HIGHLAND FUNDS II
SMALL-CAP EQUITY FUND
SUB-ADVISORY AGREEMENT
This agreement ("Agreement") is made as of February 18,
2011, by and among HIGHLAND FUNDS ASSET MANAGEMENT,
L.P.("HFAM"), a Delaware limited partnership, HIGHLAND FUNDS
II, a Massachusetts business trust ("Trust"), on behalf of the
SMALL-CAP EQUITY FUND ("Fund"), a series of the Trust, solely
with respect to Section 13(b) of this Agreement, and PALISADE
CAPITAL MANAGEMENT, L.L.C., a New Jersey limited liability
company ("Sub-Adviser").
RECITALS
WHEREAS, HFAM has entered into an Investment Advisory and
Administration Agreement dated February 18, 2011 ("Advisory
Agreement") with the Trust, an open-end management investment
company registered under the Investment Company Act of 1940,
as amended ("1940 Act"), with respect to the Fund, a series of
the Trust;
WHEREAS, pursuant to Section 2 of the Advisory Agreement,
HFAM is authorized to delegate its investment advisory
responsibilities to other investment advisers, subject to the
requirements of the 1940 Act;
WHEREAS, HFAM wishes to retain the Sub-Adviser to furnish
certain investment advisory services to HFAM and the Fund, and
the Sub-Adviser is willing to furnish those services;
WHEREAS, subject to the approval of the Fund's Board of
Trustees, HFAM may retain additional sub-advisers to furnish
similar investment advisory services to HFAM and the Fund, and
may at its sole discretion, allocate the Fund's assets among
the Fund's sub-advisers to be managed in accordance with their
respective sub-advisory agreements; and
WHEREAS, HFAM intends that this Agreement will become
effective when approved in accordance with Section 15 of the
1940 Act.
NOW, THEREFORE, in consideration of the premises and
mutual covenants herein contained, the parties agree as
follows:
1. Appointment.
HFAM hereby appoints the Sub-Adviser as an investment
sub-adviser to the Fund for the period and on the terms set
forth in this Agreement. The Sub-Adviser accepts that
appointment and agrees to render the services herein set
forth, for the compensation herein provided. The Sub-Adviser
further acknowledges and agrees that such appointment as an
investment sub-adviser to the Fund is limited to those Fund
assets allocated to the Sub-Adviser by HFAM, which may be
changed from time to time at the sole discretion of HFAM
("Allocated Assets"). The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall,
except as expressly provided or authorized, have no authority
to act for or represent the Trust, the Fund or HFAM in any way
or otherwise be deemed an agent of the Trust, the Fund or
HFAM.
2. Duties as Sub-Adviser.
(a) Subject to the oversight and supervision of HFAM
and the Board of Trustees of the Trust (the "Board"), the Sub-
Adviser will provide a continuous investment program for the
Fund with respect to the Sub-Adviser's Allocated Assets,
including investment research and management. The Sub-Adviser
will determine from time to time what investments will be
purchased, retained or sold by the Fund with respect to such
Allocated Assets. The Sub-Adviser will be responsible for
placing purchase and sell orders for the Allocated Assets. The
Sub-Adviser will consult with HFAM from time to time regarding
matters pertaining to the Fund, including market strategy and
portfolio characteristics. The Sub-Adviser will provide
services under this Agreement in accordance with the Fund's
investment objective, policies and restrictions as stated in
the Registration Statement, the Constituent Documents (as
defined below), the Investment Guidelines (as defined below),
and applicable law. In this connection and in connection with
the further duties set forth in this Section 2 as provided
below, the Sub-Adviser shall provide HFAM and the Board with
such periodic reports and documentation as HFAM or the Board
shall reasonably request regarding the Sub-Adviser's
management of the Fund's Allocated Assets, compliance with
applicable laws and rules and the Registration Statement (as
defined below) and all requirements hereunder. The Sub-
Adviser acknowledges that copies of the Trust's current
registration statement on Form N-1A and any amendments or
supplements thereto ("Registration Statement"), and the
Trust's Agreement and Declaration of Trust and By-Laws, if
any, ("Constituent Documents"), each as currently in effect,
have been delivered to the Sub-Adviser.
(b) The Sub-Adviser shall carry out its
responsibilities under this Agreement in compliance with: (i)
the Fund's investment objective, policies and restrictions as
set forth in the Registration Statement, (ii) the Constituent
Documents, (iii) all investment guidelines, policies,
procedures or directives of the Trust or HFAM as provided to
the Sub-Adviser ("Investment Guidelines"), (iv) the 1940 Act
and the rules promulgated thereunder, (v) the Investment
Advisers Act of 1940, as amended ("Advisers Act"), and the
rules promulgated thereunder, and (vi) other applicable
federal and state laws and related regulations. To the extent
that the Investment Guidelines applicable to the Sub-Adviser's
Allocated Assets are inconsistent with the investment
restrictions applicable to the Fund's total assets as set
forth in the Registration Statement, the Sub-Adviser shall
comply with the policies, procedures and directives as set
forth in the Investment Guidelines. HFAM shall promptly
notify the Sub-Adviser of changes to (i), (ii) or (iii) above
and shall consult with Sub-Adviser before making any changes
relating solely to the Fund's investment objective, policies
and restrictions as set forth in the Registration Statement,
as well as to the policies, procedures and directives set
forth in the Investment Guidelines. In particular, the Sub-
Adviser shall take all actions necessary with respect to the
Allocated Assets, as if they were the Fund's only assets, to
ensure that the Fund: (A) satisfies the asset diversification
and gross income qualification requirements as set forth under
sub-chapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and (B) complies with the diversification
requirements of Section 817(h) of the Code and regulations
thereunder [as these apply to separate accounts through which
variable life insurance contracts and variable annuity
contracts are issued].
(c) The Sub-Adviser shall take all actions which it
considers necessary to implement the investment objectives and
policies of the Fund, and in particular, to place all orders
for the purchase or sale of securities or other investments
for the Fund's Allocated Assets with brokers or dealers
selected by Sub-Adviser. For that limited purpose, the Sub-
Adviser is authorized as the agent of the Trust to give
instructions to the Trust's custodian(s) as to deliveries of
securities or other investments and payments of cash for the
account of the Fund. In connection with the selection of
brokers or dealers and the placing of purchase and sale orders
with respect to investments of the Fund, the Sub-Adviser is
directed at all times to seek to obtain best execution and
price within the policy guidelines determined by the Board.
In addition to seeking the best price and execution,
to the extent covered by Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and
applicable guidance of the Securities and Exchange Commission
(the "SEC"), the Sub-Adviser is also authorized to take into
consideration other relevant factors which may include,
without limitation: (i) the execution capabilities of such
brokers and dealers, (ii) research, brokerage and other
services provided by brokers and dealers which the Sub-Adviser
believes will enhance its general portfolio management
capabilities, (iii) the size of the transaction, (iv) the
difficulty of execution, (v) the operational facilities of
such brokers and dealers, (vi) the risk to such a broker or
dealer of positioning a block of securities, and (vii) the
overall quality of brokerage and research services provided by
such brokers and dealers. The Sub-Adviser is also authorized
to effect individual securities transactions at commission
rates in excess of the minimum commission rates available, if
it determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Sub-
Adviser's overall responsibilities with respect to the Fund.
The policies with respect to brokerage allocation, determined
from time to time by the Board, are those disclosed in the
Registration Statement. The Sub-Adviser will periodically
evaluate the statistical data, research and other investment
services provided to it by brokers and dealers. Such services
may be used by the Sub-Adviser in connection with the
performance of its obligations under this Agreement or in
connection with other advisory or investment operations
including using such information in managing its own accounts.
Whenever the Sub-Adviser simultaneously places orders to
purchase or sell the same security on behalf of the Fund and
one or more other accounts advised by the Sub-Adviser, the
orders will be allocated as to price and amount among all such
accounts in a manner believed to be equitable by the Sub-
Adviser to each account and otherwise in accordance with the
Sub-Adviser's procedures approved by the Board.
(d) Only with prior written consent from HFAM and
subject to: (i) the requirement that the Sub-Adviser seek to
obtain best execution and price within the policy guidelines
determined by the Board and set forth in the Registration
Statement, (ii) the provisions of the 1940 Act and the
Advisers Act, (iii) the provisions of the 1934 Act, and (iv)
other applicable provisions of law, the Sub-Adviser or an
affiliated person of the Sub-Adviser or of HFAM may act as
broker for the Fund in connection with the purchase or sale of
securities or other investments for the Fund. Such brokerage
services are not within the scope of the duties of the Sub-
Adviser under this Agreement. Subject to the requirements of
applicable law and any procedures adopted by the Board, the
Sub-Adviser or its affiliated persons may receive brokerage
commissions, fees or other remuneration from the Fund or the
Trust for such services in addition to the Sub-Adviser's fees
for services under this Agreement.
(e) The Sub-Adviser shall maintain, in the form and
for the periods required by Rule 31a-2 under the 1940 Act, all
records relating to the Fund's investments that are required
to be maintained by the Trust pursuant to the requirements of
Rule 31a-1 under the 1940 Act. The Sub-Adviser agrees that
all books and records which it maintains for the Fund or the
Trust are the property of the Trust and further agrees to
surrender the same to HFAM or the Trust upon HFAM's or the
Trust's request (provided, however, that Sub-Adviser may
retain copies of such records). The Sub-Adviser agrees to
furnish the Board and HFAM with such periodic and special
reports regarding the Fund's investments and records relating
to the same as the Board or HFAM reasonably may request.
Further, the Sub-Adviser shall permit the books and records
maintained with respect to the Fund to be inspected and
audited by the Trust, HFAM or their respective agents at all
reasonable times during normal business hours upon reasonable
notice.
(f) At such times as shall reasonably be requested,
the Sub-Adviser will provide to the Board and HFAM economic
and investment analyses and reports, information required in
the Registration Statement and information necessary for HFAM
and the Board to review the Fund or discuss the management of
it. The Sub-Adviser will provide quarterly reports setting
forth the Fund's performance with respect to the Allocated
Assets and the Sub-Adviser's private account composite
performance and will complete on a quarterly basis the
checklist provided to it by HFAM regarding the Fund's
investments and transactions. The Sub-Adviser shall make
available to the Board and HFAM any economic, statistical and
investment services normally available to institutional or
other customers of the Sub-Adviser. The Sub-Adviser will make
available its officers and employees to meet with the Board on
reasonable notice to review the Fund's investments.
(g) In accordance with procedures adopted by the
Board, as amended from time to time, the Sub-Adviser is
responsible for assisting the Board in determining the fair
valuation of any illiquid portfolio securities held within the
Allocated Assets and will assist the Trust's accounting
services agent or HFAM to obtain independent sources of market
value for all other portfolio securities.
Further, the Sub-Adviser shall be responsible to
ensure that the Fund and/or HFAM is promptly notified of any
and all instances in which the Sub-Adviser knows or should
have reason to know that the available price or value of a
portfolio security does not represent the fair value of the
instrument, or that there is no price or value available from
any source with respect to a particular instrument and that
such instrument should accordingly be subject to a fair
valuation determination in accordance with procedures adopted
by the Board, as amended from time to time.
(h) At such times as shall be reasonably requested
by HFAM, the Sub-Adviser shall review and certify in writing
that the information stated in the Trust's Registration
Statement relating to the Sub-Adviser, its management of the
Fund with respect to the Allocated Assets, including
investment objectives, strategies and related risks, and its
performance history is true, correct and complete to the best
of its knowledge.
(i) The Sub-Adviser will promptly notify HFAM of any
change of control of the Sub-Adviser, including any change of
its 25% shareholders or members, as applicable, and any
changes in the key personnel of the Sub-Adviser, including
without limitation, any change in the portfolio management
personnel responsible for the Allocated Assets of the Fund, in
each case prior to or promptly after such change.
Notwithstanding the foregoing, the Sub-Adviser will promptly
notify HFAM of any existing agreement, or upon entering into
any agreement, that may result in a change of control of the
Sub-Adviser, including without limitation the retention of an
agent to assist in the sale of all, or a significant portion,
of the business of the Sub-Adviser.
(j) The Sub-Adviser will calculate its private
account composite performance in compliance with the Global
Investment Performance Standards of the CFA Institute Centre
for Financial Market Integrity and such performance will be
reviewed or verified at least annually by an independent
accounting firm.
(k) Unless HFAM gives the Sub-Adviser written
instructions to the contrary, the Sub-Adviser shall, in a
prudent and diligent manner, vote proxies in the best
interests of the Fund as may be necessary or advisable in
connection with any matters submitted to a vote of the
shareholders of an issuer held by the Fund and shall provide
HFAM with its proxy voting procedures and guidelines and any
amendments thereto.
3. Expenses.
During the term of this Agreement, the Sub-Adviser will
bear all expenses incurred by it in connection with its
investment sub-advisory services under this Agreement.
4. Supplemental Arrangements
The Sub-Adviser may enter into arrangements with other
persons affiliated with the Sub-Adviser to better enable it to
fulfill its obligations under this Agreement for the provision
of certain personnel and facilities to the Sub-Adviser, other
than the brokerage services provided in Section 2(d) herein.
5. Prohibited Conduct
In providing the services described in this Agreement,
the Sub-Adviser will not consult with any other investment
advisory firm that provides investment advisory services to
any investment company sponsored by HFAM, including the Fund,
regarding transactions in portfolio securities or other
portfolio investments of the Fund. HFAM shall provide Sub-
Adviser the list of such investment advisory firm prior to the
effectiveness of this Agreement.
6. Compensation.
For the services rendered, the facilities furnished and
the expenses assumed by the Sub-Adviser, HFAM shall pay the
Sub-Adviser no later than the twentieth (20th) business day
following the end of each calendar month, a fee based on the
net assets attributable to the aggregate Allocated Assets of
the small-cap equity funds managed by HFAM and sub-advised by
the Sub-Adviser, as provided in Schedule A to the Agreement.
7. Compliance Matters
(a) The Sub-Adviser understands and agrees that it is a
"service provider" to the Trust as contemplated by Rule 38a-1
under the 1940 Act. As such, the Sub-Adviser agrees to
cooperate fully with HFAM and the Trust and its trustees and
officers, including the Trust's Chief Compliance Officer
("CCO"), with respect to all compliance-related matters,
including the Trust's efforts to assure that each of its
service providers adopts and maintains written policies and
procedures that are reasonably designed to prevent violation
of the "federal securities laws" (as that term is defined by
Rule 38a-1) by the Trust, HFAM and Sub-Adviser. In this
regard, the Sub-Adviser shall:
(i) submit to the Board for its consideration and
approval, the Sub-Adviser's applicable compliance
policies and procedures;
(ii) submit to the Board for its consideration and
approval, annually (and at such other times as the
Trust may reasonably request), a written report
("Report") fully describing the results of the Sub-
Adviser's review of the adequacy of its compliance
policies and procedures, including its assessment of
the effectiveness of such policies and procedures
and a description of any material amendments to such
policies and procedures since the more recent of:
(A) the Board's approval of such policies and
procedures or (B) the most recent Report;
(iii) provide reports discussing the Sub-Adviser's
compliance program as reasonably requested by HFAM
and special reports in the event of material
compliance matters;
(iv) permit HFAM and the Trust and its trustees and
officers to become familiar with the Sub-Adviser's
operations and understand those aspects of the Sub-
Adviser's operations that may expose HFAM and the
Trust to compliance risks or lead to a violation by
the Trust, HFAM or the Sub-Adviser of the federal
securities laws;
(v) provide HFAM, the Trust and its trustees and CCO
with such certifications regarding compliance as may
be reasonably requested; and
(vi) make the Sub-Adviser's personnel and compliance
policies and procedures reasonably available to such
personnel as HFAM and the Trust and its trustees and
officers may designate to evaluate the effectiveness
of the Sub-Adviser's compliance controls, policies
and procedures.
(b) The Sub-Adviser agrees to maintain and implement a
compliance program that complies with the requirements of Rule
206(4)-7 under the Advisers Act.
8. Annual Contract Renewals.
This Agreement may only continue in effect for a
period of more than two years from the date of its execution,
if such continuance is specifically approved at least annually
by the Board of the Fund. As such, the Sub-Adviser agrees to
cooperate fully with HFAM and the Trust to provide the Board
with any and all relevant information that will enable the
Board to make an informed determination as to whether to renew
the Agreement for the ensuing year. In that regard, the Sub-
Adviser agrees to provide the Board on an annual basis with
such relevant information that includes, but is not limited
to, the following:
(a) information confirming the financial condition of
the Sub-Adviser and the Sub-Adviser's profitability derived
from its relationship with the Fund;
(b) a description of the personnel and services provided
by the Sub-Adviser;
(c) information on compliance matters;
(d) comparative information on investment performance
and advisory fees;
(e) information regarding brokerage and portfolio
transactions; and
(f) information on current legal matters.
9. Representations and Warranties of Sub-Adviser.
The Sub-Adviser represents, warrants and agrees as
follows:
(a) The Sub-Adviser (i) is registered as an investment
adviser under the Advisers Act and will continue to be so
registered for so long as this Agreement remains in effect;
(ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Agreement;
(iii) has met, and will seek to continue to meet for so long
as this Agreement remains in effect, any other applicable
federal or state requirements, or the applicable requirements
of any regulatory or industry self-regulatory agency,
necessary to be met in order to perform the services
contemplated by this Agreement; (iv) has the authority to
enter into and perform the services contemplated by this
Agreement and the execution, delivery and performance by the
Sub-Adviser of this Agreement does not contravene or
constitute a default under any agreement binding upon the Sub-
Adviser; (v) will promptly notify HFAM of the occurrence of
any event that would disqualify it from serving as an
investment adviser of an investment company pursuant to
Section 9(a) of the 1940 Act or otherwise; (vi) has filed a
notice of exemption pursuant to Rule 4.14 under the Commodity
Exchange Act with the Commodity Futures Trading Commission and
the National Futures Association, or is not required to file
such exemption; and (vii) is duly organized and validly
existing under the laws of the state in which it was organized
with the power to own and possess its assets and carry on its
business as it is now being conducted.
(b) The Sub-Adviser has adopted a written code of ethics
pursuant to Rule 204A-1 under the Advisers Act that also
complies with Rule 17j-1 under the 1940 Act (the "Code"), and
will provide HFAM and the Board with a copy of that code of
ethics, together with evidence of its adoption. Within
fifteen (15) days of the end of the last calendar quarter of
each year that this Agreement is in effect, the president, any
vice president or chief compliance officer of the Sub-Adviser
shall certify to HFAM that the Sub-Adviser (i) has complied
with the requirements of Rule 204A-1 under the Advisers Act
and Rule 17j-1 under the 1940 Act during the previous year and
that there has been no violation of the Sub-Adviser's code of
ethics or, if such a violation has occurred, the details of
such violation and of the appropriate action that was taken in
response to such violation and (ii) has adopted procedures
reasonably necessary to prevent Access Persons (as defined in
Rule 17j-1) from violating the Code. On an annual basis, the
Sub-Adviser shall provide a written report to the Board and
HFAM pursuant to Rule 17j-1(c)(2) under the 1940 Act, and upon
a reasonable written request from HFAM, furnish to HFAM all
other records relevant to the Sub-Adviser's code of ethics as
it relates to this Agreement
(c) The Sub-Adviser certifies that the information
stated in each of the most current Post Effective Amendment to
the Trust's Registration Statement relating to the Sub-
Adviser, its management of the Fund with respect to the
Allocated Assets and its performance history is true, correct
and complete to the best of its knowledge.
10. Representations and Warranties of HFAM.
HFAM represents, warrants and agrees that HFAM (i) is
registered as an investment adviser under the Advisers Act and
will continue to be so registered for so long as this
Agreement remains in effect; (ii) is not prohibited by the
1940 Act or the Advisers Act from performing the services
contemplated by this Agreement; (iii) has met, and will seek
to continue to meet for so long as this Agreement remains in
effect, any other applicable federal or state requirements, or
the applicable requirements of any regulatory or industry
self-regulatory agency, necessary to be met in order to
perform the services contemplated by this Agreement; (iv) has
the authority to enter into and perform the services
contemplated by this Agreement and the execution, delivery and
performance by HFAM of this Agreement does not contravene or
constitute a default under any agreement binding upon HFAM;
(v) will promptly notify the Sub-Adviser of the occurrence of
any event that would disqualify HFAM from serving as an
investment adviser of an investment company pursuant to
Section 9(a) of the 1940 Act or otherwise; (vi) has filed a
notice of exemption pursuant to Rule 4.14 under the Commodity
Exchange Act with the Commodity Futures Trading Commission and
the National Futures Association, or is not required to file
such exemption; and (vii) is duly organized and validly
existing under the Laws of the State of Delaware with the
power to own and possess its assets and carry on its business
as it is now being conducted.
11. Duty to Update Information.
The parties hereto shall promptly notify each other in
writing regarding any change to the foregoing representations
and warranties. Likewise, the Sub-Adviser agrees to notify
HFAM of any change of control of Sub-Adviser, including any
change of its general partner or 25% shareholders, as
applicable, and any changes in the key personnel of the Sub-
Adviser, including in particular portfolio management personnel
responsible for the Allocated Assets of the Fund, in each case
prior to or promptly after notice of such change.
12. Limitation Of Liability.
The Sub-Adviser shall not be liable to the Trust or HFAM
for any loss suffered by the Fund, the Trust or its
shareholders or by HFAM in connection with the matters to
which this Agreement relates, except (a) a loss resulting from
willful misfeasance, bad faith or gross negligence on its part
in the performance of its duties or from reckless disregard by
it of its obligations and duties under this Agreement, and (b)
to the extent otherwise provided in Section 36(b) of the 1940
Act concerning loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services;
provided, however, that with respect to subsection (b) above,
the Sub-Adviser shall not be liable to the Trust or HFAM for
any loss in excess of its proportional share of any loss
suffered by the Trust or HFAM in connection with a Section
36(b) claim. Notwithstanding the foregoing, Sub-Adviser shall
be liable for any loss suffered by the Fund, the Trust or its
shareholders or by HFAM as a result of any negligent act or
omission by Sub-Adviser relating to or arising out of any
breach by the Sub-Adviser of the second paragraph of Section
2(g) of this Agreement.
13. Indemnification.
(a) HFAM agrees to indemnify and hold the Sub-
Adviser, its officers and directors, and any person who
controls the Sub-Adviser within the meaning of Section 15 of
the Securities Act of 1933, as amended ("1933 Act") harmless
from any and all direct or indirect liabilities, losses or
damages (including reasonable attorneys' fees) arising out of
any claim, demand, action, suit or proceeding arising out of:
(i) HFAM's breach of its duties under this
Agreement; or
(ii) any bad faith, willful misfeasance,
reckless disregard or gross negligence on the part of HFAM or
any of its trustees, officers or employees in the performance
of HFAM's duties and obligations under this Agreement, except
to the extent such loss results from the Sub-Adviser's own
willful misfeasance, bad faith, reckless disregard or gross
negligence in the performance of Sub-Adviser's duties and
obligations under this Agreement.
(b) The Trust agrees to indemnify and hold the Sub-
Adviser, its officers and directors, and any person who
controls the Sub-Adviser within the meaning of Section 15 of
the 1933 Act harmless from any and all direct or indirect
liabilities, losses or damages (including reasonable
attorneys' fees) arising out of any claim, demand, action,
suit or proceeding arising out of any misrepresentation of a
material fact or the omission of a fact necessary to make
information not misleading in the Registration Statement, any
proxy statement, or any annual or semi-annual report to
investors in the Fund (other than a misstatement or omission
relating to disclosure about the Sub-Adviser approved by the
Sub-Adviser or provided to HFAM or the Trust by the Sub-
Adviser or relating to an incorrect valuation of a Fund
portfolio security that resulted from any breach by the Sub-
Adviser of the second paragraph of Section 2(g) of this
Agreement).
(c) The Sub-Adviser agrees to indemnify and hold
HFAM, its officers and trustees, and any person who controls
HFAM within the meaning of Section 15 of the 1933 Act, and the
Trust harmless from any and all direct or indirect
liabilities, losses or damages (including reasonable
attorneys' fees) arising out of any claim, demand, action,
suit or proceeding arising out of:
(i) any misrepresentation of a material fact or
the omission of a fact necessary to make information not
misleading in the Registration Statement, any proxy statement,
or any annual or semi-annual report to investors in the Fund
relating to disclosure about the Sub-Adviser approved by the
Sub-Adviser or provided to HFAM or the Trust by the Sub-
Adviser or relating to an incorrect valuation of a Fund
portfolio security that resulted from any breach by the Sub-
Adviser of the second paragraph of Section 2(g) of this
Agreement;
(ii) Sub-Adviser's breach of its duties under this
Agreement; or
(iii) any bad faith, willful misfeasance, reckless
disregard or gross negligence on the part of the Sub-Adviser or any of its
directors, officers or employees in the performance of the Sub-Adviser's
duties and obligations under this Agreement, except to the
extent such loss results from the Trust's or HFAM's own
willful misfeasance, bad faith, reckless disregard or gross
negligence in the performance of their respective duties and
obligations under the Advisory Agreement or this Agreement.
14. Survival of Representations and Warranties.
All representations and warranties made by the Sub-
Adviser and HFAM pursuant to Sections 9 and 10, respectively,
shall survive for the duration of this Agreement and the
parties hereto shall promptly notify each other in writing
upon becoming aware that any of the foregoing representations
and warranties are no longer true.
15. Duration and Termination.
(a) This Agreement shall become effective upon the date
first above written and will continue thereafter so long as
the continuance is specifically approved at least annually (a)
by the Board or (b) by a vote of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act,
provided that in either event the continuance is also approved
by a majority of the Board who are not parties to this
Agreement or "interested persons" (as defined in the 0000 Xxx)
of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on the approval.
(b) This Agreement may be terminated at any time without
the payment of any penalty, by the Board, or by vote of a
majority of the Fund's outstanding voting securities, on 60
days' written notice to the Sub-Adviser. This Agreement may
also be terminated, without the payment of any penalty, by
HFAM: (i) upon 60 days' written notice to the Sub-Adviser;
(ii) upon material breach by the Sub-Adviser of any of the
representations and warranties set forth in Section 9 of this
Agreement; or (iii) if the Sub-Adviser becomes unable to
discharge its duties and obligations under this Agreement,
including circumstances such as financial insolvency of the
Sub-Adviser or other circumstances that could adversely affect
the Fund. The Sub-Adviser may terminate this Agreement at any
time, without the payment of a penalty, on 60 days' written
notice to HFAM. This Agreement will terminate automatically in
the event of its assignment, including without limitation, a
change of control of the Sub-Adviser, or upon termination of
the Advisory Agreement.
16. Change of Control of the Sub-Adviser.
The Sub-Adviser will be liable to the Trust and HFAM for
all reasonable direct and indirect costs resulting from a
change of control of the Sub-Adviser, including without
limitation all costs associated with proxy solicitations,
Board meetings, revisions to prospectuses, statements of
additional information and marketing materials, and the hiring
of another sub-adviser to the Fund. The understandings and
obligations set forth in this Section 16 shall survive the
termination of this Agreement and shall be binding upon the
Sub-Adviser's successor(s) and/or assign(s).
17. Confidentiality.
During the term of this Agreement, and at all times
thereafter, the Sub-Adviser shall not itself, or assist anyone
else to, directly or indirectly, disclose to any person or
entity Confidential Information of HFAM, the Trust or the
Fund, now known or subsequently learned by the Sub-Adviser.
"Confidential Information" shall mean any information, whether
written or oral, and materials furnished to or obtained by the
Sub-Adviser, which directly relates to HFAM, the Trust, the
Fund, and their affiliates, clients, customers, vendors, or
other third party's research, development, trade secrets,
techniques, processes, procedures, plans, policies, business
affairs, marketing activities, discoveries, hardware,
software, screens, specifications, designs, drawings, data and
other information and materials, regardless of its form, other
than information in the public domain.
18. Amendment of this Agreement.
No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no
material amendment to the terms of this Agreement shall be
effective until approved by a vote of a majority of the Fund's
outstanding voting securities (unless the Trust receives an
SEC exemptive order or opinion of counsel, or the issue is the
subject of a position of the SEC or its staff, permitting it
to modify the Agreement without such vote).
19. Governing Law.
This Agreement shall be construed in accordance with the
1940 Act and the laws of the State of New York, without giving
effect to the conflicts of laws principles thereof. To the
extent that the applicable laws of the State of New York
conflict with the applicable provisions of the 1940 Act, the
latter shall control.
20. Miscellaneous.
The captions in this Agreement are included for
convenience of reference only and in no way define or delimit
any of the provisions hereof or otherwise affect their
construction or effect. If any provision of this Agreement
shall be held or made invalid by a court decision, statute,
rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto. As used in
this Agreement, the terms "majority of the outstanding voting
securities," "affiliated person," "interested person,"
"assignment," "broker," "investment adviser," "net assets,"
"sale," "sell" and "security" shall have the same meaning as
such terms have in the 1940 Act, subject to such exemption as
may be granted by the SEC by any rule, regulation or order.
Where the effect of a requirement of the federal securities
laws reflected in any provision of this Agreement is made less
restrictive by rule, regulation or order of the SEC, whether
of special or general application, such provision shall be
deemed to incorporate the effect of such rule, regulation or
order. This Agreement may be signed in counterpart.
IN WITNESS WHEREOF, the parties hereto have caused
this instrument to be executed by their duly authorized
signatories as of the date and year first above written.
HIGHLAND FUNDS ASSET MANAGEMENT, L.P.
BY:
____________________________
_______
Name:
Title:
HIGHLAND FUNDS II, ON BEHALF OF
SMALL-CAP EQUITY FUND, A SERIES
OF HIGHLAND FUNDS II, SOLELY WITH
RESPECT TO SECTION 13(b) OF THIS
AGREEMENT
BY:
____________________________
_______
Name:
Title:
PALISADE CAPITAL MANAGEMENT, L.L.C.
BY:
____________________________
________
Name:
Title:
SCHEDULE A
Fees Paid to the Sub-Adviser
The Sub-Adviser's fee shall be accrued daily at
1/365th of the applicable annual rate set forth below:
First $75 million 0.50%
Next $75 million 0.45%
Over $150 million 0.40%
The foregoing breakpoints and the annual rate to be
paid by HFAM to the Sub-Adviser shall be based on the net
assets attributable to the aggregate Allocated Assets of all
the small-cap equity funds managed by HFAM and sub-advised by
the Sub-Adviser.
For the purpose of accruing compensation, the net
assets of the Fund shall be determined in the manner and on
the dates set forth in the current prospectus of the Trust,
and, on dates on which the net assets are not so determined,
the net asset value computation to be used shall be as
determined on the next day on which the net assets shall have
been determined.
In the event of termination of this Agreement, all
compensation due through the date of termination will be
calculated on a pro-rated basis through the date of
termination and paid within thirty (30) business days of the
date of termination.
