MUTUAL FUND AGREEMENT
This Agreement is made this 30th day of April, 1993 by and between FRANKLIN
TAX-FREE TRUST, a Massachusetts business trust, with principal offices at 000
Xxxxxxxx Xxxxxx Xxxxxxxxx, Xxx Xxxxx, Xxxxxxxxxx 00000 ("Franklin") and
FINANCIAL GUARANTY INSURANCE COMPANY, a New York stock insurance company, with
principal offices at 000 Xxxxxxxx, Xxx Xxxx, Xxx Xxxx 00000 ("Financial
Guaranty"), with reference to the following facts:
X. Xxxxxxxx is an open-end investment company (mutual fund), organized as a
Massachusetts business trust. Franklin currently consists of twenty-seven
separate series, two of which are: Franklin Arizona Insured Tax-Free Income
Fund (the "Arizona Fund") and Franklin Florida Insured Tax-Free Income Fund
(the "Florida Fund") (collectively, the "Insured Funds"). Each of the
Insured Funds issues a separate series of Franklin's shares and will
maintain a totally separate investment portfolio. The Insured Funds are
currently the only funds intended to be insured under this Agreement. Other
insured funds may be organized by Franklin from time to time and may be
covered by this Agreement as herein provided.
B. The Arizona Fund will invest primarily in securities of the State of
Arizona and its political subdivisions, agencies, and instrumentalities,
the interest on which is exempt from federal and Arizona personal income
taxes. The Florida Fund will invest primarily in securities of the State of
Florida and its political subdivisions, agencies, and instrumentalities,
the interest on which is exempt from federal and Florida personal income
taxes. Franklin desires to have certain of the Insured Fund's investments
in municipal securities be covered by portfolio insurance guaranteeing
their scheduled payment of interest and of principal while held by the
Insured Fund.
C. Financial Guaranty is in the business of providing insurance and financial
guaranties for a variety of investment instruments. Financial Guaranty
desires to provide Franklin the portfolio insurance described in the
preceding paragraph (B).
In consideration of the mutual covenants and conditions set forth below,
Franklin and Financial Guaranty agree as follows:
1. AGREEMENT TO INSURE.
1.1 Financial Guaranty agrees to insure the municipal securities purchased
in accordance with the terms of this Agreement from time to time by
Franklin for the Insured Fund, which municipal securities Financial
Guaranty has approved in advance of such purchase as eligible for
insurance.
1.2 Notwithstanding Section 1.1, Franklin may, but shall not be required
to purchase insurance from Financial Guaranty for municipal securities
covered by insurance obtained by the issuer or by any seller,
including a dealer, and applicable to the securities purchased by
Franklin, regardless of the insurance company providing such
insurance.
1.3 Franklin may, but shall not be required to purchase insurance from
Financial Guaranty on any municipal securities where the payment of
interest and principal is guaranteed by the United States of America
or an agency or instrumentality of the United States of America or
where an escrow or trust account has been established which contains
sufficient direct, non-callable obligations of the United States of
America or securities backed by the full faith and credit of the
United States of America in order to ensure the timely payment of
principal and interest on such municipal securities,, or on any
short-term instruments, such as Project Notes or tax exempt commercial
paper, which have the highest rating issued by Standard & Poor's.
2. ISSUANCE OF MASTER POLICIES.
2.1 Financial Guaranty agrees to issue a master insurance policy (the
"Master Policy") for the Insured Fund, and future insured funds which
may be organized by Franklin, on the date Franklin informs Financial
Guaranty it desires to have Financial Guaranty issue a Master Policy
for a given insured fund. (The form of the Master Policy is attached
hereto as Exhibit 1.) A schedule will be issued by Financial Guaranty
and attached to and made a part of each Master Policy which lists all
bonds insured in the given Insured Fund ("Schedule All). Each Schedule
A will list the following information for each insured bond in a given
Insured Fund: item number, par or face value, full name of issuer,
full name of xxxx, interest rate, date of bond, stated maturity date
of bond, CUSIP number, secondary market premium rate, annual premium
rate, annual premium amount, date bond first insured under policy, and
date bond sold (including, for all purposes of this Agreement,
municipal securities not delivered or paid prior to maturity). As
bonds are added to and/or sold from an insured fund's portfolio,
Financial Guaranty agrees to issue updated addendums to Schedule A
reflecting such deletions and/or additions. Financial Guaranty agrees
to deliver to Franklin updated Schedule A's on a monthly basis for
each insured fund. In addition, Financial Guaranty agrees to provide
to Franklin for each insured fund on a monthly basis a summary which
contains the same information specified above for inclusion in
Schedule A but on a cumulative basis for all insured bonds which have
been sold by an insured fund.
2.2 Financial Guaranty's obligation to insure any particular bond which it
has agreed to insure is subject only to Franklin's becoming the
bondholder (within the meaning of the Master Policies) (i) on or
before the 100th day following the date on which the Fund purchases
such bond (the "Purchase Date") or (ii) on or before the 150th day
following the Purchase Date in the case of "when, as and if issued"
bonds which the issuer thereof has failed timely to deliver in
definitive form to the original purchasers thereof. So long as
Franklin becomes the bondholder on or before the 100th or 150th day
following the Purchase Date, as the case may be, such municipal
security shall be insured as of the Purchase Date.
3. PREMIUM PAYMENT.
3.1 Financial Guaranty agrees to provide Franklin on the fifth business
day of each month with a premium payment statement for each Insured
Fund containing an accounting of the premium due for that month,
including adjustments for (i) any premium refund due Franklin because
of the sale of bond(s) by an Insured Fund during the previous month
(including bonds for which Secondary Market Insurance has been
purchased), (ii) any additional premium due Financial Guaranty because
of a purchase of bond(s) by an Insured Fund during the previous month,
and (iii) any single premium due for Secondary Market Insurance
acquired during the prior month.
3.2 Franklin agrees to pay Financial Guaranty on behalf of each Insured
Fund within five business days of Franklin's receipt and acceptance of
the complete premium statement provided for in Section 4.1 one-twelfth
(1/12) of the aggregate of the annual premiums for the bonds listed on
the Schedule A to the Master Policy for each Insured Fund as of the
last business day of the prior month.
3.3 If Financial Guaranty does not receive the premium payment within five
business days of Franklin's receipt of the premium statement, then
Financial Guaranty agrees to notify Franklin by the end of the sixth
business day following the Franklin's receipt of the premium statement
that it has not received said premium payment. All premium payments
due Financial Guaranty which are received by Financial Guaranty on or
before the close of business on the fifth business day following
Franklin's receipt of the premium statement shall not be considered
late. However, if a premium payment is received after the fifth
business day following Franklin's receipt of the premium statement,
Franklin agrees to pay Financial Guaranty in addition to the premium
due, interest at a rate equal to that rate of interest publicly
announced as its base rate from time to time by Citibank, N.A. in New
York, plus one percent per annum for each 24-hour period or portion
thereof payment of the premium is delayed after the fifth business day
following the Franklin's receipt of the premium statement.
3.4 Financial Guaranty agrees that once an Insured Fund purchases a bond
and begins paying a premium for that bond based upon a stated annual
premium rate, neither the annual premium rate nor the secondary market
premium rate for that bond can be changed by Financial Guaranty so
long as the bond is owned by Franklin and insured by Financial
Guaranty under the Master Policies of the Insured Funds or the
Secondary Market Policy referred to in Section 9 herein.
3.5 With or prior to each premium payment, Franklin shall, to the extent
Franklin has notice thereof, notify Financial Guaranty as to any bond
which has been paid prior to maturity, defeased (whether legally or
economically) sold by an Insured Fund or never purchased by such Fund
during the preceding thirty days. Such notification must specify the
amount of bonds affected and identify such bonds by their item number
in Schedule A to the applicable Master Policy. Such notification shall
be deemed sufficient for purposes of entitling Franklin to receive
premium refunds pursuant to the Master Policies. No such notice need
be given as to bonds with respect to which Financial Guaranty has
previously been notified to the same effect.
4. DEFINITIONS.
Financial Guaranty and Franklin agree that the following definitions shall
apply to the interpretation of the Master Policies and the interpretation
of this Agreement.
4.1 "Approved List" is the then current list of municipal securities or
bonds, including premium rate and allocation information, which
Financial Guaranty will insure under the terms of the Master Policies
if Franklin purchases such municipal securities or bonds.
4.2 "Bonds" or "municipal securities" are all of the municipal securities
or bonds purchased by Franklin which are insured under one of the
Master Policies issued to the Insured Funds.
4.3 "Interest Coupons" are the coupons, if any, attached to each of the
bonds.
4.4 "Policy Period" is the period of time commencing with the policy
effective date of a given Master Policy and continuing until the date
of cancellation of said Master Policy under Section 6.1, 6.2, or 6.3
herein.
4.5 "Policy Effective Date" is the first day on which Franklin has
coverage under a given Master Policy issued to an Insured Fund. Each
Master Policy takes effect at 12:01 Pacific Standard Time on the
Policy Effective Date.
4.6 "Purchase Date" is the date on which an Insured Fund purchases a
municipal security and is the first day on which such municipal
security is insured under a given Master Policy.
4.7 In addition to the definitions contained in the Master Policies and
any endorsements thereto, "Due for Payment," when referring to the
principal of a bond, does not refer to any extension or delay in
payment by reason of court order, legislation, or governmental action
of any nature.
5. BOND PURCHASE ALLOCATIONS.
5.1 Financial Guaranty agrees to provide Franklin by a method capable of
producing a written record with an allocation of bonds which Franklin
may purchase and have insured by Financial Guaranty during any
calendar quarter. Once Financial Guaranty makes the allocation, it
agrees not to reduce an allocation for any bond during the course of
that quarter for which the allocation is made. Furthermore, if
Franklin exhausts its allocation for a given bond during a quarter and
if it desires to purchase additional amounts of said bond during the
quarter, Financial Guaranty agrees to use its best efforts to increase
Franklin's allocation of said bonds so as to allow Franklin to make
additional purchases. However, Financial Guaranty reserves the right
to remove from the allocation lists of all its clients, any bond the
credit of which has, in the judgment of Financial Guaranty, materially
deteriorated after it made the quarterly allocations.
6. CANCELLATION OF THE MASTER POLICY.
6.1 The Master Policy is non-cancellable by Financial Guaranty except for
non-payment of premium. if Financial Guaranty has not received a
premium payment for any bond by the 15th business day following the
date on which it was due, it agrees to notify Franklin again of
Franklin's nonpayment. If Financial Guaranty has not received any such
overdue premium payment on or before the next succeeding premium due
date, then the Master Policy(ies) of the Insured Fund(s) with respect
only to the bond or bonds for which the premium payment has not been
received shall be canceled. The effective date of such cancellation
shall be as of the date on which the premium payment was originally
due and all such bonds previously insured thereunder shall cease to be
insured as of that date.
6.2 Franklin reserves the right to cancel the Master Policy upon sixty
(60) days' prior written notice to Financial Guaranty.
6.3 Franklin reserves the right upon thirty (30) days' prior written
notice to Financial Guaranty to discontinue insuring bonds under any
or all of the Master Policies which Franklin purchases after the
effective date of the notice of discontinuance. If Franklin
discontinues insuring any bonds with Financial Guaranty, it shall have
the right to continue to pay premiums to Financial Guaranty and
thereby keep any and/or all of the Master Policies in force for bonds
which are not subject to the notice of discontinuance. In this
situation, a Master Policy will terminate (i) on the date on which the
last principal payment of the last bonds, together with accrued
interest, are received by Franklin or (ii) on the date the last bond
insured under a Master Policy is sold by Franklin, whichever occurs
later. During the period of time in which the Fund keeps the Master
Policies in force, it shall also retain the right to purchase a
Secondary Market Policy for any bonds theretofore insured under the
Master Policy.
7. SECONDARY MARKET INSURANCE CONVERSION OPTION.
7.1 Financial Guaranty hereby grants Franklin the right to purchase, on a
bond-by-bond basis for each and every bond owned by Franklin which is
insured under the Master Policies, Financial Guaranty's Municipal Bond
Secondary Market Insurance Policy ("Secondary Market Policy") in
substantially the form attached to this Agreement as Exhibit 2. The
premium with respect to any Secondary Market Policy for any bond is
payable with the premium payment due in the next succeeding month
following the month in which the bond was sold.
7.2 Franklin's right to purchase the Secondary Market Policy shall apply
to each and every bond held by Franklin under one or more of the
Master Policies, regardless of whether Franklin intends to hold or
sell such bond and regardless of the then existing credit status or
rating of the issuer of said bond.
7.3 Contemporaneously with the issuance of a Secondary Market Policy for
any bond, the coverage of such bond under one or more Master Policies
shall cease and such bond shall be treated as sold for purposes of the
accounting therefor in Section 4.1 herein and no further premium shall
be due under the Master Policy or Policies.
8. APPROVAL OF BOND PURCHASE REQUEST.
8.1 Financial Guaranty agrees to use its best efforts to promptly
research, investigate, and approve or disapprove any request of
Franklin to purchase a bond which is not on Financial Guaranty's then
current Approved List.
9. TIME FOR PAYMENT BY FISCAL AGENT.
9.1 Financial Guaranty will cause its Fiscal Agent to pay Franklin any
principal and/or interest due Franklin because of nonpayment by an
issuer within 30 calendar days after Financial Guaranty has paid the
Fiscal Agent under the provisions of paragraph 2 of each Master
Policy, so long as the evidence requirements under such paragraph are
met. Within 15 days of Financial Guaranty's payment to the Fiscal
Agent, Financial Guaranty is to ascertain if there are any problems
between Franklin and the Fiscal Agent with respect to the neces5ary
evidence Franklin is to provide the Fiscal Agent. If there are any
problems, Financial Guaranty agrees to work with Franklin and the
Fiscal Agent to resolve such problems so that the Fiscal Agent can
make payment within the 30-calendar-day period.
10. CONFIDENTIALITY: FINANCIAL GUARANTY STAFF.
10.1 Financial Guaranty hereby agrees that (except for disclosures required
by law) its staff while employed by Financial Guaranty will not reveal
to any other Financial Guaranty clients, directly or indirectly, the
amount and/or types of municipal bonds purchased by Franklin. In
addition, Financial Guaranty agrees that (except for disclosures
required by law) its staff will not reveal to other Financial Guaranty
clients any information received from Franklin's staff, as a result of
the relationship between Financial Guaranty and Franklin created under
this Agreement, regarding Franklin's business, trading strategy and/or
business practices, and/or any other information which might lessen
Franklin's competitive place in the mutual fund market.
11. CONFIDENTIALITY: FRANKLIN STAFF.
11.1 Franklin hereby agrees that (except for disclosures required by law)
its staff, while employed by Xxxxxxxx, xxxx not reveal to any
individuals and/or entities outside Franklin, directly or indirectly,
any information concerning the names of the bonds and the issuers on
Financial Guaranty's Approved List, which information the staff
obtains as a result of the relationship between Financial Guaranty and
Franklin created under this Agreement.
12. INFORMATION NOTIFICATION.
12.1 Financial Guaranty agrees promptly to provide Franklin in writing,
from time to time or upon the reasonable written request of Franklin,
with (a) any information concerning any change which would make the
statements in the Registration Statement of Franklin on Form N-lA
("Registration Statement") under the caption "Insurance" relating to
Financial Guaranty and the Master Policies fail to present accurately
and fairly the summary information set forth therein or omit any
material fact with respect to the description of Financial Guaranty
relevant to the material terms of the Master Policies and/or Financial
Guaranty's ability to meet its obligations under the Master Policies
and (b) any information concerning any material adverse change in
Financial Guaranty's financial condition since the date of the
financial information relating to Financial Guaranty which was
included in the Registration Statement. The purpose for providing this
information to Franklin is to keep the information in the Registration
Statement current for so long as the Prospectus and Statement of
Addition Information in such Registration Statement, as amended or
supplemented, is required to be delivered in connection with the
offer, sale, or resale of shares of the Funds.
13. GENERAL PROVISIONS.
13.1 Headings. Headings and subheadings are provided in this Agreement for
convenience only and are not to be taken to modify in any way the
provisions with which they are associated or any other provisions.
13.2 Severability of Provisions. If any provision of this Agreement is held
to be unenforceable or in conflict with the law of any state or of the
United States, the remainder of this Agreement is to be considered
valid and enforceable according to its terms, and the Agreement is to
be construed as if such unenforceable provisions had never been
contained in it.
13.3 Waiver. A waiver of any breach of any provision of this Agreement is
not be construed as a continuing waiver of other breaches of the same
or other provisions of this Agreement. Furthermore, performance of any
obligation required of a party under this Agreement may be waived only
by written waiver signed by the other party. Such a waiver is to be
effective only with respect to the specific obligations described in
the waiver.
13.4 Limitation of Franklin's Liability. Financial Guaranty acknowledges
that it has received notice of and accepts the limitations of
Franklin's liability set forth in Article VIII of its Agreement and
Declaration of Trust. Financial Guaranty agrees that Franklin's
obligations hereunder shall be limited to Franklin and to its assets
and that Financial Guaranty its affiliates, successors or assigns
shall not seek satisfaction of any such obligation from the
shareholders of Franklin nor from any Trustee, officer, employee, or
agent of Franklin.
13.5 Remedy. Unless specifically provided ill this Agreement, no remedy
available to either party under this Agreement is intended to be
exclusive of any other remedy. Furthermore, each and every remedy is
to be cumulative and is to be in addition to every other remedy
provided under this Agreement or available at law or in equity.
13.6 Amendments. All amendments or modifications of this Agreement are to
be binding upon the parties so long as such amendments are in writing
and executed by both parties.
13.7 Successor and Assigns. This Agreement is to be binding upon and shall
inure to the benefit of each of the parties, and, except as otherwise
provided in this Agreement, to their respective legal successors and
assigns.
13.8 Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party
is to be entitled to reasonable attorneys' fees, costs, and necessary
disbursements in addition to any other relief to which such party is
entitled.
13.9 General Assurances. The parties agree to execute, acknowledge, and
deliver all such further instruments and do all such other acts as may
be appropriate in order to carry out the intent and purposes of this
Agreement.
13.10 Notices. Any notice, request, or communication required under this
Agreement is to be in writing and is for all purposes deemed to be
fully given if sent by telegram, if delivered personally, or if
mailed, postage prepaid, return receipt requested by certified or
registered mail, to the respective parties at the addresses set forth
at the beginning of this Agreement. Either party may change its
address for the purposes of this Agreement by giving the ' other party
written notice of its new address. A communication, if received after
the date on which it is due, will nevertheless be considered timely if
it was mailed at least seven (7) days prior to the date on which it
was due.
13.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which is to be deemed an original, but all such
counterparts together constitute one and the same instrument.
13.12 Force Majeure. Neither party will be liable in damages or will be
considered in breach for any delay or default in performing under this
Agreement if such delay or default is caused by conditions beyond its
control, including but not limited to acts of God, government
restriction, wars or insurrections, strikes, fires, floods, severe
weather, work stoppages, lockouts, lack of materials, default of a
common carrier, or similar occurrences.
13.13 Governing Law. This Agreement is to be interpreted and construed, and
the legal relations created by it are to be determined, in accordance
with the laws of the State of New York.
13.14 Entire Agreement. This Agreement and the Exhibits thereto constitute
the sole and only Agreement of the parties with respect to the subject
matter hereof. They supersede any and all prior or contemporaneous
oral or written agreements, proposals, understandings, promises,
negotiations, representations, or communications between the parties
relating to this Agreement and all past course of dealing or industry
custom, all of which are merged herein. If any provision in Financial
Guaranty operations Manual is in conflict with this Agreement, this
Agreement will control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized officers as of the date first above written.
FRANKLIN TAX-FREE TRUST
By: /s/ XXXXXXX X. XXXXXX
Title: V.P. Secretary
FINANCIAL GUARANTY INSURANCE COMPANY
By: /s/ XXXXXXX X XXXXX
Xxxxxxx X. Price
Managing Director
