SPECIAL CUSTODY ACCOUNT AGREEMENT
(Stock and Index Options)
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(Short Sales)
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AGREEMENT, dated as of the date on which it is duly executed by all
parties, is by and among U.S. BANK, N.A. in its capacity as custodian hereunder
("Bank"), PIEDMONT SELECT EQUITY FUND, ("Customer"), a series of Piedmont
Investment Trust, SHEETS XXXXX WEALTH MANAGEMENT as investment advisor to
Customer ("IA"), and XXXXXXXXX & COMPANY, INC. ("Broker").
RECITALS
A. Broker is a securities broker-dealer registered with the Securities
and Exchange Commission and a clearing member of The Options Clearing
Corporation ("OCC") and is a member of several national securities exchanges.
B. Customer is registered with the Securities and Exchange Commission
as an open-end management investment company under the Investment Company Act of
1940, as amended (the "Company Act").
C. Bank is, and at all times during the term of this Agreement shall
remain, qualified under the Custody Rules (as defined below) to act as custodian
of Customer's assets.
D. Customer desires from time to time to purchase securities on margin,
to sell securities "short" through Broker, and to engage in the purchase and
sale of certain OCC Option (as defined below) contracts and over-the-counter
("OTC") Option contracts through Broker, such margin purchases, short sales and
Option transactions being permitted by Customer's investment policies, and for
that purpose has opened one or more margin accounts with Broker (each an
"Account") and executed Broker's margin account documents (the "Margin
Agreement").
E. Customer has appointed IA as an investment adviser and manager over
certain of its assets (the "Assets") with authority to engage in the
transactions contemplated herein and to act on Customer's behalf in connection
with the pledge of assets to Broker to secure performance of Customer's
obligations with respect to transactions effected for Customer's account with
Broker as contemplated herein.
F. To facilitate Customer's transactions through Broker, Customer, Bank
and Broker desire to establish procedures for compliance by Broker with
Regulation T of the Board of Governors of the Federal Reserve System, NASD
Conduct Rule 2520 and other applicable requirements and for compliance by
Customer with Regulation X of the Board of Governors of the Federal Reserve
System and other applicable requirements (the "Margin Rules").
G. To assist Broker and Customer in complying with the Margin Rules, as
well as the requirements of Section 17(f) of the Investment Company Act relating
to custody of assets of Customer (the "Custody Rules"), Bank is prepared to act
as custodian to hold collateral as defined below (in such capacity, Bank is
herein called the "Custodian").
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AGREEMENT
1. As used herein, the following terms have the following meanings:
"Adequate Margin" shall mean such Collateral as is adequate in
Broker's judgment under the Margin Rules and the internal policies of
Broker. Collateral shall be valued by Broker at Broker's sole discretion.
"Advice from Broker" means a written notice sent to IA, Customer and
Bank or transmitted by a facsimile sending device, except that for any of
the following purposes it shall mean notice by telephone to a person
designated by Customer and/or IA as authorized to receive such Advice or,
in the event that no such person is available, to any officer of Customer
and/or IA and confirmed promptly in writing thereafter: (i) for initial or
additional Collateral; (ii) that Customer has defaulted pursuant to
paragraph 9 (c) hereof, (iii) that an exercise notice filed with OCC has
been assigned to Customer; (iv) that an OTC Option purchased by Broker has
been exercised; or (v) that Customer has failed to give notice of intent
to make payment of the applicable Exercise Settlement Amount as provided
in paragraph 9 (a) or 9 (b) hereof, has failed to give notice of intent to
make delivery of or payment for securities as provided in paragraph 9 (c)
or 9 (d) or otherwise defaulted pursuant to paragraph 9 (a) hereof. With
respect to any short sale or covering purchase transaction, the Advice
from Broker shall mean a standard confirmation in use by Broker and sent
or transmitted to IA, Customer and Bank. With respect to substitutions or
releases of Collateral, Advice from Broker means a written notice sent or
transmitted to Bank sent by an authorized representative of Broker.
"Advise" means the act of sending an Advice from Broker. Authorized
representatives, which may be amended from time to time, are attached
hereto as Exhibit A
"Option" means either a Put Option or a Call Option or both as the
context requires.
"Put Option" means a put option which is issued by the OCC and is
cleared by Broker through the OCC, or an OTC put option sold by the
Customer to the Broker or sold by the Broker to the Customer.
"Call Option" means a call option which is issued by the OCC and is
cleared by Broker through the OCC, or an OTC call option sold by the
Customer to the Broker or sold by the Broker to the Customer.
"Closing Transaction" is a transaction in which (i) Customer
purchases securities which have been sold short or (ii) Customer purchases
an Option of the same series as an Option previously written by it and
still outstanding or in which Customer sells an Option of the same series
as an Option previously purchased by it and still outstanding.
"Collateral" means cash, U.S. Government securities, or other
domestic securities acceptable to Broker, or in the case of short sales
against the box, the long position of such security held by the Fund,
which are deposited from time to time in the Special Custody Account.
"Exercise Settlement Amount" means the difference between the
aggregate exercise price and the aggregate current index value (as such
terms are defined from time to time by the OCC), or the product of the
exercise price (expressed as a percentage) specified in such Option and
the face amount of the underlying securities covered by such Option, as
applicable, plus applicable commissions or other charges.
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"Insolvency" means that (i) an order, judgment or decree has been
entered under the bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar
law (the "Bankruptcy Law") of any jurisdiction adjudicating the Customer
insolvent; or (ii) the Customer has petitioned or applied to any tribunal
for, or consented to the appointment of, or taking possession by, a
trustee, receiver, liquidator or similar official, of the Customer, or
commenced a voluntary case under the Bankruptcy Law of the United States
or any proceedings relating to the Customer under the Bankruptcy Law of
any other jurisdiction, whether now or hereinafter in effect, or (iii) any
such petition or application has been filed, or any such proceedings has
commenced, against the Customer or the Customer by any act has indicated
its approval thereof, consent thereto or acquiescence therein, or an order
for relief has been entered in an involuntary case under the Bankruptcy
Law of the United States, as now or hereinafter constituted, or an order,
judgment or decree has been entered appointing any such trustee, receiver,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree is not stayed and remains
in effect during any thirty (30) day period thereafter.
"Instructions from Customer" or "Instructions" means a written
request, direction or certification delivered in the name of Customer by
Customer or IA, to Bank and/or Broker or transmitted by a facsimile
sending device and which is reasonably believed by Broker and/or Bank in
good faith to be signed by a person authorized to give Instructions on
behalf of Customer or IA. "Instruct" means the act of sending an
Instruction from Customer.
"Receipt of Payment" means receipt by Bank on behalf of Broker, of
(i) a certified or official bank check; (ii) a written or telegraphic
advice from a registered clearing agency that funds have been or will be
credited to the account of Bank; or (iii) a transfer of funds from any of
Customer's accounts maintained at Bank.
"Receipt of Securities" means receipt by Bank on behalf of Broker,
of (i) securities in proper form for transfer; or (ii) a written or
telegraphic advice from a registered clearing agency that securities have
been credited to the account of Bank.
2. From time to time, IA on behalf of Customer may place orders with
Broker to purchase securities on margin or for the short sale of securities.
Prior to the acceptance of such short sale orders, Broker will notify IA on
behalf of Customer of Broker's ability to borrow such securities or other
properties, and acceptance of short sale orders will be contingent upon same.
3. Bank shall open an account on its books which shall be a sub-account
of the Customer's custody account. Such sub-account shall be for the benefit of
Broker as pledgee of the Fund and shall be entitled "Special Custody Account for
Jefferies & Company, Inc., as pledgee of the Piedmont Select Equity Fund" (the
"Special Custody Account"). The Special Custody Account shall be established as
a sub-account of Customer's custody account solely for the administrative
convenience of Bank and Customer, and shall not affect Broker's rights with
respect to the Collateral as set forth in this Agreement. Customer agrees to
instruct Bank in Instructions from Customer that cash and securities specified
by Customer qualifying as Collateral and at least equal in value to what Broker
shall initially and from time to time advise Customer in an Advice from Broker
is necessary to constitute Adequate Margin are to be accepted by Bank for
delivery into the Special Custody Account and identified on Bank's books and
records as pledged to Broker as Collateral. Customer can substitute or exchange
Collateral only after IA on behalf of Customer notifies Broker of the
contemplated substitution or exchange and Broker Advises Bank that such
substitution or exchange is acceptable. Customer hereby
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grants a continuing security interest to Broker in the Collateral and the
proceeds thereof while in the Special Custody Account to secure its obligations
to Broker under the Margin Agreement and this Agreement.
4. The Collateral (i) will be held by Bank for Broker as agent of
Broker, subject to the terms and conditions of this Agreement, (ii) may be
released to Broker only in accordance with the terms of paragraph 9 below, and
(iii) except as required to be released hereunder to Broker, shall not be made
available to Broker or to any other person claiming through Broker, including
creditors of Broker. Bank will hold the Collateral in the Special Custody
Account separate and apart from any other property of Customer which may be held
by Bank subject to the interest therein of Broker as the pledgee thereof in
accordance with the terms of this Agreement. Such security interest will
terminate only if and at such time as Collateral is released to Broker as
provided in paragraph 9 or withdrawn from the Special Custody Account as
provided in paragraph 7 below.
Interest, dividends or proceeds attributable to Collateral shall be
credited to the Special Custody Account as additional Collateral and shall be
held in the Special Custody Account as Collateral until released therefrom or
withdrawn in accordance with this Agreement.
Bank will make available to Broker and Customer by use of a secured
website all deliveries, releases or substitutions of Collateral. Bank will
supply Broker and Customer with a monthly statement of Collateral in the Special
Custody Account and transactions in the Special Custody Account during the
preceding month. Bank will also advise Broker, Customer and/or IA promptly, upon
reasonable request of the kind and amount of Collateral pledged to Broker.
Broker shall advise Bank, Customer and IA daily of any excess of Collateral in
the Special Custody Account as provided in paragraph 7 below.
5. Customer represents and warrants to Broker that securities included
at any time in the Collateral shall be in good deliverable form (or Bank shall
have the unrestricted power to put such securities into good deliverable form)
in accordance with the requirement of such exchanges as may be the primary
market or markets for such securities. Securities Collateral may be held at
Depository Trust Company ("DTC") or other book-entry depository system in the
account of Bank, except U.S. Treasury securities may also be held at the Federal
Reserve Bank in the account of Bank. Bank represents that Collateral will not be
subject to any lien, charge, security interest or other right or claim of Bank
or any person claiming through Bank, other than the security interest of Broker.
6. Bank will maintain accounts and records for the Collateral in the
Special Custody Account separate from the accounts and records for other
property of Customer held by Bank and other property in which Broker has an
interest. Customer and Broker acknowledge that Bank holds securities and cash as
custodian for its customers through subcustodians, depositories and
deposit-taking banks which maintain omnibus accounts on behalf of customers of
Bank and which Bank represents satisfy the requirements of the Custody Rules.
Bank makes no representation as to the attachment or perfection of any security
interest herein granted.
7. Customer agrees to maintain Adequate Margin at all times. Broker
shall initially, and from time to time, Advise Bank, IA and Customer of the
value of Collateral which is necessary to constitute Adequate Margin. At
Customer's request and upon Advice from Broker, which shall be given promptly
upon request, Bank shall withdraw from the Special Custody Account Collateral in
excess of Adequate Margin and credit the same to Customer's general custody
account with Bank. Broker shall from time to time compute the aggregate net
credit or debit balance on Customer's open short sales and Advise Bank, IA
and/or Customer by
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2PM New York time that day of the amount of the net debit or credit balance, as
the case may be. If a net debit balance exists on such day, Customer will cause
an amount equal to such net debit balance to be delivered to Broker or deposited
as Collateral in the Special Custody Account by the close of business on such
day, at the option of Broker. Balances will be appropriately adjusted to reflect
each Closing Transaction.
8. It is understood and agreed that IA, when placing with Broker any
order to sell short for Customer's account, will designate the order as such and
hereby authorizes Broker to xxxx such order as being "short," and when placing
with Broker any order to sell long for Customer's account, will designate the
order as such and hereby authorizes Broker to xxxx such order as being "long."
9. (a) In the event that (i) Broker Advises Customer or IA that an
exercise notice filed with OCC with respect to one or more index Call Option
sold by Customer has been assigned to Customer through Broker or that Broker has
exercised an index Call Option sold by Customer; and (ii) Customer or IA does
not promptly notify Broker by telephone of Customer's intention to comply with
the exercise notice by payment of the applicable Exercise Settlement Amount; or
if (iii) Customer, having given such notice, fails to make such payment, then
Broker will immediately advise Customer or IA of such failure to give telephone
notice or failure to make payment, as applicable, either of which failure shall
be a sufficient condition precedent to Broker's right to direct disposition of
the Collateral, and may thereafter pay such Exercise Settlement Amount and sell
such of the Collateral as is necessary to reimburse Broker for the payment of
such Exercise Settlement Amount under the exercised Call Option plus applicable
commissions or other charges.
(b) In the event that (i) Broker Advises Customer or IA that an
exercise notice filed with OCC with respect to one or more index Put Options
sold by Customer has been assigned to Customer through Broker or that Broker has
exercised an index Put Option sold by Customer; and (ii) Customer or IA does not
promptly notify Broker by telephone of Customer's intention to comply with the
exercise notice by making payment of the applicable Exercise Settlement Amount;
or if (iii) Customer, having given such notice, fails to make such payment, then
Broker will immediately advise Customer or IA of such failure to give telephone
notice or make payment, as applicable, either of which failure shall be a
sufficient condition precedent to Broker's right to direct disposition of the
Collateral, and may thereafter pay such Exercise Settlement Amount and sell such
of the Collateral as is necessary to reimburse Broker for the applicable
Exercise Settlement Amount plus applicable commissions or other charges.
(c) In the event that (i) Broker Advises Customer or IA that an
exercise notice filed with OCC with respect to one or more stock Call Options
sold by Customer has been assigned to Customer through Broker or that Broker has
exercised a stock Call Option sold by Customer; and (ii) Customer or IA does not
promptly notify Broker by telephone of Customer's intention to comply with the
exercise notice by delivery of the underlying securities; or if (iii) Customer,
having given such notice, fails to make delivery of such securities to Broker,
against Receipt of Payment of the gross exercise price for such securities less
applicable commissions or other charges, then Broker will immediately advise
Customer or IA of such failure to give telephone notice or failure to deliver,
as applicable, either of which failure shall be a sufficient condition precedent
to Broker's right to direct disposition of the Collateral, and may thereafter
purchase the securities necessary and sell such of the Collateral as is
necessary to reimburse Broker for the purchase of the securities which were
deliverable under the exercised Call Option plus applicable commissions or other
charges.
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(d) In the event that (i) Broker Advises Customer or IA that an
exercise notice filed with OCC with respect to one or more stock Put Options
sold by Customer has been assigned to Customer through Broker or that Broker has
exercised a stock Put Option sold by Customer; and (ii) Customer or IA does not
promptly notify Broker by telephone of Customer's intention to comply with the
exercise notice by making payment of the gross exercise price plus applicable
commissions or other charges against Receipt of Securities underlying the Put
Option; or if (iii) Customer, having given such notice, fails to make such
payment, against Receipt of Securities underlying the Put Option, then Broker
will immediately advise Customer or IA of such failure to give telephone notice
or make payment, as applicable, any of which failure shall be a sufficient
condition precedent to Broker's right to direct disposition of the Collateral,
and may thereafter make payment of the gross exercise price plus applicable
commissions or other charges against Receipt of Securities underlying the Put
Option, and sell the securities underlying the Put Option and sell such of the
Collateral as is necessary to reimburse Broker for the gross exercise price of
the Put Option plus applicable commissions or other charges.
(e) In the event of default by Customer of any obligation
hereunder or under the Margin Agreement, or in the event of Customer's
Insolvency, or if at any time Broker deems necessary in its own protection,
Broker may sell or instruct Bank to sell and deliver to Broker the proceeds of
such of the Collateral as in Broker's judgment is reasonably necessary for its
own protection or enter an order to sell any or all of the Collateral and demand
delivery by Bank of the Collateral to cover that sale.
(f) Customer shall remain liable to Broker for any deficiency
resulting from such sale. Broker shall promptly advise customer or IA of any
sale of Collateral and any deficiency remaining. If the proceeds of any such
sale exceed the amount due to Broker under this paragraph 9, the excess of the
amount due to Broker shall remain in the Special Custody Account as Collateral,
unless otherwise released or withdrawn as provided hereunder. Broker and Bank
shall have responsibility for compliance with provisions of this paragraph 9 (f)
relating to the manner of sale of any Collateral.
10. Bank shall be paid for its services pursuant to this Agreement such
compensation as may from time to time be agreed upon in writing between Customer
and Bank.
11. With respect to any losses or liabilities, Bank shall be protected
in acting pursuant to any Instructions, Advices or notices from IA, Customer or
Broker reasonably believed by Bank in good faith to be genuine and authorized.
Customer agrees to indemnify Bank for, and hold it harmless against, any loss,
liability or expense incurred by Bank, without gross negligence or bad faith on
the part of Bank, arising out of this Agreement.
12. Broker shall not be liable for any losses, costs, damages,
liabilities or expenses suffered or incurred by Customer as a result of any
transaction executed hereunder, or any other action taken or not taken by Broker
or Bank hereunder for Customer's account at IA's or Customer's direction or
otherwise, except to the extent that such loss, cost, damage, liability or
expense is the result of Broker's own gross negligence or bad faith.
13. Bank shall act only upon receipt of instructions from Broker
regarding release of Collateral. Bank may rely and shall be protected in acting
upon any notice, instruction or other communication which it reasonably believes
to be genuine and authorized. All securities held in the Special Custody Account
shall be identified on Bank's records as subject to this Agreement and shall be
in a form that permits transfer without additional authorization or consent of
Customer.
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14. Any of the parties hereto may terminate this Agreement by notice in
writing to the other parties hereto; provided, however, that (i) the status of
any short sales, and of Collateral held at the time of such notice to margin
such short sales shall not be affected by such termination until the release of
such Collateral pursuant to applicable law or regulations or rules of any self
regulatory organization to which Broker is subject; (ii) Customer shall not be
entitled to terminate this Agreement unless and until Customer shall have
indefeasibly paid in full in cash to Broker all obligations then outstanding;
and (iii) Custodian shall not be entitled to terminate this Agreement unless and
to the extent that, immediately before such termination, (A) Customer shall have
also been entitled to terminate this Agreement in accordance with clause (ii)
above or (B) the Collateral shall have been transferred to Broker or its
designee, and Broker shall continue to have a valid and enforceable perfected
first-priority lien and security interest in the Collateral. The security
interest shall terminate (i) with respect to Collateral released or paid
pursuant to this Agreement, upon such release or payment; and (ii) in any other
case, upon the termination of this Agreement. Any Collateral in which the
security interest shall have terminated in accordance with the preceding
sentence shall be transferred to Customer or its designee.
15. No amendment of this Agreement shall be effective unless in writing
and signed by an authorized person of each of the parties hereto.
16. This Agreement may be executed in one or more counterparts, all of
which together shall constitute but one and the same instrument.
17. It is agreed that, notwithstanding any language to the contrary in
Bank's form of confirmation, Bank holds the Collateral as agent of Broker as
pledgee and secured party hereunder, not as escrow agent.
18. Customer represents and warrants that the Collateral will not be
subject to any other liens or encumbrances, other than to Broker in accordance
with the Margin Agreement and this Agreement.
19. Any of the parties hereto may terminate this Agreement by notice in
writing to the other parties hereto; provided, however, that the status of any
short sales or Option transactions, and of Collateral held at the time of such
notice relating to such short sales or Option transactions, shall not be
affected by such termination.
20. Written communications hereunder shall be sent by facsimile
transmission or hand delivered as required herein, and when another method of
delivery is not specified, may be mailed first class postage prepaid or by
certified mail, addressed;
(a) If to Bank, to: U.S Bank, N.A.
0000 X. Xxxxxxxxxxx Xx., XX-XX-X000
Xxxxxxxxx, XX 00000
Attn: Xxx Xxxxxx
Phone: 000-000-0000
Fax: 000-000-0000
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(b) If to Customer, to:
Piedmont Select Equity Fund
c/o Sheets Xxxxx Wealth Management
000 Xxxx Xxxx Xxxxx, Xxxxx 000
Xxxxxxx-Xxxxx, XX 00000
Attention: Xxxxx Xxxxx
Phone: (000) 000-0000
Fax: (000) 000-0000
(c) If to IA:
Sheets Xxxxx Wealth Management
000 Xxxx Xxxx Xxxxx, Xxxxx 000
Xxxxxxx-Xxxxx, XX 00000
Attention: Xxxx X. Xxxxxxx
Phone: (000) 000-0000
Fax: (000) 000-0000
(d) If to Broker, to:
Xxxxxxxxx & Company, Inc.
000 Xxxxxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxx Xxxxxxx
Phone: (000) 000-0000
With a copy to:
Xxxxxxxxx & Company, Inc.
Xxx XxXxxxxx
21. This Agreement will be governed by the laws of the State of New York
applicable to transactions entered into and to be performed wholly within
the State of New York.
22. Bank and Broker each agree that Customer's obligations hereunder shall be
limited to Customer, and that neither Bank nor Broker shall seek
satisfaction of any such obligation from the shareholders of Customer or
of any other series of the Trust, or from any trustee, officer, employee,
or agent of the Customer.
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BANK: U.S. BANK, NATIONAL ASSOCIATION
By: /s/ Xxxxxxx X. XxXxx
Print name and title: Xxxxxxx X. XxXxx
Date: 6/18/08
CUSTOMER: PIEDMONT INVESTMENT TRUST, ON BEHALF OF PIEDMONT SELECT EQUITY FUND
By: /s/ Xxxxx X. Xxxxx III
Print name and title: Xxxxx X. Xxxxx III
Date: 6/18/08
I.A.: SHEETS XXXXX WEALTH MANAGEMENT
By: /s/ Xxxxx X. Xxxxxxx
Print name and title: Xxxxx X. Xxxxxxx, EVP
Date: 6/18/08
BROKER: JEFFERIES & CO., INC.
By: /s/ Xxxxxxx Xxxxxxxxx
Print name and title: Xxxxxxx Xxxxxxxxx, Managing Director
Date: 6/25/08
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EXHIBIT A
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AUTHORIZED PERSONS
Set forth below are the names and specimen signatures of the persons
authorized to give Advice from Broker to act on the Special Custody Accounts.
Authorized Persons (Name and Title) Specimen Signatures
Xxx XxXxxxxx, SVP /s/ Xxx XxXxxxxx
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Xxxxx Xxxxx /s/ Xxxxx Xxxxx
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