XXXXXXXXX TAX-FREE FUND OF KENTUCKY
SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made as of [ ], 1998 by and between
AQUILA MANAGEMENT CORPORATION (the "Manager"), 000 Xxxxxxx
Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, and BANC ONE
INVESTMENT ADVISORS CORPORATION (the "Sub- Adviser"), 000 Xxxx
Xxxxxxxxx Xxxxxx, Xxxxxxxxxx, XX 00000.
W I T N E S S E T H :
WHEREAS, XXXXXXXXX TAX-FREE TRUST (the "Business Trust") is
a Massachusetts business trust which is registered under the
Investment Company Act of 1940 (the "Act") as an open-end, non-
diversified management investment company, the sole series and
portfolio of which is Xxxxxxxxx Tax-Free Fund of Kentucky (the
"Fund");
WHEREAS, the Manager has entered into an Advisory and
Administration Agreement as of the date hereof with the Business
Trust (the "Advisory and Administration Agreement") pursuant to
which the Manager shall act as investment adviser with respect to
the Fund; and
WHEREAS, pursuant to paragraph 2 of the Advisory and
Administration Agreement, the Manager wishes to retain the Sub-
Adviser for purposes of rendering investment advisory services to
the Manager in connection with the Fund upon the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual promises and
agreements herein contained and other good and valuable
consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. In General
The Manager hereby appoints the Sub-Adviser to render, to
the Manager and to the Fund, investment research and advisory
services as set forth below under the supervision of the Manager
and subject to the approval and direction of the Board of
Trustees of the Business Trust. The Sub-Adviser shall, all as
more fully set forth herein, act as managerial investment adviser
to the Fund with respect to the investment of the Fund's assets,
and supervise and arrange the purchase of securities for and the
sale of securities held in the portfolio of the Fund.
2. Duties and Obligations of the Sub-Adviser With Respect To
Investment of the Assets of the Fund
(a) Subject to the succeeding provisions of this section and
subject to the direction and control of the Manager and the Board
of Trustees of the Business Trust, the Sub-Adviser shall:
(i) supervise continuously the investment program of the
Fund and the composition of its portfolio;
(ii) determine what securities shall be purchased or sold by
the Fund;
(iii) arrange for the purchase and the sale of securities
held in the portfolio of the Fund;
(iv) at its expense provide for pricing of the Fund's
portfolio daily using a pricing service or other source of
pricing information satisfactory to the Fund and, unless
otherwise directed by the Board of Trustees, provide for
pricing of the Fund's portfolio at least quarterly using
another such source satisfactory to the Fund; and
(v) consult with the Manager in connection with its duties
hereunder.
(b) Any investment program furnished by the Sub-Adviser
under this section shall at all times conform to, and be in
accordance with, any requirements imposed by: (1) the Investment
Company Act of 1940 (the "Act") and any rules or regulations in
force thereunder; (2) any other applicable laws, rules and
regulations; (3) the Declaration of Trust and By-Laws of the
Business Trust as amended from time to time; (4) any policies and
determinations of the Board of Trustees of the Business Trust;
and (5) the fundamental policies of the Fund, as reflected in its
registration statement under the Act or as amended by the
shareholders of the Fund.
(c) The Sub-Adviser shall give to the Manager and to the
Fund the benefit of its best judgment and effort in rendering
services hereunder, but the Sub-Adviser shall not be liable for
any loss sustained by reason of the adoption of any investment
policy or the purchase, sale or retention of any security,
whether or not such purchase, sale or retention shall have been
based upon (i) its own investigation and research or (ii)
investigation and research made by any other individual, firm or
corporation, if such purchase, sale or retention shall have been
made and such other individual, firm or corporation shall have
been selected in good faith by the Sub-Adviser.
(d) Nothing in this Agreement shall prevent the Sub-Adviser
or any affiliated person (as defined in the Act) of the Sub-
Adviser from acting as investment adviser or manager for any
other person, firm or corporation and shall not in any way limit
or restrict the Sub-Adviser or any such affiliated person from
buying, selling or trading any securities for its own or their
own accounts or for the accounts of others for whom it or they
may be acting, provided, however, that the Sub-Adviser expressly
represents that, while acting as Sub-Adviser, it will undertake
no activities which, in its judgment, will adversely affect the
performance of its obligations to the Fund under this Agreement.
(e) In connection with its duties to arrange for the
purchase and sale of the Fund's portfolio securities, the Sub-
Adviser shall select such broker-dealers ("dealers") as shall, in
the Sub-Adviser's judgment, implement the policy of the Fund to
achieve "best execution," i.e., prompt, efficient, and reliable
execution of orders at the most favorable net price. The Sub-
Adviser shall cause the Fund to deal directly with the selling or
purchasing principal or market maker without incurring brokerage
commissions unless the Sub-Adviser determines that better price
or execution may be obtained by paying such commissions; the Fund
expects that most transactions will be principal transactions at
net prices and that the Fund will incur little or no brokerage
costs. The Business Trust understands that purchases from
underwriters include a commission or concession paid by the
issuer to the underwriter and that principal transactions placed
through dealers include a spread between the bid and asked
prices. In allocating transactions to dealers, the Sub-Adviser
is authorized to consider, in determining whether a particular
dealer will provide best execution, the dealer's reliability,
integrity, financial condition and risk in positioning the
securities involved, as well as the difficulty of the transaction
in question, and thus need not pay the lowest spread or
commission available if the Sub-Adviser determines in good faith
that the amount of commission is reasonable in relation to the
value of the brokerage and research services provided by the
dealer, viewed either in terms of the particular transaction or
the Sub-Adviser's overall responsibilities. If, on the foregoing
basis, the transaction in question could be allocated to two or
more dealers, the Sub-Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the Fund. Such research may be in
written form or through direct contact with individuals and may
include quotations on portfolio securities and information on
particular issuers and industries, as well as on market,
economic, or institutional activities. The Business Trust
recognizes that no dollar value can be placed on such research
services or on execution services and that such research services
may or may not be useful to the Fund and may be used for the
benefit of the Sub-Adviser or its other clients.
(f) The Sub-Adviser agrees to maintain, and to preserve for
the periods prescribed, such books and records with respect to
the portfolio transactions of the Fund as are required by
applicable law and regulation, and agrees that all records which
it maintains for the Fund on behalf of the Manager shall be the
property of the Fund and shall be surrendered promptly to the
Fund or the Manager upon request.
(g) The Sub-Adviser agrees to furnish to the Manager and to
the Board of Trustees of the Business Trust such periodic and
special reports as each may reasonably request.
(h) It is agreed that the Sub-Adviser shall have no
responsibility or liability for the accuracy or completeness of
the Business Trust's Registration Statement under the Act and the
Securities Act of 1933, except for information supplied by the
Sub-Adviser for inclusion therein. The Sub-Adviser shall
promptly inform the Business Trust as to any information
concerning the Sub-Adviser appropriate for inclusion in such
Registration Statement, or as to any transaction or proposed
transaction which might result in an assignment (as defined in
the Act) of this Agreement.
(i) The Sub-Adviser shall not be liable for any error in
judgment or for any loss suffered by the Fund or its security
holders in connection with the matters to which this Agreement
relates, except a loss resulting from wilful 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. Nothing in this Agreement shall, or
shall be construed to, waive or limit any rights which the Fund
may have under federal and state securities laws which may impose
liability under certain circumstances on persons who act in good
faith.
(j) To the extent that the Manager is indemnified under the
Business Trust's Declaration of Trust with respect to the
services provided hereunder by the Sub-Adviser, the Manager
agrees to provide the Sub-Adviser the benefits of such
indemnification.
3. Allocation of Expenses
The Sub-Adviser shall bear all of the expenses it incurs in
fulfilling its obligations under this Agreement. In particular,
but without limiting the generality of the foregoing: the Sub-
Adviser shall furnish, at the Sub-Adviser's expense, all office
space, facilities, equipment and clerical personnel necessary for
carrying out its duties under this Agreement. The Sub-Adviser
shall supply, or cause to be supplied, to any investment adviser,
administrator or principal underwriter of the Fund all necessary
financial information in connection with such adviser's,
administrator's or principal underwriter's duties under any
agreement between such adviser, administrator or principal
underwriter and the Fund. The Sub-Adviser will also pay all
compensation of the Fund's officers, employees, and Trustees, if
any, who are affiliated persons of the Sub-Adviser.
4. Compensation of the Sub-Adviser
The Manager agrees to pay the Sub-Adviser, and the Sub-
Adviser agrees to accept as full compensation for all services
rendered by the Sub-Adviser as such, a management fee payable
monthly and computed on the net asset value of the Fund as of the
close of business each business day at the annual rate of 0.17 of
1% of such net asset value; provided, however, that for any day
that the Fund pays or accrues a fee under the Distribution Plan
of the Fund based upon the assets of the Fund, the annual
management fee shall be payable at the annual rate of 0.14 of 1%
of such net asset value.
5. Duration and Termination
(a) This Agreement shall become effective as of the date
first written above following approval by the shareholders of the
Fund and shall, unless terminated as hereinafter provided,
continue in effect until the June 30 next preceding the first
anniversary of the effective date of this Agreement, and from
year to year thereafter, but only so long as such continuance is
specifically approved at least annually (1) by a vote of the
Business Trust's Board of Trustees, including a vote of a
majority of the Trustees who are not parties to this Agreement or
"interested persons" (as defined in the Act) of any such party,
with votes cast in person at a meeting called for the purpose of
voting on such approval, or (2) by a vote of the holders of a
"majority" (as so defined) of the outstanding voting securities
of the Fund and by such a vote of the Trustees.
(b) This Agreement may be terminated by the Sub-Adviser at
any time without penalty upon giving the Manager and the Business
Trust sixty days' written notice (which notice may be waived).
This Agreement may be terminated by the Manager or the Business
Trust at any time without penalty upon giving the Sub-Adviser
sixty days' written notice (which notice may be waived by the
Sub-Adviser), provided that such termination by the Business
Trust shall be directed or approved by a vote of a majority of
its Trustees in office at the time or by a vote of the holders of
a majority (as defined in the Act) of the voting securities of
the Fund outstanding and entitled to vote. This Agreement shall
automatically terminate in the event of its assignment (as
defined in the Act) or the termination of the Advisory and
Administration Agreement.
6. Notices of Meetings
The Manager agrees that notice of each meeting of the Board
of Trustees of the Business Trust will be sent to the Sub-Adviser
and that Sub-Adviser will make appropriate arrangements for the
attendance (as persons present by invitation) of such person or
persons as the Sub-Adviser may designate.
IN WITNESS WHEREOF, the parties hereto have caused the
foregoing instrument to be executed by their duly authorized
officers and their seals to be hereunto affixed, all as of the
day and year first above written.
ATTEST: AQUILA MANAGEMENT CORPORATION
_______________________ By:__________________________
ATTEST: BANC ONE INVESTMENT ADVISORS CORPORATION
_______________________ By:___________________________
