FORM OF
INVESTMENT ADVISORY AGREEMENT
E*TRADE FUNDS
with respect to
E*TRADE S&P 500 INDEX FUND
AGREEMENT, effective commencing as of, 1999 between E*TRADE Asset
Management, Inc. (the "Adviser") and E*TRADE Funds (the "Trust") with respect to
E*TRADE S&P 500 Index Fund (the "Fund").
WHEREAS, the Trust is a Delaware business trust organized pursuant to a
Declaration of Trust dated November 4, 1998 (the "Declaration of Trust"), and is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end, diversified management investment company, and the Fund
is the initial portfolio of the Trust; and
WHEREAS, the Trust wishes to retain the Adviser to render investment
advisory services to the Fund, and the Adviser is willing to furnish such
services to the Fund; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended ("Advisers Act");
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the Trust and the Adviser as follows:
1. Appointment. The Trust hereby appoints the Adviser to act as
investment adviser to the Fund for the periods and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth, for the compensation herein provided.
2. Investment Advisory Duties.
(a) Subject to the supervision of the Trustees of the Trust, the Adviser
will: (i) provide a program of continuous investment management for the Fund in
accordance with the Fund's investment objective, policies and limitations as
stated in the Fund's Prospectus and Statement of Additional Information included
as part of the Trust's Registration Statement filed with the Securities and
Exchange Commission ("SEC") and as the Prospectus and Statement of Additional
Information may be amended from time to time, copies of which shall be provided
to the Adviser by the Trust; and (ii) select and manage, subject to approval by
the Trustees, investment subadvisers, who may be granted discretionary
investment authority, and/or master funds for the Fund.
(b) In performing its investment management services to the Fund hereunder,
the Adviser will provide the Fund with ongoing investment guidance, policy
direction, including oral and written research, monitoring of any master fund,
analysis, advice, statistical and economic data and judgments regarding
individual investments, general economic conditions and trends and long-range
investment policy.
(c) To the extent permitted by the Adviser's Form ADV as filed with the SEC
and subject to the approval of the Trustees of the Trust, the Adviser shall have
the authority to manage cash and money market instruments for cash flow
purposes.
(d) To the extent permitted by the Adviser's current Form ADV as filed with
the SEC, the Adviser will advise as to the securities, instruments, repurchase
agreements, options and other investments and techniques that the Fund will
purchase, sell, enter into or use, and will provide an ongoing evaluation of the
Fund's portfolio. The Adviser will advise as to what portion of the Fund's
portfolio shall be invested in securities and other assets, and what portion if
any, should be held uninvested.
(e) The Adviser may engage and remove one or more subadvisers, subject to
the legally required approvals of the Trust and its shareholders, and the
Adviser shall monitor the performance of any subadviser and report to the Trust
thereon.
(f) The Adviser further agrees that, in performing its duties
hereunder, it will:
(i) comply with the 1940 Act and all rules and regulations
thereunder, the Advisers Act, the Internal Revenue Code (the "Code") and all
other applicable federal and state laws and regulations, and with any applicable
procedures adopted by the Trustees;
(ii) use reasonable efforts to manage the Fund so that it will
qualify, and continue to qualify, as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder;
(iii) place orders pursuant to the Fund's investment determinations as
approved by the Trustees for the Fund directly with the issuer, or with any
broker or dealer, in accordance with applicable policies expressed in the Fund's
Prospectus and/or Statement of Additional Information and in accordance with
applicable legal requirements;
(iv) furnish to the Trust whatever statistical information the
Trust may reasonably request with respect to the Fund's assets or contemplated
investments. In addition, the Adviser will keep the Trust and the Trustees
informed of developments materially affecting the Fund's portfolio and shall, on
the Adviser's own initiative, furnish to the Trust from time to time whatever
information the Adviser believes appropriate for this purpose;
(v) make available to the Trust's administrator (the
"Administrator") and the Trust, promptly upon their request, such copies of its
investment records and ledgers with respect to the Fund as may be required to
assist the Administrator and the Trust in their compliance with applicable laws
and regulations. The Adviser will furnish the Trustees with such periodic and
special reports regarding the Fund and any subadviser as they may reasonably
request;
(vi) immediately notify the Trust in the event that the Adviser or
any of its affiliates: (1) becomes aware that it is subject to a statutory
disqualification that prevents the Adviser from serving as investment adviser
pursuant to this Agreement; or (2) becomes aware that it is the subject of an
administrative proceeding or enforcement action by the SEC or other regulatory
authority. The Adviser further agrees to notify the Trust immediately of any
material fact known to the Adviser respecting or relating to the Adviser that is
not contained in the Trust's Registration Statement regarding the Fund, or any
amendment or supplement thereto, but that is required to be disclosed thereon,
and of any statement contained therein that becomes untrue in any material
respect; and
(vii) in providing investment advice to the Fund, use no inside
information that may be in its possession or in the possession of any of its
affiliates, nor will the Adviser seek to obtain any such information.
3. Futures and Options. The Adviser's investment authority shall include
advice with regard to purchasing, selling, covering open positions, and
generally to deal in financial futures contracts and options thereon, or master
funds which do so in accordance with Rule 4.5 of the Commodity Futures Trading
Commission.
The Adviser's authority shall include authority to: (i) open and
maintain brokerage accounts for financial futures and options (such accounts
hereinafter referred to as "Brokerage Accounts") on behalf of and in the name of
the Fund; and (ii) execute for and on behalf of the Brokerage Accounts, standard
customer agreements with a broker or brokers. The Adviser may, using such of the
securities and other property in the Brokerage Accounts as the Adviser deems
necessary or desirable, direct the custodian to deposit on behalf of the Fund,
original and maintenance brokerage deposits and otherwise direct payments of
cash, cash equivalents and securities and other property into such brokerage
accounts and to such brokers as the Adviser deems desirable or appropriate.
4. Use of Securities Brokers and Dealers. The Adviser will monitor the use
by master funds of broker-dealers. To the extent permitted by the Adviser's Form
ADV, purchase and sale orders will usually be placed with brokers who are
selected by the Adviser as able to achieve "best execution" of such orders.
"Best execution" shall mean prompt and reliable execution at the most favorable
securities price, taking into account the other provisions hereinafter set
forth. Whenever the Adviser places orders, or directs the placement of orders,
for the purchase or sale of portfolio securities on behalf of the Fund, in
selecting brokers or dealers to execute such orders, the Adviser is expressly
authorized to consider the fact that a broker or dealer has furnished
statistical, research or other information or services which enhance the
Adviser's research and portfolio management capability generally. It is further
understood in accordance with Section 28(e) of the Securities Exchange Act of
1934, as amended, that the Adviser may negotiate with and assign to a broker a
commission which may exceed the commission which another broker would have
charged for effecting the transaction if the Adviser determines in good faith
that the amount of commission charged was reasonable in relation to the value of
brokerage and/or research services (as defined in Section 28(e)) provided by
such broker, viewed in terms either of the Fund or the Adviser's overall
responsibilities to the Adviser's discretionary accounts.
Neither the Adviser nor any parent, subsidiary or related firm shall
act as a securities broker with respect to any purchases or sales of securities
which may be made on behalf of the Fund, provided that this limitation shall not
prevent the Adviser from utilizing the services of a securities broker which is
a parent, subsidiary or related firm, provided such broker effects transactions
on a "cost only" or "nonprofit" basis to itself and provides competitive
execution. Unless otherwise directed by the Trust in writing, the Adviser may
utilize the service of whatever independent securities brokerage firm or firms
it deems appropriate to the extent that such firms are competitive with respect
to price of services and execution.
5. Allocation of Charges and Expenses.
(a) Except as otherwise specifically provided in this section 5, the
Adviser shall pay the compensation and expenses of all of its directors,
officers and employees who serve as trustees, officers and executive employees
of the Trust (including the Trust's share of payroll taxes), and the Adviser
shall make available, without expense to the Fund, the service of its directors,
officers and employees who may be duly elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law.
(b) The Adviser shall not be required to pay pursuant to this Agreement any
expenses of the Fund other than those specifically allocated to the Adviser in
this section 5. In particular, but without limiting the generality of the
foregoing, the Adviser shall not be responsible, except to the extent of the
reasonable compensation of such of the Trust's employees as are officers or
employees of the Adviser whose services may be involved, for the following
expenses of the Fund: organization and certain offering expenses of the Fund
(including out-of-pocket expenses, but not including the Adviser's overhead and
employee costs); fees payable to the Adviser and to any other Fund advisers or
consultants; legal expenses; auditing and accounting expenses; interest
expenses; telephone, telex, facsimile, postage and other communications
expenses; taxes and governmental fees; fees, dues and expenses incurred by or
with respect to the Fund in connection with membership in investment company
trade organizations; cost of insurance relating to fidelity coverage for the
Trust's officers and employees; fees and expenses of the Fund's Administrator or
of any custodian, subcustodian, transfer agent, registrar, or dividend
disbursing agent of the Fund; expenses of any master fund in which the Fund
invests; payments to the Administrator for maintaining the Fund's financial
books and records and calculating its daily net asset value; other payments for
portfolio pricing or valuation services to pricing agents, accountants, bankers
and other specialists, if any; expenses of preparing share certificates; other
expenses in connection with the issuance, offering, distribution or sale of
securities issued by the Fund; expenses relating to investor and public
relations; expenses of registering and qualifying shares of the Fund for sale;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; brokerage commissions or other costs of acquiring
or disposing of any portfolio securities or other assets of the Fund, or of
entering into other transactions or engaging in any investment practices with
respect to the Fund; expenses of printing and distributing prospectuses,
Statements of Additional Information, reports, notices and dividends to
stockholders; costs of stationery or other office supplies; any litigation
expenses; costs of stockholders' and other meetings; the compensation and all
expenses (specifically including travel expenses relating to the Fund's
business) of officers, Trustees and employees of the Trust who are not
interested persons of the Adviser; and travel expenses (or an appropriate
portion thereof) of officers or Trustees of the Trust who are officers,
directors or employees of the Adviser to the extent that such expenses relate to
attendance at meetings of the Board of Trustees of the Trust with respect to
matters concerning the Fund, or any committees thereof or advisers thereto.
6. Compensation.
As compensation for the services provided and expenses assumed by the
Adviser under this Agreement, the Trust will arrange for the Fund to pay the
Adviser at the end of each calendar month an advisory fee computed daily at an
annual rate equal to the amount of average daily net assets listed opposite the
Fund's name in Exhibit A, attached hereto. The "average daily net assets" of the
Fund shall mean the average of the values placed on the Fund's net assets as of
4:00 p.m. (New York time) on each day on which the net asset value of the Fund
is determined consistent with the provisions of Rule 22c-1 under the 1940 Act
or, if the Fund lawfully determines the value of its net assets as of some other
time on each business day, as of such other time. The value of net assets of the
Fund shall always be determined pursuant to the applicable provisions of the
Declaration of Trust and the Registration Statement. If, pursuant to such
provisions, the determination of net asset value is suspended for any particular
business day, then for the purposes of this section 6, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of the close of the New York Stock Exchange, or as of such other time
as the value of the net assets of the Fund's portfolio may lawfully be
determined, on that day. If the determination of the net asset value of the
shares of the Fund has been so suspended for a period including any month end
when the Adviser's compensation is payable pursuant to this section, then the
Adviser's compensation payable at the end of such month shall be computed on the
basis of the value of the net assets of the Fund as last determined (whether
during or prior to such month). If the Fund determines the value of the net
assets of its portfolio more than once on any day, then the last such
determination thereof on that day shall be deemed to be the sole determination
thereof on that day for the purposes of this section 6.
7. Books and Records. The Adviser agrees to maintain such books and
records with respect to its services to the Fund as are required by Section 31
under the 1940 Act, and rules adopted thereunder, and by other applicable legal
provisions, and to preserve such records for the periods and in the manner
required by that Section, and those rules and legal provisions. The Adviser also
agrees that records it maintains and preserves pursuant to Rules 31a-1 and Rule
31a-2 under the 1940 Act and otherwise in connection with its services hereunder
are the property of the Trust and will be surrendered promptly to the Trust upon
its request. The Adviser further agrees that it will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with its services hereunder which may be requested in order to
determine whether the operations of the Fund are being conducted in accordance
with applicable laws and regulations.
8. Aggregation of Orders. Provided that the investment objective, policies
and restrictions of the Fund are adhered to, the Trust agrees that the Adviser
may aggregate sales and purchase orders of securities held in the Fund with
similar orders being made simultaneously for other accounts managed by the
Adviser or with accounts of the affiliates of the Adviser, if in the Adviser's
reasonable judgment such aggregation shall result in an overall economic benefit
to the respective Fund taking into consideration the advantageous selling or
purchase price, brokerage commission and other expenses. The Trust acknowledges
that the determination of such economic benefit to the Fund by the Adviser
represents the Adviser's evaluation that the Fund is benefited by relatively
better purchase or sales prices, lower commission expenses and beneficial timing
of transactions or a combination of these and other factors.
9. Standard of Care and Limitation of Liability. The Adviser shall
exercise its best judgment in rendering the services provided by it under this
Agreement. The Adviser shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund or the holders of the Fund's shares
in connection with the matters to which this Agreement relates, provided that
nothing in this Agreement shall be deemed to protect or purport to protect the
Adviser against any liability to the Trust, the Fund or to holders of the Fund's
shares to which the Adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or by reason of the Adviser's reckless disregard of its obligations and
duties under this Agreement. As used in this Section 9, the term "Adviser" shall
include any officers, directors, employees or other affiliates of the Adviser
performing services with respect to the Fund.
10. Services Not Exclusive. It is understood that the services of the
Adviser are not exclusive, and that nothing in this Agreement shall prevent the
Adviser from providing similar services to other investment companies or to
other series of investment companies, including the Trust (whether or not their
investment objectives and policies are similar to those of the Fund) or from
engaging in other activities, provided such other services and activities do
not, during the term of this Agreement, interfere in a material manner with the
Adviser's ability to meet its obligations to the Fund hereunder. When the
Adviser recommends the purchase or sale of a security for other investment
companies and other clients, and at the same time the Adviser recommends the
purchase or sale of the same security for the Fund, it is understood that in
light of its fiduciary duty to the Fund, such transactions will be executed on a
basis that is fair and equitable to the Fund. In connection with purchases or
sales of portfolio securities for the account of the Fund, neither the Adviser
nor any of its directors, officers or employees shall act as a principal or
agent or receive any commission. If the Adviser provides any advice to its
clients concerning the shares of the Fund, the Adviser shall act solely as
investment counsel for such clients and not in any way on behalf of the Trust or
the Fund.
11. Duration and Termination.
(a) This Agreement shall continue for a period of two years from the
date of commencement, and thereafter shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by (i) the Trustees or (ii) a vote of a "majority" (as defined in the
0000 Xxx) 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 Trustees 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 (to the extent required by the 0000 Xxx) at a meeting called for
the purpose of voting on such approval.
(b) Notwithstanding the foregoing, this Agreement may be terminated:
(a) at any time without penalty by the Fund upon the vote of a majority of the
Trustees or by vote of the majority of the Fund's outstanding voting securities,
upon sixty (60) days' written notice to the Adviser or (b) by the Adviser at any
time without penalty, upon sixty (60) days' written notice to the Trust. This
Agreement will also terminate automatically in the event of its assignment (as
defined in the 1940 Act).
12. Amendments. This Agreement may be amended at any time but only by
the mutual agreement of the parties to this Agreement and in accordance with any
applicable legal or regulatory requirements.
13. Proxies. Unless the Trust gives written instructions to the
contrary, the Adviser shall vote all proxies solicited by or with respect to the
issuers of securities in which assets of the Fund may be invested in a manner
which best serves the interests of the Fund's shareholders. The Adviser shall
use its best good faith judgment to vote such proxies in a manner which best
serves the interests of the Fund's shareholders.
14. Use of "E*TRADE" Name.
(a) It is understood that the name "E*TRADE" and any logo associated
with that name, is the valuable property of E*TRADE Group, Inc., and that the
Trust and Adviser have the right to include "E*TRADE" as a part of their name
only so long as this Agreement shall continue in effect and the Adviser is a
wholly owned subsidiary of the E*TRADE Group, Inc. Further, the Trust and the
Adviser agree that: (i) they will use the name "E*TRADE" only as a component of
the names of the Trust, the Fund and the Adviser, and for no other purposes;
(ii) neither will purport to grant to any third party any rights in the name
"E*TRADE"; (iii) at the request of E*TRADE Group, Inc., the Trust or the Adviser
take such action as may be required to provide their consent to use of the name
"E*TRADE" by E*TRADE Group, Inc. or any affiliate of E*TRADE Group, Inc., to
whom E*TRADE Group, Inc. shall have granted the right to such use; and (iv)
E*TRADE Group, Inc. may use or grant to others the right to use the name
"E*TRADE", or any abbreviation thereof, as all or a portion of a corporate or
business name or for any commercial purpose, including a grant of such right to
any other investment company.
(b) Upon termination of this Agreement as to the Trust or its Fund, the
Trust and the Adviser shall, upon request of E*TRADE Group, Inc., cease to use
the name "E*TRADE" as part of the name of the Trust, the Fund or the Adviser, as
applicable. In the event of any such request by E*TRADE Group, Inc. that use of
the name "E*TRADE" shall cease, the Trust and the Adviser shall cause their
officers, trustees, directors and stockholders to take any and all such actions
which E*TRADE Group, Inc. may request to effect such request and to reconvey to
E*TRADE Group, Inc. any and all rights to the name "E*TRADE."
15. Use of "S&P 500" Name.
It is understood that the Adviser has entered into a licensing
agreement with The XxXxxx-Xxxx Companies, Inc., for use of the terms "S&P 500",
"S&P", "Standard & Poor's", and "Standard & Poor's 500" (the "license"). In
accordance with such license, the Adviser shall permit the Trust, on behalf of
the Fund, to use the terms "S&P 500", "S&P", "Standard & Poor's", and "Standard
& Poor's 500", so long as the license and this Agreement shall continue in
effect.
16. Miscellaneous.
(a) This Agreement shall be governed by the laws of the State of
California, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Advisers Act, or rules or orders of the SEC
thereunder.
(b) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
(c) 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 hereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(d) Nothing herein shall be construed as constituting the Adviser as an
agent of the Trust or the Fund.
(e) All liabilities of the Trust hereunder are limited to the assets of
the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of.
E*TRADE FUNDS
By:_____________________________
Name:
Title:
E*TRADE ASSET MANAGEMENT, INC.
By:_____________________________
Name:
Title:
EXHIBIT A
Name of Fund Advisory Fee
E*TRADE S&P 500 Index Fund 0.02%, if the Fund invests all
of its assets in a master fund
and 0.07% on that portion of
the Fund's assets not invested
in a master fund.
