PARTICIPATION AGREEMENT
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AMONG
FIRST SECURITY BENEFIT LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK,
POTOMAC INSURANCE TRUST,
AND
XXXXXXXX ASSET MANAGEMENT, LLC
THIS AGREEMENT, dated as of the 8th day of November, 2004, by and among
First Security Benefit Life Insurance and Annuity Company of New York, (the
"Company"), a stock life insurance company organized under the laws of the State
of New York, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto, as may be amended from time to time
(each an "Account"), Potomac Insurance Trust (the "Fund"), a Massachusetts
business trust, and Xxxxxxxx Asset Management, LLC(the "Adviser"), a New York
limited liability company.
WHEREAS, the shares of beneficial interest of the Fund are divided into
several series of shares, each representing the interest in a particular managed
portfolio of securities and other assets (each a "Portfolio"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act") and shares of
the Portfolios are registered under the Securities Act of 1933, as amended (the
"1933 Act"); and
WHEREAS, the Adviser, which serves as investment adviser to the Fund, is
duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended; and
WHEREAS, the Company has issued or will issue certain variable annuity
contracts supported wholly or partially by the Account (the "Contracts"), and
said Contracts are listed in Schedule A hereto, as it may be amended from time
to time by mutual written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, duly established by the Company, on the date shown for such
Account on Schedule A hereto, to set aside and invest assets attributable to the
aforesaid Contracts; and
WHEREAS, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios"), on behalf of the Account to fund the
aforesaid Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Adviser agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. Subject to Article X hereof, the Fund agrees to make available to the
Company for purchase on behalf of the Account, shares of the Designated
Portfolios, such purchases to be effected at net asset value in accordance with
Section 1.3 of this Agreement. Notwithstanding the foregoing, (i) the Portfolios
(other than those listed on Schedule A) in existence now or that may be
established in the future will be made available to the Company only as the Fund
may so provide, and (ii) the Board of Trustees of the Fund (the "Board") may
suspend or terminate the offering of shares of any Designated Portfolio or class
thereof upon written notice to the Company, if such action is required by law or
by regulatory authorities having jurisdiction or if, in the sole discretion of
the Board acting in good faith and in light of its fiduciary duties under
federal and any applicable state laws, suspension or termination is necessary
and in the best interests of the shareholders of such Designated Portfolio.
1.2. The Fund shall redeem, at the Company's request, any full or
fractional Designated Portfolio shares held by the Company on behalf of the
Account, such redemptions to be effected at net asset value in accordance with
Section 1.3 of this Agreement. Notwithstanding the foregoing, the Fund may delay
redemption of Fund shares of any Designated Portfolio to the extent permitted by
the 1940 Act, and any rules, regulations or orders thereunder.
1.3. Purchase and Redemption Procedures
(a) The Fund hereby appoints the Company as an agent of the Fund for the
limited purpose of receiving and accepting purchase and redemption requests on
behalf of the Account (but not with respect to any Fund shares that may be held
in the general account of the Company) for shares of those Designated Portfolios
made available hereunder, based on allocations of amounts to the Account or
subaccounts thereof under the Contracts and other transactions relating to the
Contracts or the Account. Receipt and acceptance of any such request (or
relevant transactional information therefor) on any day the New York Stock
Exchange is open for trading and on which a Designated Portfolio calculates its
net asset value (a "Business Day") pursuant to the rules of the Securities and
Exchange Commission ("SEC"), by the Company as such limited agent of the Fund
prior to the time that the Fund ordinarily calculates its net asset value as
described from time to time in the Fund's prospectus shall constitute receipt
and acceptance by the Designated Portfolio on that same Business Day, provided
that the Fund receives notice of such request by 9:30 a.m. Eastern Time on the
next following Business Day. Requests received by the Company after the
calculation of the Fund's net asset value as described from time to time in the
Fund's prospectus on any given day shall be treated as if received on the
following Business Day. The receipt and acceptances of any requests shall be
made in accordance with Rule 22c-1 of the 1940 Act.
(b) The Company shall pay for shares of each Designated Portfolio on the
same Business Day that it notifies the Fund of a purchase request for such
shares. Payment for Designated Portfolio shares shall be made in federal funds
transmitted to the Fund or other designated person by wire to be received by
3:00 p.m. Eastern Time on the Business Day the Fund is notified of the purchase
request for Designated Portfolio shares (unless the Fund determines and so
advises the Company that sufficient proceeds are available from redemption of
shares of other Designated Portfolios effected pursuant to redemption requests
tendered by the Company on behalf of the Account, or unless the Fund otherwise
determines and so advises the Company to delay the date of payment, to the
extent the Fund may do so under the 1940 Act). If federal funds are not received
on time, such funds will be invested, and Designated Portfolio shares purchased
thereby will be issued, as soon as practicable and the Company shall promptly,
upon the Fund's request, reimburse the Fund for any charges, costs, fees,
interest or other expenses incurred by the Fund in connection with any advances
to, or borrowing or
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overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a
result of portfolio transactions effected by the Fund based upon such purchase
request. Upon receipt of federal funds so wired, such funds shall cease to be
the responsibility of the Company and shall become the responsibility of the
Fund.
(c) Payment for Designated Portfolio shares redeemed by the Account or the
Company shall be made by the Fund in federal funds transmitted by wire to the
Company or any other designated person by 3 p.m. Eastern Time on the same
Business Day the Fund is properly notified of the redemption order of such
shares (unless redemption proceeds are to be applied to the purchase of shares
of other Designated Portfolios in accordance with Section 1.3(b) of this
Agreement), except that the Fund reserves the right to delay payment of
redemption proceeds to the extent permitted under Section 22(e) of the 1940 Act
and any rules thereunder, and in accordance with the procedures and policies of
the Fund as described in the then-current prospectus.
1.4. The Company agrees to purchase and redeem the shares of the Portfolios
named in Schedule A offered by the then current prospectus of the Fund in
accordance with the provisions of the applicable prospectus.
1.5. The Fund shall use its best efforts to make the net asset value per
share for each Designated Portfolio available to the Company by 6:30 p.m.
Eastern Time each Business Day, and in any event, as soon as reasonably
practicable after the net asset value per share for such Designated Portfolio is
calculated, and shall calculate such net asset value in accordance with the
Fund's prospectus. If the Fund provides the Company with materially incorrect
share net asset value information, the Company on behalf of the Account, shall
be entitled to an adjustment to the number of shares purchased or redeemed to
reflect the correct share net asset value. Any material error in the calculation
of the net asset value per share, dividend or capital gain information shall be
reported promptly to the Company upon discovery. In the event that any such
material error is the result of the gross negligence of the Fund, or its
designated agent for calculating the net asset value, any administrative or
other costs or losses incurred for correcting underlying Contract owner accounts
shall be at the Adviser's expense.
1.6. If the Company provides incorrect processing information, the Fund
shall be entitled to an adjustment with respect to the number of shares
purchased or redeemed to reflect the correct information. Any error in the
information provided by the Company to the Fund shall be reported promptly to
the Fund and the Adviser upon discovery. In the event that the Company provides
incorrect processing information to the Fund which causes a material error in
the calculation of the NAV for a Designated Portfolio and which is the result of
the gross negligence of the Company, any administrative or other costs or losses
incurred by the Fund for correcting the transaction shall be at the Company's
expense.
1.7. The Fund shall use its best efforts to furnish notice (by wire or
telephone followed by written confirmation) to the Company of any income
dividends or capital gain distributions payable on any Designated Portfolio
shares by the record date, but in no event later than 6:30 p.m. Eastern Time on
the ex-dividend date. The Company, on its behalf and on behalf of the Account,
hereby elects to receive all such dividends and distributions as are payable on
any Designated Portfolio shares in the form of additional shares of that
Designated Portfolio. The Company reserves the right, on its behalf and on
behalf of the Account, to revoke this election and to receive all such dividends
and capital gain distributions in cash. The Fund shall notify the Company
promptly of the number of Designated Portfolio shares so issued as payment of
such dividends and distributions.
1.8. Issuance and transfer of Fund shares shall be by book entry only.
Share certificates will not be issued to the Company or the Account. Purchase
and redemption orders for Fund shares shall be recorded in an appropriate ledger
for the Account or the appropriate subaccount of the Account.
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1.9. (a) The parties hereto acknowledge that the arrangement contemplated
by this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies and the cash value of the Contracts may be invested in other
investment companies.
(b) The Company shall not, without prior notice to the Adviser (unless
otherwise required by applicable law), take any action to operate the Account as
a management investment company under the 1940 Act.
(c) The Company shall not, without prior notice to the Adviser (unless
otherwise required by applicable law), induce Contract owners to change or
modify the Fund or change the Fund's investment adviser.
(d) The Company shall not, without prior notice to the Fund, induce
Contract owners to vote on any matter submitted for consideration by the
shareholders of the Fund in a manner other than as recommended by the Board.
1.10 The parties may agree, in lieu of the procedures set forth above in
this Article 1, to place and settle trades for Fund shares through a clearing
corporation. In the event that such a clearing corporation is used, the parties
agree to abide by the rules of the clearing corporation.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts (a) are, or
prior to issuance will be, registered under the 1933 Act, or (b) are not
registered because they are properly exempt from registration under the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under the 1933 Act. The Company further represents and warrants
that the Contracts will be issued and sold in compliance in all material
respects with all applicable federal securities and state securities and
insurance laws. The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law, that
it has legally and validly established the Account as a segregated asset account
under New York insurance laws, and that it (a) has registered or, prior to any
issuance or sale of the Contracts, will register the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, or alternatively (b) has not
registered the Account in proper reliance upon an exclusion from registration
under the 0000 Xxx.
2.2. The Fund represents and warrants that Designated Portfolio shares sold
pursuant to this Agreement shall be registered under the 1933 Act, shall be duly
authorized for issuance and sold in compliance with applicable state and federal
securities laws and that the Fund is and shall remain registered under the 0000
Xxx. The Fund shall amend the registration statement for its shares under the
1933 Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares for sale in accordance with the laws of the various states only if and to
the extent deemed advisable by the Fund.
2.3. The Fund makes no representation as to whether any aspect of its
operations (including, fees and expenses and investment policies) complies with
the insurance laws or insurance regulations of the various states.
2.4. The Fund represents and warrants that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act, including,
without limitation, Rule 38a-1 under the 1940 Act.
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2.5. The Adviser represents and warrants that it is registered as an
investment adviser with the SEC and that it does and will comply in all material
respects with the Investment Advisors Act of 1940, including, without
limitation, Rule 206(4)-7 under the Investment Advisors Act.
2.6. The Fund and the Adviser represent and warrant that all of their
trustees/directors, officers, employees, and other individuals or entities
dealing with the money and/or securities of the Fund are and shall continue to
be at all times covered by a blanket fidelity bond or similar coverage for the
benefit of the Fund in an amount not less than the minimum coverage as required
currently by Rule 17g-1 of the 1940 Act or related provisions as may be
promulgated from time to time. The aforesaid bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding company.
2.7. The Company represents and warrants that all of its directors,
officers, employees, investment advisers and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage in an amount of not
less than $5 million. The aforesaid includes coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.8 The Company represents and warrants that it (a) has adopted policies
and procedures to monitor trading activity in the Portfolios by Contract owners
and (b) is entitled (by disclosure in the prospectus) to require that
allocations to sub-accounts investing in the Portfolios made by or on behalf of
Contract owners be made exclusively via regular U.S. mail (i.e. submissions via
facsimile, e-mail and the Company's website are note permitted) if such
allocations follow a market timing strategy , and (c) will use reasonable
efforts to identify allocations following a market timing strategy and enforce
the "U.S. mail only" submission policy noted above upon the Fund's or the
Adviser's request.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Fund shall provide the Company with as many printed copies of the
current prospectus, current Statement of Additional Information ("SAI"),
supplements, proxy statements, and annual or semi-annual reports of each
Designated Portfolio as the Company may reasonably request to deliver to
existing Contract owners and for marketing of the Contracts. If requested by the
Company in lieu thereof, the Fund shall provide such documents (including a
"camera-ready" copy of such documents as set in type, a diskette in the form
sent to the financial printer, or an electronic copy of the documents in a
format suitable for posting on the Company's website, all as the Company may
reasonably request) and such other assistance as is reasonably necessary in
order for the Company to have prospectuses, SAIs, supplements and annual or
semi-annual reports for the Contracts and the Fund printed together in a single
document or posted on the Company's web-site or printed individually by the
Company if it so chooses. The expenses associated with printing and providing
such documentation shall be as set forth in Article V.
3.2. The Fund's prospectus shall state that the current SAI for the Fund is
available.
3.3. The Fund shall provide the Company with information regarding the
Fund's expenses, which information may include a table of fees and related
narrative disclosure for use in any prospectus or other descriptive document
relating to a Contract. The Company agrees that it will use such information
substantially in the form provided. The Company shall provide prior written
notice of any proposed modification of such information, which notice will
describe the manner in which the Company proposes to modify the information, and
agrees that it may not modify such information in any way without the prior
consent of the Fund, which consent shall not be unreasonably withheld.
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3.4. So long as, and to the extent the SEC continues to interpret the 1940
Act to require pass-through voting privileges for variable contract owners, or
to the extent otherwise required by law, the Company shall, at the Company's
option, follow one of the two methods described below to provide pass-through
voting privileges to contract owners:
(a) Provide a list of Contract owners with value allocated to a Designated
Portfolio as of the record date to the Fund or its agent in order to permit the
Fund to send solicitation material and gather voting instructions from Contract
owners on behalf of the Company. The Company shall also provide such other
information to the Fund as is reasonably necessary in order for the Fund to
properly tabulate votes for Fund initiated proxies. In the event that the
Company chooses this option, the Fund shall be responsible for properly "echo
voting" shares of a Designated Portfolio for which no voting instructions have
been received.
(b) Solicit voting instructions from Contract holders itself and vote
shares of the Designated Portfolio in accordance with instructions received from
Contract holders. The Company shall vote the shares of the Designated Portfolios
for which no instructions have been received in the same proportion as shares of
the Designated Portfolio for which instructions have been received.
3.5 The Company reserves the right to vote Fund shares held in its general
account in its own right, to the extent permitted by applicable laws.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the Fund
or its designee, each piece of sales literature or other promotional material
that the Company develops and in which the Fund (or a Designated Portfolio
thereof) or the Adviser is named. No such material shall be used until approved
by the Fund or its designee, and the Fund will use its best efforts for it or
its designee to review such sales literature or promotional material within five
(5) Business Days after receipt of such material. The Fund or its designee
reserves the right to reasonably object to the continued use of any such sales
literature or other promotional material in which the Fund (or a Designated
Portfolio thereof) or the Adviser is named, and no such material shall be used
if the Fund or its designee so objects.
4.2. The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund or the Adviser in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus or SAI for
the Fund shares, as such registration statement and prospectus or SAI may be
amended or supplemented from time to time, or in reports or proxy statements for
the Fund, or in sales literature or other promotional material approved by the
Fund or its designee, except with the permission of the Fund or its designee.
4.3. The Fund and the Adviser, or their designee, shall furnish, or cause
to be furnished, to the Company, each piece of sales literature or other
promotional material that it develops and in which the Company, and/or the
Account, is named. No such material shall be used until approved by the Company,
and the Company will use its best efforts to review such sales literature or
promotional material within five (5) Business Days after receipt of such
material. The Company reserves the right to reasonably object to the continued
use of any such sales literature or other promotional material in which the
Company and/or its Account is named, and no such material shall be used if the
Company so objects.
4.4. The Fund shall not give any information or make any representations on
behalf of the Company or concerning the Company, the Account, or the Contracts
in connection with the sale of Portfolio shares other than the information or
representations contained in a registration statement,
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disclosure document and prospectus (which shall include an offering memorandum,
if any, if the Contracts issued by the Company or interests therein are not
registered under the 1933 Act), or SAI for the Contracts, as such registration
statement, prospectus, or SAI may be amended or supplemented from time to time,
or in published reports for the Account which are in the public domain or
approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company, except with
the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, SAIs, reports, proxy statements, sales
literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Designated Portfolios or their shares, promptly after the filing
of such document(s) with the SEC or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses (which shall include an offering
memorandum, if any, if the Contracts issued by the Company or interests therein
are not registered under the 1933 Act), SAIs, reports, solicitations for voting
instructions, sales literature and other promotional materials, applications for
exemptions, requests for no-action letters, and all amendments to any of the
above, that relate to the Contracts or the Account, promptly after the filing of
such document(s) with the SEC or other regulatory authorities. The Company shall
provide to the Fund and the Adviser any complaints received from the Contract
owners pertaining to the Fund or a Designated Portfolio.
4.7. The Fund will provide the Company with as much notice as is reasonably
practicable of any proxy solicitation for any Designated Portfolio, and of any
material change in the Fund's registration statement, particularly any change
resulting in a change to the registration statement or prospectus for any
Account. The Fund will work with the Company so as to enable the Company to
solicit proxies from Contract owners, or to make changes to its prospectus or
registration statement, in an orderly manner. The Fund will make reasonable
efforts to attempt to have changes affecting Contract prospectuses become
effective simultaneously with the annual updates for such prospectuses.
4.8. The Company agrees and acknowledges that the Company has no right,
title or interest in the names and marks of the Fund and that all use of any
designation comprised in whole or part of such names or marks under this
Agreement shall insure to the benefit of the Fund and the Adviser. Except as
provided in Section 4.1, the Company shall not use any such names or marks on
its own behalf or on behalf of a Separate Account in connection with marketing
the Contracts without prior written consent of the Fund and the Adviser. Upon
termination of this Agreement for any reason, the Company shall cease all use of
any such names or marks. To the extent, if any, that any ownership interest in
and to the names and marks of the Fund does not automatically vest in the Fund
by virtue of this Agreement, and instead invests in the Company, the Company
hereby transfers and assignments to the Fund all right, titles and interest that
the Company may have in and to the names and marks of the Fund.
ARTICLE V. Fees and Expenses
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Designated Portfolio adopts and
implements a plan pursuant to Rule 12b-1 to finance distribution expenses, then
the Fund may make payments to the Company or to the underwriter for the
Contracts if and in amounts agreed to by the Fund in writing.
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5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund. The Fund shall see to it that all its shares are
registered and authorized for issuance in accordance with applicable federal law
and, if and to the extent deemed advisable by the Fund, in accordance with
applicable state laws prior to their sale. The Fund shall bear the expenses for
the cost of registration and qualification of the Fund's shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type the proxy materials and
reports to shareholders (including the costs of printing a prospectus that
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or transfer
of the Fund's shares.
5.3. The Fund will pay or cause to be paid the expenses associated with
printing, mailing, distributing, solicitation and tabulation of proxy materials
to Contract owners with respect to proxies related to the Fund, consistent with
applicable provisions of the 1940 Act. The Fund shall also bear the expense of
printing and postage with respect to Fund prospectuses, annual and semi-annual
reports and all other Fund reports delivered to existing Contract owners with
value allocated to one or more Designated Portfolios (regardless of whether such
documents are printed by the Fund or the Company).
5.4. The Company shall bear the expense of distributing all prospectuses
and reports to prospective Contract owners. The Company shall bear the expense
of printing copies of the prospectus for the Contracts for use with prospective
Contract owners. The Company shall bear the expenses incident to (including the
costs of printing) sales literature and other promotional material that the
Company develops and in which the Fund (or a Designated Portfolio thereof) is
named.
ARTICLE VI. Qualification
6.1 The Fund will invest its assets in such a manner as to ensure that the
Contracts will be treated as annuity or life insurance contracts, whichever is
appropriate, under the Code and the regulations issued thereunder (or any
successor provisions). Without limiting the scope of the foregoing, each
Designated Portfolio represents and warrants that it will comply with Section
817(h) of the Code and Treasury Regulation ss.1.817-5, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, and any amendments or
other modifications or successor provisions to such Section or Regulations. In
the event of a breach of this Article VI by the Fund, it will take all
reasonable steps (a) to notify the Company of such breach and (b) to adequately
diversify the Fund so as to achieve compliance within the grace period afforded
by Regulation 1.817-5.
6.2 The Fund represents and warrants that it will seek to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code,") and that it will maintain such
qualification (under Subchapter M or any successor or similar provisions) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
6.3 The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance or annuity insurance
contracts, under applicable provisions of the Code, and that it will maintain
such treatment, and that it will notify the Fund immediately upon having a
reasonable basis for believing the Contracts have ceased to be so treated or
that they might not be so treated in the future. The Company agrees that any
prospectus offering a contract that is a "modified endowment contract" as that
term is defined in Section 7702A of the Code (or any successor or similar
provision), shall identify such contract as a modified endowment contract.
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ARTICLE VII. Potential Conflicts
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of Contract owners investing in
Portfolios. A material irreconcilable conflict may arise for a variety of
reasons, including: (a) state insurance regulatory authority action; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling or any similar action by
insurance, tax or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding, (d) the manner in which the
investments of the Portfolios are being managed; (e) a difference in voting
instructions given by contract owners of different Participating Insurance
Companies; and (f) a decision by a Participating Insurance Company to disregard
the voting instructions of Contract owners.
7.2 The Company will report any potential or existing conflicts to the
Board. The Company will be responsible for assisting the Board in carrying out
its responsibilities under the Conditions set forth in the notice when issued by
the SEC for the Portfolios (the "Notice"), which the Company has reviewed, by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised. The responsibility includes, but is not limited to,
an obligation by the Company to inform the Board whenever Contract owner voting
instructions are disregarded by the Company. These responsibilities will be
carried out with a view only to the interests of the Contract owners.
7.3 If a majority of the Board or majority of its disinterested trustees,
determines that a material irreconcilable conflict exists, affecting the
Company, the Company, at its expense and to the extent reasonably practicable
(as determined by a majority of the Board's disinterested trustees), will take
any steps necessary to remedy or eliminate the irreconcilable material conflict,
including; (a) withdrawing the assets allocable to some or all of the Separate
Accounts from the Fund or any Portfolio thereof and reinvesting those assets in
a different investment medium, which may include another Portfolio of Fund, or
another investment company; (b) submitting the question of whether such
segregation should be implemented to a vote of all affected Contract owners and
as appropriate, segregating the assets of any appropriate group (i.e., variable
annuity or variable life insurance Contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering to the
affected Contract owners' the option of making such a change; and (c)
establishing a new registered management investment company (or series thereof)
or managed separate account. If a material irreconcilable conflict arises
because of a decision by the Company to disregard Contract owner voting
instructions, and that decision represents a minority position or would preclude
a majority vote, the Company may be required, at the election of Fund, to
withdraw the Separate Account's investment in Fund, and no charge or penalty
will be imposed as a result of such withdrawal. The responsibility to take such
remedial action shall be carried out with a view only to the interests of the
Contract owners.
For the purposes of this Section 7.3, a majority of the disinterested
members of the Board shall determine whether or not any proposed action
adequately remedies any material irreconcilable conflict, but in no event will
the Fund or the Adviser (or any other investment adviser of the Portfolios) be
required to establish a new funding medium for any Contract. Further, the
Company shall not be required by this Section 7.3 to establish a new funding
medium for any Contracts if any offer to do so has been declined by a vote of a
majority of Contract owners materially and adversely affected by the
irreconcilable material conflict.
7.4 The Board's determination of the existence of an material
irreconcilable conflict and its implications shall be made known promptly and in
writing to the Company.
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7.5 No less than annually, the Company and the Adviser shall submit to the
Board such reports, materials or data as the Board may reasonably request so
that the Board may fully carry out the obligations imposed upon them by these
Conditions. Such reports, materials, and data. shall be submitted more
frequently if deemed appropriate by the Board.
Article VIII. Indemnification
8.1 Indemnification by the Company
8.1(a). The Company agrees to indemnify and hold harmless each of the Fund
and the Adviser and each of its trustees/directors, officers, employees or
agents and each person, if any, who controls the Fund or Adviser within the
meaning of Section 15 of the 1933 Act or who is under common control with the
Fund or the Adviser (collectively, the "Indemnified Parties" for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements:
(i) arise out of or are based upon any untrue statement or alleged
untrue statements of any material fact contained in the registration
statement, prospectus (which shall include a written description of a
Contract that is not registered under the 1933 Act), or SAI or other
disclosure document for the Contracts or contained in the Contracts or
sales literature for the Contracts (or any amendment or supplement to any
of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund or the Adviser for use
in the registration statement, prospectus, SAI or other disclosure document
for the Contracts or in the Contracts or sales literature (or any amendment
or supplement) or otherwise for use in connection with the sale of the
Contracts, or
(ii) arise out of or as a result of statements or representations by
or on behalf of the Company (other than statements or representations
contained in the registration statement, prospectus, SAI, other disclosure
document or sales literature of the Fund not supplied by the Company or
persons under its control) or wrongful conduct of the Company or its agents
or persons under the Company's authorization or control, with respect to
the sale or distribution of the Contracts, or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a registration statement, prospectus, SAI,
other disclosure document or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement or omission was
made in reliance upon information furnished to the Fund by or on behalf of
the Company for use in the registration statement, prospectus, SAI or other
disclosure document of the Fund or in sales literature; or
-10-
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company;
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of its obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from the Company to such party of
the Company's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by the Adviser
8.2(a). The Adviser agrees to indemnify and hold harmless the Company and
each of its directors, officers, employees or agents and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Adviser) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or SAI, other disclosure document or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to state therein
a material fact
-11-
required to be stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify shall not apply
as to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Adviser or Fund by or on behalf of the Company
for use in the registration statement, prospectus, SAI or other disclosure
document for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations by or on
behalf of the Fund or the Adviser (other than statements or representations
contained in the registration statement, prospectus, SAI, other disclosure
document or sales literature for the Contracts not supplied by the Fund or
the Adviser) or wrongful conduct of the Adviser or the Fund with respect to
the sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, SAI, other
disclosure document or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Adviser or the Fund; or
(iv) arise as a result of any failure by the Fund or the Adviser to provide
the services and furnish the materials under the terms of this Agreement
(including a failure of the Fund, whether unintentional or in good faith or
otherwise, to comply with the diversification and other qualification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any representation
and/or warranty made by or on behalf of the Adviser or the Fund in this
Agreement or arise out of or result from any other material breach of this
Agreement by or on behalf of the Adviser or the Fund;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance or such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or the Account, whichever is applicable.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
-12-
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Party, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the Adviser to such party of the
Adviser's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Adviser will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers,
directors, employees or agents in connection with the issuance or sale of the
Contracts or the operation of the Account.
8.3 Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company and each
of its directors, officers, employees or agents and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or litigation
(including reasonable legal and other expenses) to which the Indemnified Parties
may be required to pay or may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, expenses, damages,
liabilities or expenses (or actions in respect thereof) or settlements, are
related to the operations of the Fund and:
(i) arise as a result of any material failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise,
to comply with the diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by or on behalf of the Fund in this Agreement or arise
out of or result from any other material breach of this Agreement by or on
behalf of the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company or the Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to
-13-
notify the Fund of any such claim shall not relieve the Fund from any liability
which it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In case any such
action is brought against the Indemnified Parties, the Fund will be entitled to
participate, at its own expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from the Fund to such party of the
Fund's election to assume the defense thereof, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the Fund
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceeding against it or any of its respective officers,
directors, employees or agents in connection with the Agreement, the issuance or
sale of the Contracts, the operation of the Account, or the sale or acquisition
of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
without regard to the conflict of laws provisions thereof.
9.2. This Agreement shall be subject to the provisions of the 1933 and
1940 Acts as well as the Exchange Act of 1934, and the rules and
regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant, and the terms hereof
shall be interpreted and construed in accordance therewith. If, in the
future, the Mixed and Shared Funding Order discussed in Article VII should
no longer be necessary under applicable law, then Article VII hereof shall
no longer apply.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to some or
all Designated Portfolios, by six (6) months advance written
notice delivered to the other parties; or
(b) termination by the Company by written notice to the other parties
in the event any of the Designated Portfolio's shares are not
registered, issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of such shares
as the underlying investment media of the Contracts issued or to
be issued by the Company; or
(c) termination by the Fund or Adviser in the event that formal
administrative proceedings are instituted against the Company by
the National Association of Securities Dealers, Inc. (the
"NASD"), the SEC, the Insurance Commissioner or like official of
any state or any other regulatory body regarding the Company's
duties under this Agreement or related to the sale of the
Contracts, the operation of any Account, or the purchase of the
Designated Portfolios' shares; provided, however, that the Fund
or Adviser determines in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse
-14-
effect upon the ability of the Company to perform its obligations
under this Agreement; or
(d) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or
Adviser by the SEC or any state securities department or any
other regulatory body; provided, however, that the Company
determines in its sole judgment exercised in good faith, that any
such administrative proceedings will have a material adverse
effect upon the ability of the Fund or Adviser to perform its
obligations under this Agreement; or
(e) termination by the Company by written notice to the other parties
in the event that any Designated Portfolio ceases to qualify as a
regulated investment company under Subchapter M or fails to
comply with the Section 817(h) diversification requirements
specified in Article VI hereof, or if the Company reasonably
believes that any such Portfolio may fail to so qualify or comply
with either provision; or
(f) termination by either the Fund or the Adviser by written notice
to the other parties, if either one or both the Fund and the
Adviser, respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a material
adverse change in its business, operations, financial condition,
or prospects since the date of this Agreement or is the subject
of material adverse publicity; or
(g) termination by the Company by written notice to the other
parties, if the Company shall determine, in its sole judgment
exercised in good faith, that the Fund or the Adviser has
suffered a material adverse change in its business, operations,
financial condition or prospects since the date of this Agreement
or is the subject of material adverse publicity; or
(i) at the option of the Fund with respect to any Portfolio, upon 60
days' advance written notice from the Fund or the Adviser to the
Company, upon a decision by the Fund to cease offering shares of
the Portfolio for sale
(j) termination by the Company upon any substitution of the shares of
another investment company or series thereof for shares of a
Designated Portfolio of the Fund in accordance with the terms of
the Contracts, provided that the Company has given at least 45
days prior written notice to the Fund and Adviser of the date of
substitution.
10.2. Notwithstanding any termination of this Agreement, the Fund and the
Adviser shall, at the option of the Company, continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
Agreement, for all Contracts in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Contracts"), unless the
Company seeks an order pursuant to Section 26(b) of the 1940 Act to permit the
substitution of other securities for the shares of the Designated Portfolios.
Specifically, the owners of the Existing Contracts shall be permitted to
reallocate investments in the Fund, redeem investments in the Fund and/or invest
in the Fund upon the making of additional purchase payments under the Existing
Contracts (subject to any such election by the Company).
-15-
10.3. Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
10.4 The Company shall not redeem Portfolio shares attributable to the
Contracts (as opposed to Portfolio shares attributable to the Company's assets
held in a Separate Account) except (i) as necessary to implement Contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
("Legally Required Redemption") or (iii) as permitted by an order of the SEC
pursuant to Section 26(c) of the 1940 Act or (iv) as permitted by a Contract if
such Contract is not, and is not required to be, registered pursuant to the
federal securities laws. Upon request, the Company will promptly furnish to the
Fund and the Adviser the opinion of counsel for the Company (which counsel shall
be reasonably satisfactory to the Fund and the Adviser) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required Redemption.
Furthermore, except in cases where permitted under the terms of the Contracts,
the Company shall not prevent Contract owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Adviser 90 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Company: First Security Benefit Life Insurance and Annuity
Company of New York
Attention: General Counsel
One Security Benefit Place
Topeka, Kansas 66636 - 0001
If to the Fund: Potomac Funds
Attention: Xxxxxx X. X'Xxxxx
000 Xxxxx Xxxxxx, Xxxxx 000
Xxx Xxxx, XX 00000-0000
If to Adviser: Xxxxxxxx Asset Management, LLC
Attention: Xxxxxx X. X'Xxxxx
000 Xxxxx Xxxxxx, Xxxxx 000
Xxx Xxxx, XX 00000-0000
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to the property of
the respective Designated Portfolios listed on Schedule A hereto as though
each such Designated Portfolio had separately contracted with the Company
and the Adviser for the enforcement of any claims against the Fund. The
parties agree that neither the Board, officers, agents or shareholders of
the Fund assume any personal liability or responsibility for obligations
entered into by or on behalf of the Fund.
-16-
12.2. Subject to the requirements of legal process and regulatory
authority, the Fund and the Adviser shall treat as confidential the names
and addresses of the owners of the Contracts. Each party shall treat as
confidential all information reasonably identified as confidential in
writing by any other party hereto and, except as permitted by this
Agreement, shall not disclose, disseminate or utilize such information
without the express written consent of the affected party until such time
as such information has come into the public domain.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the
same instrument.
12.5. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC,
the NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. Notwithstanding the generality of the foregoing, each
party hereto further agrees to furnish the New York Insurance Commissioner
with any information or reports in connection with services provided under
this Agreement which such Commissioner may request in order to ascertain
whether the variable insurance operations of the Company are being
conducted in a manner consistent with the New York insurance laws and
regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies, and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
-17-
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative.
First Security Benefit Life
Insurance and Annuity Company of New York By its authorized officer
By:/s/ Xxxxxx Xxxx, Xx.
--------------------
Xxxxxx Xxxx, Xx.
Title: Vice President and Chief
Marketing Officer
Date:
Potomac Insurance Trust By its authorized officer
By: /s/ Xxxxxx X. X'Xxxxx
---------------------
Title: President
Date:11/8/04
Xxxxxxxx Asset Management, LLC By its authorized officer
By: /s/ Xxxxxx X. X'Xxxxx
---------------------
Title: Managing Partner
Date: 11/8/04
18
November 8, 2004
SCHEDULE A
ACCOUNT(S) CONTRACT(S) DESIGNATED PORTFOLIO(S)
Variable Annuity Account B FSB234 Evolution Managed Bond
Evolution Managed Equity
A-1
