EXHIBIT 99.g6
SPECIAL CUSTODY AND PLEDGE AGREEMENT
(Short Sales)
AGREEMENT, (hereinafter "Agreement") dated as of September 29, 2005, among
the LONG/SHORT EQUITY FUND, A SERIES OF AMERICAN CENTURY QUANTITATIVE EQUITY
FUNDS, INC. ("Customer"), XXXXXXX, XXXXX & CO., a New York limited
partnership ("Broker"), AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("Manager")
and STATE STREET BANK AND TRUST COMPANY as Custodian hereunder ("Custodian").
WHEREAS, Customer has opened a margin account (the "Margin Account") with
Broker in which Customer may effect Short Sales (as such term is hereinafter
defined), and for that purpose has signed a New Account Application and
Agreement for Entities and New Account - Supplemental Documents for Entities
with Broker (the "Margin Agreement"); and
WHEREAS, Broker is required to comply with applicable laws and regulations
requiring the margining of Short Sales, including the margin regulations of the
Board of Governors of the Federal Reserve System and of any relevant securities
exchanges and other self-regulatory associations (the "Margin Rules") and
Broker's internal policies; and,
WHEREAS, to facilitate Short Sales hereunder, Customer and Broker desire to
establish procedures for compliance with the Margin Rules;
WHEREAS, Customer has appointed Manager as an investment advisor and
manager over certain of its assets with authority to effect Short Sales and to
act on Customer's behalf in connection with the pledge of assets to Broker to
secure performance of Customer's obligations with respect to Short Sales
effected for Customer's account with Broker; and
WHEREAS, Custodian is prepared to assist Customer, Manager and Broker in
complying with the Margin Rules by acting as custodian for Collateral (as
hereinafter defined) pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, be it agreed as follows:
(1) As used herein, capitalized terms have the following meanings unless
otherwise defined herein:
"Adequate Performance Assurance" shall mean such Collateral placed in the
Special Custody Account (as such term is hereinafter defined) as is adequate
under the Margin Rules and Broker's internal policies in effect from time to
time.
"Advice from Broker" means a notice sent by an Authorized Representative of
Broker (as defined below) delivered to Customer, Manager or Custodian, as
applicable, hereunder, communicated: (i) in writing; (ii) by a facsimile-sending
device; or (iii) in cases of calls for additional Collateral (as such term is
hereinafter defined) or notices referred to in paragraph 8 hereof, by telephone
to a person designated by Customer or Custodian in writing as authorized to
receive such advice or, in the event that no such person is available, to any
officer of the Customer, Manager or Custodian, provided, however, that such
Advice from Broker is confirmed promptly thereafter by written notice. An
officer of Broker will certify to Custodian, on Appendix A attached, the names
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and signatures of those employees who are authorized to sign Advices from Broker
(each, an "Authorized Representative of Broker"), which certification may be
amended from time to time.
"Business Day" means a day on which Custodian and Broker are open for
business.
"Collateral" means U.S. cash, U.S. Government securities or other U.S.
margin-eligible securities acceptable to Broker which are pledged to Broker as
provided herein.
"Insolvency" means that: (i) an order, judgment or decree has been entered
under the bankruptcy, reorganization, compromise, arrangement, insolvency,
readjustment of debt, dissolution or liquidation or similar law (herein called
the "Bankruptcy Law") of any jurisdiction adjudicating the Customer insolvent;
or (ii) the Customer has petitioned or applied to any tribunal for, or consented
to the appointment of, or taking possession by, a trustee, receiver, liquidator
or similar official, of the Customer, or commenced a voluntary case under the
Bankruptcy Law of the United States or any proceedings relating to the Customer
under the Bankruptcy Law of any other jurisdiction, whether now or hereinafter
in effect; or (iii) any such petition or application has been filed, or any such
proceedings commenced, against the Customer and the Customer by any act has
indicated its approval thereof, consent thereto or acquiescence therein, or an
order for relief has been entered in an involuntary case under the Bankruptcy
Law of the United States or any other jurisdiction, as now or hereinafter
constituted, or an order, judgment or decree has been entered appointing any
such trustee, receiver, liquidator or similar official, or approving the
petition in any such proceedings, and such order, judgment or decree remains
unstayed and in effect for more than 30 days.
"Instructions from Customer" means a request, direction or certification in
writing signed in the name of the Customer by a person authorized by Customer
(including Manager), and delivered to Custodian or transmitted to it by a
facsimile-sending device, except that instructions to pledge initial or
additional Collateral may be given by telephone and thereafter confirmed in
writing signed in the name of Customer by a person authorized in writing by
Customer (including Manager). An officer of Customer shall certify to Custodian
on Appendix B attached hereto the names and signatures of those employees of
Customer or other persons who are authorized to give Instructions from Customer
(each, an "Authorized Representative of Customer").
"Short Sales" shall mean the sale by Customer of securities which Customer
does not own, and which is consummated by the delivery of securities borrowed
from or through the facilities of Broker, in accordance with the applicable
provisions of the Margin Rules, particularly Sections 220.10 and 220.12 of
Regulation T of the Board of Governors of the Federal Reserve.
(2) (a) Custodian, in its capacity as a securities intermediary as defined
in Revised Article 8 of the Uniform Commercial Code as adopted in The State of
New York ("Article 8"), to the extent the same may be applicable, or in
applicable federal law or regulations, shall open a separate account on its
books entitled Special Custody Account for Xxxxxxx, Sachs & Co. as Pledgee
of the Long/Short Equity Fund, a series of AMERICAN CENTURY QUANTITATIVE EQUITY
FUNDS, INC. ("Special Custody Account") and shall hold therein for Broker as
pledgee upon the terms of this Agreement all Collateral. The Custodian hereby
agrees that any Collateral except U.S. cash held in the Special Custody Account
shall be treated as a financial asset for purposes of Article 8 (as defined
above) to the extent the same may be applicable. Customer agrees to
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instruct Custodian through Instructions from Customer as to the cash and
specific securities which Custodian is to identify on its books and records as
pledged to Broker as Collateral in the Special Custody Account.
(b) Customer grants to Custodian the authority to segregate in the
Special Custody Account any Collateral specified by Customer. Customer agrees to
provide and at all times maintain Adequate Performance Assurance in the Special
Custody Account pursuant to the terms and conditions of this Agreement.
(c) Customer, Broker and Custodian agree that Collateral will be held
for Broker in the Special Custody Account by Custodian under the terms and
conditions of this Agreement, that the Custodian will take such actions with
respect to any Collateral (including without limitation the delivery thereof in
accordance with paragraph 8) as Broker shall direct in an Advice from Broker or
other entitlement order (as defined in Article 8), and that in no event shall
any consent of Customer be required for the taking of any such action by
Custodian.
(d) Customer hereby grants a continuing security interest to Broker:
(i) in the Collateral and any proceeds thereof; (ii) all other property in the
Margin Account and the Special Custody Account; and (iii) in its accounts
(including the Margin Account) with Broker and the Special Custody Account, to
secure Customer's obligations to Broker hereunder and under the Margin
Agreement. Custodian shall have no responsibility for the validity or
enforceability of such security interest.
(e) Any ordinary cash interest or cash dividends paid with respect to
Collateral shall be credited by Custodian to Customer's custody account.
(3) Custodian will confirm in writing to Broker within one Business Day,
all pledges, releases or substitutions of Collateral and will supply Broker with
a monthly statement of Collateral in the Special Custody Account. Custodian will
also advise Broker, Manager or Customer upon reasonable request, of the kind and
amount of Collateral pledged to Broker.
(4) (a) Subject to the provisions of paragraph (4)(b) below, only upon
receipt of an Advice from Broker no later than 1 p.m. on a Business Day,
Custodian agrees to release Collateral to Customer from the pledge hereunder on
the same day as the Advice from Broker was received. Broker agrees, upon request
of Manager, to promptly thereafter provide such an Advice from Broker with
respect to Collateral selected by Manager: (i) if said Collateral represents an
excess in value of the Collateral necessary to constitute Adequate Performance
Assurance at that time; (ii) against receipt in the Special Custody Account of
substitute Collateral having a value at least equal (with any remaining
Collateral) to Adequate Performance Assurance; or (iii) upon termination of
Customer's accounts with Broker including the Margin Account (if any) and
settlement in full of all transactions therein and any amounts owed to Broker
with respect thereto. It is understood that Broker will be responsible for
valuing Collateral; Custodian at no time has any responsibility for determining
whether the value of Collateral is equal in value to Adequate Performance
Assurance.
(4)(b) Broker agrees that Broker will not require Customer at any time to
provide Broker Collateral in excess of the amount then required by the Margin
Rules. Broker shall calculate the amount of Collateral required to meet its
Margin Rules each Business Day and notify Manager of such amount via Broker's
web portal by 8 a.m. (EST) on each Business Day (subject to availability of the
web portal). If the amount of Collateral exceeds the amount required by the
Margin Rules, Manager agrees to notify Broker of
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the Collateral Manager selects for release. If such notification is received by
Broker by 11:00 a.m. (EST) Broker agrees to send to Custodian by 1:00 p.m. (EST)
on such Business Day an Advice from Broker to release to Customer for credit to
Customer's custody account with Custodian the Collateral selected by Manager,
and thereupon Custodian shall transfer such Collateral to Customer's custody
account by the close of business on such Business Day. If any notification under
this Section 4(b) is not provided within the time set forth therein, the
applicable party agrees to deliver the applicable notification promptly
thereafter.
(5) Customer represents and warrants to Broker that securities pledged to
Broker shall be in good deliverable form (or Custodian shall have the
unrestricted power to put such securities into good deliverable form), and that
Collateral will not be subject to any liens or encumbrances other than the lien
in favor of Broker contemplated under this Agreement.
(6) Collateral shall at all times remain the property of the Customer
subject only to the extent of the interest and rights therein of Broker as the
pledgee and secured party thereof. Custodian represents that Collateral is not
subject to any other lien, charge, security interest or other right or claim of
the Custodian or any person claiming through Custodian, and Custodian hereby
waives any right, charge, security interest, lien or right of set off of any
kind which it may have or acquire with respect to Collateral. Custodian shall
use its best efforts to notify Broker, Manager and Customer as soon as possible
if Custodian receives any notice of levy, lien, court order or other process
purporting to affect the Collateral.
(7) Broker shall, on each Business Day, compute the aggregate net credit or
debit balance on Customer's open short sales and advise Manager by 11:00 a.m.
New York time of the amount of the net debit or credit, as the case may be. If a
net debit balance exists on such day, Customer will cause an amount equal to
such net debit balance to be paid to Broker by the close of business on such
day. If a net credit balance exists on such day, Broker will pay such credit
balance to Customer by the close of business on such day. As Customer's open
short positions are marked-to-market daily, payments will be made by or to
Customer to reflect changes (if any) in the credit or debit balances. Broker
will charge Customer interest on debit balances in accordance with Broker's
policies as stated in the document entitled "Interest Charges and Margin
Requirements Disclosure Statement" (receipt of which Customer hereby
acknowledges), and Broker will pay interest on credit balances. Balances will be
appropriately adjusted when Short Sales are closed out.
(8) The occurrence of any of the following constitutes a Customer Default
hereunder:
(a) failure by Customer to perform any obligation, determined by Broker to
be material in its good faith discretion, hereunder or under the
Margin Agreement including, without limitation, its obligation to
maintain Adequate Performance Assurance as herein provided or, upon
receiving notice from Broker that it can no longer protect Customer's
Short Sale, to make timely delivery to Broker in accordance with
applicable laws, rules and regulations, of securities identical to the
securities sold short; or
(b) Customer's Insolvency.
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Broker will immediately notify Customer and Manager in an Advice from Broker of
such Customer Default. No sooner than 2:00 p.m. on the next Business Day after
transmittal by Broker of such Advice from Broker, if the Customer Default
continues at the end of such period, Broker may thereupon take any action
permitted pursuant to the Margin Agreement, including without limitation, the
conversion of any convertible securities or exercise of Customer's rights in
warrants (if any) held in the Margin Account and the Special Custody Account,
the buy-in of any securities of which the Margin Account may be short, and the
sale of any or all property or securities in the Margin Account and the Special
Custody Account to the extent necessary to satisfy Customer's obligations (in
which event such Collateral shall be delivered to Broker as directed in an
Advice from Broker). Any sale of Collateral made hereunder shall be made in
accordance with the provisions of the New York Uniform Commercial Code in the
principal market for the securities or, if such principal market is closed, such
sale shall be made in a manner commercially reasonable for Collateral. Customer
shall be liable to Broker for any deficiency which may exist after the exercise
by Broker of its rights and remedies as aforesaid. Any surplus resulting from
the sale of Collateral shall be transmitted to Custodian. Broker shall notify
Customer and Manager of any sale of Collateral and any deficiency remaining
thereafter in an Advice from Broker.
(9) Broker hereby covenants, for the benefit of Customer, that Broker will
not instruct Custodian to deliver Collateral free of payment with respect to any
sale of Collateral pursuant to paragraph 8 until after the occurrence of the
events and the expiration of the time periods set forth in paragraph 8. The
foregoing covenant is for the benefit of Customer only and shall in no way be
deemed to constitute a limitation on Broker's right at any time to instruct
Custodian pursuant to an Advice of Broker and Custodian's obligation to act upon
such instructions. Custodian shall not be required to make any determination as
to whether such delivery is made in accordance with any provisions of this
Agreement or any other agreement between Broker and Customer. Custodian will,
however, provide prompt telephone notice to an officer of Customer of receipt by
Custodian of an Advice from Broker to deliver Collateral.
(10) It is understood that all determinations and directions for Short
Sales for the account of the Customer pursuant to the terms of this Agreement
shall be made by Manager. The Customer is not relying upon Broker to make
recommendations with respect thereto.
(11) Custodian's duties and responsibilities are set forth in this
Agreement. Custodian shall act only upon receipt of an Advice from Broker
regarding release of Collateral, except as required by applicable law. Custodian
shall not be liable or responsible for anything done, or omitted to be done, by
it in good faith and in the absence of negligence and may rely and shall be
protected in acting upon any Advice from Broker which it reasonably believes to
be genuine and authorized. As between Custodian and Broker, Broker shall
indemnify and hold harmless Custodian with regard to any losses or liabilities
of Custodian (including counsel fees) imposed on or incurred by Custodian
subsequent to the taking of any action, or arising out of any omission, of
Custodian in compliance with any notice from Broker, Advice from Broker or
instruction of Broker under this Agreement, excluding any losses or liabilities
caused by the negligence or willful misconduct of Custodian in complying with
any such notice, Advice from Broker or instruction. As between Customer and
Custodian, the terms of the Custodian Agreement shall apply with respect to any
losses or liabilities of such parties arising out of matters covered by this
Agreement. In matters concerning or relating to this Agreement, Custodian shall
not be liable for the acts or omissions of any of the
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other parties to this Agreement. In matters concerning or relating to this
Agreement, Custodian shall not be responsible for compliance with any statute or
regulation regarding the establishment or maintenance of margin credit,
including but not limited to Regulations T or X of the Board of Governors of the
Federal Reserve System, the OCC or the Securities and Exchange Commission.
Custodian shall have no duty to require any cash or securities to be delivered
to it or to determine that the amount and form of assets deposited in the
Special Custody Account comply with any applicable requirements. Custodian may
hold the securities in the Special Custody Account in bearer, nominee,
book-entry, or other form and in any depository or clearing corporation
(including omnibus accounts), with or without indicating that the securities are
held hereunder; provided, however, that all securities held in the Special
Custody Account shall be identified on Custodian's records as subject to this
Agreement and shall be in a form that permits transfer without additional
authorization or consent of the Customer. The Custodian or Broker shall not be
responsible or liable for any losses resulting from nationalization,
expropriation, devaluation, seizure, or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation, imposition or
enforcement by any such governmental authority of currency restrictions,
exchange controls, levies or other charges affecting the property in the Special
Custody Account; acts of war, terrorism, insurrection or revolution; or acts of
God; or any other similar event beyond the control of the such party or its
agents. Neither Custodian nor Broker shall be liable for indirect special or
consequential damage even if advised of the possibility or likelihood thereof.
This Section shall survive the termination of this Agreement.
(12) All charges for Custodian's services under this Agreement shall be
paid by Customer.
(13) Broker shall not be liable for any losses, costs, damages, liabilities
or expenses suffered or incurred by Customer as a result of any transaction
executed hereunder, or any other action taken or not taken by Broker hereunder
for Customer's account at Customer's direction or otherwise, except to the
extent that such loss, cost, damage, liability or expense is the result of
Broker's own gross negligence, recklessness, willful misconduct or bad faith.
(14) No modification or amendment of this Agreement shall be effective
unless in writing and signed by an authorized officer of each of Broker,
Customer, Manager and Custodian.
(15) Written communications hereunder, other than Advice from Broker, shall
be sent by facsimile-sending device or telegraphed when required herein, hand
delivered, sent by overnight delivery or mailed first-class postage prepaid,
except that written notice of termination shall be sent by certified mail, in
any such case addressed:
(a) if to Custodian, to: State Street Bank and Trust Company
Address: 000 Xxxxxxxxxxxx Xxxxxx
Xxxxxx Xxxx, XX 00000
Attn.: Managing Counsel
Phone: 000-000-0000
Fax: 000-000-0000
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(b) if to Customer, to: THE LONG/SHORT EQUITY FUND, A SERIES OF
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS, INC.
Address: 0000 Xxxx Xxxxxx
Xxxxxx Xxxx, XX 00000
Attn.: Legal Department
Phone: 000-000-0000
Fax: 000-000-0000
(c) if to Broker, to: Xxxxxxx, Xxxxx & Co.
00 Xxxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Client Services Dept.
Fax No: 000-000-0000
Phone No: 000-000-0000
(D) if to Manager, to: AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
Address: 0000 Xxxx Xxxxxx
Xxxxxx Xxxx, XX 00000
Attn.: Legal Department
Phone: 000-000-0000
Fax: 000-000-0000
Copies of Custodian's confirmations, statements and advices issued pursuant
to Paragraph 4 should be sent to:
Xxxxxxx, Sachs & Co.
00 Xxxxx Xxxxxx
Xxx Xxxx, XX 00000
Attn: Xxxxxx Xxxxxxxx
Fax: 000-000-0000
Phone: 000-000-0000
(16) Any of the parties hereto may terminate this Agreement by notice in
writing, within 30 days of the date of termination, to the other parties hereto;
provided, however, that the status of any Collateral pledged to Broker at the
time of such notice shall not be affected by such termination until the release
of such pledge pursuant to the terms of the Margin Agreement and any applicable
Margin Rules. Upon termination of this Agreement, all assets of the Customer
held in the Special Custody Account shall be transferred to a successor
custodian specified by the Customer and agreed to by Broker.
(17) Nothing in this Agreement prohibits Broker, Customer or Custodian from
entering into similar agreements with others in order to facilitate option
contract transactions.
(18) Any controversy between Broker or any of its, or its affiliates,
managing directors, officers, directors or employees on the one hand, and
Customer on the
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other hand, arising out of or relating to this Agreement, shall be settled by
means of either arbitration or litigation in accordance with the following
procedures, unless the parties agree to other procedures in writing when any
dispute arises.
a. DISPUTE RESOLUTION MECHANISM. All disputes shall be resolved by
arbitration pursuant to the procedures set forth in subparagraph
(b) below unless Customer shall elect that a dispute be resolved
by litigation, in which case the dispute shall be resolved by
litigation pursuant to the procedures set forth in subparagraph
(c) below. Customer shall make such election either (i) by
instituting litigation if neither party has already commenced
arbitration proceedings, or (ii) by electing to proceed by
litigation in writing by overnight or registered mail addressed
to Broker at its main office within ten (10) days of notification
that Broker has taken the first step in the commencement of
arbitration proceedings.
b. ARBITRATION. This Agreement contains a predispute arbitration
clause. By signing an arbitration agreement, the parties agree as
follows:
1. All parties to this Agreement are giving up the right to xxx
each other in court, including the right to a trial by jury,
except as provided by the rules of the arbitration forum in
which a claim is filed.
2. Arbitration awards are generally final and binding; a
party's ability to have a court reverse or modify an
arbitration award is very limited.
3. The ability of the parties to obtain documents, witness
statements and other discovery is generally more limited in
arbitration than in court proceedings.
4. The arbitrators do not have to explain the reason(s) for
their award.
5. The panel of arbitrators will typically include a minority
of arbitrators who were or are affiliated with the
securities industry.
6. The rules of some arbitration forums may impose time limits
for bringing a claim in arbitration. In some cases, a claim
that is ineligible for arbitration may be brought in court.
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7. The rules of the arbitration forum in which the claim is
filed, and any agreements thereto, shall be incorporated
into this Agreement.
Arbitration shall be conducted before The New York Stock Exchange,
Inc. ("NYSE") or NASD Dispute Resolution ("NASD-DR"), or, if the NYSE
and NASD-DR decline to hear the matter, before the American
Arbitration Association, in accordance with their arbitration rules
then in force. The award of the arbitrator shall be final, and
judgment upon the award rendered may be entered in any court, state or
federal, having jurisdiction.
No person shall bring a putative or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration agreement
against any person who has initiated in court a putative class action
or who is a member of a putative class who has not opted out of the
class with respect to any claims encompassed by the putative class
action until: (i) the class certification is denied; (ii) the class is
decertified; or (iii) Customer is excluded from the class by the
court.
Such forbearance to enforce an agreement to arbitrate shall not
constitute a waiver of any rights under this Agreement except to the
extent stated herein.
c. LITIGATION. Any litigation commenced pursuant to this
subparagraph must be instituted in the United States Court for
the Southern District of New York, or in the event such court
lacks subject matter jurisdiction, the New York Supreme Court for
the County of New York. Customer consents to personal
jurisdiction in New York for purposes of such litigation. Any
right to trial by jury with respect to any claim or action is
hereby waived by all parties to this agreement."
(19) If any provision or condition of this Agreement shall be held to be
invalid or unenforceable by any court, or regulatory or self-regulatory agency
or body, such invalidity or unenforceability shall attach only to such provision
or condition. The validity of the remaining provisions and conditions shall not
be affected thereby and this Agreement shall be carried out as if any such valid
or unenforceable provision or condition were not contained herein.
(20) All references herein to times of day shall mean the time in New York,
New York, U.S.A.
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(21) This Agreement and its enforcement (including, without limitation, the
establishment and maintenance of the Special Custody Account and all interests,
duties and obligations related thereto) shall be governed by the laws of The
State of New York. This Agreement shall be binding on the parties and any
successor organizations thereof irrespective of any change or changes in
personnel thereof.
(22) This Agreement may be executed in one or more counterparts, all of
which shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this Agreement as of the date and year first written above.
CUSTOMER: LONG/SHORT EQUITY FUND, A SERIES OF
AMERICAN CENTURY QUANTITATIVE EQUITY FUNDS, INC.
By: /s/ Xxxxx X. Xxxxxxxxxx
--------------------------------
Name: Xxxxx X. Xxxxxxxxxx
Title: Vice President
BROKER: XXXXXXX, XXXXX & CO.
By: /s/ Xxxxxxxx Xxxxxxxx
--------------------------------
Name: Xxxxxxxx Xxxxxxxx
Title: Managing Director
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY
By: /s/ Xxxx Xxxxxxxxx
--------------------------------
Name: Xxxx Xxxxxxxxx
Title: Vice President
MANAGER: AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
By: /s/ Xxxx X. Xxxxxxx
--------------------------------
Name: Xxxx X. Xxxxxxx
Title: Vice President
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A. Interest Charges and Margin Requirements Disclosure Statement
Until further notice and except as set forth below, the annual rate of interest
that GS&Co. charges its clients ("Clients") on credit extended to or
maintained for them by GS&Co. with respect to securities accounts will be
determined on the basis of either the broker's call rate or the federal funds
rate, as notified to each Client, and will be no more than 1% above the broker's
call rate or 4% above the federal funds rate, as the case may be, each computed
on a daily basis.
The "broker's call rate" will be determined by GS&Co. for this purpose, in
its sole discretion, in accordance with prevailing money market conditions. In
making such determination, GS&Co. will consider, among other things, the
rates quoted for brokers' loans by one or more New York banks that are members
of the New York Clearing House Association. The "federal funds rate" will also
be determined by GS&Co. for this purpose, in its sole discretion, in
accordance with prevailing money market conditions. In making such
determination, GS&Co. will consider, among other things, the rates quoted
for overnight federal funds by Federal Reserve member banks and for overnight
repurchase agreements by securities dealers at several points during each
business day. Credit "extended to or maintained for" a Client is any net debit
balance resulting from aggregating the debit balances in all margin accounts of
the Client and any free credit balances in any cash accounts of the Client.
Credit balances in short accounts are not included in such computation. Since
the foregoing charges are dependent upon the broker's call rate or federal funds
rate, they will change automatically without prior notice to Clients in
accordance with changes in the broker's call rate or federal funds rate, as the
case may be.
Interest on the basis of the charges described above is computed daily, using a
360-day base year, from the last business day of each month through the next to
the last business day of the succeeding month. At the close of each month in
which interest is charged to a Client, the charges will appear on the monthly
statement, which GS&Co. will mail to the Client. Information with respect to
the balances from which the interest charge is derived will be maintained by
GS&Co. and will be made available to the Client upon request.
Short positions will be "marked to market" daily. If the aggregate value of the
securities sold short by a Client appreciates, an amount equal to such
appreciation will be transferred from the Client's general margin account to its
short account resulting in a debit entry in the general margin account. If the
aggregate value of all the securities sold short depreciates, an amount equal to
such decline in value will be transferred from the Client's short account to its
general margin account resulting in a credit entry in the general margin
account. The closing price from the previous business day is used to determine
any appreciation or depreciation in the market value of any security sold short.
Client agrees to maintain at all times margin for its accounts as required by
GS&Co. from time to time. GS&Co.'s general policy is to require the
deposit of cash or collateral on initial transactions as published under
Regulation T of the Board of Governors of the Federal Reserve System. GS&Co.
will also require the deposit of cash or additional eligible collateral at such
times as may be necessary to prevent the equity in Client's
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accounts from dropping below levels determined by GS&Co., which may exceed
those required by applicable regulations.
The initial and maintenance equity requirements for corporate debt securities
which are rated investment grade by a national rating agency and are determined
by GS&Co. to be margin eligible will be the greater of 25% of the current
market value thereof or 8% of the principal amount thereof. Credit extended on
corporate bonds with a lesser rating may be subject to a greater requirement.
For direct U.S. Government obligations and agencies, the initial maintenance
margin requirements are set forth below and are expressed as a percentage of
current market value.
Maturity Initial Margin Maintenance Margin
---------------------------------------------- -------------- ------------------
Less than 1 year 3% 2%
---------------------------------------------- -------------- ------------------
1 year or greater but less than 10 years 5% 4%
---------------------------------------------- -------------- ------------------
5 years or greater but less than 10 years 7% 5%
---------------------------------------------- -------------- ------------------
10 years or greater 10% 7%
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The foregoing margin requirements will also apply to zero coupon bonds issued by
the U.S. Government and governmental agencies except that the initial and
maintenance margin requirements will be 5% and 4%, respectively, of the
principal amount on maturities of 5 years or greater.
Equity securities that at any time have a market value of less than $5 will be
deemed to have no value for purposes of computing the equity in the account.
GS&CO. MAY IN ANY INDIVIDUAL CASE MAKE EXCEPTIONS TO ITS GENERAL POLICY BY
REQUIRING MORE OR LESS CASH OR COLLATERAL AT SUCH TIMES AS UNDER THE
CIRCUMSTANCE APPEAR NECESSARY OR APPROPRIATE TO GS&Co. GS&Co.'S
DETERMINATION OF THE ELIGIBILITY OF COLLATERAL AND THE VALUATION THEREOF SHALL
BE CONCLUSIVE.
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B. Margin Risk Disclosure Statement
Brokerage firms, including GS&Co., are required, pursuant to NASD Rule 2341,
to furnish the following margin risk disclosure statement to their customers, to
provide some basic facts about purchasing securities on margin, and to alert
customers to the risks involved with trading securities in a margin account.
Before trading securities in a margin account, you should carefully review this
Margin Risk Disclosure Statement. You should call your GS&Co. representative
regarding any questions or concerns you may have with your margin accounts at
GS&Co. When you purchase securities, you may pay for the securities in full
or you may borrow part of the purchase price from your brokerage firm. If you
intend to borrow funds from a brokerage firm, including GS&Co., you will be
required to open a margin account. The securities purchased are the brokerage
firm's collateral for the loan to you. If the securities in a margin account
decline in value, the value of the collateral supporting this loan also
declines, and, as a result, a brokerage firm is required to take action, such as
issue a margin call and/or sell securities or other assets in your accounts, in
order to maintain necessary level of equity in the account. It is important that
you fully understand the risks involved in trading securities on margin, which
are applicable to any margin account that you may maintain, including your
margin account at GS&Co. These risks include the following:
o YOU CAN LOSE MORE FUNDS THAN YOU DEPOSIT IN YOUR MARGIN ACCOUNT. If
you purchase securities on margin and the value of those securities
declines, your brokerage firm may require additional funds from you.
Otherwise the brokerage firm may be required to liquidate the
securities that you purchased on margin or other securities or other
assets in your account in accordance with applicable regulations.
o YOUR BROKERAGE FIRM CAN FORCE THE SALE OF SECURITIES OR OTHER ASSETS
IN YOUR ACCOUNT. If the equity in your account falls below the
regulatory maintenance margin requirements, or your brokerage firm's
higher "house" requirements, your brokerage firm can sell the
securities or other assets in any of your accounts with your brokerage
firm to cover the margin deficiency. You also will be responsible for
any short fall in the account after such a sale.
o YOUR BROKERAGE FIRM CAN SELL YOUR SECURITIES OR OTHER ASSETS WITHOUT
CONTACTING YOU. Some investors mistakenly believe that a firm must
contact them for a margin call to be valid and that the firm cannot
liquidate securities or other assets in their accounts to meet a
margin call unless the firm has contacted them first. This is not the
case. A brokerage firm may attempt to notify customers of margin
calls, but is not required to do so. However, even if your brokerage
firm has contacted you and provided a specific date by which you can
meet a margin call, the brokerage firm can take steps to protect its
financial interests prior to such date, including immediately selling
assets in your account without notice to you.
o YOU ARE NOT ENTITLED TO CHOOSE WHICH SECURITIES OR OTHER ASSETS IN ITS
MARGIN ACCOUNT ARE LIQUIDATED OR SOLD TO MEET A MARGIN CALL. Because
the securities are collateral for the margin
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loan, your brokerage firm has the right to decide which security or
other asset to sell in order to protect its interests.
o YOUR BROKERAGE FIRM MAY MOVE SECURITIES HELD IN YOUR CASH ACCOUNT TO
YOUR MARGIN ACCOUNT AND PLEDGE OR REHYPOTHECATE THE TRANSFERRED
SECURITIES. Any such pledge or rehypothecation may result in a benefit
to your brokerage firm and result in your becoming a general unsecured
creditor of your brokerage firm with respect to the securities so
pledged or rehypothecated.
o YOUR BROKERAGE FIRM CAN INCREASE ITS "HOUSE" MAINTENANCE MARGIN
REQUIREMENTS AT ANY TIME AND IS NOT REQUIRED TO PROVIDE YOU WITH
ADVANCE WRITTEN NOTICE. These changes in firm policy often take effect
immediately and may result in the issuance of a maintenance margin
call. Your failure to satisfy the call may cause your brokerage firm
to liquidate or sell securities or other assets in your account.
o YOU ARE NOT ENTITLED TO AN EXTENSION OF TIME ON A MARGIN CALL. While
an extension of time to meet margin requirements may be available to
customers under certain conditions, a customer does not have a right
to the extension.
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