19 was identified as a global pandemic by the World Health Organization. In response to its spread, governmental authorities have imposed restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning in March 2020, in the U.S. As world leaders focused on the unprecedented human and economic challenges of COVID-19, global equity markets plunged as the coronavirus pandemic spread. In March 2020, the unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. In the remainder of 2020 and continuing through 2021, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of COVID-19 vaccines, the markets have rebounded strongly. As a result of this pandemic, the Company allowed most of our employees (“teammates”) to work remotely. This policy continued through the end of June 2021. Effective July 2021, the Company changed its policy and asked teammates to return to our offices. As a result, the majority of our teammates are now back in our offices. There continues to be no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan.

Organizational Chart

This is the current organizational chart of the Company:

2021 Business and Investment Highlights

•

On January 4th, GAMCO International SICAV launched GAMCO Convertible Securities. The fund, managed by our Dinsmore team, which marked the 50th Anniversary of managing the Bancroft Fund in April, leverages the firm’s history of investing in dedicated convertible security portfolios. Multiple share classes are tailored for global institutional investors as well as select non-U.S. retail investors.

•	We launched our first semi-transparent actively managed ETF, the Love our Planet & People ETF (LOPP), on February 1st , and our second one, Gabelli Growth Innovators (GGRW), on February 16th.

•	Our 31st Annual Pump, Valve & Water Systems Symposium took place on February 25th. The meeting featured presentations by senior management of several leading industrial companies with an emphasis on industrial and municipal water use and the role of technology.

•	On March 18th, we hosted our 7th Annual Waste & Environmental Services Symposium via webcast.  The timely conference featured presentations by leading companies.

•	On April 15th, the Gabelli Utility Trust (NYSE: GUT) completed an oversubscribed rights offering raising approximately $43 million.

•	On May 1st, the 15th Annual Omaha Research Trip was held virtually. Members of our team participated in panel discussions regarding investment styles and strategies.

•	On May 14th, we hosted our 36th GAMCO Investor Client Symposium with over 500 clients and prospects attending on a virtual basis.

•	On June 3rd, more than a dozen media and entertainment companies participated in our 13th Annual Entertainment & Broadcasting Symposium.

•	On June 15th, the Company paid a $2.00 dividend in the form of 2-Year subordinated notes due June 15, 2023 (“Subordinated Notes”) totaling $52.2 million to holders of record on June 1, 2021.

•	The Company opened a relationship center in Charleston, SC.

•	On July 20th, the Company held a special meeting where shareholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation.

•	On July 21st, the Gabelli Equity Trust (NYSE: GAB) completed an oversubscribed rights offering raising approximately $144 million.

•	On July 21st, the Company filed a shelf registration statement to register up to $500 million of securities, including common stock, preferred stock, warrants, rights, and convertible securities.

•	On August 30th, the Gabelli Multimedia Trust Inc. (NYSE: GGT) completed an offering that  raised approximately $18 million.

•	On September 9th, we hosted our 27th Annual Aerospace & Defense Symposium in New York City. The symposium featured leading companies in the Aerospace and Defense industries.

•	On October 7th, the Gabelli Dividend & Income Trust (NYSE: GDV) completed the offering of $150 million of 4.25% Series K Cumulative Preferred Shares.

•	On October 15th, the Gabelli Healthcare & Wellness Trust (NYSE: GRX) completed a private placement of $40 million of 4% Series E Cumulative Preferred Shares.

•	On November 1st, the Gabelli Global Small and Mid Cap Value Trust (NYSE: GGZ) raised a similar $40 million via a private placement of 4% Series B Cumulative Preferred Shares.

•

On November 1st and 2nd, we hosted our 45th Annual Automotive Symposium, “Batteries Included” in Las Vegas. The symposium featured presentations from senior management of leading automotive and electric vehicle suppliers, with an emphasis on the battery ecosystem, technological innovation, and industry dynamics.

•	On November 19th, Gabelli Funds and the Columbia Business School hosted the 3rd Annual Healthcare Symposium, which featured presentations by leading healthcare professionals providing important insights into major trends in clinical innovation, healthcare delivery, access, and economics.

•	On December 17th, the Gabelli Equity Trust (NYSE: GAB) had an initial closing of a private placement of $68 million of 4.25% Series M Cumulative Preferred Shares.

Giving Back to Society – (Y)our “S” in ESG

The Board of Directors approved in November 2021 a $0.50 per share shareholder designated charitable contribution (“SDCC”), a 100% increase from the prior year’s $0.25 per share designation under the program. We estimate this will total approximately $11.3 million. Since the inception of GAMCO’s SDCC program in 2013, and counting this current amount, shareholders will have designated charitable gifts of $48 million to more than 350 501(c)(3) institutions.

When combined with our other charitable contributions, this boosts our total contributions to approximately $74 million since our initial public offering (“IPO”) in February 1999.

Shareholder Compensation and Initiatives

During 2021, we returned $73.8 million of our earnings to shareholders through dividends and stock repurchases, including a total of $0.10 per share in regular quarterly cash dividends totaling $2.7 million and $2.00 per share in a special dividend to shareholders of Class A Stock and Class B Stock payable in Subordinated Notes totaling $54.5 million. During 2020, we returned $30.7 million of our earnings to shareholders through dividends and stock repurchases, including a total of $0.08 per share in regular quarterly cash dividends and $0.90 per share in a special dividend totaling $26.8 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 700,722 shares and 296,296 shares in 2021 and 2020, respectively, for approximately $16.5 million and $3.9 million, respectively, or $23.54 per share and $13.16 per share, respectively. At December 31, 2021, the total shares available under the Stock Repurchase Program for Class A Stock to be repurchased in the future were 2,173,937. The Stock Repurchase Program is not subject to an expiration date.

Assets Under Management

AUM was $35.0 billion as of December 31, 2021, an increase of $2.4 billion, or 7.4%, from the December 31, 2020 AUM of $32.6 billion. The activity for 2021 consisted of $5.3 billion of market appreciation, net cash outflows of $2.3 billion and recurring distributions, net of reinvestments, from open-end and closed-end funds (the “Funds”) of $568 million. Average total AUM was $34.3 billion in 2021 versus $31.0 billion in 2020, an increase of 10.6%.

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, 2021, assets with incentive based fees were $1.3 billion, 18.2% above the $1.1 billion on December 31, 2020. 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.

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 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. 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, interest expense, and shareholder-designated charitable contribution. 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, 2021 Compared to Year Ended December 31, 2020

 

 

Net income for 2021 was $73.2 million, or $2.73 per fully diluted share, versus $58.7 million, or $2.20 per fully diluted share, in 2020. The year-to-year comparison was impacted by higher revenues and lower non-operating loss offset partially by higher variable compensation.

Total revenues were $301.1 million in 2021, $41.4 million or 15.9% higher than the total revenues of $259.7 million in 2020. The change in total revenues by component was as follows (dollars in millions):

Investment advisory fees excluding incentive fees, which comprised 86.0% of total revenues in 2021, are directly influenced by the level and mix of average AUM. Average total AUM increased 10.6% to $34.3 billion in 2021 as compared to $31.0 billion in 2020. Average equity AUM increased 15.3% to $32.4 billion in 2021 from $28.1 billion in 2020, primarily from market appreciation partially offset by net outflows. Incentive fees, which comprised 5.2% of total revenues in 2021, 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 2021 as a larger number of portfolios exceeded their respective benchmarks as compared to 2020.

 

Fund revenues increased $29.0 million or 18.3%, to $187.3 million, driven by higher average AUM. Revenue from open-end Funds increased $9.6 million, or 10.5%, to $100.8 million from the prior year as average AUM in 2021 increased $0.9 billion, or 7.6%, to $12.7 billion from the $11.8 billion in 2020. Closed-end fund revenues increased $19.4 million, or 28.9%, to $86.5 million from the prior year and were comprised of an increase of $5.4 million in incentive fees on certain closed-end fund AUM and an increase of $14.0 million in investment advisory fees attributable to higher average AUM. Revenue from Institutional and PWM accounts, which are generally billed on beginning quarter AUM, increased $8.9 million, or 13.8%, principally due to higher billable AUM levels throughout the course of 2021. In 2021, average AUM in our equity Institutional and PWM business increased $1.8 billion, or 16.8%, for the year to $12.5 billion. SICAV revenues were $14.1 million in 2021, including $7.3 million of incentive fees, up from $11.0 million in 2020.

 

Distribution fees and other income increased $0.5 million, or 1.9%, to $26.6 million in 2021 from $26.1 million in 2020 primarily from higher average open-end equity Fund AUM which increased 11.0%. Distribution fees were $23.7 million in 2021 versus $23.1 million in 2020 while other income was $2.9 million in 2021 versus $3.0 million in 2020.

Total compensation costs, which are largely variable in nature, increased $15.9 million, or 15.5%, to $118.2 million in 2021 from $102.3 million in 2020. Variable compensation costs, which are tied to revenues and principally consist of portfolio manager and relationship manager fees, increased $8.3 million to $68.2 million in 2021 from $59.9 million in 2020 and decreased as a percent of revenues to 22.7% in 2021 from 23.1% in 2020. The increase of waived compensation by the CEO, in his capacity as a portfolio manager and a relationship manager, to $17.1 million in 2021, as compared to $12.4 million in 2020, partially offset the large increase in variable compensation costs due to higher average AUM. During 2021, the CEO elected to irrevocably waive all of his compensation for a total of five months (July 1, 2021 to November 30, 2021) as comparted to four months and ten days during 2020 (July 1, 2020 to November 10, 2020). Additionally, the accounting for the vesting of the deferred cash compensation agreement (“DCCA”) decreased 2020 compensation by $1.5 million. Fixed compensation costs increased to $41.3 million in 2021 from $38.2 million in 2020. Stock based compensation was $8.7 million in 2021, an increase of $4.5 million, as compared to $4.2 million in 2020. The increase primarily results from the acceleration of all 2018 and 2019 restricted stock award grants during 2021 for an additional expense of $3.8 million that would have been recognized in future years.

In 2021, management fee expense increased to $5.6 million versus $5.4 million in 2020. 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 2021 and 2020, the CEO compensation waiver reduced management fee expense by $3.7 million and $2.3 million.

Distribution costs, which include marketing, promotion, and distribution costs increased $1.8 million, or 6.3%, to $30.3 million in 2021 from $28.5 million in 2020, driven by an increase in average open-end equity mutual funds AUM of 11.0%.

Other operating expenses were $29.7 million in 2021 compared to $24.0 million in 2020, an increase of $5.7 million or 23.8%, primarily from increased sub advisory fees for two funds totaling $4.1 million and one-time system implementation costs of $1.5 million.

Operating income increased $17.8 million, or 17.9%, to $117.4 million for 2021 versus $99.7 million in 2020. This increase in 2021 as compared to 2020 primarily resulted from higher revenues of $41.4 million and a higher CEO compensation waiver of $4.7 million. Operating margin was 39.0% for the year ended December 31, 2021, versus 38.4% in the prior year.

Operating income before management fee was $123.0 million for the year ended of 2021, versus $105.0 million in the prior year. Operating margin before management fee was 40.8% in 2021 versus 40.4 % in 2020. 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 $13.4 million for the year ended December 31, 2021, compared to a loss of $15.9 million in 2020. This was comprised of net gain from investments of $0.3 million in 2021 as compared to a net loss from investments of $8.7 million in 2020; interest and dividend income of $0.6 million in 2021 versus $0.8 million in 2020; interest expense of $2.9 million in 2021 as compared to $2.6 million in 2020; and shareholder-designated charitable contributions of $11.3 million in 2021 and $5.4 million in 2020.

The effective tax rate was 29.6% for the year ended December 31, 2021 versus 29.9% for the year ended December 31, 2020.

Operating income before management fee expense is used by management for purposes of evaluating its business operations. We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including gain/(loss) from investments, net from our proprietary investment portfolio, interest and dividend income, interest expense, and shareholder-designated charitable contribution. We believe that an investor would find this useful in analyzing our business operations without the impact of the non-operating items such as trading and investment portfolios, interest and dividend income, interest expense, or shareholder-designated charitable contribution.

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

DEFERRED COMPENSATION

The Company deferred, through a DCCA, the cash compensation of the CEO relating to all of 2016 (“2016 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.

The DCCA deferred the CEO’s compensation expense by amortizing it over the DCCA’s 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. 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 the vesting date. While the agreement 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 DCCA 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, the 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 DCCA (in millions, except RSUs and VWAPs):

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, the change in GBL price from December 31, 2019 to January 2, 2020, resulted in a $1.4 million decrease in compensation expense in 2020.

The following tables show the amortization and earnings per share (“EPS”) impact, inclusive of the indexing to the GBL stock price, of the DCCA 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, 2021 and 2020 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 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, U.S. Treasury Bills, short-term investments, and securities held for investment purposes. Cash and cash equivalents are comprised primarily of U.S Treasury Bills with maturities of three months or less at the time of purchase and 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, 2021 and 2020 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 was available through April 2021. On July 21, 2021, the Company filed a new “shelf” registration statement on Form S-3 on similar terms, which was declared effective on July 27, 2021.

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. On July 1, 2020, the Company announced that the CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from July 1, 2020 to November 10, 2020. On June 30, 2021, the Company announced that the CEO elected to irrevocably waive all of his compensation that he would otherwise have been entitled to for the period from July 1, 2021 to November 30, 2021. As a result of these waivers, there was $20.8 million and $14.7 million of compensation and management fee waived by the CEO for the years ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, we had cash, cash equivalents, short-term investments in U.S. Treasury Bills, and investments in fixed maturity securities of $142.0 million, an increase of $43.7 million from the prior year-end balance of $98.3 million primarily due to the Company’s operating and investing activities, partially offset by the Company’s financing activities, described below. Total debt outstanding at December 31, 2021 was $51.0 million, which consisted of the Subordinated Notes. Total debt outstanding at December 31, 2020 was $24.2 million, which consisted of 5.875% senior notes due June 1, 2021.

Net cash provided by operating activities was $96.1 million in 2021, as compared to $40.7 million provided by operating activities in 2020. Cash flows from operating activities primarily consisted of net income adjusted for certain non-cash items and changes in assets and liabilities.

 

Net cash provided by investing activities in 2021 was $59.5 million relating to net maturities of U.S. Treasuries held for investment purposes, as compared to $63.5 million used in 2020 relating to net purchases of U.S. Treasuries held for investment purposes. As of December 31, 2021, we had total investments of $32.3 million, a decrease in total investments of $58.5 million from the prior year-end balance of $90.8 million.

 

Net cash used in financing activities in 2021 was $46.9 million, including $24.2 million paid for the repurchase of 5.875% senior notes due June 1, 2021, $16.5 million paid for the purchase of treasury stock, $4.3 million paid in dividends, $1.6 million paid for the repurchase of Subordinated Notes that were put back to the Company, and $0.3 million paid on the principal portion of lease liabilities, as compared to $30.0 million used in 2020.

The Company’s principal contractual commitments include repayments of the Subordinated Notes and payments of lease obligations. At December 31, 2021, we had $51.0 million of Subordinated Notes due June 2023, which we expect to satisfy with cash and cash equivalents. Under the terms of the lease of our Rye, New York office, we are obligated to make minimum total payments of $7.8 million through December 2028. We are obligated to make future payments under various contracts such as debt agreements and finance and operating lease agreements of $7.8 million and $3.8 million, respectively. We also had a net liability for unrecognized tax benefits related to uncertain tax positions of $20.2 million, including penalties and interest related to tax uncertainties in income taxes of approximately $9.5 million, some or all of which could result in future cash payments to various taxing authorities. At this time, we are unable to estimate the timing and amount of any future cash outflows related to these uncertain tax positions. As such amounts above, both individually and in the aggregate, can be satisfied with cash on hand and investments, we do not believe they represent a material liquidity risk to the company. 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.

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, 2021 and 2020. At December 31, 2021 and 2020, G.distributors had net capital, as defined in the Rule, of approximately $1.9 million and $1.4 million, respectively, exceeding the regulatory requirement by approximately $1.6 million and $1.1 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.

Our subsidiary, GAMCO Asset Management (UK) Limited, is authorized and regulated by the Financial Conduct Authority (“FCA”). At December 31, 2021 and 2020, GAMCO Asset Management (UK) Limited held total capital of £746 thousand and £708 thousand ($1.0 million and $961 thousand), respectively, and had a Financial Resources Requirement of £310 thousand and £195 thousand ($419 thousand and $265 thousand), respectively. We have consistently met or exceeded these minimum requirements.

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 90% of its total revenues from advisory fees, including incentive fees, for the years ended December 31, 2021 and 2020. 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.

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 $1.1 million and $0.1 million as of December 31, 2021 and 2020, respectively.

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, 2021 or 2020.

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, or earlier if there is a redemption. 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 $1.5 million and $2.5 million in advisory fees receivable on the closed-end preferred shares as of December 31, 2021 and 2020, 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 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.

Note 2 to the consolidated financial statements includes additional information on the Company’s revenue recognition policy.

Investments in Securities

Equity securities owned are recorded at fair value in the statements of financial condition, with any unrealized gains or losses reported in current period earnings in gain/(loss) from investments, net on the consolidated statements of income, in accordance with U.S. GAAP.

Management determines the appropriate classification of debt 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, 2021 and 2020, there were no impairments on the Company’s investments in debt securities classified as held-to-maturity.

Securities transactions and any related gains and losses are recorded on a trade date basis. Realized gains and losses from equity and debt 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.

Income Taxes

Seasonality and Inflation

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 condition 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, 2021, we had equity investments of $32.3 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

Equity Price Risk

The following table provides a sensitivity analysis for our investments in equity securities as of December 31, 2021 and 2020 (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 either directly in U.S. government securities or 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, 2021 cash, cash equivalents, and U.S. Treasury Bills balance of $142.0 million, a 1% increase in interest rates would increase our interest income by $1.4 million annually. Given the current low interest rate environment, an analysis of a 1% decrease is not meaningful.

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.

Opinion on the Financial Statements

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, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2022, 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.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Unrecognized Tax Benefits – Refer to Note 1 and Note 5 to the consolidated financial statements

 

Critical Audit Matter Description

 

 

 

We identified the evaluation of the Company’s unrecognized tax benefits as a critical audit matter because the calculation of these tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations. In accordance with ASC 740, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. Auditing management’s analysis of its uncertain tax positions and resulting unrecognized tax benefits required a high degree of auditor judgment and extensive audit effort, including involvement of our tax specialists.

 

How the Critical Audit Matter Was Addressed in the Audit

 

Our audit procedures to evaluate management’s estimates of liabilities for unrecognized tax benefits related to uncertain tax positions included the following, among others:

•	We involved our tax specialists to assist us in obtaining an understanding of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions and resulting unrecognized tax benefits.

•	We tested the operating effectiveness of the internal controls related to management’s assessment of uncertain tax positions and resulting unrecognized tax benefits.

•	With the assistance of tax specialists, we evaluated the reasonableness of management’s estimates and judgements regarding the future resolution of uncertain tax positions, including evaluating the technical merits of each position and considering tax law, statutes, regulations and case law.

•

With the assistance of our tax specialists, we developed an expectation of changes in the liability for unrecognized tax benefits associated with uncertain tax positions to evaluate whether management had appropriately considered new information that could significantly change measurement or disclosure.

/s/ Deloitte & Touche, LLP

Stamford, Connecticut

March 9, 2022

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.

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, 2021, 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, 2021, 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, 2021 of the Company and our report dated March 9, 2022, 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 9, 2022

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except per share data)

See notes to consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

See notes to consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

See notes to consolidated financial statements.

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

GAMCO INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(continued) (in thousands, except per share data)