Exhibit 10.16
FULLY DISCLOSED CLEARING AGREEMENT
BETWEEN SPEAR, LEEDS & XXXXXXX, X.X.
AND
OPTIONSXPRESS, INC.
This Fully Disclosed Clearing Agreement and any supplements hereto
(collectively, the "Agreement"), is made and entered into as of this 13 day of
September 2004 by and between Spear, Leeds & Xxxxxxx, X.X. ("SLK") and
optionsXpress, Inc. ("Broker").
1. Subject to the approval of the New York Stock Exchange ("NYSE"), from the
opening of business on the date of NYSE approval until the termination of
this Agreement as provided for in Paragraph 19, hereof, SLK will carry the
cash and margin accounts of the customers introduced by Broker to SLK, and
accepted by SLK, and will clear transactions on a fully disclosed basis for
such accounts, all as more specifically provided in Paragraph 4 hereof, and
subject to the terms and conditions hereinafter set forth.
All references made to margin accounts in this agreement shall apply only
if Broker introduces such accounts and they are accepted by SLK.
2. LAWS AND REGULATIONS. The term "Applicable Laws and Regulations," as
referred to in this Agreement, means the following: any applicable United
States federal, state or foreign laws, rules or regulations including the
Securities Act of 1933 (the "Securities Act"), the Securities Exchange Act
of 1934 (the "Exchange Act"), the Investment Company Act of 1940 and the
Investment Advisers Act of 1940, the Employee Retirement Income Security
Act of 1974 ("ERISA"), all anti-money laundering and related federal
statutes, rules or regulations, including 31 U.S.C. 5318(h), the Bank
Secrecy Act ("BSA") as modified by the USA PATRIOT Act, and any Executive
Orders administered by the U.S. Treasury Department's Office of Foreign
Assets Control ("OFAC"); the rules, regulations, and, as applicable, the
by-laws and constitution of the Securities and Exchange Commission (the
"SEC"), any state securities authority, any "self-regulatory organization"
("SRO") (as defined in Section 3 of the Exchange Act), including the New
York Stock Exchange, Inc. (the "NYSE") and the National Association of
Securities Dealers, Inc., (the "NASD") and their respective clearing houses
and depositories or any other regulatory body or agency having authority
over the party, a transaction or an account of the party. Broker is not a
member of the NYSE, and agrees that in each case where there is a reference
in this Agreement to a rule of the NYSE (the "NYSE Rules") it will comply
with the comparable rules of the NASD.
3. REPRESENTATIONS AND WARRANTIES
(a) Broker represents, warrants, and covenants to SLK that:
(1) Broker is and will remain during the term of this Agreement duly
registered and in good standing as a broker-dealer with the SEC
and in compliance in all material respects with all Applicable
Laws and Regulations.
(2) Broker is and will remain during the term of this Agreement a
member firm in good standing with the NASD, and Broker is, and
will provide SLK with not less than 30 days prior notice in the
event it will not remain, a member firm in good standing with the
Chicago Board Options Exchange, the International Securities
Exchange and the Boston Options Exchange.
(3) Broker has fulfilled all registration and other requirements of
all states and the District of Columbia and any foreign countries
to the extent such registration or other requirements are
applicable to Broker.
(4) To the extent required by law, Broker has entered into a dealer
agreement with each and every mutual fund or other investment
company whose shares are sold to Broker's customer accounts.
(5) Broker has all requisite authority under Applicable Laws and
Regulations to enter into this Agreement and to retain the
services of SLK in accordance with the terms hereof.
(6) Broker has obtained a Brokers Blanket Bond and lists SLK as a
party to be notified if said Bond's monetary limits are reduced
or if said Bond is cancelled.
(7) Notwithstanding the terms of section 3(a)(1) above, Broker is in
full compliance, and during the term of this Agreement will
remain in compliance, with the Bank Secrecy Act as amended by the
USA PATRIOT Act, including federal and state criminal statutes,
rules and regulations of the U.S. Department of Treasury,
(including 31 U.S.C. 5318(h)) as well as the sanctions and
embargo programs administered by the Office of Foreign Assets
Control ("OFAC").
(8) In the event that Broker desires to receive commissions from
introducing customers that want to clear securities futures
products, Broker shall be properly registered with the National
Futures Association ("NFA") and shall remain in good standing
with the NFA during the term of this Agreement. In such case and
for so long as Broker receives commissions related to the trading
of securities futures products, Broker agrees that it will remain
in material compliance with the rules and regulations of the
Commodity Exchange Act, the Commodity Futures Trading Commission
and any other regulatory body or agency having authority over a
party, a transaction or an account of the party.
(b) SLK represents, warrants and covenants that:
(1) SLK is duly registered and in good standing as a broker-dealer
with the SEC and is a member firm in good standing with the NYSE
and the NASD and any other United States exchanges necessary for
it to perform as contemplated by this Agreement.
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(2) SLK has all requisite authority under Applicable Rules and
Regulations to enter into this Agreement.
(3) SLK is in compliance in all material respects, and during the
term of this Agreement will remain in compliance in all material
respects, with all Applicable Laws and Regulations.
4. DUTIES, OBLIGATIONS AND RESPONSIBILITIES OF SLK
(a) SERVICES TO BE PERFORMED BY SLK
SLK, acting as Broker's agent, shall carry the customers' cash and margin
accounts introduced by Broker and accepted by SLK on a fully disclosed
basis, and perform the following services:
(1) Execute transactions in the customers' accounts and release or deposit
money, including via ACH transfer, or securities to or for the
accounts, only upon Broker's instructions.
(2) Prepare and mail monthly statements to Broker's customers on forms
agreed between SLK and Broker that shall disclose that the account is
carried on a fully disclosed basis for Broker. Notwithstanding the
foregoing, to the extent that Broker's customers have requested
electronic transmission of their monthly statements, SLK shall
suppress the mailing of a hard copy of the monthly statement. In such
case, Broker shall be responsible for transmitting the monthly
statement to Broker's customers on SLK's behalf. Copies of all
statements prepared for Broker's customers shall be transmitted or
delivered to Broker. If required by Applicable Laws or Regulations or
upon reasonable request by Broker, SLK will use commercially
reasonable efforts to provide Broker with that information that is
reasonably necessary to permit Broker to prepare and transmit
confirmations to Broker's customers on forms agreed between SLK and
Broker.
(3) Settle contracts and transactions in securities and securities futures
contracts and options thereon, (collectively referred to as
"securities") (i) between Broker and other brokers and dealers, (ii)
between Broker and its customers and (iii) between Broker and third
persons.
(4) Perform cashiering functions for such customers' accounts, including
receipt and delivery of securities purchased, sold, borrowed and
loaned; remittance and receipt of payments therefor, provision of
custody and safekeeping of securities and cash; and handling of margin
accounts, dividends and exchanges, rights, warrants, redemptions, and
tender offers with respect to such securities. In this regard, SLK
will not accept cash and certain types of cash equivalents, such as
money orders, traveler's checks, or cashier's checks (whether or not
in bearer form) or similar instruments in bearer form. SLK reserves
the right to reject any transaction that violates these prohibitions
or limitations, or that raises anti-money laundering or OFAC concerns.
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(5) SLK shall transmit to Broker, in an electronic format to the extent
reasonably possible by SLK, a daily position and daily activity file
to permit Broker to reconcile its books and records and to prepare and
provide customer account information, including cash balances.
(6) Complete the transfer of securities and accounts on behalf of
customers.
(7) Assist Broker in seeking to ensure compliance with restricted and
control securities under the Securities Act of 1933. Broker is
responsible for obtaining all the necessary documentation and making
all necessary legal and factual determinations.
(8) Pursuant to NYSE Rule 382(d), SLK will furnish any written customer
complaint it receives regarding Broker, or Broker's associated
persons, and relating to the responsibilities allocated to Broker
under this Agreement directly to:
(i) Broker; and
(ii) Broker's Designated Examining Authority (or, if none, to its
appropriate regulatory agency or authority).
SLK will also notify the complaining customer, in writing, that it has
received the complaint, and that the complaint has been furnished to
the parties listed in 8(i) and 8(ii) above.
(9) SLK will also utilize vendor databases for the purposes of verifying
certain background information for new accounts as well as for OFAC
screening purposes. SLK will also utilize vendor databases for
screening wire transfers against the OFAC List. To the extent
permitted by Applicable Laws and Regulations, SLK will use
commercially reasonable efforts to notify OX of those circumstances
where SLK identifies an exception during OFAC screening or requires
additional information to resolve any issues or exceptions resulting
from OFAC screening.
(10) Pursuant to NYSE Rule 382(e):
(i) At the commencement of this Agreement, and annually thereafter,
SLK will furnish Broker with a list of reports (i.e., exception
reports and/or other reports) that it can provide Broker, upon
Broker's written request, to assist Broker in its supervision
and monitoring of customer accounts.
(ii) Upon Broker's request, SLK will assist Broker in designing
appropriate AML reports for Broker to review. Broker assumes
full responsibility for reviewing any such reports provided to
Broker.
(iii) SLK will retain and preserve copies of the reports requested by
and/or supplied to Broker pursuant to NYSE Rule 440 (Books and
Records), or will have the ability to either recreate copies of
these reports or provide the report format and data elements
contained in the original.
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(iv) Annually, within thirty (30) days of July 1st of each year, SLK
will give written notice to Broker's Chief Executive Officer
and Chief Compliance Officer indicating: (a) the list of
reports offered by SLK to Broker described above; and (b) the
specific reports actually requested by and/or supplied to
Broker as of that date.
SLK will also provide a copy of this written notice to Broker's
Designated Examining Authority (or if none, to its appropriate
regulatory agency or authority).
(11) SLK, at the request of Broker, agrees to file a notice pursuant to
Section 314 of the USA PATRIOT Act and the implementing regulations
related thereto to permit the voluntary sharing of information between
SLK and Broker. Upon filing such notice, at Broker's request, SLK will
forward a copy of the notice filed to Broker. SLK will comply with all
requirements concerning the use, disclosure, and security of
information shared pursuant to Section 314 of the USA PATRIOT Act.
(12) NOTWITHSTANDING SUBPARAGRAPHS (a)(1) THROUGH (11) ABOVE, SLK MAY, IN
ITS SOLE DISCRETION, FOR GOOD CAUSE SHOWN, REFUSE TO OPEN AN ACCOUNT
FOR A SPECIFIC CUSTOMER; CLOSE AN ACCOUNT ALREADY OPENED; REFUSE TO
CONFIRM AND/OR CANCEL A CONFIRMATION; REJECT A DELIVERY OR RECEIPT OF
SECURITIES AND/OR MONEY; REFUSE TO CLEAR ANY TRADE EXECUTED BY BROKER;
OR REFUSE TO EXECUTE ANY TRADE FOR THE ACCOUNT OF A CUSTOMER
INTRODUCED BY BROKER. SLK MAY TAKE THESE ACTIONS EVEN IF THE ACCOUNT
HAS ALREADY BEEN OPENED BY BROKER OR THE TRANSACTION HAS BEEN
PROCESSED BY BROKER. NOTWITHSTANDING THE FOREGOING, SLK SHALL USE
COMMERCIALLY REASONABLE EFFORTS UNDER THE CIRCUMSTANCES TO GIVE BROKER
PRIOR NOTICE THAT IT SHALL TAKE ANY OF THE FOREGOING ACTIONS.
(13) Broker acknowledges that in connection with the performance of
the above described services, SLK may retain, at its option, one or
more independent data processing service bureaus to perform any of the
required functions and agrees that SLK shall not be responsible for
any losses, damages, liability or expenses incurred by, or claims made
by, Broker or its customers arising from the failure of any such
service bureau to perform said functions accurately, in accordance
with specifications, or within the customary time periods. SLK's only
obligation will be to cause any such service bureau to correct any
processing error in its next regularly scheduled processing, and to
deliver any overdue work as soon as reasonably practicable. In the
event such service bureau fails to perform as required hereunder, SLK
shall use commercially reasonable efforts to replace such service
bureau in a commercially reasonable timeframe. In the event there
exists a controversy or claim by Broker relating to the service
bureau's failure to perform, SLK, in its sole discretion, will take
such actions as it deems reasonable under the circumstances to resolve
any such controversy or claim. In no event shall SLK be responsible
for indirect or consequential damages.
(b) INFORMATION TO BE SUPPLIED BY SLK
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(1) Upon Broker's request, and to the extent permitted by Applicable Laws
and Regulations and any applicable contracts, SLK will use
commercially reasonable efforts to furnish Broker with information and
documents obtained by SLK in the course of its performance hereunder,
including information, reports and documents obtained from third party
vendors engaged by SLK.
(2) Upon executing this Agreement, SLK shall provide Broker with a copy of
its most recent FOCUS Report. Upon request, SLK agrees to furnish
Broker with a copy of its current FOCUS Report.
(3) SLK shall provide Broker notice of any event that materially adversely
impacts SLK's ability to carry out its duties and responsibilities
under this Agreement.
5. SERVICES FOR WHICH SLK IS NOT RESPONSIBLE
Unless otherwise expressly agreed in writing, SLK will not provide, nor be
responsible for providing, any services not described in Section 4,
including but not limited to any of the following services:
(a) Accounting, bookkeeping or record keeping, cashiering, or other
services involving commodity transactions, or any other transaction
not involving securities;
(b) Preparation of Broker's payroll records, financial statements or any
analysis thereof;
(c) Preparation or issuance of checks in payment of Broker's expenses,
other than expenses incurred by SLK on behalf of Broker pursuant to
this Agreement;
(d) Payment of commissions to Broker's salesmen;
(e) Preparation or filing of any of Broker's reports to the Securities and
Exchange Commission, any state securities commission, or any
securities exchange, securities association or other membership to
which Broker is subject. However, SLK will, at the request of Broker,
furnish Broker with any necessary information and data contained in
records kept by SLK, and not otherwise available to Broker, for use in
making such reports by Broker or to assist Broker in discharging its
obligations hereunder.
(f) Verification of address changes of Broker's customers.
(g) Obtaining and verifying new account information and ensuring that such
information meets the requirements of NYSE Rule 405(1) and any other
NYSE Rule including, but not limited to, any verification or
identification requirements in the Bank Secrecy Act, as amended by the
USA PATRIOT Act, except that SLK will provide the services referenced
in Paragraph 4 (i), above.
(f) Rendering investment advice to customers.
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(g) Preparing and transmitting confirmations to Broker's customers. Copies
of all confirmations transmitted by Broker shall be transmitted to
SLK.
(h) Transmitting to each customer a copy of the Notice to customers as
required by New York Stock Exchange Rule 382(c) and in the form agreed
between Broker and SLK.
6. DUTIES, OBLIGATIONS AND RESPONSIBILITIES OF BROKER
(a) IMMEDIATE NOTIFICATION OF RESTRICTIONS OR SUSPENSIONS, NET CAPITAL
DEFICIENCIES AND OTHER MATTERS
Broker will provide SLK with written notification of:
(1) any judicial or administrative order, consent or other agreement
placing limitations upon, restricting or suspending Broker's
securities business in any respect (whether voluntary or
involuntary) within 24 hours of first becoming aware of same;
(2) any deficiency in Broker's net capital within 24 hours of first
becoming aware of same;
(3) any material action, investigation, inquiry, suit or formal
proceeding, including pending or threatened indictment (each
referred to herein as an "action"), against Broker or, where such
action is material to Broker or its business or operations, any
of Broker's customers or affiliates, or any officer, director,
general securities principal, financial or operations principal,
or employee, independent contractor or other person associated
with Broker, by or before any court or other tribunal, any
arbitrator, any governmental authority or any SRO (in writing and
within ten (10) business days of Broker's receipt of notice of
such action); and nothing in this Agreement shall require Broker
to provide notice to SLK of any action which is required by law
or required by applicable authority to remain confidential; and
(4) any event that adversely and materially impacts Broker's ability
to carry out its duties and responsibilities under this Agreement
within 24 hours of first becoming aware of same.
BROKER REPRESENTS AND WARRANTS THAT ALL OF THE ABOVE-MENTIONED AND ANY
OF THE INFORMATION PROVIDED TO SLK IN CONNECTION WITH THIS AGREEMENT,
AS WELL AS ALL OTHER INFORMATION PROVIDED IN RESPONSE TO A REQUEST BY
SLK IS ACCURATE AND COMPLETE.
THE FAILURE OF BROKER TO PROVIDE THE NOTIFICATION AND INFORMATION AS
REQUIRED IN SUBPARAGRAPHS (a)(1) (2) AND (4) SHALL BE CONSIDERED A
MATERIAL DEFAULT UNDER THIS AGREEMENT AND GROUNDS FOR IMMEDIATE
TERMINATION OF THE AGREEMENT PURSUANT TO PARAGRAPH 19.
(b) INFORMATION TO BE SUPPLIED BY BROKER:
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(1) Broker will provide SLK with such basic data and documents as
shall be necessary or appropriate to permit SLK to discharge its
service obligations hereunder, including, but not limited to,
copies of records of any receipts of customers' funds and
securities received directly by Broker. In all cases, such data
and documents must be compatible with the requirements of SLK's
bookkeeping system.
(2) Broker will furnish SLK with such information and signatures as
are requested by SLK OR THAT MAY BE REQUIRED BY LAW for the
opening and carrying of customer accounts on forms that have been
approved by SLK and Broker.
(3) Broker will furnish SLK with such information and documents as
are requested by SLK to permit SLK to satisfy its obligations
under the USA PATRIOT Act and implementing regulations
thereunder.
(4) All accounts shall be opened in accordance with SLK's and
Broker's requirements. Such requirements include, but are not
limited to, the requirement to obtain, prior to account opening,
all customer identification information required under the Bank
Secrecy Act, as amended by the USA PATRIOT Act, and its
implementing regulations, including but not limited to, for each
new customer, the customer's name; date of birth (for
individuals); address(es) (electronic mail address and mailing
and residential address, for individuals, or principal place of
business for non-natural persons); and a documentary number. The
acceptance or opening of an account without such requirements
being fulfilled shall not be deemed to be a waiver of such
requirements. A duly authorized and licensed principal of Broker
will approve in writing the opening of each customer's account.
(5) Broker shall be responsible for maintaining proper customer
addresses and SLK may, for all purposes, rely on such addresses
furnished by Broker.
(6) Pursuant to NYSE Rule 382(e)(1), after receiving SLK's list of
available exception reports and/or other reports, Broker must
promptly notify SLK, in writing, of those specific reports
offered by SLK that Broker requires to supervise and monitor its
customer accounts. Broker shall advise SLK of exception reports
it requires to meet its obligations under the Bank Secrecy Act,
as amended by the USA PATRIOT Act of 2001, and its implementing
regulations, and SLK will endeavor to use its best efforts to
prepare such reports.
(7) Pursuant to NYSE Rule 382(f), in those instances where SLK
permits Broker to issue checks, whether to Broker's customers or
to third parties (i.e., parties other than Broker's customers),
Broker shall represent to SLK, IN WRITING, that Broker maintains,
and shall enforce, supervisory procedures with respect to the
issuance of such checks. Such supervisory procedures
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must be acceptable to SLK which shall not unreasonably withhold
its approval.
(8) Broker, at the request of SLK, agrees to file a notice pursuant
to Section 314 of the USA PATRIOT Act and the implementing
regulations related thereto to permit the voluntary sharing of
information between Broker and SLK. Upon filing such notice,
Broker shall forward a copy of the notice filed to SLK. Broker
agrees to comply with all requirements concerning the use,
disclosure, and security of information shared pursuant to
Section 314 of the USA PATRIOT Act and implementing regulations
thereunder.
(c) RECEIPT OF MONEY AND SECURITIES:
(1) Broker shall be responsible for all customer purchases until
actual and complete payment therefor has been received by SLK. In
the case of checks representing such payment received by SLK,
Broker shall be responsible until the proceeds are actually
received and credited to SLK by its bank, in the case of
Automated Clearing House payments representing such payment
received by SLK, Broker shall be responsible until the period for
the customer to dispute the transfer expires or as otherwise
provided in the National Automated Clearing House Association
Rules. SLK agrees to use due diligence in depositing such checks
promptly. SLK RESERVES THE RIGHT TO REJECT ANY CHECK OR OTHER
PAYMENT THAT RAISES ANTI-MONEY LAUNDERING OR OFAC CONCERNS.
(2) Broker shall be responsible for all sales until acceptable
delivery of the securities to SLK has been made.
(3) Broker agrees to promptly turn over to SLK funds or securities
received by Broker from its customers, together with such
information as may be relevant or necessary to enable SLK to
promptly and properly record such remittance and receipts in the
customers' respective accounts.
(4) Broker shall arrange for timely settlement of "delivery versus
payment" transactions, and shall not introduce any retail or
individual accounts requiring settlement, on "delivery vs
payment" or "receive versus payment" basis without first
obtaining the prior written approval of the customer allowing SLK
to accept "partial deliveries" and to abide by other clearance
arrangements as may be directed by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc., or the NASD. SLK may, at
its option, charge for late payments or deliveries, any interest
incurred by it accrued at its then prevailing "Brokers Call" rate
plus 1% on the principal amount of trade, or at such other
interest rate as may be agreed upon in writing, above the
Broker's Call rate.
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(5) SLK reserves the right to give prior oral or written notice to
Broker, and to any customer, of SLK's intention to take remedial
action for failure to make timely settlement.
(d) DUTIES OF BROKER WITH RESPECT TO CUSTOMERS:
(1) The customer shall remain the customer of Broker, and Broker
shall be responsible for obtaining all of the essential facts
relative to every customer, every cash or margin account, every
order, and every person holding power of attorney over any
account accepted by Broker. To the extent required by Applicable
Laws and Regulations, Broker shall also be responsible for the
conduct of customer accounts and the supervision thereof,
including, but not limited to, assessing the suitability of a
transaction for the customer when required under applicable
rules, the authenticity of all orders, signatures and
endorsements, and the genuineness of all signatures, certificates
and papers, the status under the Securities Act of 1933 of
securities proposed to be sold or margined by a customer, and
reviewing the accounts and relevant exception reports for, among
other things, manipulative practices and xxxxxxx xxxxxxx, and
compliance with all Applicable Laws and Regulations which Broker
and customers are subject.
(2) Broker undertakes to comply with NYSE Rule 405 (1), (2) and (3),
and with other rules of regulatory organizations having
jurisdiction over Broker. It is understood that Broker will
establish adequate procedures regarding Rule 405 and will make a
diligent attempt in every case to conform to this rule. BROKER
SHALL ALSO COMPLY WITH ANY DUE DILIGENCE PROCEDURES OR
REQUIREMENTS RELATING TO CUSTOMER IDENTIFICATION AND VERIFICATION
UNDER THE ANTI-MONEY LAUNDERING LAWS AND REGULATIONS INCLUDING
THE USA PATRIOT ACT AND ITS IMPLEMENTING REGULATIONS. Broker
shall diligently supervise compliance through the use of a
compliance manual or other written procedures.
(3) Broker warrants that, to its best knowledge, the customers
introduced to SLK by Broker shall not be minors and shall not be
such as to come under prohibitions referred to in NYSE Rule 407,
or in any other law, rule or regulation of any other regulatory
authority; that Broker's customers shall in fact be the owners of
accounts opened by SLK in their names, and that any orders and
instructions given by Broker or any of Broker's employees shall
have been fully and properly authorized.
(4) Prior to allowing any of Broker's customers to engage in options
trading, Broker shall transmit to such customer the most recent
copy of the document titled "Characteristics and Risks of
Standardized Options", or its successor, together with any
effective supplements thereto. A current prospectus of the Option
Clearing Corporation is optional. Broker will comply in all
material respects with Broker's options compliance program,
including the obtaining of information, written approval of
option accounts by the Senior Registered
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Options Principal of Broker, and execution of forms. Upon
request, Broker shall provide SLK with a copy of Broker's options
compliance program and any forms.
(5) This Agreement places the responsibility for "knowing the
customer," "suitability," and "due diligence" relating to the
customer on Broker. It permits SLK to satisfy itself, for its own
benefit, that Broker has the ability to comply itself, for its
own benefit, and that Broker has the ability to comply and has
complied with the requirements of NYSE Rule 405 and the
comparable requirements of similar rules of any other
self-regulatory organization to which Broker belongs. It is
understood that the preparation and/or possession by SLK of
surveillance records or any new data, including exception
reports, on behalf of, or for the use of Broker, shall neither
obligate SLK to review such material nor make SLK responsible to
know its contents. Where SLK undertakes to review such materials
for its own benefit, such activity does not relieve Broker of the
obligation to review such materials or to take appropriate action
with respect to any unusual activity that SLK may bring to
Broker's attention.
(6) Within 10 days after the signing of the Agreement, the Broker
will provide notice to SLK both of the designation of an
anti-money laundering compliance officer as discussed more fully
in Paragraph 6(g)(i)(d), and where required, of its notification
to the appropriate regulatory authority of its designation.
(7) At or prior to the time of the opening of each account, the
Broker will obtain sufficient information from its customer to
satisfy itself that the customer is the individual or entity it
says it is, that its funds are legitimate, and that the account
is not established or maintained for a prohibited foreign "shell
bank," as defined by the Bank Secrecy Act, as amended by the USA
PATRIOT Act, and that, if the customer is a foreign bank, Broker
has taken reasonable steps to ensure that the account is not used
to indirectly service prohibited foreign shell banks. Broker will
obtain a completed certification as referenced in Paragraph
6(h)(i)(g)(2) below establishing that the foreign bank is not a
prohibited shell bank, as well as any foreign bank certifications
described in Paragraph 6(h)(i)(g)(3) below, and promptly forward
copies of all such certifications to SLK.
(8) At or prior to the time of the opening of any account, Broker
will obtain all customer identification information required by
the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001,
and its implementing regulations, including but not limited to
documentary numbers such as Taxpayer Identification Numbers
("TIN") for U.S. Persons or passport numbers for non-U.S.
Persons. At or prior to the time of the opening of any account,
Broker will obtain a copy of the passport of any foreign
individual opening the account, and where requested, will forward
a copy to SLK.
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(9) At the time of the opening of any account, the Broker will obtain
sufficient information from its customer to satisfy itself that
opening the account would not violate the provisions of any
Applicable Laws and Regulations.
(10) Broker undertakes to comply with any customer notice provisions
under the Bank Secrecy Act, as amended by the USA PATRIOT Act,
and its implementing regulations, concerning the collection and
verification of customer identification information.
(e) REGULATORY AND FINANCIAL DATA
Upon executing and returning this Agreement to SLK, Broker shall also
provide SLK with a copy of its most recent FOCUS Report, its Form BD
and any amendments thereto, and Form U-4s (including DRPs, if any) for
all individuals listed on Schedules A and B of Form BD (i.e., direct
owners, executive officers, indirect owners or other control
affiliates). Thereafter, within 48 hours of SLK's making a request
therefor, Broker agrees to furnish SLK with a copy of all FOCUS
Reports, Broker's Form BD and any amendments thereto, and any other
regulatory filing or submission pertaining to Broker. Broker is
further required, within 48 hours of any changes or additions to its
Form BD, and Form U-4s for the above individuals, to notify SLK and
provide SLK with updated information relating to such changes or
additions.
(f) Broker shall assume all responsibility for reviewing customer
orders prior to execution, and for errors in execution.
(g) ANTI-MONEY LAUNDERING AND OFAC REPORTING AND REGULATORY OBLIGATIONS
(1) Broker recognizes its responsibility to and agrees to comply
with, among others, any applicable anti-money laundering laws and
regulatory rules and, reporting and recordkeeping requirements
including, as appropriate, and to the extent applicable, any
Federal, state and international criminal and civil prohibitions
against money laundering which may include the following:
(i) The Bank Secrecy Act, including any amendments thereto
under the USA PATRIOT Act, which now requires, or which
may in the future require, among other things:
(a) reports of any transaction over $10,000 in currency,
including multiple transactions occurring during the
course of the same day, on a Currency Transaction
Report, Form 4789 ("CTR");
(b) reports of any transportation of more than $10,000 in
currency or monetary instruments into or outside of
the United States on a Report of International
Transportation of Currency or Monetary Instruments,
Form 4790 ("CMIR");
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(c) reports of any suspicious activity on a Suspicious
Activity Report ("SAR" or "SAR-SF", collectively
referred to as SARs);
(d) the establishment of an anti-money laundering
program, consisting of, at a minimum, the development
of internal policies, procedures and controls
including a system for monitoring and identifying
suspicious activity, the designation of a compliance
officer and notification of such designation as
requested to the appropriate self-regulatory
organization, an ongoing employee training program,
and an independent audit function to test such
programs;
(e) recordkeeping, including, but not limited to,
collection and maintenance of records regarding funds
transfers of $3,000 or more and the transmission of
certain information with such funds transfers;
(f) due diligence and enhanced due diligence policies,
procedures and controls for private banking
customers, as defined by the BSA, including
ascertaining the identity of the nominal and
beneficial owners of the account and the source of
funds deposited into the account;
(g) conducting enhanced scrutiny of any accounts,
including private banking accounts, requested or
maintained by or on behalf of a senior political
figure, any member of the figure's immediate family,
or any close associate of the figure as defined in
the USA PATRIOT Act of 2001 and implementing
regulations thereunder, and the Treasury Guidance of
2001;
(h) procedures with respect to correspondent accounts as
defined by the USA PATRIOT Act and its implementing
regulations, including:
(1) due diligence and enhanced due diligence
policies, procedures and controls for such
correspondent accounts;
(2) a prohibition on opening, maintaining,
administering or managing such accounts for, or
on behalf of, a prohibited foreign shell bank,
as defined in the BSA, as amended by the USA
PATRIOT Act, and its implementing regulations,
and obtaining the appropriate certification(s)
concerning foreign shell banks;
13
(3) obtaining certification or other evidence of
ownership of any foreign bank for whom an
account is maintained, and forwarding to SLK a
copy of the completed certification form or
other evidence of ownership, except that a
certification need not be obtained as to
ownership where the shares of the foreign bank
are publicly traded or where the foreign bank
has filed a Form FR Y-7 with the Federal Reserve
Board;
(4) as to any foreign bank for whom an account is
maintained, obtaining the name and address of a
person that resides in the United States and is
authorized to accept service of legal process
for records regarding such account, and
forwarding to SLK a copy of the completed
certification form or other document indicating
the foreign bank's agent for service of process;
and
(5) prompt notification to SLK upon receipt of
written notice requiring Broker to terminate a
correspondent relationship with a foreign bank
where the foreign bank has failed to comply with
a summons or subpoena or failed to initiate
proceedings in a United States court contesting
same; and
(i) special measures imposed by the Secretary of the
Treasury by order, rule, regulation or as otherwise
required, including additional due diligence for
certain customers, accounts or transactions within or
involving jurisdictions identified as a primary money
laundering concern, additional recordkeeping and
reporting of certain financial transactions and the
obtaining and retaining of information relating to
the beneficial ownership of certain types of
accounts;
(j) any future regulations which may be imposed on the
Broker involving the obligation to know its customers
and their source of funds, to monitor for and
identify suspicious activity, or to undertake
additional due diligence efforts pursuant to any
rule, regulation, order or otherwise as may be
required by law.
(ii) Rules of the SEC and the self-regulatory organizations
relating to currency and other monetary instruments
reporting, suspicious activity reporting and related
recordkeeping requirements.
14
(iii) Rules of the various bank regulatory agencies, including
the Federal Reserve Board, relating to reporting currency
transactions and suspicious activity, including 12 C.F.R.
Section 208.62.
(iv) Applicable state reporting and recordkeeping requirements
with regard to certain currency transactions,
transportation of currency or monetary instruments, or
reports of suspicious activity.
(v) The federal statutes, regulations, Executive Orders and
other programs administered by OFAC which prohibit, among
other things, the engagement in transactions with and the
provision of services to certain sanctioned or embargoed
foreign countries and other individuals or entities as
listed on the OFAC website (xxxx://xxx.xxxxxxx.xxx/xxxx.)
(2) SLK reserves the right, to the extent permissible by law, to
reject any transaction or to freeze or block assets in any
account or to terminate an account pursuant to the various OFAC
sanctions programs or pursuant to its obligations under the Bank
Secrecy Act, as amended by the USA PATRIOT Act.
(3) SLK requires that, to the extent permissible by law, Broker
provide SLK, at the time of filing, copies of reports or other
communications with regard to the accounts filed with the U.S.
Treasury Department, the Internal Revenue Service, the U.S.
Customs Service or any regulatory body or organization relating
to the reporting of currency transactions, the transfer of
currency or monetary instruments into or outside of the United
States and suspicious activity, including, but not limited to,
CTRs, CMIRs and SARs. Further, to the extent permissible by law,
Broker will consult with SLK concerning the potential filing of a
SAR regarding any person with respect to which Broker and SLK
share an account relationship. Upon filing a SAR with respect to
any such person, Broker will inform SLK of any measures Broker
has taken with respect to the account as a result of the activity
which is the subject matter of the SAR. To the extent permitted
by law, SLK agrees to provide Broker with copies of any such
reports it files related to any customer with respect to which
SLK and Broker share an account relationship.
(4) SLK reserves the right to make and file such reports where it
deems it appropriate in its own interest; and Broker recognizes
that when SLK does so, SLK does not thereby assume any
responsibility for such reporting obligation nor relieve Broker
of its own responsibility for such reporting. To the extent
permitted by Applicable Laws and Regulations, SLK shall use
commercially reasonable efforts to provide Broker with advance
notice to Broker of the filing of any such report and a copy of
such report. To the extent that SLK or Broker is required to
prepare or file any reports or records by any entity that
regulates it, SLK and Broker shall, to the
15
extent permissible by law, cooperate with each other in providing
any information needed in order to prepare such reports or
records.
7. BROKER INDEMNIFICATION
Broker hereby agrees to indemnify, defend and hold harmless SLK from and
against all claims, demands, proceedings, suits and actions made or brought
against SLK, and to indemnify SLK's liabilities, losses, damages, expenses,
reasonable attorneys' fees and costs arising out of one or more of the
following:
(a) Failure of Broker to provide immediate notification of restrictions,
suspensions, net capital deficiencies and other matters as required by
Paragraph 6(a) above;
(b) Failure of Broker or the Broker's customer to make payment when due
for securities purchased, or to deliver when due, securities sold for
the account of Broker or Broker's customers;
(c) Failure of a customer of Broker to meet any initial margin call or any
maintenance call, except that SLK shall be responsible only for the
portion of any such losses that are directly attributable to SLK's
unreasonable failure to give proper and timely notification under the
circumstances to Broker of any call;
(d) Failure of Broker to properly perform its duties, obligations and
responsibilities with respect to customer accounts (as set forth in
Paragraph 6, above or in any Supplements hereto), it being understood
that the participation of any employee of SLK in any transactions
referred to in Paragraph 6 shall not affect Broker's indemnification
obligations hereunder, unless such participation by SLK's employee
involved gross negligence, willful misconduct or was fraudulent;
(e) Any dishonest, fraudulent, negligent or criminal act or omission on
the part of Broker or any of Brokers' officers, partners, employees,
agents or customers;
(f) All claims or disputes between Broker and its customers with respect
to Broker's duties, obligations and responsibilities set forth in this
Agreement, it being understood: (i) that Broker guarantees the
validity of customer orders in the form such orders are transmitted to
SLK by Broker, and guarantees to SLK that each customer will promptly
and fully perform his commitments and obligations with respect to all
transactions in all of the accounts carried by SLK hereunder, and (ii)
that checks received by SLK from Broker's customers shall not
constitute payment until they have been paid and the proceeds actually
received and credited to SLK by its bank;
(g) Any adverse claims with respect to any customer securities delivered
or cleared by SLK, it being understood that SLK shall be deemed to be
an intermediary between Broker and customer and shall be deemed to
make no warranties other than as provided in Section 9-306(3) of the
Uniform Commercial Code;
16
(h) The default by any over-the-counter broker with which the Broker deals
on a principal basis, giving up SLK for Clearance;
(i) The default by any third-party broker with whom the Broker deals
rather than using SLK to execute a transaction for itself or a
customer;
(j) The negligence, malfeasance, or mistakes of an employee of Broker with
respect to the use of any check-signing authority that may be granted
to Broker by SLK;
(k) The breach by the Broker of any warranty, representation, duty or
obligation under this Agreement;
(l) SLK's guarantee of any signatures with respect to transactions in the
accounts of Broker's customers;
(m) The failure of Broker's customers to fulfill their obligations to the
Broker or to SLK (whether or not such failure is in the Broker's
control); and
(n) Any inquiry or investigation, by federal or state law enforcement
agencies, the SEC, NASD, NYSE or any other regulatory body into the
activities of Broker or of its officers, partners, employees, agents
or customers except for inquiries or investigations resulting in a
finding of gross negligence, fraud, willful misconduct, or criminal
act or omission on the part of SLK, any of its officers, partners,
employees and agents with respect to SLK's duties, obligations and
responsibilities set forth in this Agreement.
8. MINIMUM EQUITY REQUIREMENT
(a) To further assure Broker's performance of its obligations under this
Agreement, including but not limited to its indemnification
obligations under Paragraph 7, Broker shall, on or before the
execution of this Agreement, establish an account(s) at SLK which
shall at all times contain cash, securities, or a combination of both,
having a market value of $1,000,000 or such other amount as SLK may
require at a future date in accordance with the provisions set forth
in this Paragraph 8 (the "Account"). The amounts maintained in the
Account shall remain Broker's funds for purposes of providing
regulatory capital to Broker and Broker shall be credited with all
interest on and proceeds received from cash and securities maintained
in the Account. The Account may be used by Broker to trade securities
on a proprietary basis. This deposit does not represent an ownership
interest.
(b) If SLK shall suffer any loss or incur any expense for which it is
entitled to be indemnified pursuant to this Agreement, and Broker
shall fail to make such indemnification within ten (10) business days
after the amount for which Broker is to indemnify SLK is requested by
SLK, SLK shall deduct the amount of such claim, loss or expense from
the commissions then credited to Broker pursuant to Paragraph 9. If
the amount of said commissions is less than the amount of such claim,
loss or expense, SLK shall have the right to withdraw from the Account
cash or securities (or both) having a market value equal to the amount
of such
17
deficiency. Broker shall then be obligated to immediately deposit in
the Account cash or securities sufficient to bring the Account back to
a market level of at least $1,000,000.
(c) All cash and/or securities in the Account shall be returned upon the
later of 10 days after termination of this Agreement or the last
account is transferred from SLK, less any amounts which SLK is
entitled to withdraw under the preceding Paragraph; provided, however,
that SLK may retain in the Account an amount to protect it from any
claim or proceeding of any type, then pending or threatened in
writing, until the final determination thereof is made. If within a
reasonable time after the termination of this Agreement, a claim or
proceeding is not resolved, the amount retained with respect to such
claim or proceeding shall be paid or delivered to Broker. If within
one year after the termination of this Agreement, a threatened claim
or proceeding is not resolved, or a threatened legal action or
proceeding is not instituted, the amount retained with respect to such
threatened claim or proceeding shall be paid or delivered to Broker.
9. COMMISSION PAYMENTS
(a) SLK shall charge each of Broker's customers the commission that Broker
directs it to charge for each transaction. If specific instructions
are not received with respect to a specific transaction in the time
period required by SLK to implement same, SLK shall charge the
customer the commission prescribed in the basic commission schedule
delivered to SLK by Broker. Such basic schedule may be amended from
time to time by Broker by written instructions delivered to SLK;
provided, however, that such changes shall be implemented only to the
extent they are within the usual capabilities of SLK's data processing
and operations systems and only within such reasonable time
limitations as SLK may deem necessary to avoid disruption of its
normal operating capabilities. When requested by SLK, Broker will also
furnish from time to time the source and amount of any commission or
other payment received by Broker in connection with transactions in
the customers' accounts.
(b) Commissions charged Broker's customers shall be collected by SLK and
credited to Broker, after deducting SLK's compensation referred to in
Paragraph 10 (and any other amount owed to SLK pursuant to this
Agreement). SLK will remit to Broker on the 20th day of each month (or
the next business day following if the 20th day is not a business day)
(the "First Monthly Payment") the net amounts due to Broker for the
period from the 1st of the month through the 15th of the month. In
addition, SLK shall remit the net amounts due to Broker for the period
from the 16th of the previous month to the final settlement date in
the previous month not later than the tenth day of the month (the
"Second Monthly Payment") and SLK shall provide a preliminary
statement of the previous month's activity not later than the 5th
business day of the month. SLK and Broker agree that the First Monthly
Payment shall be an estimated amount, which shall be adjusted if
necessary in the Second Monthly Payment, in calculating the total
amount owed to Broker for that month. On the due dates, SLK shall pay,
by check of wire transfer, to Broker the amount of commissions due to
Broker.
18
10. COMPENSATION
As compensation for services provided hereunder by SLK, there shall be
deducted from the commissions charged Broker's customers the amounts set
forth in the fully disclosed pricing schedule attached hereto. Said
compensation schedule may be changed as may be agreed to by both parties.
11. MARGIN ACCOUNTS
(a) Any transaction for a customer will be considered a cash transaction
until such time as Broker has furnished SLK with an executed
customer's margin agreement and consent to loan of securities in a
form acceptable to SLK and Broker.
(b) All margin accounts introduced by Broker shall be subject to SLK's
"house margin requirements" which are attached as Appendix A hereto.
SLK currently imposes a 40% maintenance requirement. SLK shall provide
Broker with not less than ten days advance written notice of changes
to its house margin requirements. NOTWITHSTANDING THE FOREGOING, IN
ITS SOLE DISCRETION, AND SUBJECT TO MARKET CONDITIONS AND PERIODS OF
EXTREME VOLATILITY, SLK MAY CHANGE THE HOUSE MARGIN REQUIREMENTS
APPLICABLE TO ANY CUSTOMER ACCOUNT OR CLASS OF CUSTOMER ACCOUNTS ON
APPROPRIATE NOTICE TO BROKER, UNLESS MARKET CONDITIONS PREVENT ADVANCE
NOTICE. Broker shall be responsible for advising its customer(s) of
the changed requirements and for collecting any additional margin
necessary to insure compliance with increased requirements.
(c) In all margin accounts, Broker shall be responsible for the initial
margin requirement for any transaction until such initial margin has
been received by SLK in acceptable form. SLK reserves the right to
refuse to accept any transaction in a margin account after the initial
transaction, without actual receipt of the necessary margin, and to
impose a higher margin requirement, when, in SLK's opinion, the past
history or nature of such account or the securities therein justifies
such action.
(d) SLK shall use commercially reasonable efforts to notify Broker in
advance of or concurrently with all margin calls; shall provide Broker
with copies of such calls and shall permit Broker to initially contact
any customer to whom a margin call is issued by SLK and to make
further communications with customers to whom a margin call is issued
by SLK. Broker shall be responsible for advising its customers of
margin requirements, including any changed requirements, and for the
payment by customers of any additional margin necessary to insure
compliance with the requirements imposed as provided hereunder. In the
event that Broker does not promptly contact customers as requested by
SLK or satisfactory margin is not provided within the time specified
by SLK, SLK shall be at liberty to take such actions as SLK may, in
its judgment, deem appropriate. Notwithstanding the foregoing, SLK may
take such commercially reasonable actions as it deems appropriate
under the circumstances, without prior notice to Broker or customer.
Broker agrees to cooperate with SLK in complying with and obtaining
margin on subsequent calls.
19
(e) Interest charged with respect to debit balances in customers' accounts
shall be determined in accordance with the fully disclosed pricing
schedule attached hereto.
(f) Broker shall be responsible for any failure on the part of a customer
to meet a "maintenance call", except to the extent directly
attributable to SLK's unreasonable failure to give proper and timely
notification to Broker, if, and to the extent, circumstances allow for
such notice. An officer of Broker who has been designated by Broker
(and acknowledged in writing by SLK) may request, to the extent
permitted by the margin rules, that SLK withhold temporarily any
contemplated action, or "Sell-out" or "Buy-in", for accounts which
have failed to meet a margin call. Such requests shall be made in
writing and shall clearly set forth the period of time during which
the contemplated action is requested to be withheld. Should SLK comply
in whole or in part with such request, Broker guarantees to reimburse
SLK immediately for the maximum amount of loss or liability which SLK
may sustain or incur by reason of any compliance with such request, by
depositing sufficient funds with SLK in a reserve or other appropriate
account at a bank of SLK's choosing over which SLK shall be signatory,
to reimburse SLK for the loss or unsecured indebtedness held in the
account of the particular customer; provided, however, that compliance
with such a request shall not be deemed a waiver by SLK of any of its
rights hereunder, including but not limited to, the right to close out
a contract or position if, in SLK's judgment, changing conditions
render such action advisable.
(g) Broker shall be responsible for sending each margin customer a written
statement at the time of the opening of a margin account in compliance
with Rule 10b-16 of the Securities Exchange Act of 1934.
(h) Broker shall obtain a margin agreement from each margin account
introduced to SLK, including a hypothecation authority, in a form and
substance acceptable to SLK and Broker.
12. UNSECURED DEBITS OR UNSECURED SHORT POSITIONS
Unsecured debits or short positions (on a "marked to market" basis) in a
customer's account that are not resolved by payment or delivery within
thirty (30) calendar days shall be charged to the account of the Broker
maintained by SLK, and to which SLK credits the Broker with commissions
due. Such unpaid debits or short positions shall be netted against
commissions due on a monthly basis. Any excess of such unpaid debits or
short positions over commissions due shall be applied against Broker's
Account and shall be considered a claim against Broker pursuant to
Paragraph 7 of this Agreement.
13. RESPONSIBILITIES AND RIGHTS OF SLK
(a) SLK will maintain prescribed books and records of all transactions
executed or cleared through it. SLK also undertakes to perform in good
faith the services agreed to be performed in this Agreement, including
the foregoing, but, except to the extent that a transaction or
customer raises concerns related to money laundering, shall not be
bound to make any investigation into the facts surrounding any
transaction that it
20
may have with Broker or that Broker may have with its customers or
other persons, nor shall SLK be under any responsibility of compliance
by Broker with any Applicable Laws and Regulations which may be
applicable to Broker. Nothing herein shall limit SLK's
responsibilities in the event and to the extent SLK has agreed herein.
(b) Nothing herein shall be deemed to restrict in any way the right of
SLK, or any affiliate of SLK, to compete with Broker in any or all
aspects of Broker's business;
14. DAMAGE CLAIMS BY NON-PARTIES TO THIS AGREEMENT
(a) Except as otherwise provided herein or as required by Applicable Laws
and Regulations, SLK shall have no liability to any of Broker's
customers and any other non-party for any loss suffered by any such
customer or non-party.
(b) Broker hereby waives any claim against SLK for losses suffered by
Broker's customers, any other non-party, or by Broker, on account of
its customers' or another non-party's claims, except to the extent
that such claims, demands, proceedings, suits and actions, and
liabilities, expenses, reasonable attorneys' fees, and costs in
connection therewith, arise out of any willful misconduct, dishonesty,
gross negligence, fraud, or criminal act or omission on the part of
SLK, any of its officers, partners, employees or agents with respect
to SLK's duties, obligations and responsibilities set forth in this
Agreement.
15. INDEMNIFICATION BY SLK
SLK hereby agrees to indemnify, defend and hold harmless Broker from and
against all claims, demands, proceedings, suits and actions, and all
liabilities, expenses, reasonable attorneys' fees, and costs in connection
therewith, arising out of any willful misconduct, dishonesty, gross
negligence, fraud, or criminal act or omission on the part of SLK, any of
its officers, partners, employees and agents with respect to SLK's duties,
obligations and responsibilities set forth in this Agreement.
16. EMPLOYEES
Without the prior written consent of the other, neither party will during
the period of this Agreement and for one (1) year thereafter, hire or
attempt to hire any person who is employed by the other on the termination
of this Agreement, or whose employment with the other terminated within the
one year period prior to the termination of this Agreement.
17. CONSTRUCTION OF AGREEMENT
(a) Neither this Agreement nor the performance of the services hereunder
shall be considered to create a joint venture or partnership between
SLK and Broker, or between Broker and other brokers for whom SLK may
perform the same or similar services. Neither SLK nor Broker will
utilize the name of the other in any way without the other's consent,
and under no circumstances shall either party employ the other's name
in such a manner as to create the impression that the relationship
21
created or intended between them is anything other than that of
clearing broker and correspondent broker.
(b) During the term of this Agreement, Broker will provide SLK with notice
of any other similar agreement relating to the services contemplated
by this Agreement.
18. CONFIDENTIALITY
(a) Broker and SLK agree not to disclose the terms of this Agreement to
any outside parties, except to regulatory bodies with appropriate
jurisdiction, to authorized employees of Broker or SLK on a need-to
know basis, or as required by law, regulation or judicial process. Any
other publication or disclosure of the terms of this Agreement,
including as required to provide notice to customers introduced by
Broker, may be made only with the prior written consent of the
parties.
(b) SLK shall (i) maintain in strict confidence all Confidential
Information (as defined in Section 18(d)), (ii) not disclose
Confidential Information to any person or entity and (iii) not in any
manner make use of, copy, misuse, misappropriate or reverse engineer
or otherwise appropriate Confidential Information.
(c) Notwithstanding Section 18(b)(ii), SLK may disclose Confidential
Information if necessary for the purpose of permitting SLK (i) to
perform its obligations under this Agreement, (ii) to comply with
Applicable Laws and Regulations or regulatory process or as required
by subpoena, court order, court decree or other judicial process,
(iii) to obtain relevant legal or other professional advice, (iv) to
enforce its rights under this Agreement, (v) for any other internal
purpose including credit, compliance, risk management, management
decisions and reporting, operations or recordkeeping requirements; or
(vi) to cooperate with any reasonable request made by an entity with
regulatory jurisdiction over SLK. If Confidential Information is
disclosed by SLK (for any purpose described in the previous sentence),
then SLK, if legally permitted, shall (x) use its best efforts to
inform such person that the Confidential Information is not to be
disclosed to any other person except for the purposes described in the
previous sentence, or as may be required by applicable law, regulation
or judicial or regulatory process and (y) use its best efforts notify
Broker in advance of such disclosure and in any event as soon as
reasonably practicable.
(d) For purposes of this Section 18, "Confidential Information" means
non-public information regarding this Agreement, the activities
contemplated by this Agreement, the terms of this Agreement, including
any rates or pricing, Broker's transactions executed by SLK or
unaffiliated third party brokers on Broker's behalf and cleared by SLK
pursuant to this Agreement or any other information or data that is
disclosed, accessible to or acquired by SLK (or disclosed by SLK to
its Affiliates) that relates to the past, present or future business
or affairs of the Broker. For the avoidance of doubt, Confidential
Information shall not include (i) any information which is or enters
the public domain other than due to breach of this provision by SLK,
(ii) any information which was, or was entitled to be, in
22
the possession of any director, officer, employee, agent, attorney or
other representative or advisor of SLK (each, a "Relevant Person")
prior to its disclosure by SLK to the Relevant Person and (iii) any
information which SLK receives from or is made available by an
unaffiliated third party at any time, so long as the information was
not known by SLK to be confidential at the time when disclosed by SLK.
19. TERMINATION
This agreement shall continue until terminated as hereinafter provided:
(a) Upon the unreasonable rejection by SLK of any customers or trades
pursuant to Paragraph 4, Broker may, upon fifteen (15) days prior
written notice to SLK, terminate this Agreement.
(b) This Agreement may be terminated by either party, without cause, upon
thirty (30) days written notice delivered in person or by registered
or certified mail.
(c) In the event either party defaults in the performance of its
obligations under this Agreement, the non-defaulting party may
terminate this Agreement on the following terms and conditions.
Written notice must be delivered to the defaulting party specifying
the nature of the default and notifying the defaulting party that
unless the default is cured within a period of ten (10) days from
receipt of the notice or, with respect to those notices of default
relating to non-U.S. Applicable Laws and Regulations, within thirty
(30) days from receipt of the notice, this Agreement may be terminated
without further proceedings by the non-defaulting party.
Notwithstanding the foregoing, the non-defaulting party may, in its
discretion, accept the provision of proof by the defaulting party that
it has used its best efforts to correct such default in a timely
manner and will continue to use its best efforts to cure the default
if the default cannot reasonably be corrected within 10 or 30 days, as
the case may be, and give the defaulting party additional time to cure
the default.
(d) THIS AGREEMENT MAY BE TERMINATED BY SLK OR BROKER IMMEDIATELY IN THE
EVENT THAT THE OTHER PARTY IS CRIMINALLY INDICTED, ENJOINED, DISABLED,
SUSPENDED, PROHIBITED OR OTHERWISE UNABLE TO ENGAGE IN THE SECURITIES
BUSINESS, OR ANY PART OF IT, AS A RESULT OF ANY ADMINISTRATIVE OR
JUDICIAL PROCEEDING OR ACTION BY THE U.S. DEPARTMENT OF JUSTICE OR
STATE PROSECUTOR, THE SEC, NYSE, NASD, ANY STATE SECURITIES REGULATOR
OR ANY OTHER SELF-REGULATORY ORGANIZATION HAVING JURISDICTION, OR
PURSUANT TO A VOLUNTARY AGREEMENT OR UNDERSTANDING WITH ANY OF THE
AFOREMENTIONED ENTITIES.
(e) THIS AGREEMENT MAY BE TERMINATED BY SLK OR BROKER IMMEDIATELY IN THE
EVENT THAT THE OTHER PARTY INCURS A NET CAPITAL DEFICIENCY, BECOMES A
DEBTOR IN A BANKRUPTCY PROCEEDING, IS PLACED INTO RECEIVERSHIP OR
BECOMES INSOLVENT.
(f) SLK MAY TERMINATE THIS AGREEMENT IMMEDIATELY UPON NOTICE TO THE BROKER
IN THE EVENT THAT:
23
(i) SLK discovers that Broker has failed to comply with any of the
notification requirements of Paragraphs 6(a)(1), (2) or (4).
(ii) The Broker is adjudicated bankrupt or insolvent or a trustee or
similar creditors' representative is appointed by court order,
or any property of the Broker is sequestered by court order and
such order 'remains in effect for more than thirty (30)
calendar days, or a petition is filed by or against the Broker
either voluntarily or involuntarily under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now
or hereafter in effect, and is not dismissed within thirty (30)
calendar days of such filing, or the Broker makes an assignment
for the benefit of its creditors, or admits in writing its
inability to pay its debts generally as they become due, or
consents to the appointment of a receiver, trustee or
liquidator for itself or for any property held by it; or
(iii) SLK may take appropriate steps, including but not limited to
the immediate termination of this Agreement and/or the
liquidation of an account or any portion thereof, upon the
failure of the Broker to close the account of a prohibited
shell bank; upon notification that the Broker has failed to
terminate a correspondent relationship with a foreign bank
where the foreign bank has failed to comply with a summons or
subpoena, or has failed to initiate proceedings in a United
States court contesting same or has failed to provide a foreign
bank certification.
(g) Termination of this Agreement shall not affect the parties' rights or
liabilities relating to the business prior to the effective date of
such termination. From the date of termination until transfer or
conversion of all of Broker's customers' accounts, the parties' rights
and liabilities related to the business transacted after such
termination shall be governed by the same terms as those set forth in
this Agreement. Termination of this Agreement, however caused, shall
not release Broker or SLK from any liability or responsibility to the
other with respect to transactions effected prior to the effective
date of such termination, whether or not claims relating to such
transactions shall have been made before or after such termination.
(h) If Broker terminates this Agreement pursuant to subparagraph (b) above
within the first year of the date of this Agreement, or SLK terminates
this Agreement pursuant to subparagraph (c) or (d) above, Broker will
pay to SLK a termination fee equal to the reasonable expenses incurred
by SLK (i) in establishing systems procedures and capacity for
servicing Broker and its customers, and (ii) in discontinuing the
clearing arrangement. However, in no event shall said termination fee
be less than $5,000 or more than $10,000. Said fee shall be paid
within 10 days after receipt of SLK's statement setting forth, in
reasonable detail, the expenses incurred by SLK.
(i) If either party terminates the Agreement, SLK shall have the right to
impose commercially reasonable limitations upon Broker's activities
during the period between the giving of notice of termination and the
transfer of Broker's and
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customers' accounts. Such limitations may include, but shall not be
limited to, making available new products and services, allowing the
growth of a particular business line, or the expansion or continuation
of any product, service or business that has an increased risk.
20. TRANSFER OF CUSTOMER ACCOUNTS UPON TERMINATION
(a) In the event that this Agreement is terminated for any reason, it
shall be Broker's responsibility to arrange for the transfer of Broker
and customer accounts to another clearing broker. SLK will use
commercially reasonable efforts to accommodate Broker's reasonable
clearing needs until such time as a transfer of Broker and customer
accounts is completed. Broker will give SLK notice ("Transfer Notice")
of (i) the name of the broker which will assume responsibility for
clearing services for Broker and customers; (ii) the date on which
such broker will commence providing such services; (iii) Broker's
undertaking, in form and substance satisfactory to SLK, that Broker's
agreement with such broker provides that such broker will accept on
transfer all Broker and customer accounts then maintained by SLK; and
(iv) the name of an individual within that organization whom SLK can
contact to coordinate the transfer.
(b) In the event that Broker terminates the Agreement pursuant to
Paragraph 19 above, Broker shall give the Transfer Notice to SLK at
the same time as it gives SLK notice of termination. In the event that
SLK terminates the Agreement pursuant to Section 19(b), 19(c) or
19(f)(i), Broker shall give the Transfer Notice to SLK within 45 days
of receipt of the termination notice. If Broker fails to give SLK a
timely Transfer Notice, SLK may give customers such notice as SLK
deems appropriate of the termination of this Agreement and may make
such arrangements as SLK deems appropriate for the transfer or
delivery of customer and Broker accounts. Broker shall pay any costs
thereby incurred by SLK as billed by third party vendors such as
transfer agents, etc.
(c) IF BROKER CLOSES AN ACCOUNT AS A RESULT OF THE SHELL BANK PROVISIONS
OR AS A RESULT OF MONEY LAUNDERING CONCERNS, BROKER MUST NOTIFY SLK
WITHIN 48 HOURS OF THE FACTS RELATING TO THOSE CONCERNS.
21. ACTION AGAINST CUSTOMERS; CUSTOMER COMPLAINTS
(a) SLK shall have the right at all times, in its sole discretion, and at
its sole expense, to institute and prosecute in its name, upon notice
to Broker, any action or proceeding against any of Broker's customers
as to any controversy or claim arising out of SLK's transactions with
Broker or with Broker's customers, and nothing contained in this
Agreement shall be deemed or construed to impair or prejudice such
right in any way whatsoever, nor shall the institution or prosecution
of any such action or proceeding relieve Broker of any liability or
responsibility which Broker would otherwise have had under this
Agreement. Upon notice from SLK that it requires an assignment of
rights from Broker to carry out the intent of this paragraph and to
the extent Broker will not be prejudiced in any manner by an
assignment of its
25
rights, Broker and SLK shall enter into an assignment agreement which
shall include terms reasonably requested by Broker, including, without
limitation, that Broker may monitor the status of any claims which
could affect its rights. In the event Broker will be prejudiced by an
assignment of rights, Broker and SLK shall discuss the course of
action with respect to seeking recovery of any claims and each shall
act in good faith to negotiate a manner in which SLK may pursue such
claims.
(b) In addition to SLK's obligations regarding customer complaints
pursuant to NYSE Rule 382(d), set forth in Paragraph 4(h) of this
Agreement, SLK and Broker shall each communicate to the other any
complaint/inquiry regarding the other.
22. NOTICES
Any notice or request that is required or permitted to be given under this
Agreement shall be sufficient if in writing, and sent by hand or registered
or certified mail, in either case, return receipt requested, to the
respective parties at the following addresses:
Broker:
optionsXpress, Inc.
Xxxxx 000
00 Xxxxx XxXxxxx Xxxxxx
Xxxxxxx, Xxxxxxxx 00000
Attention: General Counsel
SLK: with a copy to:
Spear, Leeds & Xxxxxxx Xxxxxxx Sachs& Co.
00 Xxxxxx Xxxxxx Xxx Xxx Xxxx Xxxxx
Xxxxxx Xxxx, XX 00000 Xxx Xxxx, XX 00000
Attn: Xxxxx Xxxxxx ATTN: Xxxxx Xxxx
23. AMENDMENTS
This Agreement represents the entire Agreement between the parties with
respect to the subject matter contained herein. This Agreement may not be
changed orally, but only in a writing signed by both parties.
24. EXCHANGE REGULATION
The parties acknowledge that they will be subject to the rules of the
securities exchanges, securities futures exchanges or associations of which
either party is or may become a member, and of any governmental agencies to
whose jurisdiction either party may be subject. Notwithstanding this
Agreement, Broker shall remain subject to only to those Applicable Laws or
Regulations of Broker and nothing herein shall be deemed to be a consent by
Broker to the jurisdiction or authority of any exchange or regulatory
authority.
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25. WAIVER
The failure of either party to insist upon strict adherence to any term of
this Agreement on any occasion shall not be considered a waiver or deprive
that party of the right thereafter to insist upon strict adherence to that
term or any other term of this Agreement.
26. ASSIGNMENT
Neither party may assign or delegate any of its rights or obligations
hereunder without the prior written consent of the other party, which
consent shall not be unreasonably withheld, provided that Broker shall give
SLK not less than 30 days prior notice of any such assignment.
Notwithstanding the foregoing, SLK may assign this Agreement (i) to any
entity which controls, is controlled by or is under common control with SLK
or (ii) to any entity which succeeds to all or substantially all of the
assigning party's assets or clearing business. In addition, a change in
control of the parent of either party shall not be deemed an assignment.
This Agreement shall be binding upon, and shall inure to the benefit of,
the respective permitted successors and assigns of the parties.
27. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
28. ARBITRATION DISCLOSURE
- ARBITRATION IS FINAL AND BINDING ON THE PARTIES.
- THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRAIL.
- PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
- THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
- THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
29. ARBITRATION AGREEMENT
ANY CONTROVERSY BETWEEN SLK AND BROKER ARISING OUT OF THIS AGREEMENT OR THE
BUSINESS OF THIS AGREEMENT SHALL BE SUBMITTED TO ARBITRATION BEFORE THE
NATIONAL ASSOCIATION OF SECURITIES
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DEALERS DISPUTE RESOLUTION INC., AND IN ACCORDANCE WITH THE RULES THEROF.
30. This Agreement shall be submitted to and/or approved by any national
securities exchange, or other regulatory and self-regulatory bodies vested
with the authority to review and/or approve this Agreement or any amendment
or modifications hereto. In the event of any disapproval, the parties
hereto agree to bargain in good faith to achieve the requisite approval.
31. If any provision or condition of this Agreement shall be held to be invalid
or unenforceable by any court, or regulatory or self-regulatory agency or
body, such invalidity or unenforceability shall attach only to such
provision or condition. The validity of the remaining provisions and
conditions shall not be affected thereby, and this Agreement shall be
carried out as if any such invalid or unenforceable provision or conditions
were not contained herein.
32. For purposes of the Securities and Exchange Commission's financial
responsibility rules and the Securities Investor's Protection Act, the
Broker's customers will be considered customers of SLK and not customers of
the Broker. Nothing herein shall cause the Broker's customers to be
construed or interpreted as customers of SLK for any other purpose, or to
negate the intent of any other Paragraph of this agreement, including, but
not limited to, the delineation of responsibilities as set forth elsewhere
in this Agreement.
33. In the event each party asserts a claim for indemnification with respect to
a claim, including the situation in which each party asserts that it bears
no responsibility for the claim, the proportionate liability, if any, of
each party shall be determined under this Agreement and the liability for
such claim shall be apportioned accordingly.
34. SLK agrees that, subject to the requirements set forth in this section,
this Agreement shall incorporate the most favorable material terms that are
available to SLK's Customers to the extent required not to place Broker at
a competitive disadvantage with respect to SLK's other Customers. In the
event SLK has made more favorable material terms available to SLK's other
Customers, and to the extent permitted in applicable contracts, SLK shall
provide notice to Broker and permit Broker the opportunity to amend this
Agreement to incorporate the most favorable material terms available. For
purposes of this section, "favorable material terms" means: (a) rates and
fees (which shall remain subject to volume and other customary
requirements); and (b) products or services offered by SLK to Broker or
Broker's customers. For purposes of this section, "Customer" means: any
introducing broker that (x) receives clearing services from SLK pursuant to
an agreement and (y) has similar size and characteristics of Broker, but
shall specifically exclude any entity that is an affiliate of SLK or The
Xxxxxxx Sachs Group, Inc.
35. PRIME BROKERAGE:
(a) ESTABLISHMENT OF AN ACCOUNT
SLK agrees to establish on its books and records an account in the
name of a prime broker for Broker's customers desiring to establish a
prime brokerage
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account and to maintain same providing SLK receives from each of such
customers establishing such an account SIA Form 151 "Executing Broker
Customer Agreement" and all other documents SLK may deem appropriate.
Broker shall provide SLK with the Prime Broker tax ID number and the
full street address of its customer, the "SIA Form 151" as well as the
necessary settlement instructions.
(b) CUSTOMER QUALIFICATIONS
By introducing Prime Broker accounts to SLK, Broker confirms that it
is aware that its customer maintains a minimum net equity of
$1,000,000 in cash or securities with a ready market for trades
executed on behalf of an account not managed by an advisor, or
$100,000 in cash or securities with a ready market for trades executed
on behalf of a customer account managed by an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940.
Broker understands that if for any reason the account falls below such
minimum net equity SLK has the right to refuse to process trades as a
prime broker transaction. Each time Broker enters an order Broker
represents that its customer is in compliance with such minimum net
equity, or will notify SLK otherwise.
In the event that any prime broker disaffirms any trade Broker has
executed, Broker hereby agrees to be responsible and liable to SLK for
settling such transaction.
(c) RESTRICTIONS ON ACCOUNT
Broker understands that SLK in its sole discretion may refuse to
accept Prime Broker Transactions on Broker's customer's behalf or
restrict or prohibit trading of securities in Broker's customer's
account or refuse to clear Broker's customer's transactions.
(d) CONFIRMATIONS
Unless otherwise instructed in writing, SLK shall confirm transactions
to Broker's customer, as well as to the prime broker, by the morning
of the next business day after the trade date.
Broker agrees to notify SLK in a timely manner of the contract amount
of the transaction, the security involved, the number of shares or
units, whether the transaction is a purchase or sale, and if a sale,
whether the transaction was a short or long sale. Broker is
responsible for complying with all applicable rules and regulations of
the SEC and applicable self-regulatory organizations governing the
execution of short sales.
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36. PROPRIETARY ACCOUNTS OF INTRODUCING BROKERS ["PAIB"]:
The parties agree to the following conditions and provisions as set forth
in the SEC No-Action Letter, dated November 3, 1998, relating to the net
capital treatment of assets in the proprietary account of an introducing
broker ("PAIB") and to permit Broker to use PAIB assets in its Net Capital
Computations.
1. SLK shall perform a computation for PAIB assets ("PAIB Reserve
Computation") of Broker in accordance with the customer reserve
computation set forth in Rule 15c3-3 ("customer reserve formula") with
the following modifications:
A. Any credit (including a credit applied to reduce a debit) that is
included in the customer reserve formula may not be included as a
credit in the PAIB reserve computation;
B. Note E(3) to Rule 15c3-3a which reduces debit balances by 1%
under the basic method and subparagraph (a)(1)(ii)(A) of the net
capital rule which reduces debit balances by 3% under the
alternative method shall not apply; and
C. Neither Note E(1) to Rule 15c3-3a nor NYSE Interpretation /04 to
item 10 of Rule 15c3-3a regarding securities concentration
charges shall be applicable to the PAIB reserve computation.
2. The PAIB reserve computation shall include all proprietary accounts of
Broker. All PAIB assets shall be kept separate and distinct from
customer assets under the customer reserve formula in Rule 15c3-3.
3. The PAIB reserve computation shall be prepared within the same time
frames as those prescribed by Rule 15c3-3 for the customer reserve
formula.
4. SLK shall establish and maintain a separate "Special Reserve Account
for the Exclusive Benefit of Customers" with a bank in conformity with
the standards of Paragraph (f) of Rule 15c3-3 ("PAIB Reserve
Account"). Cash and/or qualified securities as defined in the customer
reserve formula shall be maintained in the PAIB Reserve Account in an
amount equal to the PAIB reserve requirement.
5. If the PAIB reserve computation results in a deposit requirement, the
requirement may be satisfied to the extent of any excess debit in the
customer reserve formula of the same date. However, a deposit
requirement resulting from the customer reserve formula shall not be
satisfied with excess debits from the PAIB reserve computation.
6. Within two business days of entering into this PAIB Agreement, Broker
shall notify its designated examining authority in writing (with a
copy sent to SLK upon request) that it has entered into this PAIB
Agreement.
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7. Commissions receivable and other receivables of Broker from SLK
(excluding clearing deposits) that are otherwise allowable assets
under the net capital rule are not to be included in the PAIB reserve
computation, provided the amounts have been clearly identified as
receivables on the books and records of Broker and as payables on the
books of SLK.
8. If Broker is a guaranteed subsidiary of SLK or if Broker guarantees
SLK (i.e., guarantees all liabilities and obligations) then the
proprietary accounts of Broker shall be excluded from the PAIB Reserve
Computation.
9. Upon discovery that any deposit made to the PAIB Reserve Account did
not satisfy its deposit requirement, SLK shall by facsimile or
telegram immediately notify its designated examining authority and the
Securities and Exchange Commission ("Commission"). Unless a corrective
plan is found acceptable by the Commission and the designated
examining authority, SLK shall provide written notification within 5
business days of the date of discovery to Introducing Brokers that
PAIB assets held by SLK shall not be deemed allowable assets for net
capital purposes. The notification shall also state that if Broker
wishes to continue to count its PAIB assets as allowable, it has until
the last business day of the month following the month in which the
notification was made to transfer all PAIB assets to another clearing
broker. However, if the deposit deficiency is remedied before the time
at which Broker must transfer its PAIB assets to another clearing
broker, Broker may choose to keep its assets at SLK.
10. The parties shall adhere to the terms of the No-Action letter,
including the Interpretations set forth, in all respects.
THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION CLAUSE IN PARAGRAPHS 28 AND
29. THE DULY AUTHORIZED REPRESENTATIVES OF THE PARTIES HERETO, AGREE TO BE BOUND
BY THE TERMS AND CONDITIONS CONTAINED HEREIN AS OF THE DATE FIRST ABOVE WRITTEN.
SPEAR, LEEDS & XXXXXXX, X.X.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
optionsXpress, Inc.
By: /s/
----------------------
Name:
----------------------
Title:
----------------------
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