PRINCIPAL FUNDS, INC.
AMENDED AND RESTATED SUB-ADVISORY AGREEMENT
MELLON CAPITAL MANAGEMENT CORPORATION SUB-ADVISED SERIES
AGREEMENT executed as of the 31st day of December, 2009 by and between
PRINCIPAL MANAGEMENT CORPORATION, an Iowa corporation (hereinafter
called "the Manager"), and MELLON CAPITAL MANAGEMENT CORPORATION , a
Delaware Corporation,(hereinafter called "the Sub-Advisor).
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to each Fund
of the Principal Funds, Inc., (the "Fund"), an open-end management
investment company registered under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, the Manager desires to retain the Sub-Advisor to render
discretionary investment advisory services with respect to assets
allocated by the Manager for management by the Sub-Advisor for a portion
of the portfolio for the SmallCap Value Fund I and MidCap Growth Fund
III of the Fund (hereinafter called the "Series"), which the Manager has
agreed to provide to the Fund, and the Sub-Advisor desires to furnish
such services; and
WHEREAS, The Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly
provide the Sub-Advisor with copies properly certified or authenticated
of any amendment or supplement thereto:
(a) Management Agreement (the "Management Agreement") with the
Fund;
(b) The Fund's registration statement and financial statements as
filed with the Securities and Exchange Commission;
(c) The Fund's Articles of Incorporation and By-laws;
(d) Policies, procedures or instructions adopted or approved by the
Board of Directors of the Fund relating to obligations and
services provided by the Sub-Advisor.
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, the parties agree as follows:
1. Appointment of Sub-Advisor
In accordance with and subject to the Management Agreement, the
Manager hereby appoints the Sub-Advisor to perform the services
described in Section 2 below for investment and reinvestment of
the securities and other assets of the Series, subject to the
control and direction of the Manager and the Fund's Board of
Directors, for the period and on the terms hereinafter set forth.
The Sub-Advisor accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein
provided. The Sub-Advisor 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 Fund or the Manager in any way or otherwise be deemed an agent
of the Fund or the Manager.
2. Obligations of and Services to be Provided by the Sub-Advisor
The Sub-Advisor will:
(a) Provide investment advisory services, including but not
limited to research, advice and supervision for the Series.
(b) Furnish to the Board of Directors of the Fund for approval (or
any appropriate committee of such Board), and revise from time
to time as economic conditions require, a recommended
investment program for the Fund consistent with the Series'
investment objective and policies.
(c) Implement the approved investment program by placing orders
for the purchase and sale of securities without prior
consultation with the Manager and without regard to the length
of time the securities have been held, the resulting rate of
portfolio turnover or any tax considerations, subject always
to the provisions of the Fund's Articles of Incorporation and
Bylaws, the requirements of the 1940 Act, as each of the same
shall be from time to time in effect.
(d) Advise and assist the officers of the Fund, as requested by
the officers, in taking such steps as are reasonably necessary
or appropriate to carry out the decisions of its Board of
Directors, and any appropriate committees of such Board,
regarding the general conduct of the investment business of
the Series.
(e) Maintain, in connection with the Sub-Advisor's investment
advisory services provided to the Series, its compliance with
the 1940 Act and the regulations adopted by the Securities and
Exchange Commission thereunder and the Series' investment
policies and restrictions as stated in the Fund's prospectus
and statement of additional information, subject to receipt of
such additional information as may be required from the
Manager and provided in accordance with Section 10(d) of this
Agreement. The Sub-Advisor has no responsibility for the
maintenance of Fund records except insofar as is directly
related to the services it provides to the Series.
(f) Report to the Board of Directors of the Fund at such times and
in such detail as the Board of Directors may reasonably deem
appropriate in order to enable it to determine that the
investment policies, procedures and approved investment
program of the Series are being observed.
(g) Upon request, provide assistance in the determination of the
fair value of certain securities when reliable market
quotations are not readily available for purposes of
calculating net asset value in accordance with procedures and
methods established by the Fund's Board of Directors.
(h) Furnish, at its own expense, (i) all necessary investment and
management facilities, including salaries of clerical and
other personnel required for it to execute its duties
faithfully, and (ii) administrative facilities, including
bookkeeping, clerical personnel and equipment necessary for
the efficient conduct of its duties under this Agreement.
(i) Open accounts with broker-dealers and futures commission
merchants ("broker-dealers"), select broker-dealers to effect
all transactions for the Series, place all necessary orders
with broker-dealers or issuers (including affiliated broker-
dealers), and negotiate commissions, if applicable. To the
extent consistent with applicable law, purchase or sell orders
for the Series may be aggregated with contemporaneous purchase
or sell orders of other clients of the Sub-Advisor. In such
event allocation of securities so sold or purchased, as well
as the expenses incurred in the transaction, will be made by
the Sub-Advisor in the manner the Sub-Advisor considers to be
the most equitable and consistent with its fiduciary
obligations to the Fund and to other clients. The Manager
recognizes that, in some cases, this procedure may limit the
size of the position that may be acquired or sold for the
Series. The Sub-Advisor will report on such allocations at
the request of the Manager, the Fund or the Fund's Board of
Directors providing such information as the number of
aggregated trades to which the Series was a party, the broker-
dealers to whom such trades were directed and the basis for
the allocation for the aggregated trades. The Sub-Advisor
shall use its best efforts to obtain execution of transactions
for the Series at prices which are advantageous to the Series
and at commission rates that are reasonable in relation to the
benefits received. However, the Sub-Advisor may select brokers
or dealers on the basis that they provide brokerage, research
or other services or products to the Sub-Advisor. To the
extent consistent with applicable law, the Sub-Advisor may pay
a broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission
or dealer spread another broker or dealer would have charged
for effecting that transaction if the Sub-Advisor determines
in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research products
and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research products
and/or services, may be viewed in terms of either that
particular transaction or the overall responsibilities which
the Sub-Advisor and its affiliates have with respect to the
Series as well as to accounts over which they exercise
investment discretion. Not all such services or products need
be used by the Sub-Advisor in managing the Series. In
addition, joint repurchase or other accounts may not be
utilized by the Series except to the extent permitted under
any exemptive order obtained by the Sub-Advisor provided that
all conditions of such order are complied with.
(j) Maintain all accounts, books and records with respect to the
Series as are required of an investment advisor of a
registered investment company pursuant to the 1940 Act and
Investment Advisor's Act of 1940 (the "Investment Advisor's
Act"), and the rules thereunder, and furnish the Fund and the
Manager with such periodic and special reports as the Fund or
Manager may reasonably request. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Sub-Advisor
hereby agrees that all records that it maintains for the
Series are the property of the Fund, agrees to preserve for
the periods described by Rule 31a-2 under the 1940 Act any
records that it maintains for the Fund and that are required
to be maintained by Rule 31a-1 under the 1940 Act, and further
agrees to surrender promptly to the Fund any records that it
maintains for the Series upon request by the Fund or the
Manager.
(k) Observe and comply with Rule 17j-1 under the 1940 Act and the
Sub-Advisor's Code of Ethics adopted pursuant to that Rule as
the same may be amended from time to time. The Manager
acknowledges receipt of a copy of Sub-Advisor's current Code
of Ethics. Sub-Advisor shall promptly forward to the Manager
a copy of any material amendment to the Sub-Advisor's Code of
Ethics.
(l) From time to time as the Manager or the Fund may request,
furnish the requesting party reports on portfolio transactions
and reports on investments held by the Series, all in such
detail as the Manager or the Fund may reasonably request. The
Sub-Advisor will make available its officers and employees to
meet with the Fund's Board of Directors at the Fund's
principal place of business on due notice to review the
investments of the Series.
(m) Provide such information as is customarily provided by a sub-
advisor and may be required for the Fund or the Manager to
comply with their respective obligations under applicable
laws, including, without limitation, the Internal Revenue Code
of 1986, as amended (the "Code"), the 1940 Act, the Investment
Advisers Act, the Securities Act of 1933, as amended (the
"Securities Act"), and any state securities laws, and any rule
or regulation thereunder. Sub-Advisor will advise Manager of
any changes in Sub-Advisor's general partners within a
reasonable time after any such change. Manager acknowledges
receipt of Sub-Advisor's Form ADV more than 48 hours prior to
the execution of this Agreement.
(n) Perform quarterly and annual tax compliance tests to monitor
the Series' compliance with Subchapter M of the Code and
Section 817(h) of the Code, subject to receipt of such
additional information as may be required from the Manager and
provided in accordance with Section 10(d) of this Agreement.
The Sub-Advisor shall notify the Manager immediately upon
having a reasonable basis for believing that the Series has
ceased to be in compliance or that it might not be in
compliance in the future. If it is determined that the Series
is not in compliance with the requirements noted above, the
Sub-Advisor, in consultation with the Manager, will take
prompt action to bring the Series back into compliance (to the
extent possible) within the time permitted under the Code.
(o) Have the responsibility and authority to vote proxies
solicited by, or with respect to, the issuers of securities
held in the Series. The Manager shall cause to be forwarded
to Sub-Advisor all proxy solicitation materials that it
receives and shall assist Sub-Advisor in its efforts to
conduct the proxy voting process.
3. Prohibited Conduct
In providing the services described in this agreement, the Sub-
Advisor will not consult with any other investment advisory firm
that provides investment advisory services to any investment
company sponsored by Principal Life Insurance Company regarding
transactions for the Fund in securities or other assets.
4. Compensation
As full compensation for all services rendered and obligations
assumed by the Sub-Advisor hereunder with respect to the Fund, the
Manager shall pay the compensation specified in Appendix A to this
Agreement.
5. Liability of Sub-Advisor
Neither the Sub-Advisor nor any of its directors, officers,
employees, agents or affiliates shall be liable to the Manager,
the Fund or its shareholders for any loss suffered by the Manager
or the Fund resulting from any error of judgment made in the good
faith exercise of the Sub-Advisor's duties under this Agreement or
as a result of the failure by the Manager or any of its affiliates
to comply with the terms of this Agreement except for losses
resulting from willful misfeasance, bad faith or gross negligence
of, or from reckless disregard of, the duties of the Sub-Advisor
or any of its directors, officers, employees, agents (excluding
any broker-dealer selected by the Sub-Advisor), or affiliates.
6. Indemnification
The Manager agrees to indemnify and hold harmless the Sub-Advisor
from and against any and all claims, losses, liabilities or
damages (including reasonable attorneys' fees and other related
expenses), ("Losses") howsoever arising, from or in connection
with this Agreement or the performance by the Sub- Advisor of its
duties hereunder, so long as the Sub-Advisor shall, after receipt
of notice of any claim or commencement of any action, promptly
notify the Manager in writing of the claim or commencement of such
action. The Manager shall not be liable for any settlement of any
claim or action effected without its written consent. Nothing
contained herein shall require the Manager to indemnify the Sub-
Advisor for Losses resulting from the Sub-Advisor's willful
misfeasance, bad faith or gross negligence in the performance of
its duties or from its reckless disregard of its obligations and
duties under this Agreement.
7. Supplemental Arrangements
The Sub-Advisor may enter into arrangements with other persons
affiliated with the Sub-Advisor or with unaffiliated third parties
to better enable the Sub-Advisor to fulfill its obligations under
this Agreement for the provision of certain personnel and
facilities to the Sub-Advisor, subject to written notification to
and approval of the Manager and, where required by applicable law,
the Board of Directors of the Fund.
8. Regulation
The Sub-Advisor shall submit to all regulatory and administrative
bodies having jurisdiction over the services provided pursuant to
this Agreement any information, reports or other material which
any such body may request or require pursuant to applicable laws
and regulations.
9. Duration and Termination of This Agreement
This Agreement shall become effective on the latest of (i) the
date of its execution, (ii) the date of its approval by a majority
of the Board of Directors of the Fund, including approval by the
vote of a majority of the Board of Directors of the Fund who are
not interested persons of the Manager, the Sub-Advisor, Principal
Life Insurance Company or the Fund cast in person at a meeting
called for the purpose of voting on such approval or (iii) if
required by the 1940 Act, the date of its approval by a majority
of the outstanding voting securities of the Series. It shall
continue in effect thereafter from year to year provided that the
continuance is specifically approved at least annually either by
the Board of Directors of the Fund or by a vote of a majority of
the outstanding voting securities of the Series and in either
event by a vote of a majority of the Board of Directors of the
Fund who are not interested persons of the Manager, Principal Life
Insurance Company, the Sub-Advisor or the Fund cast in person at a
meeting called for the purpose of voting on such approval.
If the shareholders of the Series fail to approve the Agreement or
any continuance of the Agreement in accordance with the
requirements of the 1940 Act, the Sub-Advisor will continue to act
as Sub-Advisor with respect to the Series pending the required
approval of the Agreement or its continuance or of any contract
with the Sub-Advisor or a different manager or sub-advisor or
other definitive action; provided, that the compensation received
by the Sub-Advisor in respect to the Fund during such period is in
compliance with Rule 15a-4 under the 1940 Act.
This Agreement may be terminated at any time without the payment
of any penalty by the Board of Directors of the Fund or by the
Sub-Advisor, the Manager or by vote of a majority of the
outstanding voting securities of the Series on sixty days written
notice. This Agreement shall automatically terminate in the event
of its assignment. In interpreting the provisions of this Section
9, the definitions contained in Section 2(a) of the 1940 Act
(particularly the definitions of "interested person," "assignment"
and "voting security") shall be applied.
10. Amendment of this Agreement
No material amendment of this Agreement shall be effective until
approved, if required by the 1940 Act or the rules, regulations,
interpretations or orders issued thereunder, by vote of the
holders of a majority of the outstanding voting securities of the
Series and by vote of a majority of the Board of Directors of the
Fund who are not interested persons of the Manager, the Sub-
Advisor, Principal Life Insurance Company or the Fund cast in
person at a meeting called for the purpose of voting on such
approval, and such amendment is signed by both parties.
11. General Provisions
(a) Each party agrees to perform such further acts and execute
such further documents as are necessary to effectuate the
purposes hereof. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of
Iowa. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect.
(b) Any notice under this Agreement shall be in writing, addressed
and delivered or mailed postage pre-paid to the other party at
such address as such other party may designate for the receipt
of such notices. Until further notice to the other party, it is
agreed that the address of the Manager for this purpose shall
be Principal Financial Group, Xxx Xxxxxx, Xxxx 00000-0000, and
the address of the Sub-Advisor shall be 000 Xxxxx Xxxxxx, Xxxxx
0000, Xxxxxxxxxx, XX 00000-0000.
(c) The Sub-Advisor will promptly notify the Manager in writing
of the occurrence of any of the following events:
(1) the Sub-Advisor fails to be registered as an
investment adviser under the Investment Advisers Act or
under the laws of any jurisdiction in which the Sub-Advisor
is required to be registered as an investment advisor in
order to perform its obligations under this Agreement.
(2) the Sub-Advisor is served or otherwise receives notice
of any action, suit, proceeding, inquiry or investigation,
at law or in equity, before or by any court, public board or
body, involving the affairs of the Fund.
(d) The Manager shall provide (or cause the Series custodian to
provide) timely information to the Sub-Advisor regarding such
matters as the composition of the assets of the Series, cash
requirements and cash available for investment in the Series,
and all other reasonable information as may be necessary for
the Sub-Advisor to perform its duties and responsibilities
hereunder.
(e) The Sub-Advisor represents that it will not enter into any
agreement, oral or written, or other understanding under which
the Fund directs or is expected to direct portfolio securities
transactions, or any remuneration, to a broker or dealer in
consideration for the promotion or sale of Fund shares or
shares issued by any other registered investment company. Sub-
advisor further represents that it is contrary to the Sub-
advisor's policies to permit those who select brokers or
dealers for execution of fund portfolio securities transactions
to take into account the broker or dealer's promotion or sale
of Fund shares or shares issued by any other registered
investment company.
(f) The Sub-Advisor agrees that neither it nor any of its
affiliates will in any way refer directly or indirectly to its
relationship with the Fund, the Series, or the Manager or any
of their respective affiliates in offering, marketing or other
promotional materials without the express written consent of
the Manager.
(g) This Agreement contains the entire understanding and
agreement of the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
PRINCIPAL MANAGEMENT CORPORATION
By /s/ Xxxxxxx X. Beer
Xxxxxxx X. Beer, Executive Vice
President and
Chief Operating Officer
MELLON CAPITAL MANAGEMENT CORPORATION
By
APPENDIX A
The Sub-Advisor shall serve as investment sub-advisor for the Fund. The
Manager will pay the Sub-Advisor, as full compensation for all services
provided under this Agreement, a fee computed at an annual rate as
follows (the "Sub-Advisor Percentage Fee"):
MidCap Growth Fund III
Average Daily Net Assets Fee as a Percentage of
Average Daily Net Assets
First $50 million 0.40%
Assets over $50 million 0.35%
In calculating the fee for the MidCap Growth Fund III of Principal
Funds, Inc. on or after July 1, 2004, assets of any unregistered
separate account of Principal Life Insurance Company and any investment
company sponsored by Principal Life Insurance Company to which the Sub-
Advisor provides investment advisory services and which have the same
investment mandate as the MidCap Growth Fund III, will be combined
(together, the "Aggregated Assets"). The fee charged for the assets in
the MidCap Growth Fund III shall be determined by calculating a fee on
the value of the Aggregated Assets and multiplying the aggregate fee by
a fraction, the numerator of which is the amount of assets in the MidCap
Growth Fund III and the denominator of which is the amount of the
Aggregated Assets.
SmallCap Value Fund I
Average Daily Net Assets Fee as a Percentage of
Average Daily Net Assets
First $100 million 0.45%
Next $200 million 0.40%
Over $300 million 0.35%
In calculating the fee for the SmallCap Value Fund I of Principal
Funds, Inc. on or after July 1, 2005, assets of any unregistered
separate account of Principal Life Insurance Company and any investment
company sponsored by Principal Life Insurance Company to which the Sub-
Advisor provides investment advisory services and which have the same
investment mandate as the SmallCap Value Fund I, will be combined
(together, the "Aggregated Assets"). The fee charged for the assets in
the SmallCap Value Fund I shall be determined by calculating a fee on
the value of the Aggregated Assets and multiplying the aggregate fee by
a fraction, the numerator of which is the amount of assets in the
SmallCap Value Fund I and the denominator of which is the amount of the
Aggregated Assets.
With respect to the MidCap Growth Fund III and SmallCap Value Fund I
Series, the cash and cash equivalents shall be included in the Series
net assets calculation up to a maximum of 1.00% of the Series net
assets. If the Manager requests the Sub-Advisor to raise cash in the
Series portfolio in excess of 1.00% of the Series net assets for the
purpose of funding redemptions from the Series, such amount requested
shall be included in the Series net assets calculation.
Bond Market Index Fund
Average Daily Net Assets Fee as a Percentage of
Average Daily Net Assets
First $200 million 0.08%
Next $300 million 0.06%
Next $500 million 0.05%
Assets over $1 billion 0.04%
In calculating the fee for the Bond Market Index Fund, assets of any
unregistered separate account of Principal Life Insurance Company and
any investment company sponsored by Principal Life Insurance Company to
which the Sub-Advisor provides investment advisory services and which
have the same investment mandate as the Bond Market Index Fund, will be
combined (together, the "Aggregated Assets"). The fee charged for the
assets in the Bond Market Index Fund shall be determined by calculating
a fee on the value of the Aggregated Assets and multiplying the
aggregate fee by a fraction, the numerator of which is the amount of
assets in the Bond Market Index Fund and the denominator of which is the
amount of the Aggregated Assets.
The Sub-Advisor Percentage Fee shall be accrued for each calendar day
and the sum of the daily fee accruals shall be paid monthly to the Sub-
Advisor. The daily fee accruals will be computed by multiplying the
fraction of one over the number of calendar days in the year by the
applicable annual rate described above and multiplying this product by
the net assets of the Fund as determined in accordance with the Fund's
prospectus and statement of additional information as of the close of
business on the previous business day on which the Fund was open for
business.
If this Agreement becomes effective or terminates before the end of
any month, the fee (if any) for the period from the effective date to
the end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the
proportion which such period bears to the full month in which such
effectiveness or termination occurs.
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