Exhibit 8(d)(1)
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▇▇▇▇▇▇▇ ▇▇▇▇▇ CORE PRINCIPAL PROTECTED FUND
FINANCIAL GUARANTEE AGREEMENT
among
FUND ASSET MANAGEMENT, L.P.,
▇▇▇▇▇▇▇ ▇▇▇▇▇ PRINCIPAL PROTECTED TRUST
and
AMBAC ASSURANCE CORPORATION
Dated as of January 9, 2003
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TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS
Section 1.01 General Definitions.............................................1
Section 1.02 Generic Terms..................................................11
ARTICLE II
THE POLICY
Section 2.01 The Policy.....................................................12
Section 2.02 Procedure for Issuance.........................................12
Section 2.03 Conditions Precedent to Effectiveness..........................12
Section 2.04 Fees...........................................................15
ARTICLE III
MANAGEMENT OF THE FUND
Section 3.01 General........................................................15
Section 3.02 Permitted Fixed Income Investments.............................15
Section 3.03 Permitted Equity Investments...................................16
Section 3.04 Additional Portfolio Requirements..............................18
Section 3.05 Allocation Between Fixed Income Portfolio and Equity
Portfolio....................................................20
Section 3.06 Reports........................................................22
Section 3.07 Cash...........................................................23
Section 3.08 Intent.........................................................23
Section 3.09 Article III Computations.......................................23
Section 3.10 Transition Period..............................................23
Section 3.11 Master Fund Shares.............................................23
ARTICLE IV
Trigger Events
Section 4.01 Trigger Events.................................................24
Section 4.02 Defeasance Portfolio...........................................26
ARTICLE V
Limitation of Liability
Section 5.01 Limitation of Liability of Adviser.............................26
Section 5.02 Limitations as to the Trust on behalf of the Fund..............26
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.01 Representations and Warranties of the Adviser..................27
Section 6.02 Representations and Warranties of the Trust for itself
and the Fund.................................................28
Section 6.03 Representations and Warranties of the Insurer..................30
ARTICLE VII
COVENANTS
Section 7.01 Covenants of the Adviser.......................................31
Section 7.02 Covenants of the Trust on behalf of the Fund...................32
Section 7.03 Covenant of the Insurer........................................33
ARTICLE VIII
FURTHER AGREEMENTS
Section 8.01 Reinsurance and Assignments....................................34
Section 8.02 Fund Liability.................................................34
Section 8.03 Liability of the Insurer.......................................34
ARTICLE IX
CONFIDENTIALITY
Section 9.01 Confidentiality................................................34
Section 9.02 Trading Information and Other Information......................35
Section 9.03 Copies of Fund Information.....................................35
Section 9.04 Independent Verifier...........................................35
ARTICLE X
THE INDEPENDENT VERIFIER
Section 10.01 Retention of Independent Verifier..............................36
Section 10.02 Responsibilities of Independent Verifier.......................36
Section 10.03 Adviser Cooperation............................................36
ARTICLE XI
TERMINATION
Section 11.01 Termination....................................................36
ARTICLE XII
MISCELLANEOUS
Section 12.01 Amendments and Waivers.........................................36
Section 12.02 Notices........................................................37
Section 12.03 No Waiver, Remedies and Severability...........................38
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Section 12.04 Payments.......................................................38
Section 12.05 Governing Law..................................................39
Section 12.06 Submission to Jurisdiction, Waiver of Jury Trial...............39
Section 12.07 Counterparts...................................................39
Section 12.08 Paragraph Headings.............................................39
Section 12.09 Survival.......................................................39
Section 12.10 Reliance on Information........................................39
Section 12.11 Time of the Essence............................................40
Section 12.12 No Third-Party Rights..........................................40
Section 12.13 Further Assurances.............................................40
Section 12.14 Concerning Knowledge...........................................40
Section 12.15 No Additional Trust Created....................................40
Exhibit A Form of Financial Guarantee Insurance Policy
Exhibit B Form of Direction and Undertaking Regarding Remedies
Schedule 1 Form of Daily Report
Schedule 2 Intentionally omitted.
Schedule 3 Notice Procedures
Schedule 4 Confidentiality Undertaking
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FINANCIAL GUARANTEE AGREEMENT
FINANCIAL GUARANTEE AGREEMENT, dated as of January 9, 2003, (the
"Agreement"), among AMBAC ASSURANCE CORPORATION, a Wisconsin domiciled stock
insurance company (the "Insurer"), FUND ASSET MANAGEMENT, L.P., a Delaware
limited partnership (the "Adviser"), and ▇▇▇▇▇▇▇ ▇▇▇▇▇ PRINCIPAL PROTECTED
TRUST, a Delaware statutory trust (the "Trust"), on behalf of its series ▇▇▇▇▇▇▇
▇▇▇▇▇ CORE PRINCIPAL PROTECTED FUND (the "Fund").
W I T N E S S E T H:
WHEREAS, the Trust is an open-end diversified, management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and the Fund, a series of the Trust, makes certain
guarantees to the shareholders of the Fund (the "Shareholders"); and
WHEREAS, the Trust has requested the Insurer, and the Insurer has agreed,
to issue a financial guarantee insurance policy (the "Policy") to insure the
Fund's guarantee that, on the Guarantee Maturity Date, shares of the Fund of any
Class of Shares may be redeemed for an amount no less than the Guarantee per
Share for that Class of Shares; and
WHEREAS, the parties hereto, among other things, desire to specify the
conditions precedent to the issuance by the Insurer of the Policy, the payment
of the premium in respect thereof, and to provide for certain other matters
related thereto;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.01 General Definitions. The terms defined in this Article I
shall have the meanings provided herein for all purposes of this Agreement, in
both singular and plural form, as appropriate.
"Act of Insolvency" means, with respect to any party, (i) the commencement
by such party as debtor of any case or proceeding under any bankruptcy,
insolvency, reorganization, liquidation, dissolution or similar law, or such
party seeking the appointment of a receiver, trustee, custodian or similar
official for such party or any substantial part of its property; (ii) the
appointment of a receiver, conservator, or manager for such party by any
government agency or authority having the jurisdiction to do so; (iii) the
commencement of any such case or proceeding against such party, which (A) is
consented to or not timely contested by such party, (B) results in the entry of
an order for relief, such an appointment, the issuance of such a protective
decree or the entry of an order having a similar effect, or (C) is not dismissed
within 72 hours, (iv) the making or offering by such party of a composition with
its creditors or a general assignment for
the benefit of creditors, (v) the admission by such party of such party's
inability to pay its debts or discharge its obligations as they become due or
mature, or (vi) any governmental authority or agency or any person, agency or
entity acting under governmental authority shall have taken any action to
condemn, seize or appropriate, or to assume custody or control of, all or any
substantial part of the property of such party.
"Acts" means the Investment Company Act and the Securities Act.
"Adverse Effect" means, (i) in respect of the Adviser, a material adverse
effect upon (x) the ability of the Adviser to perform its obligations under this
Agreement or any other Transaction Document to which it is a party, or (y) the
rights of the Insurer under the Transaction Documents, and (ii) in respect of
the Fund, a material adverse effect upon (x) the ability of the Fund to perform
its obligations under this Agreement or any other Transaction Document to which
it is a party or (y) the rights of the Insurer under the Transaction Documents.
An adverse effect on the binding nature, validity or enforceability of this
Agreement or the Direction and Undertaking Regarding Remedies shall constitute
an Adverse Effect. The determination of whether a particular set of
circumstances would reasonably be expected to have an Adverse Effect includes a
determination of both the likelihood of the occurrence of such set of
circumstances and the likelihood that such set of circumstances, if it were to
occur, would result in an Adverse Effect.
"Aggregate Equity Exposure" means the aggregate Equity Exposure of the
Equity Portfolio.
"Ambac Information" means the five paragraphs appearing in the Preliminary
Prospectus under the heading "Ambac Assurance Corporation" and the financial
statements of the Insurer which are incorporated by reference in the Preliminary
Prospectus (such financial statements are contained in the periodic reports of
Ambac Financial Group, Inc. filed under the Securities Exchange Act of 1934). At
such time as the Registration Statement is declared effective, "Ambac
Information" includes the five paragraphs appearing in the Registration
Statement under the heading "Ambac Assurance Corporation" (if identical to the
five paragraphs in the Preliminary Prospectus or, if they are not identical,
then such information in the Registration Statement as is identified in writing
by Ambac as "Ambac Information") and the financial statements of the Insurer
which are incorporated by reference in the Registration Statement (if the
language describing such incorporation by reference is identical to the
Preliminary Prospectus or, if it is not identical, then such information in the
Registration Statement as is identified in writing by Ambac as "Ambac
Information").
"Applicable Percentage" has the meaning provided in Section 3.05.
"Approved Index" means Standard & Poor's 500, Standard & Poor's 400
Midcap, Nasdaq 100, ▇▇▇▇▇▇▇ 1000, and ▇▇▇▇▇▇▇ 2000.
"Bank Deposits" means any of the following having a maturity of not more
than 183 days: demand and time deposits in, certificates of deposit of, and
bankers' acceptances issued by any depository institution or trust company
incorporated under the laws of the United States of America or any state thereof
and subject to supervision and examination by federal
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and/or state banking authorities so long as the commercial paper or debt
obligations of such depository institution or trust company (or, in the case of
the principal depository institution in a holding company system, the commercial
paper or debt obligations of such holding company) have a credit rating of at
least "P-1" by Moody's and at least "A-1" by S&P, in the case of commercial
paper and short-term obligations; provided that the issuer thereof must also
have at the time of such investment a long-term credit rating of at least "Aa3"
by Moody's or at least "AA-" by S&P.
"Benchmark Sector Weight" means, with respect to a Sector, the weighting
of such Sector in the Equity Benchmark.
"Bond Floor" has the meaning provided in Section 3.05(c).
"Business Day" means any day other than a day on which banks located in
the City of New York, New York are required or authorized by law to close or on
which the NYSE is closed for business.
"Cash" means legal tender of the United States.
"Cash Equivalents" means Bank Deposits, Commercial Paper, and Repurchase
Obligations.
"Class of Shares" means each class of shares of beneficial interest of the
Fund designated pursuant to the Declaration of Trust.
"Commercial Paper" means commercial paper having a credit rating of at
least "P-1" by Moody's and at least "A-1+" by S&P, either bearing interest or
sold at a discount from the face amount thereof, having a maturity of not more
than 183 days from the date of issuance, and issued by either (x) a corporation
incorporated under the laws of the United States of America or any state
thereof, or (y) any depository institution or trust company incorporated under
the laws of the United States of America or any state thereof and subject to
supervision and examination by federal and/or state banking authorities,
provided that the issuer thereof must also have at the time of such investment a
long-term credit rating of at least "Aa3" by Moody's or at least "AA-" by S&P.
"Commission" means the United States Securities and Exchange Commission.
"Contractual Obligation" means, as to any Person, any provision of any
security issued by such Person or any agreement, instrument or other undertaking
to which such Person is a party or by which it or any of its property is bound.
"Covered Call" has the meaning provided in Section 3.03(c)(ii).
"Covered Expenses" means, for any Class of Shares, the annual ordinary
fund operating expenses reflected in the Prospectus relating to such Class of
Shares. "Covered Expenses" shall not include Investment-Related Costs or
extraordinary expenses such as litigation and other expenses not incurred in the
ordinary course of the Fund's business. For the avoidance of doubt, all of the
Fund's operating expenses which are intended to be or have in
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practice been covered by the Fee Waiver Agreement and the Expense Limitation
Agreement are "Covered Expenses" (regardless of whether or not the Fee Waiver
Agreement is then in effect or has been amended or modified by the parties
thereto).
"Custodian" means ▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co., as Custodian pursuant to
the Custodian Agreement or any successor to ▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co., in
such capacity.
"Custodian Agreement" means the Custodian Agreement dated as of October
26, 2001 between the Trust and the Custodian, as amended from time to time.
"Custodian Report" means the report or reports of the Custodian
contemplated by Section 3.06(d).
"Daily Report" means a report in the form of the sample attached as
Schedule 1 hereto.
"Declaration of Trust" means the Trust's Agreement and Declaration of
Trust, dated as of July 15, 2002, as amended from time to time.
"Defeasance Portfolio" has the meaning provided in Section 4.02.
"Delta" means (i) with respect to an Equity Security, the meaning provided
in Section 3.03(a)(iv); (ii) with respect to an Equity Future, the meaning
provided in Section 3.03(b)(ii); and (iii) with respect to an Equity Option, the
meaning provided in Section 3.03(c)(C).
"Designated Account" means the demand deposit account maintained with the
Custodian by the Trust on behalf of the Fund.
"Direction and Undertaking Regarding Remedies" means the direction from
the Board of Trustees of the Trust to the Custodian substantially in the form of
Exhibit B hereto.
"Distribution Per Share" means, with respect to any Class of Shares, an
amount equal to the quotient of the amount of any distribution or payment by the
Fund in respect of, or allocated to, such Class of Shares that is not a Covered
Expense or an Investment-Related Cost, and shall include, without limitation,
any distribution of income, dividends, capital gains or principal to the
Shareholders of such Class of Shares and any payment of Income Taxes allocated
to such Class of Shares, divided by the number of shares of such Class of Shares
outstanding on the date of such distribution or payment. For the avoidance of
doubt, payments of expenses that are not Covered Expenses or Investment-Related
Costs, specifically including Income Taxes and extraordinary expenses, are
treated as Distributions Per Share for purposes of determining the Guarantee per
Share, but such payments can not be reinvested and no Shares shall be issued in
respect of such payments.
"Effective Date" means the date on which the conditions set forth in
Section 2.03(a) are satisfied.
"Equity Benchmark" means the ▇▇▇▇▇▇▇ 1000(R)Index.
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"Equity Call" has the meaning provided in Section 3.03(c).
"Equity Exposure" means, with respect to each investment in the Equity
Portfolio (other than Covered Calls), the product of its Notional Value and its
Delta.
"Equity Futures" has the meaning provided in Section 3.03(b).
"Equity Options" has the meaning provided in Section 3.03(c).
"Equity Portfolio" has the meaning provided in Section 3.03.
"Equity Put" has the meaning provided in Section 3.03(c).
"Equity Security" has the meaning provided in Section 3.03(a).
"Equity Securities Portfolio" has the meaning provided in Section 3.03(a).
"Expense Amount" has the meaning provided in Section 3.05(d).
"Expense Limitation Agreement" means the Expense Limitation Agreement
dated as of the Effective Date, between the Adviser and the Trust on behalf of
the Fund, as amended from time to time.
"Fee Waiver Agreement" means the Fee Waiver Agreement dated as of the
Effective Date, between the Adviser and the Trust on behalf of the Fund, as
amended from time to time.
"Fixed Income Derivative" has the meaning provided in Section 3.02(c).
"Fixed Income Future" has the meaning provided in Section 3.02(b).
"Fixed Income Investment" has the meaning provided in Section 3.02.
"Fixed Income Portfolio" has the meaning provided in Section 3.02.
"Fixed Income Security" has the meaning provided in Section 3.02(a).
"Fixed Income Weighted Average Duration" means, at any time, the weighted
average duration by Notional Value of the Fixed Income Portfolio.
"Fund" has the meaning provided in the preamble.
"Fund Accounting Agent" means State Street Bank & Trust Company, as Fund
Accounting Agent, or any successor to State Street Bank & Trust Company, in such
capacity.
"Fund Accounting Agent Report" means the report or reports of the Fund
Accounting Agent contemplated by Section 3.06(d).
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"Fund Value" means, at any time, (x) the sum of the Market Value of the
Equity Portfolio and the Market Value of the Fixed Income Portfolio, plus (y)
all other assets of the Fund (such as dividends, interest and other
receivables), minus (z) all accrued and unpaid liabilities of the Fund.
"Gap Risk" has the meaning provided in Section 3.05(a).
"Government Authority" means any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions or pertaining to government.
"Guarantee" means the guarantee dated as of the date hereof by the Fund in
favor of the Shareholders.
"Guarantee Amount" means, as of any date, the sum of (i) the product of
(x) the Guarantee per Share applicable to the Class A Shares as of such date and
(y) the number of Class A Shares outstanding as of such date; (ii) the product
of (x) the Guarantee per Share applicable to the Class B Shares as of such date
and (y) the number of Class B Shares outstanding as of such date; (iii) the
product of (x) the Guarantee per Share applicable to the Class C Shares as of
such date and (y) the number of Class C Shares outstanding as of such date; and
(iv) the product of (x) the Guarantee per Share applicable to the Class D Shares
as of such date and (y) the number of Class D Shares outstanding as of such
date.
"Guarantee Maturity Date" means the date that is seven years (7) after the
Inception Date, but if that date is not a Business Day, the Guarantee Maturity
Date shall be the first Business Day thereafter.
"Guarantee per Share" means, with respect to any Class of Shares, (i) the
NAV for such Class of Shares at the close of business on the Transition Date and
(ii) thereafter on any Business Day, the Guarantee per Share for such Class of
Shares on the immediately preceding Business Day divided by the sum of one plus
the quotient of (A) the amount of any Distribution Per Share with respect to
such Class of Shares effective since the immediately preceding Business Day
divided by (B) the NAV for such Class of Shares at the close of business on the
day such Distribution Per Share was effective.
"Guarantee Period" means the period commencing on and including the
Inception Date to and including the Guarantee Maturity Date.
"Inception Date" means the second Business Day after the end of the
Offering Period.
"Income Taxes" means U.S. income or excise taxes that are calculated on
the net income or undistributed net income of the Fund.
"Indemnification Agreement" means the Indemnification Agreement dated as
of the date hereof among the Insurer, the Adviser, the Trust and FAM
Distributors, Inc.
"Independent Verification Report" has the meaning provided in Section
10.02.
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"Independent Verifier" means the accounting firm of nationally-recognized
standing selected in accordance with Section 10.01.
"Independent Verifier Agreement" means the agreement between the Adviser
and the Independent Verifier pursuant to which the Independent Verifier performs
the services contemplated by Section 10.02.
"Interest Rate Swaps" means plain vanilla interest rate swaps with
counterparties that are rated at least Aa3 by Moody's and AA- by S&P which are
documented on ISDA documentation (as appropriately modified to comply with
applicable provisions of the Investment Company Act and as is customary in the
fund industry), use commercially reasonable terms consistent with market
practice, require delivery of collateral pursuant to a credit support annex with
threshold amounts no greater than $10,000,000, provide for termination at market
or assignment at market upon counterparty downgrade below Aa3 or AA-, and are a
swap of a fixed rate for LIBOR in respect of a constant notional amount,
regardless of whether the Fund is the payor of the fixed rate or the floating
rate.
"Investment Advisers Act" means the Investment Advisers Act of 1940, as
amended.
"Investment Company Act" has the meaning provided in the recitals.
"Investment Management Agreement" means the Management Agreement dated as
of the Effective Date between the Trust and the Adviser with respect to the
Fund, as amended from time to time.
"Investment-Related Costs" means interest, taxes (other than Income
Taxes), brokerage commissions, transaction fees and other investment-related
costs.
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, charge, lien or security interest (statutory or other)
of any kind or nature whatsoever.
"Litigation Event" means, with respect to the Adviser or the Fund, as
applicable, the submission of any claim or the commencement of any proceedings
by or against such party in any Federal, state or local court or before any
governmental body or agency, or before any arbitrator, or the overt threat of
any such proceedings, which would reasonably be expected to have an Adverse
Effect with respect to such party.
"Loans for Temporary or Emergency Purposes" means loans that are
outstanding for not more than 60 days in an aggregate amount not exceeding five
percent of the value of the total assets of the Fund at the time the loans are
borrowed, in conformity with Section 18(g) of the Investment Company Act.
"Master Fund" means the ▇▇▇▇▇▇▇ ▇▇▇▇▇ Large Cap Core Portfolio, which is a
series of the Master Large Cap Series Trust.
"Market Adjustment" has the meaning provided in Section 3.05(e).
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"Market Value" has (i) with respect to a Fixed Income Security, the
meaning provided in Section 3.02(a)(i); (ii) with respect to a Fixed Income
Derivative, the meaning provided in Section 3.02(c)(i); (iii) with respect to an
Equity Security, the meaning provided in Section 3.03(a)(i); and (iv) with
respect to an Equity Option, the meaning provided in Section 3.03(c)(A).
"Maximum Equity Exposure" has the meaning provided in Section 3.05(b).
"Money Market Securities" means securities issued by money market funds
that (i) are registered investment companies under the Investment Company Act
and (ii) comply with all of the criteria set forth in Rule 2a-7 under the
Investment Company Act.
"Moody's" means ▇▇▇▇▇'▇ Investors Service, Inc.
"Multiplier" has the meaning provided in Section 3.05(f).
"NAV" means, with respect to any Class of Shares of the Fund, (a) on the
Transition Date, the net asset value per share of such Class of Shares
established by the Fund for such date and (b) on any date of determination
thereafter the quotient of (i) the excess of (x) the market value of the assets
allocated to that Class of Shares determined as of the close of regular trading
on the NYSE by the Fund in the manner described in the Prospectus with respect
to such Class of Shares over (y) the market value of any liabilities allocated
to and/or associated with such Class of Shares determined as of the close of
regular trading on the NYSE by the Fund in the manner described in the
Prospectus with respect to such Class of Shares divided by (ii) the number of
outstanding shares of that Class of Shares at such time. The assets, income,
gain, loss, expenses and liabilities (other than those expenses and liabilities
relating specifically to a Class of Shares) of the Fund shall be allocated to
each Class of Shares of the Fund on each date of determination on a pro rata
basis based on the NAV of such Class of Shares on the preceding date of
determination.
"Notional Value" has, (i) with respect to a Fixed Income Security, the
meaning provided in Section 3.02(a)(ii); (ii) with respect to a Fixed Income
Future, the meaning provided in Section 3.02(b)(i); (iii) with respect to a
Fixed Income Derivative, the meaning provided in Section 3.02(c)(ii); (iv) with
respect to an Equity Security, the meaning provided in Section 3.03(a)(iii); (v)
with respect to an Equity Future, the meaning provided in Section 3.03(b)(i);
and (vi) with respect to an Equity Option, the meaning provided in Section
3.03(c)(B). For the avoidance of doubt, it is understood that "Notional Value"
shall in all cases be a positive number.
"NYSE" means the New York Stock Exchange.
"Offering Period" means the period during which the shares of the Fund
will be offered for sale to investors as described in the Prospectus relating to
each Class of Shares.
"Permitted Equity Futures" has the meaning provided in Section 3.03(b).
"Permitted Equity Investments" has the meaning provided in Section 3.03.
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"Permitted Equity Options" has the meaning provided in Section 3.03(c).
"Permitted Equity Securities" has the meaning provided in Section 3.03(a).
"Permitted Fixed Income Derivatives" has the meaning provided in Section
3.02(c).
"Permitted Fixed Income Futures" has the meaning provided in Section
3.02(b).
"Permitted Fixed Income Investments" has the meaning provided in Section
3.02.
"Permitted Fixed Income Securities" has the meaning provided in Section
3.02(a).
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, limited liability
company, joint venture, Government Authority or other entity of whatever nature.
"Policy" has the meaning provided in the recitals.
"Portfolio Excess" has the meaning provided in Section 3.05(g).
"Portfolio Excess Adjustment" has the meaning provided in Section 3.05(h).
"Portfolio Requirements" has the meaning provided in Section 3.01.
"Preliminary Prospectus" means the prospectus and statement of additional
information contained in the Trust's Post-Effective Amendment No. 2 to the
Registration Statement under the Securities Act of 1933 and Amendment No. 7 to
the Registration Statement under the Investment Company Act as filed with the
Commission on January 9, 2003.
"Premium Fee" has the meaning provided in Section 2.04.
"Premium Payment Date" has the meaning provided in Section 2.04.
"Prospectus" means for any Class of Shares, the prospectus and statement
of additional information pursuant to which the shares of such Class of Shares
were offered for sale, as the same may be updated and in effect from time to
time in accordance with this Agreement.
"Protective Put" has the meaning provided in Section 3.03(c).
"Purchased Call" has the meaning provided in Section 3.03(c).
"Quoted Rate" means LIBOR (1 month, 3 month and 6 month), U.S. Treasury
Obligations, Prime, Commercial Paper (30, 90, 180 days) and overnight Federal
Funds.
"Registration Statement" has the meaning provided in Section 2.03(a)(v).
"Regulatory Change" means with respect to the Adviser or the Fund, as the
case may be, any change in any law, regulation or rule, or interpretation
thereof, by a Governmental
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Authority with respect to any statute to which such party is subject (including,
as applicable, the Investment Company Act and the Investment Advisers Act) which
has resulted in or would reasonably be expected to result in an Adverse Effect
with respect to such party.
"Regulatory Event" means with respect to the Adviser or the Fund, as the
case may be, any governmental or regulatory action that limits, suspends, or
terminates the rights, privileges or operation of such party which has resulted
in or would reasonably be expected to result in an Adverse Effect.
"Repurchase Obligations" means unleveraged repurchase obligations, with
maturities of not more than 30 days, with respect to any U.S. Government
Security entered into with a depository institution or trust company (acting as
principal) that satisfies the criteria set forth in the definition of Bank
Deposits or entered into with a corporation (acting as principal) incorporated
under the laws of the United States of America or any state thereof whose
obligations are rated at least "P-1" by ▇▇▇▇▇'▇ and at least "A-1+" by S&P, in
the case of short-term obligations or, in the case of long-term obligations, at
least "Aa2" by ▇▇▇▇▇'▇ and at least "AA" by S&P.
"Requirements of Law" means, as to any Person, the charter and by-laws or
other organizational or governing document of such Person, and any law, treaty,
rule, or regulation or determination of an arbitrator or a court or other
Government Authority, in each case applicable to or binding upon such Person or
any of its property or to which such Person or any of its property is subject.
"Risk Model" means the risk model selected by the Adviser, which shall be
either the BARRA Aegis Risk Model or the BARRA Total Risk Model, each as updated
from time to time by BARRA, Inc.
"Risk Reducing Trades" means any transaction the effect of which is to
increase the percentage that represents Gap Risk. For the avoidance of doubt, a
transaction that increases the Gap Risk from 22.0% to 22.5% is an example of a
Risk Reducing Trade.
"Sector" means each of the Sectors set forth in the Sector Classification
System.
"Sector Classification System" means the Global Industry Classification
Standard developed by Standard & Poor's and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Capital
International, as amended from time to time.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Officer" has the meaning provided in Section 12.14.
"Shareholder" has the meaning provided in the recitals.
"Shares" means shares of beneficial interest of any Class of Shares of the
Fund.
"Synthetic Futures" has the meaning provided in Section 3.03(c).
-10-
"S&P" means Standard & Poor's Ratings Services, a division of The
▇▇▇▇▇▇-▇▇▇▇ Companies, Inc.
"Termination Date" means the date of termination of this Agreement as
contemplated by Section 11.01.
"Trade Date" has the meaning provided in Section 3.06(d).
"Transaction Documents" means this Agreement, the Guarantee, the Policy,
the Direction and Undertaking Regarding Remedies, the Indemnification Agreement,
the Investment Management Agreement, the Custodian Agreement, the Independent
Verifier Agreement (from and after its execution and delivery), the Expense
Limitation Agreement and the Prospectus relating to each Class of Shares, as
each may be amended, supplemented or otherwise modified from time to time.
"Transition Date" means the Business Day after the end of the Offering
Period.
"Trigger Event" has the meaning provided in Section 4.01.
"Unclassified Equity Securities" has the meaning provided in Section
3.04(c).
"U.S. Government Securities" means (i) U.S. Treasury obligations, and (ii)
debt obligations of the Federal Home Loan Mortgage Corp., the Federal National
Mortgage Association, and the Government National Mortgage Association.
"Volatility Adjustment" has the meaning provided in Section 3.05(i).
"Volatility of Equity Benchmark" means, at any time, an amount equal to
the product of (i) the square root of 252 and (ii) the standard deviation of the
daily percentage change in the Market Value of the Equity Benchmark computed
using the most recent sixty such percentage changes determined as of the close
of business on the sixty immediately preceding Business Days.
"Volatility of Equity Portfolio" means, at any time, an amount equal to
the product of (i) the square root of 252 and (ii) the standard deviation of the
daily percentage change in the Market Value of the Equity Portfolio (adjusted
for the effect of any daily redemption of Shares) computed using the most recent
sixty such percentage changes determined as of the close of business on the
sixty immediately preceding Business Days.
Section 1.02 Generic Terms. All words used herein shall be construed to be
of such gender or number as the circumstances require. The words "herein,"
"hereby," "hereof" and "hereto," and words of similar import, refer to this
Agreement in its entirety and not to any particular paragraph, clause or other
subdivision, unless otherwise specified, and Section and Exhibit references are
to this Agreement unless otherwise specified.
-11-
ARTICLE II
THE POLICY
Section 2.01 The Policy. The Insurer agrees to issue the Policy, subject
to the conditions set forth herein. The Policy shall (i) be issued on the
Inception Date by the Insurer, and (ii) be substantially in the form of Exhibit
A hereto.
Section 2.02 Procedure for Issuance.
(a) Not later than three Business Days prior to the last day of the
Offering Period the Trust shall deliver to the Insurer a notice specifying the
expected Inception Date. On the Inception Date, the Trust shall deliver to the
Insurer a notice and certification (the "Inception Date Certification") of the
following, in each case as of the close of business on the Business Day
immediately prior to the Inception Date: (i) the NAV for each Class of Shares,
and (ii) the number of issued and outstanding shares of each Class of Shares.
The notice also shall certify that (i) no Trigger Event shall have occurred, and
(ii) each of the representations and warranties made by the Trust in this
Agreement shall be true and correct in all material respects on and as of such
date.
(b) The Inception Date Certification may include a statement that the
number of issued and outstanding shares of each Class of Shares may be adjusted
in the ordinary course of business due to trade corrections in the first week
following the Inception Date. If such a statement is included in the Inception
Date Certification then the Trust shall deliver a notice and certification at
the end of such one-week period specifying the corrected number of issued and
outstanding shares of each class of shares as of the Inception Date. In no event
shall the Inception Date Guarantee Amount be increased from the amount
calculated based on the information specified in the original Inception Date
Certification without the prior written consent of the Insurer.
(c) Subject to the satisfaction of the conditions precedent to the
effectiveness of this Agreement and to the issuance of the Policy, the Insurer
shall issue and deliver the Policy to the Custodian on behalf of the Fund on the
Inception Date.
Section 2.03 Conditions Precedent to Effectiveness.
(a) Article IX of this Agreement shall be effective upon execution and
delivery by the parties hereto. The effectiveness of all other provisions of
this Agreement is subject to the satisfaction of the following conditions:
(i) Each Transaction Document (other than this Agreement, the
Policy, the Prospectus and the Independent Verifier Agreement) shall be
duly authorized, executed and delivered by each of the parties thereto in
form and substance satisfactory to the Insurer. Each Transaction Document
(other than the Policy, the Prospectus and the Independent Verifier
Agreement) shall be in full force and effect and executed counterparts of
each such Transaction Document shall have been delivered to the Insurer.
The Form of Daily Report shall have been agreed by the parties hereto and
shall be in form and substance satisfactory to the Insurer. When a Form of
Daily Report has been so agreed, a copy thereof shall be attached as
Schedule 1 hereto.
-12-
(ii) The Insurer shall have received (A) a certificate of the
Secretary or Assistant Secretary of the Adviser, dated as of the Effective
Date, as to the incumbency and signature of the officers or other
employees of the Adviser authorized to sign this Agreement and the other
Transaction Documents to which the Adviser is a party on behalf of the
Adviser and certifying that attached thereto are true, complete and
correct copies of its constituent documents, and (B) a good standing
certificate from the Delaware Secretary of State regarding the Adviser.
(iii) The Insurer shall have received (A) a certificate of the
Secretary or Assistant Secretary of the Trust, dated as of the Effective
Date, as to the incumbency and signature of the officers or other
employees of the Trust authorized to sign this Agreement and the other
Transaction Documents to which the Trust is a party on behalf of the
Trust, and certifying that attached thereto are true, complete and correct
copies of its resolutions duly adopted by the Board of Trustees of the
Trust authorizing the execution and delivery of this Agreement, and (B) a
copy of the Declaration of Trust certified as of a recent date by the
Secretary of the State of Delaware.
(iv) The Adviser and the Fund shall have received a certificate of
the Secretary or Assistant Secretary of the Insurer, dated as of the
Effective Date, as to the incumbency and signature of the officers or
employees of the Insurer authorized to sign this Agreement, the
Indemnification Agreement and the Policy on behalf of the Insurer.
(v) The Insurer shall have received a certificate of the Secretary
or Assistant Secretary of the Trust, dated as of the Effective Date,
certifying that (A) amendments to the Trust's registration statement on
Form N-1A with respect to each Class of Shares of the Fund (1) have been
prepared by the Trust in conformity with the requirements of the Acts and
the rules and regulations of the Commission thereunder, and (2) have been
filed with the Commission under the Acts, (B) the most recent such
amendment has become effective or has been declared effective by the
Commission, (C) true and complete copies of such registration statement as
amended with respect to the Fund to the Effective Date are attached
thereto (the "Registration Statement"), excluding any exhibits thereto,
(D) the Commission has not issued any order preventing or suspending the
use of any preliminary prospectus relating to any Class of Shares and the
Trust has not received any notice from the Commission pursuant to Section
8(e) of the Investment Company Act with respect to the Registration
Statement, (E) as to information other than the Ambac Information, the
Registration Statement and the Prospectus with respect to each Class of
Shares of the Fund do not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
which they were made, not misleading, and (F) the description in the
Preliminary Prospectus of the manner in which NAV is calculated is
identical to the description thereof in the Prospectus.
(vi) The Insurer shall have received the following legal opinions,
in form and substance satisfactory to the Insurer, dated the Effective
Date: (A) the opinion of Shearman & Sterling, counsel to the Fund; (B) the
opinion of ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, the General Counsel of the Adviser; and (C)
the opinion of ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, special counsel to the Fund.
-13-
(vii) The Adviser shall have received the following legal opinions,
in form and substance satisfactory to the Adviser, dated the Effective
Date: the opinion of ▇▇▇▇▇ ▇▇▇▇▇, Managing Director and General Counsel of
the Insurer.
(viii) The Fund shall have received the following legal opinions, in
form and substance satisfactory to the Adviser, dated the Effective Date:
the opinion of ▇▇▇▇▇ ▇▇▇▇▇, Managing Director and General Counsel of the
Insurer.
(ix) All proceedings, documents, filings, instruments and other
legal matters in connection with the transactions contemplated by this
Agreement and the other Transaction Documents shall be satisfactory in
form and substance to the Insurer, and the Insurer shall have received
such other documents in respect of any aspect or consequence of the
transactions contemplated hereby or thereby as it shall reasonably
request.
(b) The obligation of the Insurer to issue the Policy is subject to the
satisfaction of the following conditions on the Inception Date:
(i) Each of the representations and warranties made by the Adviser
and the Fund in this Agreement shall be true and correct in all material
respects on and as of such date, and the Insurer shall have received a
certification from each of the Adviser and the Fund to such effect as to
the representations and warranties made by it.
(ii) No Trigger Event shall have occurred.
(iii) No statute, rule, regulation or order shall have been enacted,
entered or deemed applicable by any Government Authority which would make
the transactions contemplated by any of the Transaction Documents illegal
or otherwise prevent the consummation thereof.
(iv) No suit, action or other proceeding, investigation, or
injunction or final judgment relating thereto, shall be pending or
threatened before any court or governmental agency in which it is sought
to restrain or prohibit or to obtain damages or other relief in connection
with any of the Transaction Documents.
(v) There shall not have been an Adverse Effect with respect to the
Adviser or the Fund since the date of this Agreement.
(vi) The Adviser shall have (a) retained an Independent Verifier as
contemplated by Section 10.01, (b) prepared a form of Independent
Verification Report covering such matters as the Adviser and the Insurer
have agreed as contemplated by Section 10.02, (c) delivered to the Insurer
a fully executed copy of the Independent Verifier Agreement and (d)
delivered to the Insurer a certificate of an officer of the Adviser
attesting to the due authorization, execution and delivery of the
Independent Verifier Agreement by the Adviser.
(vii) On the Inception Date, the Guarantee Amount shall not exceed
the sum of $500,000,000 (the "Agreed Amount"). If, during the Offering
Period, the Fund expects to receive subscriptions for its Shares which
could result in such Guarantee Amount
-14-
exceeding the Agreed Amount, then the Fund shall consult with the Insurer.
If the Insurer agrees to increase such Agreed Amount in its sole
discretion, this Agreement will be amended accordingly.
Section 2.04 Fees. In consideration of the issuance by the Insurer of the
Policy, the Fund shall pay to the Insurer a fee in an amount equal to 0.625% per
annum of the average daily net asset value of the Fund during each calendar
month in the Guarantee Period (the "Premium Fee"), payable monthly in arrears on
the tenth Business Day of the following calendar month with a final payment on
the Guarantee Maturity Date (each a "Premium Payment Date"). The Premium Fee
payable on each Premium Payment Date will be calculated based on a 365 or 366
day year for the actual number of days elapsed, and will be determined in
accordance with the Fund's month end average net asset policy previously
described to the Insurer (which policy shall not be modified without 30 days
prior written notice to the Insurer). Notwithstanding the foregoing, in the
event that the Fund's assets are required to be invested in a Defeasance
Portfolio, the Premium Fee with respect to those assets comprising the
Defeasance Portfolio shall be 0.15% per annum.
ARTICLE III
MANAGEMENT OF THE FUND
Section 3.01 General. During the Guarantee Period the Fund shall not issue
additional Shares except in connection with the reinvestment of dividends and
distributions by the Fund to its Shareholders in respect of the Shares. During
the Guarantee Period, the assets of the Fund shall be invested and reinvested
only in U.S. Dollar-denominated investments in accordance with the provisions
set forth in this Article III (collectively, the "Portfolio Requirements"). The
Adviser shall fairly and objectively interpret the Portfolio Requirements,
consistent with the intent thereof. The Adviser shall consult with the Insurer
as to any requirement contained herein which, in the Adviser's reasonable
opinion is not clear, including without limitation the permissibility or
classification of any investment (including any types of investment that may be
used in the market during the term of this Agreement that were not widely used
as of the date hereof), the valuation methodology applicable thereto, and the
methodology used to calculate and report to the Insurer compliance with the
Portfolio Requirements. The Adviser shall use reasonable efforts to manage the
Fund such that the Fund Value remains at least equal to the Bond Floor.
Section 3.02 Permitted Fixed Income Investments. The Fixed Income
Component of the Fund shall consist of a portfolio of Permitted Fixed Income
Securities, Permitted Fixed Income Futures, Permitted Fixed Income Derivatives,
and/or Cash (collectively, "Permitted Fixed Income Investments"). A Permitted
Fixed Income Investment held by the Fund is a "Fixed Income Investment"; Fixed
Income Investments are collectively referred to herein as the "Fixed Income
Portfolio." For the avoidance of doubt, any requirement that an investment
satisfy a credit rating criteria shall be applicable at any time and from time
to time and shall not be limited to whether the investment satisfied such credit
rating criteria as of the date of acquisition thereof.
(a) "Permitted Fixed Income Securities" means U.S. Government Securities
and Cash Equivalents; provided, however, that Permitted Fixed Income Securities
shall not
-15-
include any interest-only obligation, any obligation that bears interest at an
inverse floating rate, any obligation the interest rate of which is variable
(unless such interest rate is established by reference to a Quoted Rate plus a
fixed spread, if any, and such interest rate moves proportionally with such
Quoted Rate), any obligation whose repayment is subject to substantial
non-credit related risk, including any security whose rating assigned by S&P
includes the subscript "r" or "t", or any obligation that may be subject to call
or prepayment prior to its maturity. Permitted Fixed Income Securities must have
a predetermined fixed dollar amount of principal due at maturity that cannot
vary or change. With respect to each Permitted Fixed Income Security held by the
Fund (a "Fixed Income Security"):
(i) Market Value of a Fixed Income Security during a Business Day
means its market price as of such time of determination and, at any other
time, the market price as of the close of trading on the NYSE preceding
such time of determination.
(ii) Notional Value of a Fixed Income Security means the Market
Value of such Fixed Income Security.
(b) "Permitted Fixed Income Futures" means U.S. T-Bond and U.S. T-Note
futures contracts traded on the Chicago Board of Trade and U.S. T-▇▇▇▇ futures
contracts traded on the Chicago Mercantile Exchange. With respect to each
Permitted Fixed Income Futures contract owned by the Fund (a "Fixed Income
Future"):
(i) Notional Value of a Fixed Income Future means, at any time, the
product of (x) the applicable trading unit (or multiplier) of such Fixed
Income Futures contract, and (y) market price of such Fixed Income Futures
contract.
(c) "Permitted Fixed Income Derivatives" means Interest Rate Swaps. With
respect to each Permitted Fixed Income Derivative to which the Fund is a party
(a "Fixed Income Derivative"):
(i) Market Value of a Fixed Income Derivative at any time means its
▇▇▇▇-to-market value (at replacement cost) determined in accordance with
the agreement related thereto.
(ii) Notional Value of a Fixed Income Derivative at any time means
the notional amount specified in the agreement related thereto.
Section 3.03 Permitted Equity Investments. The Equity Component of the
Fund shall consist of a portfolio of Permitted Equity Securities; Permitted
Equity Futures; Permitted Equity Options; and Master Fund shares as contemplated
by Section 3.11; and, solely for the purposes contemplated by Section 3.07, U.S.
Government Securities, Cash Equivalents and/or Cash (collectively, "Permitted
Equity Investments"). A Permitted Equity Investment held by the Fund is an
"Equity Investment"; Equity Investments are collectively referred to herein as
the "Equity Portfolio."
(a) "Permitted Equity Securities" means common stocks, American depository
receipts, preferred stocks, exchange-traded funds and equity real estate
investment trusts; provided, however, that Permitted Equity Securities shall not
include any security that is
-16-
not listed on the NYSE or American Stock Exchange or NASDAQ National Market
System; provided, further, however, that if any equity securities owned by the
Fund are delisted, such equity securities shall be sold by the close of business
on the second Business Day following the Business Day on which such equity
securities were delisted. With respect to Permitted Equity Securities held by
the Fund (individually, an "Equity Security" and, in the aggregate, the "Equity
Securities Portfolio"):
(i) Market Value of an Equity Security during a Business Day means
its market price as of such time of determination and, at any other time,
the market price as of the close of trading on the NYSE preceding such
time of determination.
(ii) Market Value of the Equity Securities Portfolio at any time
means the sum of the Market Values of each of the Equity Securities.
(iii) Notional Value of an Equity Security means the Market Value of
such Equity Security.
(iv) Delta of an Equity Security means 1.
(b) "Permitted Equity Futures" means Approved Index futures contracts
traded on the Chicago Mercantile Exchange. With respect to each Permitted Equity
Futures contract owned by the Fund (each such contract, an "Equity Future"):
(i) Notional Value of an Equity Future means, at any time, the
product of (x) the applicable trading unit (or multiplier) of such Equity
Futures contract, and (y) the market price of such Equity Futures
contract.
(ii) Delta of an Equity Future means 1 if long; and -1 if short
(c) "Permitted Equity Options" means U.S. exchange-traded puts and calls
with respect to an Approved Index which are (i) Protective Puts, (ii) Covered
Calls, (iii) Synthetic Futures, or (iv) Purchased Calls. With respect to each of
the following Permitted Equity Options ("Equity Put" or "Equity Call", as
applicable, and, collectively, "Equity Options") held by the Fund:
(A) Market Value of an Equity Option during a Business Day
equals the product of (x) its market price as of such time of
determination, and (y) the multiplier applicable to such Equity
Option. At any other time, the Market Value of an Equity Option
equals the product of (xx) its market price as of the close of
trading on the NYSE preceding such time of determination and (yy)
the multiplier applicable to such Equity Option.
(B) Notional Value of an Equity Option means, at any time, the
product of (x) the multiplier applicable to such Equity Option and
(y) the strike price of such Equity Option.
(C) Delta of an Equity Option means the amount calculated as
the hedge ratio (i.e., the ratio of (i) the dollar amount of change
in the value of an
-17-
option given a change in price of the related underlying security or
index by $1.00, and (ii) $1.00) pursuant to the Black-Scholes option
pricing model.
(i) "Protective Put" means buying a put option with respect to a
long equity position in Permitted Equity Securities or Permitted Equity
Futures. The aggregate of the Notional Values of all Protective Puts must
at all times be less than or equal to the sum of (x) Market Value of the
Equity Securities Portfolio and (y) aggregate Notional Value of long
Equity Futures.
(ii) "Covered Call" means selling a call option with respect to a
long equity position in Permitted Equity Securities or Permitted Equity
Futures. The aggregate Notional Values of all Covered Calls must at all
times be less than or equal to the sum of (x) Market Value of the Equity
Securities Portfolio and (y) aggregate Notional Value of long Equity
Futures.
(iii) "Synthetic Futures" means (x) selling a synthetic futures
contract by selling a call option and buying a put option, or (y) buying a
synthetic futures contract by buying a call option and selling a put
option; provided that each such pair of contracts must be in respect of
the same underlying Approved Index, have the same strike price, expiration
date, and exercise style, and be on otherwise identical terms.
(iv) "Purchased Call" means buying a call option in lieu of a long
equity position.
Section 3.04 Additional Portfolio Requirements.
(a) Single Issuer Limitation on Equity Securities. The aggregate Market
Value of all Equity Securities of a single issuer shall not exceed 6.5% of the
Market Value of the Equity Securities Portfolio (it being understood that a
breach of this Section 3.04(a) that arises solely from the Fund's investment in
Master Fund shares and is included in the Portfolio Excess Adjustment shall not
constitute a Trigger Event). For the avoidance of doubt, nothing herein shall
diminish the Fund's obligation to be in compliance with the Investment Company
Act and other applicable laws and, accordingly, the Fund may so increase the
limit only to the extent such an increase would not cause the Fund to fail to be
in compliance with the Investment Company Act and applicable regulations
thereunder.
(b) Cash Equivalents. The aggregate Market Value of Cash Equivalents shall
not exceed 20% of the Fund Value; provided, however, that such 20% limitation
shall not apply during the six months immediately prior to the Guarantee
Maturity Date as and to the extent it is not possible to purchase U.S.
Government Securities due to the limited time remaining to the Guarantee
Maturity Date. For the avoidance of doubt, the preceding sentence shall not in
any way affect the obligation to eliminate Cash Equivalents from the Defeasance
Portfolio. The aggregate Market Value of Cash Equivalents (other than fully
collateralized Repurchase Obligations) attributable to any single depositary
institution, issuer or counterparty shall not exceed 3% of the Fund Value. The
aggregate Market Value of fully collateralized Repurchase Obligations
attributable to any single counterparty shall not exceed 10% of the Fund Value.
For purposes hereof, a Repurchase Obligation shall be fully collateralized if
(i) the securities
-18-
collateralizing such Repurchase Obligation consist solely of U.S. Treasury
obligations, (ii) the value of the securities collateralizing such Repurchase
Obligation (reduced by the transaction costs (including loss of interest) that
the Fund could reasonably expect to incur if the seller defaults) is at least
equal to the resale price provided in the agreement evidencing such Repurchase
Obligation, and (iii) the provisions of Rule 5b-3(c)(1) under the Investment
Company Act are complied with.
(c) Equity Securities Portfolio Sector Diversification.
(i) The weighting of each Sector within the Equity Securities
Portfolio shall be a percentage that is (A) at least equal to the
Benchmark Sector Weight minus 15% thereof, and (B) not greater than the
Benchmark Sector Weight plus 15% thereof (it being understood that a
breach of this Section 3.04(c)(i) that arises solely from the Fund's
investment in Master Fund shares and is included in the Portfolio Excess
Adjustment shall not constitute a Trigger Event).
(ii) The Market Value of Equity Securities (other than
exchange-traded funds) that are not classified by the Sector
Classification System or the Adviser shall not in the aggregate exceed 2%
of the Market Value of the Equity Securities Portfolio. The Market Value
of Equity Securities that are not classified by the Sector Classification
System or the Adviser and all exchange traded funds (collectively,
"Unclassified Equity Securities"), other than exchange-traded funds based
solely on the Equity Benchmark, shall not in the aggregate exceed 7% of
the Market Value of the Equity Securities Portfolio. If during the term of
this Agreement, exchange-traded funds are developed that are
Sector-specific rather than based on broad market indices, each such
Sector-specific exchange-traded fund shall be classified as belonging to
the Sector on which it is based.
(iii) If the Adviser classifies an Equity Security that is not
classified by the Sector Classification System, the Adviser shall
determine the applicable Sector reasonably, in good faith and in
accordance with industry standards following prior notice to and, if
requested by the Insurer, consultation with the Insurer. The Adviser may
only classify an Equity Security if it is not classified by the Sector
Classification System.
(iv) Exchange-traded funds based solely on the Equity Benchmark
shall not be required to be assigned to a Sector and shall be disregarded
for purposes of the tests required by Section 3.04(c).
(d) Equity Securities Portfolio Tracking Error. The expected annualized
tracking error of the Equity Securities Portfolio as compared to the Equity
Benchmark, as measured by the Risk Model, shall not exceed ten percent (10.00%)
(it being understood that a breach of this Section 3.04(d) that arises solely
from the Fund's investment in Master Fund shares and is included in the
Portfolio Excess Adjustment shall not constitute a Trigger Event). Unclassified
Equity Securities shall be disregarded for purposes of the tests required by
this Section 3.04(d).
-19-
(e) Equity Securities Portfolio Beta. The expected beta of the Equity
Securities Portfolio as compared to the Equity Benchmark, as measured by the
Risk Model, shall equal at least .75 and shall not exceed 1.25 (it being
understood that a breach of this Section 3.04(e) that arises solely from the
Fund's investment in Master Fund shares and is included in the Portfolio Excess
Adjustment shall not constitute a Trigger Event). Unclassified Equity Securities
shall be disregarded for purposes of the tests required by this Section 3.04(e).
(f) Fixed Income Weighted Average Duration. The Fixed Income Weighted
Average Duration at any time shall not be less than 30 days prior to the
Guarantee Maturity Date and shall not be greater than 30 days following the
Guarantee Maturity Date; provided, however, that (i) at no time shall the Fixed
Income Portfolio include any instrument that matures later than the Guarantee
Maturity Date plus two years, and (ii) within the twelve months prior to the
Guarantee Maturity Date, (x) the Fixed Income Weighted Average Duration shall
not exceed the period remaining until the Guarantee Maturity Date and (y) the
Fixed Income Portfolio shall not include any instrument that matures after the
Guarantee Maturity Date.
(g) Aggregate Notional Value of Equity Futures and Equity Options. The
following amount shall not exceed 43% of the Market Value of the Equity
Securities Portfolio: (i) the sum of (x) the aggregate Notional Value of all
long Equity Futures and all long Synthetic Futures plus (y) the aggregate
Notional Value of all long Equity Calls, minus (ii) the sum of (a) the aggregate
Notional Value of all short Equity Futures and all short Synthetic Futures, plus
(b) the aggregate Notional Value of all short Equity Calls, plus (c) the
aggregate Notional Value of all Protective Puts.
(h) Net Futures Exposure and Net Short Calls. The sum of (x) the Net Short
Equity Futures Position and (y) the sum of the Notional Values of all Covered
Calls shall not exceed 25% of the Market Value of the Equity Securities
Portfolio. For this purpose, Net Short Equity Futures Position is either (i)
zero if the sum of the products of (x) Notional Value and (y) Delta for each
Equity Future and Synthetic Future is a positive number, or (ii) if such sum is
a negative number, the absolute value of such negative number.
(i) Maximum Equity Exposure; No Leverage. The product of the Notional
Value and the Delta for each Equity Investment shall not in the aggregate exceed
the Fund Value.
Section 3.05 Allocation Between Fixed Income Portfolio and Equity
Portfolio. Subject to Article IV, the Fund's assets shall be allocated between a
Fixed Income Portfolio and an Equity Portfolio by the Adviser. The Adviser shall
monitor such allocation and shall maintain Gap Risk of not less than the sum of
22.5% plus the adjustments thereto referred to in the definition of Multiplier
below (such sum, the "Applicable Percentage"). For purposes of the formulas set
forth below, the following values apply at any applicable time:
FV(t) = the Fund Value as of such time(t)
bf(t) = the Bond Floor as of such time(t)
AE(t) = the Aggregate Equity Exposure as of such time(t)
M(t) = the Multiplier as of such time(t)
-20-
(a) "Gap Risk" shall be expressed as a percentage and as of any time
equals:
FV(t)-bf(t)
-----------
AE(t)
(b) "Maximum Equity Exposure" shall be expressed as a percentage and as of
any time equals:
[FV(t)-bf(t)]
M x [-----------]
[ FV(t) ]
; provided that the Maximum Equity Exposure shall not exceed 100% and shall not
be less than 0% of the Fund Value.
(c) "Bond Floor" means, as of any time of determination, an amount equal
to the sum of (1) the product of (x) the Guarantee Amount and (y) the offered
price (expressed as a percentage of par) of the U.S. Treasury zero coupon bonds
that mature most nearly prior to the Guarantee Maturity Date, and (2) the
product of (x) the Expense Amount, and (y) the interpolated price (expressed as
a percentage of par) derived from the offered prices of the U.S. Treasury zero
coupon bonds that mature most nearly prior to and following the date that is
equidistant between the date of determination and the Guarantee Maturity Date,
rounded to the date nearer to the date of determination in the case of an odd
number of days; provided, however, that after the maturity of the U.S. Treasury
zero coupon bond that matures most nearly prior to the Guarantee Maturity Date,
the applicable percentage of par is 100%.
(d) For purposes hereof, the term "Expense Amount" means the sum of (i)
the sum of the following products with respect to each Class of Shares
outstanding (determined in each case as of the time of determination): (A) the
number of Shares of such Class outstanding, (B) the Guarantee per Share for such
Class of Shares, (C) 1.05% with respect to the Class A Shares, 2.05% with
respect to the Class B Shares and the Class C Shares, and 1.30% with respect to
the Class D Shares, and (D) the time remaining to the Guarantee Maturity Date,
expressed as years and fractions thereof; and (ii) the maximum amount of fees
and expenses not subject to the Expense Limitation Agreement that the Fund would
owe if the Fund's assets were required to be invested in the Defeasance
Portfolio at the time of determination (excluding contingent expenses, but
including any other expenses that the Fund will be obligated to pay on or before
the Guarantee Maturity Date).
(e) "Market Adjustment" means, if the S&P 500 or the Equity Benchmark
declines 10% or more on any Business Day from the immediately preceding Business
Day, 10.83%. The Market Adjustment shall apply on any such Business Day and each
Business Day thereafter until there have been ten (10) consecutive Business Days
on which neither the S&P 500 nor the Equity Benchmark shall have declined by 4%
or more on any Business Day.
(f) "Multiplier" means 1 divided by the sum of (i) 22.5%, (ii) the
Volatility Adjustment, (iii) the Portfolio Excess Adjustment, and (iv) the
Market Adjustment. The following examples are provided for the avoidance of
doubt: if the Volatility Adjustment, the
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Portfolio Excess Adjustment and the Market Adjustment are zero, the Multiplier
is 4 4/9; if the Volatility Adjustment is 1.00%, the Portfolio Excess Adjustment
is 1.50% and the Market Adjustment is zero, the Multiplier is 4.
(g) "Portfolio Excess" means the sum of (i) to the extent that the
aggregate Market Value of all Equity Securities of a single issuer exceeds the
maximum percentage permitted by Section 3.04(a) the sum of all such excesses
with respect to all such issuers; (ii) to the extent the weighting of any
Sector(s) with the Equity Securities Portfolio exceeds the maximum percentage
permitted by Section 3.04(c), one-half of the sum of all such excesses; (iii) to
the extent the annualized tracking error of the Equity Securities Portfolio as
compared to the Equity Benchmark exceeds the maximum percentage permitted by
Section 3.04(d), such excess; and (iv) to the extent the beta of the Equity
Section Portfolio as compared to the Equity Benchmark is outside the range
permitted by Section 3.04(e), 1% for each .01 by which it is outside such
permitted range (for example, if beta is 1.30, the amount for this clause (iv)
is 5%).
(h) "Portfolio Excess Adjustment" means the excess of (A) the Portfolio
Excess plus the product of (x) 22.5% and (y) 1 minus the Portfolio Excess; over
(B) 22.5%.
(i) "Volatility Adjustment" means the excess of the Volatility of the
Equity Portfolio over the Volatility of the Equity Benchmark, if any. For
example, if the volatility of the Equity Portfolio is 27% and the Volatility of
the Equity Benchmark is 26%, then the Volatility Adjustment is 1%.
Section 3.06 Reports.
(a) The Adviser shall provide the Daily Report to the Insurer by 9:30 a.m.
(New York City time) on the next Business Day. Each Daily Report shall reflect
the assets of the Fund as of the close of business on the Business Day in
respect of which such Daily Report is issued.
(b) The Adviser shall provide notice to the Insurer of the failure to
maintain Gap Risk of not less than the Applicable Percentage (a "Notice of
Violation") and shall provide Notice to the Insurer of each cure of any such
failure (a "Notice of Cure"). Such notices shall be sent by the Adviser to the
Insurer as promptly as practicable, and shall be used by the Insurer to
determine whether the Adviser has complied with applicable cure periods. The
Adviser shall be responsible for establishing, to the reasonable satisfaction of
the Insurer, that a violation has been cured.
(c) If the Adviser is unable to calculate Gap Risk, then the Adviser shall
notify the Insurer and shall not enter into trades other than Risk Reducing
Trades until the Adviser is able to calculate Gap Risk. The Adviser shall notify
the Insurer when the inability to calculate Gap Risk ends.
(d) The Adviser shall cause the Fund Accounting Agent and/or the Custodian
to provide to the Insurer a report or reports in form satisfactory to the
Insurer in the Insurer's sole discretion setting forth (i) the assets of the
Fund as of the close of each Business Day (such Business Day, a "Trade Date")
either (x) two Business Days following the Trade Date, together with a list of
the Fund's trades during the Business Day following the Trade Date, or (y) one
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Business Day following the Trade Date and (ii) the prices of such assets. Unless
otherwise agreed by the Insurer, all such pricing information shall be identical
to the pricing information used to calculate the NAV.
Section 3.07 Cash. For the avoidance of doubt, the parties recognize and
intend that compliance with the Portfolio Requirements may require that U.S.
Government Securities, Cash Equivalents and/or Cash, be present in the Equity
Portfolio. U.S. Government Securities, Cash Equivalents and/or Cash present in
the Equity Portfolio shall not be included in the Fixed Income Portfolio. Fixed
Income Investments present in the Equity Portfolio shall not be included in the
calculation of Fixed Income Weighed Average Duration set forth in Section
3.04(f). No Fixed Income Investment present in the Equity Portfolio shall mature
later than the Guarantee Maturity Date plus two years, and, within the twelve
months prior to the Guarantee Maturity Date, no Fixed Income Investment present
in the Equity Portfolio shall mature after the Guaranty Maturity Date.
Section 3.08 Intent. The economic intent of the Portfolio Requirements is
to limit the losses that the Fund would experience in the event of a sudden
decline in the value of the Equity Portfolio in the amount of the Applicable
Percentage or more. The Fund will not use leverage (excepting from the scope of
the term "leverage", Loans for Temporary or Emergency Purposes). To the extent
that the instruments which the Fund is permitted to invest in have implicit,
embedded or synthetic leverage, the Portfolio Requirements are intended to
prevent the Adviser from using such implicit, embedded or synthetic leverage to
materially increase the loss that the Fund would experience in the event of such
a decline, compared to a fully invested portfolio that did not include such
investments.
Section 3.09 Article III Computations. All computations under this Article
III shall be made as of the close of regular trading on the NYSE on that
Business Day in accordance with the Fund's usual procedures and in compliance
with the Investment Company Act. In determining the Market Value of any
investment, the applicable market price per unit shall be multiplied by the
number of units held by the Fund. If the Risk Model is unavailable during any
period requirements based on the application thereof shall be suspended during
such period. For the avoidance of doubt, the Daily Report shall be computed as
of the close of regular trading on the NYSE on the Business Day to which such
Daily Report corresponds.
Section 3.10 Transition Period. Notwithstanding any other provision of
this Agreement, during the first seven Business Days of the Guarantee Period,
Sections 3.04(b) and 3.04(f) shall not apply.
Section 3.11 Master Fund Shares. (a) The Fund may invest all or a portion
of the Equity Portfolio in Master Fund shares if (i) such investment does not
violate the Investment Company Act (including Section 12(d)(1)(G) thereof) or
any other Requirement of Law applicable to the Trust, the Fund, the Master Fund,
or the Adviser; (ii) the Portfolio Requirements are met on a look through basis,
as if the Fund's assets and liabilities were a pro rata portion of the assets
and liabilities of the Master Fund; and (iii) the Fund shall have provided to
the Insurer evidence satisfactory to the Insurer that an enforceable agreement
exists between the Master Fund and the Fund pursuant to which the Master Fund
has undertaken not to make a distribution in kind to the Fund, and the Insurer
shall be third party beneficiaries of such
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agreement. It shall not constitute a violation of this Article III if assets of
the Master Fund include Cash, Cash Equivalents, U.S. Government Securities,
Money Market Securities and, if they would comply with the proviso in Section
3.04(f), Cash Equivalents; provided, however, that such investments shall be
included in the calculation of the Equity Portfolio and shall not be included in
the calculation of the Fixed Income Portfolio.
(b) For the avoidance of doubt, any of the following activities by the
Master Fund would constitute a breach of the Portfolio Requirements: the use of
leverage in violation of Section 3.04(i) and/or Section 3.08; investment in
other than U.S. Dollar-denominated investments in violation of Section 3.01;
investment in common shares that are not listed on the NYSE, American Stock
Exchange or NASDAQ National Market System; investment in options and/or futures
other than as contemplated by Sections 3.03.(b), 3.03(c), 3.04(g), 3.04(h); and
investment in fixed income investments that are not consistent with the
requirements of Section 3.07. The foregoing list is not intended to be
comprehensive.
ARTICLE IV
TRIGGER EVENTS
Section 4.01 Trigger Events. (a) The following events shall constitute
Trigger Events hereunder:
(i) Any failure to maintain Gap Risk of not less than the Applicable
Percentage, unless the Adviser notifies the Insurer upon becoming aware of
such failure and is using best efforts to cure such failure (to the
reasonable satisfaction of the Insurer) and such failure is cured by the
end of the following Business Day;
(ii) Any failure to provide a Daily Report to the Insurer within two
hours following notice by the Insurer to the Adviser of the Insurer's
non-receipt thereof, unless the Adviser is using best efforts to cure such
failure (as determined by the Insurer in good faith) and such failure is
cured by the end of such Business Day;
(iii) Any violation of Article III that is not expressly provided
for in clause (i) or (ii) above unless cured by the end of the third
Business Day following the Business Day on which such violation occurred
(other than a breach of Sections 3.04(a), (c)(i), (d), or (e) if such
breach arises solely from the Fund's investment in Master Fund shares and
such breach is included in the Portfolio Excess Adjustment);
(iv) Fund Value is less than or equal to at any time 101% of the
Bond Floor;
(v) The Fund shall fail to pay the Premium Fee as provided in
Section 2.04 and such failure shall continue unremedied for a period of
two Business Days following notice by the Insurer to the Fund and to the
Adviser;
(vi) Any representation or warranty made by the Adviser or the Trust
on behalf of the Fund herein shall have been incorrect or misleading in
any material respect when made;
-24-
(vii) The Adviser or the Trust on behalf of the Fund shall fail to
perform any obligation under this Agreement or the Transaction Documents
that is not expressly provided for in clause (i), (ii), (iii) or (v)
above, which failure could reasonably be expected to have an Adverse
Effect and such violation, if capable of being remedied, shall continue
unremedied for a period of 30 days after notice shall have been given by
the Insurer to such party requiring that such default be cured;
(viii) Either ▇▇▇▇▇'▇ or S&P suspends or withdraws the short- or
long-term rating of the Adviser or, if the Adviser is not rated, its
parent company, or downgrades the senior unsecured rating of the Adviser
or, if the Adviser is not rated, its parent company, to or below Baa3 or
BBB-; provided, however, that if ▇▇▇▇▇'▇ or S&P revises its rating
categories or if a successor rating agency is designated under the
following proviso, the Insurer shall determine in good faith the
equivalent rating under the revised or successor system and shall notify
the Adviser and the Fund of its determination; and provided, further,
however that if ▇▇▇▇▇'▇ or S&P ceases its rating operations, the Insurer
may, by notice to the Adviser and the Fund, replace such rating agency
that maintains a rating of senior unsecured debt of the Adviser or, if the
Adviser is not rated, its parent company, or elect to have only one rating
agency specified herein;
(ix) The occurrence of any of the following: (i) except as otherwise
permitted by Section 8.01 hereof, the Adviser takes any action to
authorize or effect its resignation or takes or fails to take any action
the effect of which is more likely than not to result in the resignation
or removal of the Adviser; (ii) a Regulatory Event, Litigation Event or
any other event, if it is more likely than not that such event will result
in the resignation or removal of the Adviser, as reasonably determined by
the Insurer after consultation with the Adviser; (iii) an Act of
Insolvency occurs with respect to the Adviser; or (iv) any "assignment" of
the Investment Management Agreement (within the meaning of the Investment
Company Act), unless the assignee or, if the assignee is not rated, its
parent company, is rated at least Baa3 by ▇▇▇▇▇'▇ and BBB- by S&P;
(x) Notice of termination of the Custodian Agreement is given by the
Fund or the Custodian, and the Fund is unable to engage a successor
Custodian that agrees to be bound by the Direction and Undertaking
Regarding Remedies not less than five (5) Business Days prior to the
effective date of any such termination; or
(xi) Notice of termination of the Investment Management Agreement is
given by the Fund or the Adviser unless such termination is given by the
Adviser in connection with an assignment of the Investment Management
Agreement in which the assignee or, if the assignee is not rated, its
parent company, is rated at least Baa3 by ▇▇▇▇▇'▇ and BBB- by S&P.
(b) If an event has occurred and is continuing, which, if not cured or
waived would give rise to a Trigger Event, then the Adviser may only enter into
Risk Reducing Trades and shall consult with the Insurer and provide to the
Insurer a description of the manner in which the Adviser intends to cure such
event, the Adviser's assessment of the likelihood of success, the time the
Adviser expects to elapse before such event is cured, and such other information
as the Insurer may request.
-25-
(c) If a Trigger Event occurs and is continuing then, at the election of
the Insurer, the Insurer shall have the right to direct the Custodian to invest
the Fund's assets in the Defeasance Portfolio pursuant to the Direction and
Undertaking Regarding Remedies. The Insurer shall notify the Adviser of the
Insurer's exercise of remedies pursuant to this Section 4.01(c).
(d) In the event of an occurrence on any Business Day of a Trigger Event
under Section 4.01(a)(i) with respect to which the Adviser has failed to give
the notice contemplated thereby, then, subject to the Daily Report confirming
that the Gap Risk is less than 20%, the Insurer shall direct the Custodian to
invest the Fund's assets in the Defeasance Portfolio pursuant to the Direction
and Undertaking Regarding Remedies.
Section 4.02 Defeasance Portfolio. If the Insurer exercises remedies
provided by Section 4.01(c) or Section 4.01(d), the Insurer shall instruct the
Custodian to invest the assets of the Fund in a Defeasance Portfolio.
"Defeasance Portfolio" means an earmarked portfolio of investments consisting of
(i) zero coupon U.S. Treasury bonds having a par amount equal to the Guarantee
Amount and that mature on a date as close to the Guarantee Maturity Date as
practicable but in any event no later than the Guarantee Maturity Date, and,
following the maturity of such zero coupon U.S. Treasury bonds, Cash, (ii) a
portfolio of zero coupon U.S. Treasury bonds that mature on various dates which
correspond as closely as reasonably practicable to the expected payment dates of
the expected fees and expenses of the Fund, and (iii) Cash.
ARTICLE V
LIMITATION OF LIABILITY
Section 5.01 Limitation of Liability of Adviser. Solely if there is a
breach of this Agreement arising out of the gross negligence or willful
misconduct of the Adviser, the Insurer shall have all of the rights and remedies
available to it against the Adviser at law and in equity. The Insurer shall have
no claim against the Adviser hereunder for any breach hereof that did not arise
out of the willful misconduct of the Adviser. For the avoidance of doubt,
"willful misconduct" shall not be limited to actions but shall also include
failures to act. Nothing in this Section 5.01 shall limit the Insurer's rights
and remedies with respect to a Trigger Event as expressly set forth in Section
4.01(c), 4.01(d) and 4.02.
Section 5.02 Limitations as to the Trust on behalf of the Fund. The
Insurer shall have no claim against the Trust on behalf of the Fund hereunder
for any breach hereof that did not arise out of (i) the failure of the Fund to
pay the Premium Fee in accordance with Section 2.04, or (ii) the gross
negligence or willful misconduct of the Trust on behalf of the Fund. The sole
remedies that the Insurer shall have against the Trust on behalf of the Fund in
the event of such a breach shall be (x) to pursue a claim against the Trust on
behalf of the Fund for failure to pay the Premium Fee, if the breach hereof is
the Fund's failure to pay the Premium Fee in accordance with Section 2.04, and
(y) to exercise the Insurer's rights and remedies with respect to a Trigger
Event as expressly set forth in Section 4.01(c), 4.01(d) and 4.02. In no event
shall the Insurer set off against, decline to pay, or otherwise withhold amounts
payable under the Policy. Nothing in this Section 5.02 shall be construed to
limit the Insurer's rights under Article IV.
-26-
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.01 Representations and Warranties of the Adviser. To induce the
Insurer to enter into this Agreement and to issue the Policy, the Adviser hereby
represents and warrants to the Insurer as follows, on and as of the Effective
Date and the Inception Date:
(a) The Adviser (i) is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware, (ii) has
the power and authority to own its assets and to transact the business in which
it is engaged, (iii) is duly qualified to do business and is in good standing
under the laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification except where the failure
to so qualify would not have an Adverse Effect and (iv) is in compliance with
all Requirements of Law except where non-compliance would not have an Adverse
Effect.
(b) The Adviser has the power and authority to execute, deliver and
perform its obligations under the Transaction Documents to which it is a party
and has taken all necessary action required by applicable Requirements of Law to
authorize the execution, delivery and performance of the Transaction Documents
to which it is a party. Except as have been obtained or as are not material to
the enforceability or validity of the Transaction Documents, no consent or
authorization of, filing with, or other act by or in respect of, any Government
Authority or any other Person is required in connection with the execution,
delivery, performance, validity or enforceability by or against the Adviser of
the Transaction Documents to which it is a party. This Agreement has been, and
each other Transaction Document to which the Adviser is a party will be, duly
executed and delivered on behalf of the Adviser. This Agreement constitutes, and
each other Transaction Document to which the Adviser is a party, when executed
and delivered, will constitute, a legal, valid and binding obligation of the
Adviser enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance by the Adviser of its
obligations under the Transaction Documents to which the Adviser is a party will
not violate any Requirement of Law or Contractual Obligation of the Adviser and
will not result in, or require, the creation or imposition of any Lien on any of
its property, assets or revenues except where such violation or Lien would not
reasonably be expected to have an Adverse Effect. The Adviser is not in
violation of any Contractual Obligation, except where such violation would not
reasonably be expected to have an Adverse Effect.
(d) No litigation, proceeding or investigation of or before any arbitrator
or Governmental Authority is pending or, to the Adviser's knowledge, threatened
(i) asserting the invalidity or unenforceability of any of the Transaction
Documents, (ii) seeking to prevent the consummation of any of the transactions
contemplated by the Transaction Documents or (iii) that would reasonably be
expected to have an Adverse Effect.
-27-
(e) The Adviser is duly registered with the Commission as an investment
adviser under the Investment Advisers Act; and to the best of the Adviser's
knowledge there does not exist any proceeding or any facts or circumstances the
existence of which could adversely affect the registration of the Adviser with
the Commission; the Adviser is not prohibited by any provision of the Investment
Advisers Act or the Investment Company Act, or the respective rules and
regulations thereunder, from acting as an investment adviser of the Fund as
contemplated hereunder.
(f) There has been no event, condition, action or omission with respect to
the asset management segment of the Adviser's parent company since the financial
statements of the Adviser's parent company for the fiscal year ended December
31, 2001 which were furnished to the Insurer which would reasonably be expected
to have an Adverse Effect, other than such events, conditions, actions or
omissions with respect to the asset management segment of the Adviser's parent
company which have been specifically disclosed in writing to the Insurer.
(g) The most recent balance sheets of the Adviser's parent company,
commencing with the fiscal year ended December 31, 2001, and the related
statements of earnings of the Adviser's parent company, have been prepared in
accordance with GAAP and present fairly in all material respects the financial
condition of the asset management segment of the Adviser's parent company as at
the date thereof and the results of its operations for the period then ended
except for omissions that would not have an Adverse Effect.
(h) To the best of the Adviser's knowledge, all factual information
prepared and furnished by or on behalf of the Adviser to the Insurer (whether
prepared by the Adviser or any other Person) for purposes of or in connection
with this Agreement, any Transaction Document or any transaction contemplated
hereby or thereby is true and accurate in all material respects on the date as
of which such information is dated or certified and such information taken as a
whole does not omit to state any material fact necessary to make such
information in the context in which it is furnished not misleading.
(i) To the best of the Adviser's knowledge, no statute, rule, regulation
or order has been enacted or deemed applicable by any Government Authority which
would make the transactions contemplated by the Transaction Documents illegal or
otherwise prevent the consummation thereof.
Section 6.02 Representations and Warranties of the Trust for itself and
the Fund. The Trust on behalf of itself and the Fund hereby represents and
warrants to the Insurer as follows, on and as of the Effective Date and the
Inception Date:
(a) The Trust (i) is a statutory trust duly organized, validly existing
and in good standing under the laws of the State of Delaware; (ii) has the power
and authority to own its assets and to transact the business in which it is
engaged; (iii) is duly qualified to do business and is in good standing under
the laws of each jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification except where the failure to
so qualify would not have an Adverse Effect; and (iv) is in compliance with all
Requirements of Law except where non-compliance would not have an Adverse
Effect. The Fund has been duly established as a series of the Trust.
-28-
(b) The Trust has the power and authority to execute, deliver and perform
on behalf of the Fund the Transaction Documents to which it is a party and has
taken all necessary action required by applicable Requirements of Law to
authorize the execution, delivery and performance of the Transaction Documents
to which it is a party. No consent or authorization of, filing with, or other
act by or in respect of, any Government Authority is required in connection with
the execution, delivery, performance, validity or enforceability by or against
the Fund of the Transaction Documents to which it is a party, other than (i) the
filing under the Acts of the Registration Statement and the Prospectus, and (ii)
filings in accordance with applicable Blue Sky laws. No consent or authorization
of, filing with, or other act by or in respect of, any other Person is required
in connection with the validity or enforceability by or against the Fund of the
Transaction Documents to which it is a party. The Transaction Documents to which
the Fund is a party have been duly executed and delivered on behalf of the Fund
and each such agreement constitutes a legal, valid and binding obligation of the
Trust on behalf of the Fund enforceable against the Fund in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
(c) The execution, delivery and performance by the Trust on behalf of the
Fund of the Transaction Documents to which it is a party will not violate any
Requirement of Law or Contractual Obligation of the Fund and will not result in,
or require, the creation or imposition of any Lien on any of its property,
assets or revenues except where such violation or Lien would not have an Adverse
Effect.
(d) No litigation, proceeding or investigation of or before any arbitrator
or Governmental Authority is pending or, to the Fund's knowledge, threatened by
or against the Fund or against any of its properties or revenues (i) asserting
the invalidity or unenforceability of this Agreement, (ii) seeking to prevent
the consummation of any of the transactions contemplated by the Transaction
Documents to which it is a party or (iii) seeking any determination or ruling
that could reasonably be expected to have an Adverse Effect.
(e) The Fund has been operated in compliance in all material respects with
the Investment Company Act and the rules and regulations thereunder except where
non-compliance would not have an Adverse Effect.
(f) The Trust is duly registered with the Commission as an open-end,
management investment company under the Investment Company Act. The Fund is a
"diversified" fund within the meaning of the Investment Company Act.
(g) To the best of the Trust's knowledge, all factual information prepared
and furnished by or on behalf of the Fund to the Insurer (whether prepared by
the Fund or any other Person) for purposes of or in connection with this
Agreement, any Transaction Document or any transaction contemplated hereby or
thereby is true and accurate in all material respects on the date as of which
such information is dated or certified and such information taken as a whole
does not omit to state any material fact necessary to make such information in
the context in which it is furnished not misleading.
-29-
Section 6.03 Representations and Warranties of the Insurer. The Insurer
hereby represents and warrants to the Adviser and the Fund as follows, on and as
of the Effective Date and the Inception Date:
(a) The Insurer is a stock insurance company duly incorporated and validly
existing under the laws of Wisconsin.
(b) The Insurer has the corporate power and authority to execute and
deliver this Agreement, the Indemnification Agreement and the Policy and to
perform all of its obligations hereunder and thereunder.
(c) The execution, delivery and performance by the Insurer of this
Agreement, the Indemnification Agreement, and the Policy have been duly and
validly authorized by all necessary corporate action and proceedings, and any
licenses, orders, consents or other authorizations or approvals of any
governmental boards or bodies legally required for the enforceability of the
Agreement, the Indemnification Agreement and the Policy have been obtained and
any actions or proceedings not taken or any consents, approvals or filings not
obtained or made are not material to the enforceability against the Insurer of
this Agreement, the Indemnification Agreement or the Policy (assuming that the
conditions precedent to the issuance of the Policy set forth herein are
satisfied).
(d) Each of this Agreement and the Indemnification Agreement has been duly
executed and delivered by the Insurer and constitutes the legal, valid and
binding obligation of the Insurer, enforceable against the Insurer in accordance
with its terms (subject to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and subject, as
to enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)). When the
Policy is executed and delivered by the Insurer in accordance with this
Agreement, the Policy will constitute the legal, valid and binding obligation of
the Insurer, enforceable against the Insurer in accordance with its terms
(subject to applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting creditors' rights generally and subject, as to
enforceability, to equitable principles of general application (regardless of
whether enforcement is sought in a proceeding in equity or at law)).
(e) There are no actions, suits, proceedings or investigations pending or,
to the best of the Insurer's knowledge, threatened against the Insurer at law or
in equity or before or by any court, governmental agency, board or commission or
any arbitrator which could reasonably be expected to adversely affect the
enforceability of this Agreement, the Indemnification Agreement or the Policy.
-30-
ARTICLE VII
COVENANTS
Section 7.01 Covenants of the Adviser. The Adviser hereby covenants and
agrees that through the Guarantee Maturity Date or the earlier termination of
this Agreement pursuant to Section 11.01:
(a) The Adviser shall not amend, supplement, modify, terminate or agree to
any waiver with respect to any of the Transaction Documents (other than the
Prospectus), without the prior written consent of the Insurer, which consent
shall not be unreasonably withheld or delayed; provided, however, that the
Adviser may amend the Investment Management Agreement to add additional funds of
the Trust without notice to or consent of the Insurer; and provided, further,
however, that the Adviser may amend the Investment Management Agreement in any
other manner that could not adversely affect the Fund following prior notice to
the Insurer but without the requirement that the Insurer's consent be obtained.
(b) Other than in connection with the reinvestment of dividends or other
distributions, the Adviser shall not allow the offering or sale of the Shares of
the Fund during the Guarantee Period;
(c) The Adviser shall notify the Insurer promptly (i) of any request by
the Commission for an amendment to the Registration Statement with respect to
any Class of Shares of the Fund or a supplement to the Prospectus with respect
to any Class of Shares of the Fund, or (ii) of the issuance by the Commission of
any stop-order suspending the effectiveness of the Registration Statement with
respect to any Class of Shares of the Fund or the initiation or threat of any
such stop-order proceeding;
(d) The Adviser shall provide to the Insurer such additional information
with respect to the Fund as the Insurer may from time to time reasonably
request;
(e) Prior to or simultaneously upon filing with the Commission any
amendment to the Registration Statement with respect to any Class of Shares of
the Fund or supplement to the Prospectus with respect to any Class of Shares of
the Fund, the Adviser shall furnish a copy thereof to the Insurer, provided,
however, that the Adviser shall obtain the prior written consent of the Insurer
before filing any such amendment or supplement that affects the Insurer, which
consent shall not be unreasonably withheld or delayed;
(f) The Adviser shall comply in all material respects with the terms and
conditions of the Transaction Documents to which it is a party and shall provide
the Insurer with written notice promptly upon becoming aware of any material
breach by it of the provisions of any such agreements;
(g) The Adviser shall provide to the Insurer copies of the Adviser's
parent company's quarterly financial statements and audited annual financial
statements within 60 days following the end of each fiscal quarter and 90 days
following the end of each fiscal year; provided that such financial statements
may be provided by sending an e-mail to the persons listed on Schedule 3, Table
A, that includes either a link to, or an attachment containing, such financial
statements;
-31-
(h) The Adviser shall comply in all material respects with the terms and
provisions of all applicable laws, including the Acts and the Investment
Advisers Act, with respect to the Fund, except where the failure to comply does
not have an Adverse Effect, and the Adviser shall obtain and maintain all
licenses, permits, charters and registrations which are necessary to the conduct
of its business or where the failure to obtain and maintain the same would
reasonably be expected to have an Adverse Effect;
(i) The Adviser shall promptly inform the Insurer in writing of the
occurrence of any of the following events of which it has knowledge: any
Litigation Event, Regulatory Change, Regulatory Event or other event that would
reasonably be expected to have an Adverse Effect;
(j) The Adviser shall promptly and fully perform all of its obligations
(i) under each Transaction Document to which it is a party, and (ii) under each
other agreement, instrument or contract by which it is bound, except to the
extent that such nonperformance would not reasonably be expected to have an
Adverse Effect. The Adviser shall take all action necessary to preserve its
existence and ensure that the Transaction Documents remain in full force and
effect;
(k) The Adviser shall keep or cause to be kept in reasonable detail books
and records of account of its business in relation to the Fund, including
without limitation electronic information with respect thereto, in form and
detail customary in the industry and sufficient to satisfy the Investment
Advisers Act and to satisfy the Adviser's obligation to provide to the Insurer
the information referred to herein;
(l) The Adviser shall not include any material relating to the Insurer or
describing the terms of the Policy or this Agreement in any marketing materials
used by or on behalf of the Adviser or the Fund unless such material has been
approved in writing by the Insurer prior to its inclusion in such marketing
materials, such approval not to be unreasonably withheld or delayed; and
(m) The Adviser shall inform the Insurer as promptly as practicable of (i)
any inquiry or request for information with respect to the Fund by the
Commission, and (ii) any disclosure of information regarding the specific
investments of the Fund or other information relating to the Fund that is made
at the request of Governmental Authority or is required to be disclosed as a
result of any governmental investigation or inquiry.
(n) The Adviser shall notify the Insurer prior to entering into any
amendment or modification of or with respect to the Fee Waiver Agreement.
Section 7.02 Covenants of the Trust on behalf of the Fund. The Trust on
behalf of the Fund hereby covenants and agrees that through the Guarantee
Maturity Date or the earlier termination of this Agreement pursuant to Section
11.01:
(a) Within 90 days of the end of the Fund's fiscal year, the Fund shall
provide to the Insurer the financial statements for the Fund with respect to
such fiscal year, audited by independent public accountants;
-32-
(b) During the Guarantee Period, other than in connection with the
redemption of Shares by a Shareholder or the reinvestment of dividends or other
distributions, the Fund shall not change the number of outstanding Shares of the
Fund;
(c) The Fund shall comply in all material respects with the terms and
conditions of the Transaction Documents to which the Fund is a party and shall
provide the Insurer with written notice promptly upon becoming aware of any
material breach by the Fund of the provisions of any such agreements;
(d) The Fund shall not amend, supplement or otherwise modify, or agree to
any waiver with respect to any of the Transaction Documents (other than the
Prospectus) without the prior written consent of the Insurer, which consent
shall not be unreasonably withheld or delayed ; provided, however, that the
Trust may amend the Investment Management Agreement and the Custodian Agreement
to add additional funds of the Trust without notice to or consent of the
Insurer; and provided, further, however, that the Trust may amend the Investment
Management Agreement and the Custodian Agreement in any other manner that could
not adversely affect the Fund following prior notice to the Insurer but without
the requirement that the Insurer's consent be obtained.
(e) The Fund shall not change in any material respect the manner in which
the assets of the Fund are allocated to any Class of Shares of the Fund without
the prior written consent of the Insurer, which consent shall not be
unreasonably withheld or delayed;
(f) Prior to taking any action to terminate the Custodian, the Fund shall
notify the Insurer and, in the event that the Custodian notifies the Fund that
the Custodian intends to terminate the Custodian Agreement with respect to the
Fund, the Fund shall notify the Insurer;
(g) The Fund shall comply in all material respects with the terms and
provisions of the Acts with respect to the Fund except where the failure so to
comply would not have an Adverse Effect and would not have a material adverse
effect upon the Insurer; and
(h) The Fund shall provide to the Insurer such additional information with
respect to the Fund as the Insurer may from time to time reasonably request.
Section 7.03 Covenant of the Insurer. The Insurer hereby covenants and
agrees that through the Guarantee Maturity Date or the earlier termination of
this Agreement pursuant to Section 11.01:
(a) The Insurer shall provide a brief description of the Insurer to the
Fund for inclusion in the Registration Statement and subsequent updates or
amendments thereof during the Guarantee Period. The Insurer shall permit the
Fund to incorporate by reference in the Registration Statement (and subsequent
updates and amendments thereof during the Guarantee Period) the financial
statements of the Insurer included in the periodic reports of Ambac Financial
Group, Inc. under the Securities Exchange Act of 1934. The Insurer shall make
reasonable efforts to obtain the consent of the Insurer's auditor to the
incorporation by reference of the Insurer's financials in the Registration
Statement and subsequent updates and amendments thereof during the Guarantee
Period.
-33-
ARTICLE VIII
FURTHER AGREEMENTS
Section 8.01 Reinsurance and Assignments. The Insurer shall have the right
to give participations in its rights under this Agreement and to enter into
contracts of reinsurance with respect to the Policy, provided that the Insurer
agrees that any such disposition will not alter or affect in any way whatsoever
the Insurer's direct obligations hereunder and under the Policy. The Adviser
shall have the right to assign its rights and obligations under this Agreement
to an affiliate of the Adviser, provided that there would be no change of
control (meaning an event or events that would constitute an "assignment" under
or for purposes of the Investment Company Act or Investment Advisers Act) as a
result of such assignment, the assignee assumes all of the Adviser's obligations
hereunder, and the Adviser gives written notice of such assignment to the
Insurer. Except as expressly provided above in this Section 8.01, none of the
Insurer, the Adviser or the Fund may assign its obligations under this Agreement
without the prior written consent of the other parties to the Agreement.
Section 8.02 Fund Liability. Any other provision to the contrary
notwithstanding, any liability of the Trust under this Agreement or in
connection with the transactions contemplated herein shall be discharged only
out of the assets of the Fund. This Agreement has been and any other agreement
or instrument executed and delivered in connection herewith shall have been,
executed by an officer of the Trust acting under the Declaration of Trust, and
the obligations of the Trust under this Agreement or any other such agreement or
instrument are not binding upon any of the Trustees, officers or Shareholders
personally.
Section 8.03 Liability of the Insurer. The Adviser and the Fund agree that
neither the Insurer, nor any of its officers, trustees/directors or employees
shall be liable or responsible for (a) the use which may be made of the Policy
by any Person or for any acts or omissions of another Person in connection
therewith or (b) the validity, sufficiency, accuracy or genuineness of any
documents delivered to the Insurer, or of any endorsement(s) thereon, even if
such documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged. In furtherance and not in limitation of the
foregoing, the Insurer may accept documents that appear on their face to be in
order, without responsibility for further investigation.
ARTICLE IX
CONFIDENTIALITY
Section 9.01 Confidentiality. Subject to Section 9.02, the Insurer agrees
not to disclose or use for any purpose other than the administration of this
Agreement, the exercise of its rights hereunder or legitimate corporate purposes
relating to this Agreement (including any corporate purposes relating to the
characterization or treatment of the rights and obligations hereunder for
accounting, insurance, rating agency or other similar purposes) (x) any
information regarding the specific investments of the Fund whether provided to
the Insurer by the Adviser, the Trust, the Custodian or the Fund Accounting
Agent ("Trading Information") or (y) other information (including without
limitation proprietary information as to systems, software and trading methods)
("Other Information and, together with Trading Information "Fund
-34-
Information") provided by the Adviser, the Trust, the Custodian, or the Fund
Accounting Agent to the Insurer hereunder unless (i) such information was or
becomes generally available to the public other than as a result of the
Insurer's breach of this Article IX; (ii) such information is required to be
disclosed pursuant to applicable law or in connection with any legal
proceedings; or (iii) such information is required to be disclosed as a result
of any governmental investigation or inquiry, court order, subpoena, deposition,
interrogatory, request for documents, civil investigative demand, or similar
requirement or request, provided that, if reasonably practicable, prior to
disclosure pursuant to (ii) or (iii) above the Insurer will give the Adviser
prompt notice of such requirement or request so that the Fund or the Adviser may
seek a protective order or similar relief prior to disclosure.
Section 9.02 Trading Information and Other Information.
(a) Notwithstanding Section 9.01, the Insurer may disclose Fund
Information in connection with the Insurer's hedging and reinsurance
arrangements to recipients ("Permitted Recipients") if such Permitted Recipients
represent and warrant to the Insurer that such Permitted Recipients will treat
such information as Fund Information in accordance with this Article IX. The
Adviser and the Fund agree that the Insurer and any Permitted Recipient will
satisfy their obligation to treat such information as Fund Information by (i)
restricting access to such information to the investment officers and compliance
officers who require access to such information for monitoring, hedging,
administration and compliance purposes, (ii) obtaining the agreement of such
investment officers and compliance officers to keep such information
confidential on the terms of Section 9.01, (iii) complying with the other
requirements of an appropriate institutional compliance procedure in form and
detail customary in the industry with respect to the investment activities of
such investment officers and compliance officers which procedure is reasonably
designed to achieve compliance with applicable law; and (iv) providing an
undertaking to the Fund in the form of Schedule 4 hereto.
(b) Notwithstanding Section 9.01, the Insurer may disclose Other
Information to those of its officers, employees, directors, representatives,
agents, outside counsel, and independent auditors (collectively,
"Representatives") who need access to such information in connection with
administration of the Agreement, the exercise of the Insurer's rights hereunder,
or legitimate corporate purposes so long as such persons agree to keep such
information confidential on the terms contained in Section 9.01.
Section 9.03 Copies of Fund Information. Upon the request of the Fund or
the Adviser given following the Termination Date, (i) the Insurer shall return
or destroy Trading Information that is not yet publicly available and any Other
Information which, when delivered to the Insurer, was labeled as confidential
and required to be returned or destroyed upon request, and (ii) the Insurer
shall use reasonable efforts to cause any Permitted Recipients to return or
destroy such Trading Information and Other Information upon request; provided,
however, that any Fund Information retained by the Insurer, its Representatives
and any Permitted Recipients is subject to the confidentiality terms of this
Agreement.
Section 9.04 Independent Verifier. This Article IX shall not apply to the
Independent Verifier. The confidentiality arrangements among the Adviser, the
Trust and the Independent Verifier shall be set forth in the Independent
Verifier Agreement.
-35-
ARTICLE X
THE INDEPENDENT VERIFIER
Section 10.01 Retention of Independent Verifier. The Adviser shall, no
later than the Inception Date, retain, at the Adviser's expense, an accounting
firm of nationally-recognized standing, as Independent Verifier. If the
Independent Verifier selected in accordance with this Section 10.01 fails to
perform its duties to the Insurer's reasonable satisfaction, then, upon the
Insurer's request, the Adviser shall select another accounting firm of
nationally-recognized standing to act as Independent Verifier and provide the
Independent Verification Report.
Section 10.02 Responsibilities of Independent Verifier. The Independent
Verifier shall, on a periodic basis perform such procedures with respect to the
information provided to the Insurer pursuant to Article III as the Insurer and
the Adviser shall agree prior to the Inception Date and report its finding to
the Insurer (the "Independent Verification Report").
Section 10.03 Adviser Cooperation. The Adviser shall cooperate fully with
the Independent Verifier to facilitate the fulfillment of the Independent
Verifier's responsibilities.
ARTICLE XI
TERMINATION
Section 11.01 Termination. (a) Subject to paragraph (b) below, this
Agreement shall terminate (i) on the Guarantee Maturity Date if no amounts are
payable under the Policy, or (ii) thereafter, upon payment by the Insurer of all
amounts due under the Policy to the Designated Account.
(b) This Agreement may be terminated by the Trust by written notice to the
Insurer at any time (i) prior to the Inception Date, if the Board has determined
to liquidate the Fund, (ii) upon the occurrence of an Act of Insolvency with
respect to the Insurer, or (iii) if the rating of the Insurer's financial
strength and claims-paying ability is suspended, withdrawn or downgraded to or
below A1 by ▇▇▇▇▇'▇ or A+ by S&P. If the Trust so terminates this Agreement, the
Trust shall notify the Fund's shareholders of such termination and such notice
shall state that the Trust has released the Insurer from all liability under the
Policy. The Trust shall provide a copy of such notice to the Insurer. From and
after such termination, the Fund shall have no obligation to pay the Premium Fee
(except as to amounts thereof accrued on a daily interpolated basis prior to
such termination), and the Insurer shall have no liability under the Policy.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement nor consent to any departure therefrom, shall in any
event be effective unless in writing and signed by all of the parties hereto;
provided that any waiver so granted shall extend only to the specific event or
occurrence so waived and not to any other similar event or occurrence which
occurs subsequent to the date of such waiver.
-36-
Section 12.02 Notices. (a) Except to the extent otherwise expressly
provided herein, all notices, requests and demands to or upon the respective
parties hereto to be effective shall be in writing (and if, sent by mail,
certified or registered, return receipt requested) or facsimile transmission
and, unless otherwise expressly provided herein, shall be deemed to have been
duly given or made when delivered by hand, or three Business Days after being
deposited in the mail, postage prepaid, or, in the case of facsimile
transmission, upon verbal telephone confirmation of receipt, addressed as
follows:
If to the Adviser:
Fund Asset Management, L.P.
Legal Advisory Department
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, General Counsel
Telephone No: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile No: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Fund:
c/o Fund Asset Management, L.P.
Legal Advisory Department
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, General Counsel
Telephone No: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile No: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
Shearman & Sterling
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇▇▇▇, Esq.
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
and:
Attention: ▇▇▇▇ ▇▇▇▇▇▇▇▇, Esq.
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
-37-
with a copy to:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇▇, Esq.
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Insurer:
Ambac Assurance Corporation
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: Managing Director, Structured Finance and Credit Derivatives
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
or such other address and/or addresses (and with copies to such persons) as
shall be specified in writing by any such party to the others.
(b) Notices permitted or required to be given pursuant to Section 3.06 and
Section 4.01 hereof shall be given as set forth in Schedule 3 hereto.
Section 12.03 No Waiver, Remedies and Severability. No failure on the part
of the Insurer to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such right preclude any other or further exercise thereof or the exercise of
any other right. Except to the extent provided in Section 5.01 and Section 5.02,
the remedies herein provided are cumulative and not exclusive of any remedies
provided by law. The parties further agree that the holding by any court of
competent jurisdiction that any remedy pursued by the Insurer hereunder is
unavailable or unenforceable shall not affect in any way the ability of the
Insurer to pursue any other remedy available to it. In the event any provision
of this Agreement shall be held invalid or unenforceable by any court of
competent jurisdiction, the parties hereto agree that such holding shall not
invalidate or render unenforceable any other provision hereof.
Section 12.04 Payments. All payments to the Insurer hereunder shall be
made in lawful currency of the United States in immediately available funds and
shall be made prior to 2:00 p.m. (New York City time) on the date such payment
is due by wire transfer to the account designated by the Insurer by notice to
the Fund and the Adviser.
Whenever any payment under this Agreement shall be stated to be due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such cases be
included in computing interest or fees, if any, in connection with such payment.
-38-
Section 12.05 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York (including
Section 5-1401 of the New York General Obligations Law but excluding all other
choice of law and conflicts of law rules).
Section 12.06 Submission to Jurisdiction, Waiver of Jury Trial. EACH OF
THE PARTIES HERETO (I) IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF
ANY NEW YORK STATE OR FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE
CITY OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT; (II) IRREVOCABLY AGREES THAT CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT;
(III) WAIVES TO THE FULLEST EXTENT THAT IT MAY LEGALLY DO SO, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING; AND (IV)
AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
EACH OF THE PARTIES HERETO KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES
ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR
ACTIONS OF THE PARTIES HERETO. EACH OF THE PARTIES HERETO ACKNOWLEDGES AND
AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION
AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT.
Section 12.07 Counterparts. This Agreement may be executed in counterparts
of the parties hereto, and each such counterpart shall be considered an original
and all such counterparts shall constitute one and the same instrument.
Section 12.08 Paragraph Headings. The headings of paragraphs contained in
this Agreement are provided for convenience only. They form no part of this
Agreement and shall not affect its construction or interpretation.
Section 12.09 Survival. Article IX and all representations, warranties and
covenants contained herein shall survive the execution and delivery of this
Agreement and the Policy, and the Termination Date.
Section 12.10 Reliance on Information. In making a determination as to
whether a Trigger Event has occurred, the Insurer shall be entitled to rely on
reports published or broadcast by media sources believed by the Insurer to be
generally reliable and on information provided to the Insurer by any other
source believed by the Insurer to be generally reliable, provided that the
Insurer reasonably and in good faith believes such information to be accurate
-39-
and has taken such steps as may be reasonable in the circumstances to attempt to
verify such information.
Section 12.11 Time of the Essence. Time is of the essence under this
Agreement.
Section 12.12 No Third-Party Rights. Nothing in this Agreement, express or
implied, shall or is intended to confer any rights upon any Person (including,
without limitation, any Shareholder) other than the parties hereto or their
respective successors or assigns.
Section 12.13 Further Assurances. The parties hereto shall, upon the
request of the Insurer or the Adviser, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, within a
reasonable period following such request, such amendments or supplements hereto
and such further instruments and take such further action as may be reasonably
necessary to effectuate the intention, performance and provisions of the
Transaction Documents.
Section 12.14 Concerning Knowledge. When used herein, a reference to the
"knowledge" of the Adviser or the Fund means the actual knowledge of a Senior
Officer of such Person of the matter in question, and not just the facts giving
rise to the matter. For purposes hereof, the term Senior Officer means (i) in
the case of the Adviser, an officer who is a Director or occupies a more senior
position, and (ii) in the case of the Fund, the President, any Vice-President,
the Treasurer or the Secretary of the Fund.
Section 12.15 No Additional Trust Created. Nothing herein or in the Policy
shall be deemed to create a trust other than that created by the Declaration of
Trust in respect of the Fund.
-40-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all
as of the day and year first above mentioned.
AMBAC ASSURANCE CORPORATION, as Insurer
By:
------------------------------------------
Name:
Title:
FUND ASSET MANAGEMENT, L.P.,
as Adviser
By: PRINCETON SERVICES, INC., as general
partner
By:
------------------------------------------
Name:
Title:
▇▇▇▇▇▇▇ ▇▇▇▇▇ PRINCIPAL PROTECTED TRUST,
on behalf of its series ▇▇▇▇▇▇▇
▇▇▇▇▇ Core Principal Protected Fund
By:
------------------------------------------
Name:
Title:
EXHIBIT A
Ambac Assurance Corporation
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telephone: ▇▇▇-▇▇▇-▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
Attn: General Counsel
Financial Guaranty Insurance Policy
Policy Number: [_________]
Insured Amount: The Guarantee Amount on the Guarantee Maturity Date.
Insured Obligation: The Guarantee, dated as of January 9, 2003,
by the ▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund (the
"Fund"), a series of ▇▇▇▇▇▇▇ ▇▇▇▇▇ Principal Protected
Trust (the "Trust"), in favor of the holders of Class A,
Class B, Class C, and Class D Shares (the "Shareholders")
of the Fund.
Beneficiary: The Trust, on behalf of the Fund, for the benefit of the
Shareholders.
Ambac Assurance Corporation ("Ambac"), a Wisconsin stock insurance company, in
consideration of the payment of the Premium and subject to the terms of this
financial guarantee insurance policy (the "Policy"), hereby agrees
unconditionally and irrevocably to pay to the Beneficiary, by deposit to the
Designated Account, that portion of the Insured Amount which shall become Due
for Payment but shall be unpaid by reason of Nonpayment, up to the Maximum
Amount.
Ambac will make any such payments which are due under this Policy to the
Beneficiary no later than the close of business on the second Business Day
following Receipt by Ambac of a valid Notice of Claim. Payments due under this
Policy will be satisfied by payment by Ambac to the account specified in the
relevant Notice of Claim. Payment to such account shall discharge the
obligations of Ambac under this Policy to the extent of such payment. Once
payment of the Insured Amount has been made in the manner referred to above,
Ambac shall have no further obligation under this Policy.
This Policy is not cancelable by Ambac for any reason, including the failure of
Ambac to receive payment of any Premium due in respect of this Policy. This
Policy does not insure against any risk other than Nonpayment.
This Policy shall terminate (i) on the fifth Business Day following the
Guarantee Maturity Date if Ambac shall not have received a valid Notice of
Claim, (ii) upon payment by Ambac of the Insured Amount to the Designated
Account if Ambac receives a valid Notice of Claim within
Exh. A-1
five Business Days following the Guarantee Maturity Date, or (iii) on the date
the Trust terminates this Policy by notice to Ambac pursuant to the Financial
Guarantee Agreement.
The insurance provided by this Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
Any capitalized terms not defined herein shall have the meaning given to such
terms in Appendix A hereto.
This Policy shall be governed by the laws of the state of New York, including
all matters of construction, validity and performance (including Section 5-1401
of the New York General Obligations Law but excluding all other choice-of-law
and conflicts-of-law rules).
There shall be no accelerated payment due under the Policy unless such
acceleration is at the sole option of Ambac.
In witness whereof, Ambac has caused this Policy to be duly executed on its
behalf by a duly authorized officer of Ambac.
________________________________________
Authorized Officer
Dated:___Effective Date: [______], ▇▇▇▇
▇▇▇. A-2
APPENDIX A
DEFINITIONS
"Adviser" means Fund Asset Management, L.P., as Adviser to the Fund.
"Business Day" means any day other than a day on which banks located in
the City of New York, New York are required or authorized by law to close or on
which the NYSE is closed for business.
"Class of Shares" means, as applicable, the Class A, Class B, Class C, and
Class D shares of beneficial interest of the Fund designated pursuant to the
Declaration of Trust.
"Covered Expenses" means, for any Class of Shares, the annual ordinary
fund operating expenses reflected in the Prospectus relating to such Class of
Shares. "Covered Expenses" shall not include Investment-Related Costs or
extraordinary expenses such as litigation and other expenses not incurred in the
ordinary course of the Fund's business. For the avoidance of doubt, all of the
Fund's operating expenses which are intended to be or have in practice been
covered by the Fee Waiver Agreement (as defined in the Financial Guarantee
Agreement) and the Expense Limitation Agreement (as defined in the Financial
Guarantee Agreement) are "Covered Expenses" (regardless of whether or not the
Fee Waiver Agreement is then in effect or has been amended or modified by the
parties thereto).
"Custodian" means ▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co., as Custodian pursuant to
the Custodian Agreement or any successor to ▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co., in
such capacity.
"Custodian Agreement" means the Custodian Agreement dated as of October
26, 2001 between the Trust and the Custodian, as amended from time to time.
"Designated Account" means the demand deposit account maintained with the
Custodian by the Trust on behalf of the Fund.
"Distribution Per Share" means, with respect to any Class of Shares, an
amount equal to the quotient of the amount of any distribution or payment by the
Fund in respect of, or allocated to, such Class of Shares that is not a Covered
Expense or an Investment-Related Cost, and shall include, without limitation,
any distribution of income, dividends, capital gains or principal to the
Shareholders of such Class of Shares and any payment of Income Taxes allocated
to such Class of Shares, divided by the number of shares of such Class of Shares
outstanding on the date of such distribution or payment. For the avoidance of
doubt, payments of expenses that are not Covered Expenses or Investment-Related
Costs, specifically including Income Taxes and extraordinary expenses, are
treated as Distributions Per Share for purposes of determining the Guarantee per
Share, but such payments can not be reinvested and no Shares shall be issued in
respect of such payments.
"Due for Payment" means, in relation to the Insured Obligation, the
occurrence of the Guarantee Maturity Date.
Appendix A-1
"Financial Guarantee Agreement" means the Financial Guarantee Agreement,
dated as of January 9, 2003, among the Adviser, the Trust on behalf of the Fund,
and Ambac, as it may be amended from time to time in accordance with the terms
thereof.
"Guarantee Amount" means, as of any date, the sum of (i) the product of
(x) the Guarantee per Share applicable to the Class A Shares as of such date and
(y) the number of Class A Shares outstanding as of such date; (ii) the product
of (x) the Guarantee per Share applicable to the Class B Shares as of such date
and (y) the number of Class B Shares outstanding as of such date; (iii) the
product of (x) the Guarantee per Share applicable to the Class C Shares as of
such date and (y) the number of Class C Shares outstanding as of such date; and
(iv) the product of (x) the Guarantee per Share applicable to the Class D Shares
as of such date and (y) the number of Class D Shares outstanding as of such
date.
"Guarantee Maturity Date" means the date that is seven (7) years after the
Inception Date, but if that date is not a Business Day, the Guarantee Maturity
Date shall be the first Business Day thereafter.
"Guarantee per Share" means, with respect to any Class of Shares, (i) the
NAV for such Class of Shares at the close of business on the Transition Date and
(ii) thereafter on any Business Day, the Guarantee per Share for such Class of
Shares on the immediately preceding Business Day divided by the sum of one plus
the quotient of (A) the amount of any Distribution Per Share with respect to
such Class of Shares effective since the immediately preceding Business Day
divided by (B) the NAV for such Class of Shares at the close of business on the
day such Distribution Per Share was effective.
"Inception Date" means the date hereof.
"Income Taxes" means U.S. income or excise taxes that are calculated on
the net income or undistributed net income of the Fund.
"Investment-Related Costs" means interest, taxes (other than Income
Taxes), brokerage commissions, transaction fees and other investment-related
costs.
"Maximum Amount" means, as of the Guarantee Maturity Date, the excess of
(a) the Guarantee Amount on the Guarantee Maturity Date, over (b) the sum of (i)
the product of (x) the NAV for the Class A Shares as of the Guarantee Maturity
Date and (y) the number of Class A Shares outstanding on such date; plus (ii)
the product of (x) the NAV for the Class B Shares as of the Guarantee Maturity
Date and (y) the number of Class B Shares outstanding on such date; plus (iii)
the product of (x) the NAV for the Class C Shares as of the Guarantee Maturity
Date and (y) the number of Class C Shares outstanding on such date; plus (iv)
the product of (x) the NAV for the Class D Shares as of the Guarantee Maturity
Date and (y) the number of Class D Shares outstanding on such date.
"NAV" means, with respect to any Class of Shares of the Fund, (a) on the
Transition Date, the net asset value per share of such Class of Shares
established by the Fund for such date and (b) on any date of determination
thereafter the quotient of (i) the excess of (x) the market value of the assets
allocated to that Class of Shares determined as of the close of regular trading
on the NYSE by the Fund in the manner described in the Prospectus with respect
to such
Appendix A-2
Class of Shares over (y) the market value of any liabilities allocated to and/or
associated with such Class of Shares determined as of the close of regular
trading on the NYSE by the Fund in the manner described in the Prospectus with
respect to such Class of Shares divided by (ii) the number of outstanding shares
of that Class of Shares at such time. The assets, income, gain, loss, expenses
and liabilities (other than those expenses and liabilities relating specifically
to a Class of Shares) of the Fund shall be allocated to each Class of Shares of
the Fund on each date of determination on a pro rata basis based on the NAV of
such Class of Shares on the preceding date of determination.
"Nonpayment" means the failure of the Fund to pay to the Designated
Account an amount such that the amount in clause (b) of the definition of
Maximum Amount is at least equal to the Guarantee Amount to which Shareholders
are entitled on the Guarantee Maturity Date if the Shareholders redeem on such
date.
"Notice of Claim" means a Notice of Claim and Certificate in the form
attached as Appendix B to this Policy, duly executed by the Beneficiary.
"NYSE" means the New York Stock Exchange.
"Offering Period" means the period during which the shares of the Fund
will be offered for sale to investors as described in the Prospectus relating to
each Class of Shares.
"Prospectus" means for any Class of Shares, the prospectus and statement
of additional information pursuant to which the shares of such Class of Shares
were offered for sale, as the same may be updated and in effect from time to
time in accordance with the Financial Guarantee Agreement.
"Premium" means the premium payable in consideration for the issuance of
this Policy.
"Receipt" means actual delivery of an original to Ambac at the office
indicated on the first page of this Policy or at the new address provided as
contemplated below, Attn: General Counsel, on a Business Day. Delivery on a day
that is not a Business Day or after 5:00 p.m., New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. Delivery by facsimile
shall not be complete until orally confirmed at the appropriate telephone number
set forth above. If Ambac's offices are relocated subsequent to the date hereof
while the Policy is in effect, Ambac shall notify the Fund and the Beneficiary
of Ambac's new address and telephone and facsimile numbers.
"Transition Date" means the Business Day after the end of the Offering
Period.
Appendix A-3
APPENDIX B
NOTICE OF CLAIM AND CERTIFICATE
Ambac Assurance Corporation
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telephone: ▇▇▇-▇▇▇-▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
Attention: General Counsel
The undersigned hereby certifies to Ambac Assurance Corporation
("Ambac"), with reference to financial guaranty insurance policy No. [_________]
dated [_____], 2002 (the "Policy") issued by Ambac in respect of the shares of
▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund (the "Fund"), that:
(i) The undersigned, for the benefit of holders of Class A, Class B,
Class C Shares and Class D Shares (the "Shareholders") of the Fund, is the
Beneficiary of the Policy.
(ii) There has not heretofore been a demand for the Insured Amount
under the Policy.
(iii) The Beneficiary, for the benefit of the Shareholders, is
making a claim under the Policy for the Insured Amount, in an amount not
more than the Maximum Amount.
(iv) The Beneficiary, on behalf of the Shareholders, demands payment
of $_________, and directs that payment under the Policy be deposited to
the Designated Account by bank wire transfer of federal or other
immediately available funds two (2) Business Days after receipt by Ambac
of this Notice of Claim in accordance with the terms of the Policy. The
account number of the Designated Account is [___________].
By executing this Notice of Claim, the undersigned hereby confirms
and agrees that, subject to and concurrently with the payment by Ambac of
amounts then due under the Policy, Ambac shall, without necessity of further
act, be subrogated, to the extent of such payment to all rights of the Fund
under the following agreements (each as defined in the Financial Guarantee
Agreement): Financial Guarantee Agreement, Direction and Undertaking Regarding
Remedies, Indemnification Agreement, Investment Management Agreement, Custodian
Agreement, Independent Verifier Agreement, Expense Limitation Agreement, and Fee
Waiver Agreement. In furtherance of the foregoing, the undersigned hereby
assigns to Ambac all rights of the Fund under such agreements. The undersigned
shall, and shall cause the Fund to, cooperate in Ambac's exercise of such
subrogated and assigned rights.
Unless the context otherwise requires, capitalized terms used in
this Notice of Claim and Certificate and not defined herein shall have the
respective meanings provided in the Policy.
Appendix B-1
ANY PERSON WHO KNOWINGLY AND WITH INTENT TO DEFRAUD ANY INSURANCE
COMPANY OR OTHER PERSON FILES AN APPLICATION FOR INSURANCE OR STATEMENT OF CLAIM
CONTAINING ANY MATERIALLY FALSE INFORMATION, OR CONCEALS FOR THE PURPOSE OF
MISLEADING, INFORMATION CONCERNING ANY FACT MATERIAL THERETO, COMMITS A
FRAUDULENT INSURANCE ACT, WHICH IS A CRIME AND SHALL ALSO BE SUBJECT TO A CIVIL
PENALTY NOT TO EXCEED FIVE THOUSAND DOLLARS AND THE STATED VALUE OF THE CLAIM
FOR EACH SUCH VIOLATION.
IN WITNESS WHEREOF, the Beneficiary has executed and delivered this
Notice of Claim and Certificate this [ ] day of [ ], [ ].
▇▇▇▇▇▇▇ ▇▇▇▇▇ PRINCIPAL PROTECTED TRUST,
on behalf of its series ▇▇▇▇▇▇▇
▇▇▇▇▇ Core Principal Protected Fund
By: ______________________________________
Name:
Title:
CC: ▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co., as Custodian
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn:
Appendix B-2
EXHIBIT B
▇▇▇▇▇▇▇ ▇▇▇▇▇ Principal Protected Trust
[address]
January __, 2003
▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co.
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention:
Re: ▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund
Ladies and Gentlemen:
Pursuant to the terms of the Custody Agreement dated as October 26, 2001
(as amended, the "Contract"), between ▇▇▇▇▇▇▇ ▇▇▇▇▇ Principal Protected Trust
(the "Trust") and ▇▇▇▇▇ Brothers ▇▇▇▇▇▇▇▇ & Co., (the "Custodian"), the
undersigned Trust hereby authorizes and directs the Custodian to follow and act
upon any instructions delivered from time to time to the Custodian by Ambac
Assurance Corporation ("Ambac") with respect to the liquidation of the assets of
the Trust's series designated ▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund (the
"Fund") and the investment of the Fund's assets in the Defeasance Portfolio (as
defined below) (each, an "Ambac Instruction").
Each Ambac Instruction shall be deemed to constitute "Proper Instructions"
pursuant to Section 4.01 of the Contract. Further, this letter itself
constitutes a "Proper Instruction" pursuant to Section 4.01 of the Contract and
shall be a standing instruction, effective as of the date of this letter and
until the Trust and Ambac jointly instruct the Custodian otherwise in writing.
"Defeasance Portfolio" means an earmarked portfolio of investments
consisting of (i) zero coupon U.S. Treasury bonds having a par amount equal to
the Guarantee Amount (as defined in the Financial Guarantee Agreement dated as
of January 9, 2003 among Fund Asset Management, L.P., the Trust on behalf of the
Fund, and Ambac, as amended from time to time (the "Agreement")) and that mature
on a date as close to the Guarantee Maturity Date (as defined in the Agreement)
as practicable but in any event no later than the Guarantee Maturity Date, and,
following the maturity of such zero coupon U.S. Treasury bonds, cash, (ii) a
portfolio of zero coupon U.S. Treasury bonds that mature on various dates which
correspond as closely as reasonably practicable to the expected payment dates of
the expected fees and expenses of the Fund, and (iii) cash.
Exh. B-1
In the event that the Custodian receives any Ambac Instruction which, in
the reasonable belief of the Custodian, conflicts in any way (in whole or in
part) with any other outstanding instruction to the Custodian regarding the
Fund's assets issued by the Trust, an investment advisor to the Trust or the
Fund or any other party (each, an "Other Instruction"), the Custodian shall be
entitled to rely upon the Ambac Instruction and further, the Custodian is hereby
authorized and directed to disregard the Other Instruction and instead, follow
and act upon the Ambac Instruction.
The Trust hereby confirms to and agrees with the Custodian that, as a
condition of any obligation of the Custodian hereunder, the Trust shall at all
times do, make, execute and deliver (and shall likewise use its best efforts to
cause Ambac to do, make, execute and deliver) all such additional and further
acts, instruments and documents as the Custodian may at any time reasonably
request (each in form and substance satisfactory to the Custodian) in connection
with these instructions and any Ambac Instruction including, without limitation,
the execution and delivery of (a) an Authorized Person Certificate regarding
each of the Trust's and Ambac's officers duly authorized by the Trust's Board;
(b) funds transfer security procedure documentation regarding each of the Trust
and Ambac; and (c) remote access services documentation.
The undersigned Trust hereby acknowledges that, except as may arise from
the Custodian's own negligence or willful misconduct, the Custodian shall be
without liability to the Trust for any loss, liability, claim or expense
resulting from or caused by the Custodian's acting in accordance with this
letter of instruction and/or any Ambac Instruction, and/or the Custodian's
disregarding any Other Instruction. The Trust, on behalf of the Fund, agrees to
indemnify the Custodian for any loss, liability, claim or expense incurred by
the Custodian, except as may arise from the Custodian's own negligence or
willful misconduct, in connection with actions omitted or taken by the Custodian
pursuant to each of this letter of instruction and/or any Ambac Instruction.
Please sign below to evidence your receipt of this letter and to
acknowledge that, as Custodian, you will follow, pursuant to the terms of this
instruction letter and in accordance with the governing standard of care set
forth in the Contract, any Ambac Instruction.
▇▇▇▇▇▇▇ ▇▇▇▇▇ PRINCIPAL PROTECTED TRUST,
on behalf of its series ▇▇▇▇▇▇▇
▇▇▇▇▇ Core Principal Protected Fund
By: __________________________________
Name: __________________________________
Title: __________________________________
Exh. B-2
Acknowledged and Agreed:
▇▇▇▇▇ BROTHERS ▇▇▇▇▇▇▇▇ & CO.
By: _________________________________
Name:
Title:
Exh. B-3
Schedule 1
FORM OF DAILY REPORT
To be provided as contemplated by Section 2.03(a)(i).
Sched. 1-1
Schedule 2
Intentionally omitted.
Sched. 2-1
Schedule 3
CONCERNING NOTICES UNDER
FINANCIAL GUARANTEE AGREEMENT
Notices to the Adviser or the Fund
The party giving notice (the "Notice Giver") shall attempt to reach an
individual named in Table I below by calling each such person, in the order
their names appear below, at the business number given for that person. If the
Notice Giver is not able to speak to one of the individuals named, the Notice
Giver shall then call each such person, in the order their names appear below,
at the cell number given for that person. If the Notice Giver still is not able
to speak to one of the individuals named, the Notice Giver shall then call each
such person, in the order their names appear below, at the home number given for
that person.
As soon as the Notice Giver speaks to one of the individuals named in
Table I and communicates the notice, or if the Notice Giver is unable to speak
with any of the individuals after following the procedures in the preceding
paragraph, the Notice Giver shall send, via fax and email to all of the
individuals named in Table I, a written confirmation or written notice, as
applicable.
Notice shall be deemed given upon verbal communication with an individual
named in Table I or, if the Notice Giver is unable to speak with such
individuals after following the procedures above, dispatch of written notice by
fax and email to the individuals on Table I.
Table I
--------------------------------------------------------------------------------
MLIM
Representative BUSINESS CELL HOME FAX E-MAIL ADDRESS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
For purposes hereof, the Notice Giver shall not be considered to have
spoken to an individual if the Notice Giver leaves a voicemail or other message
for that person.
The Adviser may, from time to time by written notice to the Insurer,
change the names or other information in the tables, provided that no more than
five individuals are included in Table I.
Sched. 3-1
Notices to the Insurer
The Notice Giver shall call each person listed in Table A, in the order
their names appear below, at the business number given for that person, and
thereafter shall call each person, in the order their names appear below, at the
mobile number given for that person. If the Notice Giver speaks to an individual
listed in Table A, the Notice Giver may cease calling and shall in addition send
an email and a fax to each person listed in Table A.
Notice shall be deemed given upon verbal communication with an individual
named in Table A, or if the Notice Giver is unable to speak with such
individuals after following the procedures above, dispatch of written notice by
fax and email to the individuals listed on Table A.
The Daily Report shall be delivered to each person listed in Table B by
email. If any email is indicated returned due to delivery failure, the Daily
Report shall be delivered by fax to each person listed in Table B.
Table A
--------------------------------------------------------------------------------
Table B
--------------------------------------------------------------------------------
For purposes hereof, the Notice Giver shall not be considered to have
spoken to an individual if the Notice Giver leaves a voicemail or other message
for that person.
The Insurer may, from time to time by written notice to the Adviser,
change the names or other information in Tables A and B.
Sched. 3-2
Schedule 4
CONFIDENTIALITY UNDERTAKING
[Date]
▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund
c/o Fund Asset Management, L.P.
Legal Advisory Department
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Re: ▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund
Ladies and Gentlemen:
Reference is made to the Financial Guarantee Agreement dated as of January
9, 2003 among Fund Asset Management, L.P. (the "Adviser"), ▇▇▇▇▇▇▇ ▇▇▇▇▇
Principal Protected Trust (the "Trust") on behalf of its series designated
▇▇▇▇▇▇▇ ▇▇▇▇▇ Core Principal Protected Fund (the "Fund"), and Ambac Assurance
Corporation ("Ambac") as amended from time to time (the "Agreement").
Capitalized terms are used as defined in the Agreement.
Pursuant to Section 9.02(a) of the Agreement, the undersigned undertakes
to the Fund as follows with respect to Fund Information: the undersigned shall
(i) restrict access to such information to the investment officers and
compliance officers of the undersigned and its affiliates who require access to
such information for monitoring, hedging, administration and compliance
purposes; (ii) obtain the agreement of such investment officers and compliance
officers to keep such information confidential unless (a) such information was
or becomes generally available to the public other than as a result of the
breach by the undersigned or its affiliates of this undertaking, (b) such
information is required to be disclosed pursuant to applicable law or in
connection with any legal proceedings, or (c) such information is required to be
disclosed as a result of any governmental investigation or inquiry, court order,
subpoena, deposition, interrogatory, request for documents, civil investigative
demand, or similar requirement or request; and (iii) comply with the
requirements of an appropriate institutional compliance procedure in form and
detail customary in the industry with respect to the investment activities of
such investment officers and compliance officers which procedure is reasonably
designed to achieve compliance with applicable law; provided that, if reasonably
practicable, prior to disclosure pursuant to (ii) or (iii) above the undersigned
will give the Adviser prompt notice of such requirement or request (at the
address set forth above) so that the Fund or the Adviser may seek a protective
order or similar relief prior to disclosure).
Sched. 4-1
[Name of entity]
By:___________________________________
Name:
Title:
Sched. 4-2