SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made and entered into as of this 1st day of July, 2003,
between SECURITY MANAGEMENT COMPANY, LLC (the "Adviser"), a Kansas limited
liability company, registered under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act") and MAINSTREAM INVESTMENT ADVISERS, LLC
(the "Subadviser"), a Kentucky limited liability company, registered under the
Investment Advisers Act.
WITNESSETH:
WHEREAS, SBL Fund and Security Equity Fund, Kansas corporations, are each
registered with the Securities and Exchange Commission (the "Commission") as
open-end management investment companies under the Investment Company Act of
1940, as amended (the "Investment Company Act");
WHEREAS, SBL Fund is authorized to issue shares of Series Z, a separate
series of SBL Fund, and Security Equity Fund is authorized to issue shares of
Alpha Opportunity Series, a separate series of Security Equity Fund (Series Z
and Alpha Opportunity Series are referred to herein individually as a "Fund" and
collectively as the "Funds");
WHEREAS, each of the Funds has, pursuant to an Advisory Agreement with the
Adviser (the "Advisory Agreement"), retained the Adviser to act as investment
adviser for and to manage its assets;
WHEREAS, the Advisory Agreements permit the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the Investment Company Act;
WHEREAS, the Adviser desires to retain the Subadviser as subadviser to act as
investment adviser for and to manage a portion of each Fund's assets and the
Subadviser desires to render such services; and
WHEREAS, the Adviser shall have the sole discretion to determine the
percentage of each Fund's assets to be managed by the Subadviser.
NOW, THEREFORE, the Adviser and the Subadviser do mutually agree and promise
as follows:
1. APPOINTMENT AS SUBADVISER. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage assets of the Funds, subject to the
supervision of the Adviser, the Board of Directors of such Fund and the terms of
this Agreement, and the Subadviser hereby accepts such employment. In such
capacity, the Subadviser shall be responsible for the Investments (as defined
herein) of the Funds; provided that the Adviser reserves the authority to
review, modify or reject Subadviser's investment recommendations with respect to
the management of the Funds' Investments.
2. DUTIES OF SUBADVISER.
(a) INVESTMENTS. Subject to the instructions of the Adviser from time to
time, the Subadviser is hereby authorized and directed and hereby agrees,
subject to the stated investment policies and restrictions of each Fund as
set forth in the Fund's prospectus and statement of additional information as
currently in effect and as supplemented or amended from time to time
(collectively referred to hereinafter as the "Prospectus") to purchase, hold
and sell investments for the account of the Fund (hereinafter "Investments")
and to monitor on a continuous basis the performance of such Investments.
"Investments" when referred to in this Agreement shall mean those investments
included in the portion of each Fund's total assets that Adviser has
allocated to Subadviser for management. The Adviser has agreed that it shall
increase or decrease the total assets allocated to the Subadviser for
management solely as of the first business day of each calendar month, unless
otherwise mutually agreed to by the parties. Subject to the instructions of
the Adviser from time to time, the Subadviser may contract with or consult
with such banks, other securities firms, brokers or other parties, without
additional expense to the Adviser, as it may deem appropriate regarding
investment advice, research and statistical data, clerical assistance or
otherwise.
(b) BROKERAGE. The Subadviser is authorized, subject to the supervision of
the Adviser and the respective Fund's Board of Directors, to establish and
maintain accounts on behalf of each Fund with, and place orders for the
purchase and sale of each Fund's Investments with or through, such persons,
brokers or dealers as Subadviser may select which may include, to the extent
permitted by the Adviser or the respective Fund's Board of Directors, brokers
or dealers affiliated with the Subadviser. The Subadviser is also authorized,
subject to the supervision of the Adviser and the respective Fund's Board of
Directors to negotiate commissions to be paid on such transactions. The
Subadviser shall make sales, exchanges, commitments, contracts, investments
or reinvestments, or take any action which it deems necessary or desirable in
connection with the Investments, in accordance with its own judgment and
discretion. Specifically, the Subadviser shall have the authority to
purchase, sell, sell short, transfer, deal in or otherwise invest in publicly
traded common stocks, convertible bonds, convertible preferred stocks, stock
warrants and rights. The Subadviser agrees that in placing such orders for a
Fund it shall attempt to obtain best execution, provided that, the Subadviser
may, on behalf of such Fund, pay brokerage commissions to a broker that
provides brokerage and research services to the Subadviser in excess of the
amount another broker would have charged for effecting the transaction,
provided (i) the Subadviser determines in good faith that the amount is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker in terms of the particular transaction or in
terms of the Subadviser's overall responsibilities with respect to such Fund
and the accounts as to which the Subadviser exercises investment discretion,
(ii) such payment is made in compliance with Section 28(e) of the Securities
Exchange Act of 1934, as amended, and any other applicable laws and
regulations, and (iii) in the opinion of the Subadviser, the total
commissions paid by such Fund will be reasonable in relation to the benefits
to the Fund over the long term. In reaching such determination, the
Subadviser will not be required to place or attempt to place a specific
dollar value on the brokerage and/or research services provided or being
provided by such broker. It is recognized that the services provided by such
brokers may be useful to the Subadviser in connection with the Subadviser's
services to other clients. On occasions when the Subadviser deems the
purchase or sale of a security to be in the best interests of the Fund as
well as other clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of securities so sold or purchased, as
well as the expenses incurred in the transaction, shall be made by the
Subadviser in the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund or Funds involved
and to such other clients. The Subadviser shall report on such allocations at
the request of the Adviser, or the respective Fund's Board of Directors,
providing such information as the number of aggregated trades to which a Fund
was a party, the broker(s) to whom such trades were directed and the basis of
the allocation for the aggregated trades. Subject to the foregoing provisions
of this Subsection 2(b) and at the direction of the Adviser or the Fund, the
Subadviser may also consider sales of the Funds' shares as a factor in the
selection of brokers or dealers for a Fund's portfolio transactions.
(c) SECURITIES TRANSACTIONS. The Subadviser and any affiliated person of
the Subadviser shall not purchase securities or other instruments from or
sell securities or other instruments to a Fund ("Principal Transactions");
PROVIDED, HOWEVER, the Subadviser may enter into a Principal Transaction with
a Fund if (i) the transaction is permissible under applicable laws and
regulations, including, without limitation, the Investment Advisers Act and
the rules and regulations promulgated thereunder, and (ii) the transaction or
category of transactions receives the express written approval of the
Adviser.
The Subadviser agrees to observe and comply in all material respects
with Rule 17j-1 under the Investment Company Act and its Code of Ethics, as
the same may be amended from time to time. The Subadviser agrees to provide
the Adviser with a copy of such Code of Ethics.
(d) BOOKS AND RECORDS. The Subadviser shall maintain all books and records
required to be maintained pursuant to the Investment Company Act and the
rules and regulations promulgated thereunder solely with respect to
transactions made by it on behalf of the Funds including, without limitation,
the books and records required by Subsections (b)(1), (5), (6), (7), (9),
(10) and (11) and Subsection (f) of Rule 31a-1 under the Investment Company
Act and shall timely furnish to the Adviser all information relating to the
Subadviser's services hereunder needed by the Adviser to keep such other
books and records of the Funds required by Rule 31a-1 under the Investment
Company Act. The Subadviser shall also preserve all such books and records
for the periods prescribed in part (e) of Rule 31a-2 under the Investment
Company Act, and agrees that such books and records shall remain the sole
property of the respective Fund and shall be immediately surrendered to the
appropriate Fund upon request. The Subadviser further agrees that all books
and records maintained hereunder shall be made available to the respective
Fund or the Adviser at any time upon reasonable request and notice during any
business day.
(e) INFORMATION CONCERNING INVESTMENTS AND SUBADVISER. From time to time
as the Adviser or a Fund may reasonably request, the Subadviser shall furnish
the requesting party reports on transactions and reports on Investments held
in the Fund portfolios, all in such detail as the Adviser or the applicable
Fund may reasonably request. From time to time as the Adviser or a Fund may
reasonably request, the Subadviser will make available its officers and
employees to meet with the Board of Directors of a Fund at the Fund's
principal place of business on due notice to review the Investments of the
Fund.
The Subadviser shall also provide such information as is customarily
provided by a subadviser and as may be required for each Fund or the Adviser
to comply with their respective obligations under applicable laws, including,
without limitation, the Internal Revenue Code of 1986, as amended (the
"Code"), the Investment Company 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.
During the term of this Agreement, the Adviser agrees to furnish the
Subadviser at its principal office all registration statements, proxy
statements, reports to stockholders, sales literature or other materials
prepared for distribution to stockholders of each Fund, or the public that
refer to the Subadviser for Subadviser's review and approval. The Subadviser
shall be deemed to have approved all such materials unless the Subadviser
reasonably objects by giving notice to the Adviser in writing within five
business days (or such other period as may be mutually agreed) after receipt
thereof. The Subadviser's right to object to such materials is limited to the
portions of such materials that expressly relate to the Subadviser, its
services and its clients. The Adviser agrees to use its best efforts to
ensure that materials prepared by its employees or agents or its affiliates
that refer to the Subadviser or its clients in any way are consistent with
those materials previously approved by the Subadviser as referenced in this
paragraph. Sales literature may be furnished to the Sub-Adviser by first
class or overnight mail, facsimile transmission equipment or hand delivery.
(f) CUSTODY ARRANGEMENTS. The Subadviser shall provide each Fund's
custodian (the "Custodian"), on each business day, information relating to
all transactions made by it on behalf of the Funds.
(g) COMPLIANCE WITH APPLICABLE LAWS AND GOVERNING DOCUMENTS. In all
matters relating to the performance of this Agreement, the Subadviser and its
members, officers, partners, employees and interested persons shall act in
conformity in all material respects with each Fund's Articles of
Incorporation, By-Laws, and currently effective registration statement and
with the written instructions and directions of each Fund's Board of
Directors and the Adviser, after receipt of such documents from the relevant
Fund, and shall comply in all material respects with the requirements of the
Investment Company Act, the Investment Advisers Act, the Commodity Exchange
Act (the "CEA"), the rules thereunder, and all other applicable federal and
state laws and regulations.
In carrying out its obligations under this Agreement, the Subadviser
shall, solely with regard to those matters within its control and based on
information available to it (i) invest the assets of the Fund in such a
manner that each Fund complies with Section 851(b)(2) and Section 851(b)(3)
of Subchapter M of the Code (or any successor provision), and (ii) invest the
assets of Series Z of SBL Fund in such a manner that Series Z complies with
the diversification provisions of Section 817(h) of the Code (or any
successor provision) and the regulations issued thereunder relating to the
diversification requirements for variable insurance contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder. Subadviser shall notify the Adviser immediately upon having a
reasonable basis for believing that a Fund has ceased to qualify as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code
(or any successor or similar provision) or Series Z has ceased to comply with
Section 817(h) and, with respect to Section 817(h), shall take all reasonable
steps to adequately diversify Series Z so as to achieve compliance within the
grace period afforded by Regulation 1.817-5.
The Adviser has furnished the Subadviser with copies of each of the
following documents and will furnish the Subadviser at its principal office
all future amendments and supplements to such documents, if any, as soon as
practicable after such documents become available: (i) the Articles of
Incorporation of each Fund, (ii) the By-Laws of each Fund, (iii) each Fund's
registration statement under the Investment Company Act and the Securities
Act, as filed with the Commission, and (iv) any written instructions of the
respective Fund's Board of Directors and the Adviser. The Subadviser shall
not be held responsible for compliance with any document described above
unless and until such document has been received by the Subadviser.
(h) VOTING OF PROXIES. The Subadviser shall direct the Custodian as to how
to vote such proxies as may be necessary or advisable in connection with any
matters submitted to a vote of shareholders of Investments held by a Fund.
3. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Funds or Adviser in any way or otherwise
be deemed an agent of the Funds or Adviser.
4. COMPENSATION. The Adviser shall pay to the Subadviser an Advisory Fee
computed in accordance with Schedule A attached hereto, which fee shall be
payable as provided therein. The parties hereby disclaim any obligation on the
part of the Funds or their shareholders to pay any portion of the Advisory Fee
payable by the Adviser to the Subadviser.
5. EXPENSES. The Subadviser shall bear all expenses incurred by it in
connection with its services under this Agreement and shall, from time to time,
at its sole expense employ or associate itself with such persons as it believes
to be particularly fitted to assist it in the execution of its duties hereunder.
However, the Subadviser shall not assign or delegate any of its investment
management duties under this Agreement without the written approval of the
Adviser and the respective Fund's Board of Directors.
6. REPRESENTATIONS AND WARRANTIES OF SUBADVISER. The Subadviser represents
and warrants to the Adviser as follows:
(a) The Subadviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Subadviser shall immediately notify the Adviser of the existence
or occurrence of any event that would disqualify the Subadviser from serving
as an investment adviser of an investment company pursuant to Section 9(a) of
the Investment Company Act;
(c) The Subadviser is fully authorized under all applicable law to serve
as Subadviser to the Funds and to perform the services described under this
Agreement;
(d) The Subadviser is a limited liability company duly organized and
validly existing under the laws of the State of Kentucky with the power to
own and possess its assets and carry on its business as it is now being
conducted;
(e) The execution, delivery and performance by the Subadviser of this
Agreement are within the Subadviser's powers and have been duly authorized by
all necessary action of the members, and no action by or in respect of, or
filing with, any governmental body, agency or official is required on the
part of the Subadviser for the execution, delivery and performance by the
Subadviser of this Agreement, and the execution, delivery and performance by
the Subadviser of this Agreement do not contravene or constitute a default
under (i) any provision of applicable law, rule or regulation, (ii) the
Subadviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Subadviser;
(f) This Agreement is a valid and binding agreement of the Subadviser; and
(g) The Form ADV of the Subadviser previously provided to the Adviser is
accurate and complete in all material respects, and does not omit to state
any material fact necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading.
7. NON-EXCLUSIVITY. The services of the Subadviser with respect to the Funds
are not deemed to be exclusive, and the Subadviser and its officers shall be
free to render investment advisory and administrative or other services to
others and to engage in other activities. Nothing in this Agreement shall limit
or restrict the Subadviser or any of its officers, managers, members, employees,
affiliates or agents from buying, selling or trading in any securities for its
or their own account or accounts, except as set forth in Subsection 2(c) herein.
The Adviser acknowledges that the Subadviser and its officers, managers,
members, employees, affiliates or agents and its other clients may at any time
have, acquire, increase, decrease or dispose of positions in investments which
are at the same time being acquired or disposed of for the Funds. The Adviser
agrees that the Subadviser may give advice and take action with respect to any
of its other clients which may differ from advice given or the timing or nature
of action taken with respect to the Funds, so long as it is the Subadviser's
policy, to the extent practical, to allocate investment opportunities to the
Funds over a period of time on a fair and equitable basis relative to other
clients.
8. REPRESENTATIONS AND WARRANTIES OF ADVISER. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule 4.14
under the CEA with the Commodity Futures Trading Commission (the "CFTC") and
the National Futures Association;
(c) The Adviser is a limited liability company duly organized and validly
existing under the laws of the State of Kansas with the power to own and
possess its assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its members, and no action by or in
respect of, or filing with, any governmental body, agency or official is
required on the part of the Adviser for the execution, delivery and
performance by the Adviser of this Agreement, and the execution, delivery and
performance by the Adviser of this Agreement do not contravene or constitute
a default under (i) any provision of applicable law, rule or regulation, (ii)
the Adviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Adviser;
(e) This Agreement is a valid and binding agreement of the Adviser; and
(f) The Adviser acknowledges that it received a copy of the Subadviser's
Form ADV at least 48 hours prior to the execution of this Agreement.
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; DUTY TO UPDATE INFORMATION.
All representations and warranties made by the Subadviser and the Adviser
pursuant to Sections 6 and 8 hereof shall survive for the duration of this
Agreement and the parties hereto shall promptly notify each other in writing
upon becoming aware that any of the foregoing representations and warranties are
no longer true.
10. DUTY OF CARE AND INDEMNIFICATION.
(a) LIABILITY. In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Subadviser or a material breach of its duties
hereunder, the Subadviser shall not be subject to any liability to the
Adviser, to either Fund, or any of either Fund's shareholders, and, in the
absence of willful misfeasance, bad faith or gross negligence on the part of
the Adviser or a material breach of its duties hereunder, the Adviser shall
not be subject to any liability to the Subadviser, for any act or omission in
the case of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of Investments;
PROVIDED, HOWEVER, that nothing herein shall relieve the Adviser and the
Subadviser from any of their respective obligations under applicable law,
including, without limitation, the federal and state securities laws and the
CEA
(b) INDEMNIFICATION. The Subadviser shall indemnify the Adviser and the
Funds, and their respective officers and directors, for any liability and
expenses, including reasonable attorneys' fees, which may be sustained by the
Adviser, or the Funds, as a result of the Subadviser's willful misfeasance,
bad faith, or gross negligence, material breach of its duties hereunder or
material violation of applicable law, including, without limitation, the
federal and state securities laws or the CEA. The Adviser shall indemnify the
Subadviser and its officers and partners, for any liability and expenses,
including reasonable attorneys' fees, which may be sustained as a result of
the Adviser's, or the Funds' willful misfeasance, bad faith, or gross
negligence, material breach of its duties hereunder or material violation of
applicable law, including, without limitation, the federal and state
securities laws or the CEA.
12. DURATION AND TERMINATION.
(a) DURATION. This Agreement shall become effective upon the date first
above written, provided that this Agreement shall not take effect with
respect to the Funds, unless it has first been approved by a vote of a
majority of those directors of SBL Fund and Security Equity Fund, as
applicable, who are not parties to this Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of voting
on such approval. This Agreement shall continue in effect for a period of two
years from the date hereof, subject thereafter to being continued in force
and effect from year to year with respect to each Fund if specifically
approved each year by the Board of Directors of the applicable Fund. In
addition to the foregoing, each renewal of this Agreement with respect to
each Fund must be approved by the vote of a majority of the applicable Fund's
directors who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on
such approval. Prior to voting on the renewal of this Agreement, the Board of
Directors of the applicable Fund may request and evaluate, and the Subadviser
shall furnish, such information as reasonably may be necessary to enable the
Fund's Board of Directors to evaluate the terms of this Agreement.
(b) TERMINATION. Notwithstanding whatever may be provided herein to the
contrary, this Agreement may be terminated at any time, without payment of
any penalty:
(i) By vote of a majority of the Board of Directors of the applicable
Fund, or by vote of a majority of the outstanding voting securities of the
applicable Fund, or by the Adviser, in each case, upon sixty (60) days'
written notice to the Subadviser;
(ii) By the Adviser upon material breach by the Subadviser of any
representation or warranty contained in Section 6 hereof, which shall not
have been cured within twenty (20) days of the Subadviser's receipt of
written notice of such breach;
(iii) By the Adviser immediately upon written notice to the Subadviser
if the Subadviser becomes unable to discharge its duties and obligations
under this Agreement; or
(iv) By the Subadviser upon sixty (60) days' written notice to the
Adviser and the applicable Fund.
This Agreement shall not be assigned (as such term is defined in the
Investment Company Act) without the prior written consent of the parties
hereto. This Agreement shall terminate automatically in the event of its
assignment without such consent or upon the termination of the Advisory
Agreement.
13. DUTIES OF THE ADVISER. The Adviser shall continue to have responsibility
for all services to be provided to the Funds pursuant to the Advisory Agreement
and shall oversee and review the Subadviser's performance of its duties under
this Agreement.
14. AMENDMENT. This Agreement may be amended in writing by mutual consent of
the parties; provided that the terms of each such amendment with respect to a
Fund shall be approved by the Board of Directors of the applicable Fund or by a
vote of a majority of the outstanding voting securities of the applicable Fund.
15. NOTICE. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other party, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Mainstream Investment Advisers, LLC
000 X. Xxxxxx Xxxxxx
Xxxxxx Xxxxx
Xxx Xxxxxx, XX 00000
Attention: Xxxxx X. Hulls, Director
Facsimile: (000) 000-0000
(b) If to the Adviser:
Security Management Company, LLC
One Security Benefit Place
Topeka, Kansas 66636-0001
Attention: Xxxxx X. Xxxxxxx, President
Facsimile: (000) 000-0000
(c) If to SBL Fund:
SBL Fund
One Security Benefit Place
Topeka, Kansas 66636-0001
Attention: Xxx X. Xxx, Secretary
Facsimile: (000) 000-0000
(d) If to Security Equity Fund:
Security Equity Fund
One Security Benefit Place
Topeka, Kansas 66636-0001
Attention: Xxx X. Xxx, Secretary
Facsimile: (000) 000-0000
16. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Kansas.
17. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
all of which shall together constitute one and the same instrument.
18. CAPTIONS. The captions herein are included for convenience of reference
only and shall be ignored in the construction or interpretation hereof.
19. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
20. DEFINITIONS. As used herein, "business day" means any customary business
day in the United States on which the New York Stock Exchange is open. As used
herein, "investment company," "affiliated person," "interested person,"
"assignment," "broker," and "dealer" shall all have such meaning as such terms
have in the Investment Company Act. The term "investment adviser" shall have
such meaning as such term has in the Investment Advisers Act and the Investment
Company Act, and in the event of a conflict between such Acts, the most
expansive definition shall control. In addition, where the effect of a
requirement of the Investment Advisers Act or the Investment Company Act
reflected in any provision of this Agreement is relaxed by a rule, regulation or
order of the Commission, whether of special or general application, such
provision shall be deemed to incorporate the effect of such rule, regulation or
order.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
MAINSTREAM INVESTMENT ADVISERS, LLC
By:
--------------------------------
Name:
Title:
Attest:
--------------------------------
Name:
Title:
SECURITY MANAGEMENT COMPANY, LLC
By:
--------------------------------
Name: Xxxxx X. Xxxxxxx
Title: President
Attest:
--------------------------------
Name: Xxx X. Xxx
Title: Secretary
SCHEDULE A
INVESTMENT ADVISORY FEE
1. BASE FEE. The Adviser shall pay the Subadviser at the end of each calendar
month, an advisory fee (the "Base Fee") equal to 2.50%, on an annual basis, of
that portion of each Fund's net assets that Adviser has allocated to Subadviser
for management ("Subadviser Assets"). The Base Fee shall be determined as of the
last day of each calendar month based upon the average of the value of
Subadviser Assets as of the close of business on the first business day, and the
close of business on the last business day, of each calendar month. If the
Subadviser shall serve for less than the whole of any calendar month, the Base
Fee shall be calculated on a pro rata basis for the portion of the month for
which it has served as Subadviser. The value of the Subadviser Assets shall be
determined by valuations made in accordance with each Fund's procedures for
calculating its net assets as described in each Fund's current prospectus and/or
Statement of Additional Information. During the first 12 months of operations,
the management fee will be charged at the Base Fee of 2.50% without any
adjustment as discussed in Section 2 below.
2. BASE FEE ADJUSTMENT. Beginning in the 13th month of operations, the Base
Fee of 2.50% will be adjusted upward or downward on a monthly basis based upon
the performance of the Subadviser Assets relative to the performance of the S&P
500 Index (the "Index"). The maximum or minimum adjustment is 1.50% annually.
Therefore, the maximum annual fee payable to the Subadviser shall be 4.00% of
Subadviser Assets, and the minimum annual fee shall be 1.00% of Subadviser
Assets. The pro rata adjustment upward or downward will be determined based upon
the performance of the Subadviser Assets in excess of, or below, that of the
Index. The amount of any upward adjustment in the Base Fee shall be equal to
1.50% multiplied by the ratio of the number of percentage points by which the
performance of the Subadviser Assets exceeds the performance of the Index as
compared to 30 percentage points. For example, if the performance of the
Subadviser Assets was 6.6% above that of the S&P 500 Index, the ratio would be
6.6 to 30, or 22%, times 1.50%, for an upward adjustment of 0.33%. The amount of
any downward adjustment in the Base Fee will be equal to 1.50% multiplied by the
ratio of the number of percentage points by which the performance of the
Subadviser Assets is less than the performance of the Index as compared to 30
percentage points. For example, if the performance of the Subadviser Assets was
10.0% below that of the S&P 500 Index, the ratio would be 10 to 30, or 33.33%,
times 1.50%, for a downward adjustment of 0.50%.
In determining the Base Fee adjustment, if any, applicable during any month,
the Adviser will compare the investment performance of the Subadviser Assets for
the twelve-month period ending on the last day of the prior month (the
"Performance Period") to the investment record of the Index during the
Performance Period. The investment performance of the Subadviser Assets will be
determined for each month in the Performance Period by subtracting (i) the value
of the Subadviser Assets as of the first business day of the calendar month
(including any amounts allocated to the Subadviser Assets as of that date) from
(ii) the value of the Subadviser Assets as of the last business day of the
calendar month, expressed as a percentage of (iii) the value of the Subadviser
Assets as of the first business day of the calendar month (including any amounts
allocated to the Subadviser Assets as of that date). The investment performance
for the Performance Period shall be the annualized product of the investment
performance for each month in the Performance Period. The investment performance
of the Index will be determined by adding together (i) the change in the level
of the Index during the Performance Period, and (ii) the value, computed
consistently with the Index, of cash distributions made by companies whose
securities comprise the Index accumulated to the end of the Performance Period,
and will be expressed as a percentage of the Index at the beginning of the
Performance Period.
After it determines any Base Fee adjustment, the Adviser will determine the
dollar amount of additional fees or fee reductions to be accrued each month by
multiplying the Base Fee adjustment by the average Subadviser Assets during the
Performance Period and dividing that number by the number of months in the
Performance Period. The average Subadviser Assets will be the average of (i) the
value of the Subadviser Assets as of the first business day of each calendar
month (including any amounts allocated to the Subadviser Assets as of that
date), and (ii) the value of the Subadviser Assets as of the last business day
of each calendar month (not including any rebalancing), in the Performance
Period. The Base Fee, as adjusted, is accrued and paid monthly and shall be
prorated in any month for which this Agreement is not in effect for the entire
month.
3. VALUATION. For purposes of calculating the compensation to be paid
hereunder, the value of the Subadviser Assets shall be computed in the same
manner at the end of each business day as the value of the Funds' net assets is
computed in connection with the determination of the net asset value of Fund
shares as described in the then current registration statement for the
applicable Fund. Adviser shall provide Subadviser within three business days of
each calendar month end such information as Adviser used to value the Subadviser
Assets as of the first and last business day of that calendar month. The parties
agree to review the valuation process on or before August 15, 2003 to determine
whether there is any material difference in the valuation of the Fund's net
assets as determined by Adviser from that determined by Banc of America, the
Funds' custodian. In the event that there is a material difference, the parties
agree to promptly renegotiate the basis for valuation of the Subadviser Assets
for purposes of calculating the compensation to be paid hereunder.
4. PAYMENT OF FEES. All fees due Subadviser shall be remitted by the Adviser
within thirty (30) days after the applicable calendar month end and/or Valuation
Period.
