FORM OF SPECIAL CUSTODY ACCOUNT AGREEMENT - Short Sales
AGREEMENT, dated as of _________, 200__ by and among ________________, in
its capacity as custodian hereunder (the "Bank"), _________________________ (the
"Customer") and ________________________ (the "Broker").
WHEREAS, Broker is a securities broker-dealer and is a member of several
national securities exchanges; and
WHEREAS, Customer desires from time to time to sell securities "short"
through Broker, and for that purpose has executed a margin agreement (the
"Margin Agreement"); and
WHEREAS, to facilitate Customer's transactions in short sales of
securities, Customer and Broker desire to establish procedures for the
compliance by Broker with the provisions of Regulation T of the Board of
Governors of the Federal Reserve System and other applicable law ("Margin
Rules"); and
WHEREAS, to assist Broker and Customer in complying with the Margin Rules,
Bank is prepared to act as custodian to hold Collateral as defined below.
NOW, THEREFORE, be it agreed as follows:
1. DEFINITIONS
As used herein, the following terms have the following meanings:
(a) "Adequate Margin" in respect of short sales shall mean such
Collateral as is adequate in Broker's sole judgment under the
Margin Rules and the internal policies of Broker.
(b) "Advice from Broker" or "Advice" means a written notice sent to
Customer and Bank or transmitted by a facsimile sending device,
except that Advices for initial or additional Collateral or with
respect to Broker's ability to effect a short sale for Customer
may be given orally. With respect to any short sale or Closing
Transaction, the Advice from Broker shall mean a standard
confirmation in use by Broker and sent or transmitted to Customer
and Bank. With respect to substitutions or releases of
Collateral, Advice from Broker means a written notice signed by
Broker and sent or transmitted to Customer and Bank. An
authorized agent of Broker will certify to Customer and Bank the
names and signatures of those employees who are authorized to
sign Advices from Broker, which certification may be amended from
time to time. When used herein, the term "Advise" means the act
of sending an Advice from Broker.
(c) "Closing Transaction" is a transaction in which Customer
purchases securities, which have been sold short.
(d) "Collateral" shall mean cash or U.S. Government securities or
other securities acceptable to Broker.
(e) "Insolvency" means that (A) an order, judgment or decree has been
entered under the bankruptcy, reorganization, compromise,
arrangement, insolvency, readjustment of debt, dissolution or
liquidation or similar law (herein called the "Bankruptcy Law")
of any jurisdiction adjudicating the Customer insolvent; or (B)
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 his property, 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 (C) any
such petition or application has been filed or any such
proceedings commenced against the Customer and 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 any order, judgment
or decree has been entered appointing any such trust, receiver,
liquidator or similar official, or approving the petition in any
such proceedings, and such order, judgment or decree remains
unstayed and in effect for more than 60 days.
(f) "Instructions from Customer" or "Instructions" means a request,
direction or certification in writing signed by Customer and
delivered to Bank and Broker or transmitted by a facsimile
sending device or via electronic mail to an acceptable recipient.
When used herein, the term "Instruct" shall mean the act of
sending and Instruction from Customer.
(g) "Receipt of Payment" means receipt by Bank of (1) a certified or
official bank check or wire transfer to Bank; (2) a written or
telegraphic advice from a registered clearing agency that funds
have been or will be credited to the account of Bank, or (3) a
transfer of funds from any of Broker's accounts maintained at
Bank.
(h) "Receipt of Securities" means receipt by Bank of (1) securities
in proper form for transfer or (2) a written or telegraphic
advice from a registered clearing agency that securities have
been credited to the account of Bank for the Special Custody
Account.
(i) "Special Custody Account" shall have the meaning assigned to that
tern in Section 2 hereof.
2. SPECIAL CUSTODY ACCOUNT
(a) Bank shall open an account on its books entitled "Special Custody
Account for ______________________________ as Pledgee of
__________________ Fund" ("Special Custody Account") and shall
hold therein all securities and similar property as shall be
received and accepted by it therein pursuant to this Agreement.
Customer agrees to instruct Bank in Instructions from Customer as
to cash and specific securities which Bank is to identify on its
books and records as pledged to Broker as Collateral in the
Special Custody Account. Customer agrees that the value of such
cash and securities shall be 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.
Such collateral (i) will be held by Bank for Broker as agent of
Broker, (ii) may be released only in accordance with the terms of
this Agreement 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 the creditors
of Broker.
(b) Customer hereby grants a continuing security interest to Broker
in the Collateral in the Special Custody Account. To perfect
Broker's security interest Bank will hold the Collateral in the
Special Custody Account, subject to the interest therein of
Broker as the pledgee and secured party thereof in accordance
with the terms of this Agreement. Such security interest will
terminate at such time as Collateral is released as provided
herein. Bank shall have no responsibility for the validity or
enforceability of such security interest.
(c) Bank will confirm in writing to Broker and Customer all pledges,
releases or substitutions of Collateral and will supply Broker
and Customer with a monthly statement of Collateral and
transactions in the Special Custody Account for such month. Bank
will also advise Broker upon request of the kind and amount of
Collateral pledged to Broker.
(d) Upon the request of Customer, Broker shall advise Bank and
Customer of any excess of Collateral in the Special Custody
Account. Such excess shall at Customer's request be transferred
therefrom upon Advice from Broker. 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
unrestricted power to put such securities into good deliverable
form) in accordance with the requirements of such exchanges as
may be the primary market or markets for such securities.
Notwithstanding the foregoing, upon the maturity of collateral
consisting of direct obligations of the U.S. Treasury, Bank may,
without prior Advice from Broker, substitute such collateral for
other obligations of the U.S. Treasury in the same face amount as
the maturing collateral. Broker consents to the release to
Customer of any amount representing an excess between the face
amount of such direct obligations of the U.S. Treasury and their
cost of acquisition.
(e) Bank will maintain accounts and records for the Collateral in the
Special Custody Account as more fully described in subparagraph
5(a) below. The Collateral shall at all times remain the property
of the Customer subject only to the extent of the interest and
rights therein of Broker as the pledgee thereof.
3. ORIGINAL AND VARIATION MARGIN ON SHORT SALES
(a) From time to time, Customer may place orders with Broker for the
short sale of securities. Prior to the acceptance of such orders
Broker will advise Customer of Broker's ability to borrow such
securities or other properties and acceptance of short sale
orders will be contingent upon same.
(b) Broker shall, based on the closing market price on each business
day, compute the aggregate net credit or debit balance on
Customer's open short sales and advise Customer by 11:00 a.m. New
York time of the amount of the net debit or credit, 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 paid to
Broker by the close of business on such day. If a net credit
balance exists on such day, Broker will pay such credit balance
to Customer by the close of business on such day. As Customer's
open short positions are marked-to market each week, payments
will be made by or to Customer to reflect changes (if any) in the
credit or debit balances. Broker will charge interest on debit
balances, and Broker will pay interest on credit balances.
Balances will be appropriately adjusted when short sales are
closed out.
4. PLACING ORDERS
It is understood and agreed that Customer, 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". Any sell order
which Customer shall designate as being for a long account as above
provided is for securities then owned by Customer and, if such
securities are not then deliverable by Broker from any account of
Customer, the placing of such order shall constitute a representation
by Customer that it is impracticable for Customer then to deliver such
securities to Broker but that Customer shall deliver them by the
settlement date or as soon as possible thereafter.
5. RIGHTS AND DUTIES OF THE BANK
(a) The Bank shall receive and hold in the Special Custody Account,
as custodian upon the terms of this Agreement, all Collateral
deposited and maintained pursuant to the terms of this Agreement
and, except as provided in subparagraph 5(b) below, shall receive
and hold all monies and other property paid, distributed or
substituted in respect of such Collateral or realized on the sale
or other disposition of such Collateral; provided, however, that
the Bank shall have no duty to require any money or securities to
be delivered to it or to determine that the amount and form of
assets delivered to it comply with any applicable requirements.
Collateral held in the Special Custody Account shall be released
only in accordance with this Agreement or as required by
applicable law. The Customer warrants its authority to deposit in
such accounts any money, securities and other property received
by Bank.
The Bank may hold the securities in the Special Custody Account
in bearer, nominee, book entry, or other form and in a depository
or clearing corporation, with or without indicating that the
securities are held hereunder; provided, however, that all
securities held in the Special Custody Account shall be
identified on the Bank's records as subject to this Agreement and
shall be in a form that permits transfer without additional
authorization or consent of the Customer. The Customer and Broker
hereby agree to hold Bank and its nominees harmless from any
liability as holder of record.
(b) Any dividends or interest paid with respect to the Collateral
held in the Special Custody Account shall be paid by the Bank to
the Customer when collected unless the Bank has received contrary
instructions from the Customer.
(c) The Bank shall, as promptly as practical, provide Broker and the
Customer with written confirmation of each transfer into and out
of the Special Custody Account. The Bank also shall render to the
Customer and Broker a monthly statement of the Collateral held in
the Special Custody Account. In addition, the Bank will advise
the Customer or Broker upon request at any time of the type and
amount of Collateral held in the account; provided, however, that
the Bank shall have no responsibility for making any
determination as to the value of such Collateral.
(d) The Bank's duties and responsibilities are as set forth in this
Agreement. The Bank shall act only upon receipt of Advice from
Broker regarding release of Collateral. The Bank shall not be
liable or responsible for anything done, or omitted to be done by
it in good faith and in the absence of negligence and may rely
and shall be protected in acting upon any notice, instruction or
other communication which it reasonably believes to be genuine
and authorized. As between Customer and Bank, the terms of the
Custodian Agreement shall apply with respect to any losses or
liabilities of such parties arising out of matters covered by
this Agreement. As between the Bank and Broker, Broker shall
indemnify and hold the Bank harmless with regard to any losses or
liabilities of the Bank (including counsel fees) imposed on or
incurred by the Bank arising out of any action or omission of the
Bank in accordance with any notice or instruction of Broker under
this Agreement reasonably relied upon by Bank. In matters
concerning or relating to this Agreement, the Bank shall not be
responsible for compliance with any statute or regulation
regarding the establishment or maintenance of margin credit,
including but not limited to Regulations T or X of the Board of
Governors of the Federal Reserve System, or with any rules or
regulations of the OCC. The Bank shall not be liable to any party
for any acts or omissions of the other parties to this Agreement.
(e) Bank shall be paid as compensation for its services pursuant to
this Agreement such compensation as may from time to time be
agreed upon in writing between Customer and Bank.
6. DEFAULT
In the event of a default by Customer of its obligations (i) to
maintain Adequate Margin as herein provided, (ii) to timely comply
with any obligation on Customer's part to be performed or observed
under this Agreement or in the Margin Agreement, (iii) to pay on
demand by Broker any losses sustained by Broker as may occur under
circumstances contemplated in paragraph 3 above; or (iv) in the event
of Customer's Insolvency, Broker may give notice (which notice may be
verbal or by telegraph, facsimile transmission or hand delivery) to
Customer specifying such default and Broker may, no sooner than 2:00
p.m., New York time on the next business day after giving such notice
to Customer, if Customer continues to be in default or insolvent at
the end of such period, effect a Closing Transaction or buy-in of any
securities of which Customer's account may be short. In the event of a
default specified in subparagraphs (i), (ii) or (iii) above, Broker
shall also have the right, without demand to sell any and all
Collateral in the Special Custody Account and to give Advice to Bank
to deliver such Collateral free of payment to Broker, which Advice
shall state that, pursuant to this Agreement, the condition precedent
to Broker's right to receive such collateral free of payment has
occurred. The Bank will provide prompt telephone notice to Customer of
any receipt by Bank of Advice from Broker to deliver Collateral free
of payment, and shall affect delivery of Collateral to Broker. Such
sale or purchase may be made according to Broker's judgment and may be
made at Broker's discretion, on the principal exchange or other market
for such securities, or in the event such principal market is closed,
in a manner commercially reasonable for such securities.
7. LIMITATION OF BROKER LIABILITY
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 hereunder for Customer's account at Customer's direction or
otherwise, except to the extent that such loss, cost, damage,
liability or expense is the result of Broker's own recklessness,
willful misconduct or bad faith. Notwithstanding anything set forth in
this Agreement, Broker shall not be liable for any losses caused
directly or indirectly by any inability of Broker to perform
occasioned by suspension of trading wars, civil disturbances, strikes,
natural calamities, labor or material shortages, government
restrictions, acts or omissions of exchanges, specialists, markets
(including changes in market conditions), clearance organizations or
information providers, delays in mails, delays or inaccuracies in the
transmission of orders, or information, governmental, exchange or
self-regulatory organization laws, rules or actions, or any other
causes beyond Broker's control, or for any consequential, incidental,
punitive, special or indirect damages, economic loss or lost profits,
even if Broker is advised of the possibility of such damages or loss.
8. CUSTOMER REPRESENTATION
Customer represents and warrants that the Collateral will not be
subject to any other liens or encumbrances.
9. TERMINATION
Any of the parties hereto may terminate this Agreement by notice in
writing to the parties hereto; provided, however, that 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 rules of
such national securities exchanges of which Broker may be a member. In
the event of the release of Collateral, the Collateral shall be
transferred to Customer.
10. NOTICE
Written communication hereunder shall be telegraphed, sent by
facsimile transmission or hand delivered as required herein, when
another method of delivery is not specified, may be mailed first class
postage prepaid, except that written notice of termination shall be
sent by certified mail, addressed:
(a) If to Bank, to:
_____________________________
_____________________________
_____________________________
Telephone:
_____________________________
Facsimile:
_____________________________
(b) If to Customer, to:
_____________________________
_____________________________
_____________________________
Telephone:
_____________________________
Facsimile:
_____________________________
(c) If to Broker, to:
_____________________________
_____________________________
_____________________________
Telephone:
_____________________________
Facsimile:
_____________________________
11. CONTROLLING LAW
The construction and enforcement of this Agreement shall be subject to
and governed by the laws of the State of ______________________.
Executed as of the date first above written.
[BANK]
By: _____________________________
Name: ___________________________
Title: __________________________
[CUSTOMER]
By: _____________________________
Name: ___________________________
Title: __________________________
[BROKER]
By: _____________________________
Name: ___________________________
Title: __________________________
