Important Disclosures With Respect to Fully Paid Securities Lending Transactions1
In the following disclosure, the words “we,” “us,” “our,” “Morgan Stanley”, “Morgan Stanley Wealth Management” and E*TRADE from Morgan Stanley (“E*TRADE”) refer to Morgan Stanley Smith Barney LLC. E*TRADE is a business of Morgan Stanley Smith Barney LLC. The words “you,” “your,” “yours” and “client” refer to the account owner(s) and/or authorized person(s).
Please read these important disclosures carefully before agreeing to lend to Morgan Stanley Smith Barney LLC (“MSSB”), a broker-dealer registered with the U.S. Securities and Exchange Commission, any of your fully paid securities2 (the “Loaned Securities”) from your eligible account(s) at MSSB that you have enrolled in the MSSB fully paid lending program (the “Program”).3 These disclosures are intended to be read in conjunction with the Securities Loan Agreement (as amended, modified or supplemented from time to time, the “Securities Loan Agreement”) between you, MSSB and your appointed collateral agent, currently Stable Custody Group II LLC (the “Collateral Agent”) that governs any loans of Loaned Securities to MSSB.
Introduction and Basic Mechanics of the Program
The following summary does not purport to be a complete description of the Program; for additional information, please refer to the Securities Loan Agreement or contact your Financial Advisor or representative (if applicable).
By enrolling an eligible account in the Program, your fully paid securities in that account are automatically made available for borrowing by MSSB. MSSB is under no obligation to borrow securities from your enrolled account(s) and can terminate a loan at any time. Each loan will consist of securities of the same CUSIP. The terms of each loan, including the issuer of the securities, the amount of securities to be lent, the basis of compensation, the amount of collateral to be transferred by MSSB, and any additional terms, will be determined by, and may be amended by, MSSB, in accordance with the terms of the Securities Loan Agreement, without consulting you. You will be informed by MSSB either through your online account or by way of a notification when a new loan is initiated and when a loan is terminated.4 Once borrowed, the Loaned Securities may be on loan to an affiliate of MSSB or other market participants and may be used in connection with facilitating short sales, or may be used by MSSB. MSSB will earn compensation in connection with the use of your Loaned Securities and will pass a majority of that compensation on to you in the form of a lending fee.
When MSSB borrows Loaned Securities from your enrolled account(s), the Loaned Securities will be removed from that account. In order to secure the amount of the loan, MSSB will deposit cash collateral in an amount at least equal to 102% of the market value of the Loaned Securities as of the prior business day into a deposit account at one or more banks (currently Morgan Stanley Bank, NA and Morgan Stanley Private Bank, NA, collectively, the “Banks”) held for your benefit in the name of the Collateral Agent (the “Collateral Account”). You will not have access to this collateral, however, unless and until MSSB defaults on its obligations with respect to the Loaned Securities (subject to the delays described further below), and so you will not be able to pledge, sell or otherwise use the collateral during the term of a loan absent such a default by MSSB.
As described in greater detail below, engaging in fully paid securities lending transactions through the Program involves certain risks, including but not limited to:
- the provisions of the Securities Investor Protection Act of 1970 may not protect you with respect to the securities that you loan to MSSB or the collateral MSSB pledges to you;
- the securities that are borrowed from you may be used by short sellers, which may put downward pressure on the price of these securities on which you continue to be exposed to market risk; and
- you do not have the right to vote the securities that have been borrowed from you.
1These disclosures are designed to satisfy the requirements of FINRA Rule 4330(b)(2)(B).
2“Fully paid securities” are securities in your account that you have paid for completely and that are not being pledged as collateral to support the purchase of other securities on margin or otherwise being borrowed against.
3If you have multiple accounts at MSSB that are eligible for the Program, you must separately enroll each account that you want to participate in the Program.
4You may not receive any notification from MSSB if MSSB increases or decreases the amount of Loaned Securities under an existing loan. You may request information on any such increases or decreases to an existing loan by contacting your Financial Advisor (if applicable) through your online account.
The following disclosures describe important features of the Program as well as your rights and the risks associated with enrolling in the Program and engaging in fully paid securities lending transactions through the Program.
1. THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION ACT OF 1970 (SIPA) MAY NOT PROTECT YOU WITH RESPECT TO LOANED SECURITIES ONCE SUCH SECURITIES ARE REMOVED FROM YOUR ACCOUNT AND, THEREFORE, THE COLLATERAL DELIVERED TO THE COLLATERAL ACCOUNT FOR YOUR BENEFIT MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF MSSB’S OBLIGATIONS IN THE EVENT MSSB FAILS TO RETURN THE LOANED SECURITIES.
2. Loaned Securities/Short Sales: Once you have entered into the Securities Loan Agreement with MSSB, all of the fully paid securities in each account you have enrolled in the Program will be made available for lending to MSSB as Loaned Securities, except for securities that you have affirmatively identified as not available for lending through the Program or securities that are otherwise not eligible for lending under the Program. MSSB may borrow the Loaned Securities for any purpose permitted under applicable regulations, including to satisfy delivery requirements which may be a result of short sales, to satisfy customer possession and control requirements, or to relend the Loaned Securities to an affiliate of MSSB or other market participants who may use the Loaned Securities for similar purposes.
In general, securities that are in-demand in the securities lending market are deemed “hard-to-borrow” securities because of short-selling or scarcity of available lending supply. Loaned Securities may be used to facilitate short sales, where the end-borrower is selling shares in hopes that the stock will decline in value. Use of the Loaned Securities to facilitate short selling could put downward pressure on the price of the Loaned Securities and could cause your position to go down in value. Even though the Loaned Securities are borrowed from your account, you retain the market risk if they decrease in value.
If you do not want specific fully paid securities in an enrolled account to be available for lending to MSSB as Loaned Securities and/or used in connection with short sales, you can:
a. affirmatively identify the specific securities in each enrolled account that you do not want made available for lending through the Program;5
b. unenroll your enrolled account from the Program;
c. place a hold on your participation in the Program (note that this option is not available for E*TRADE from Morgan Stanley self-directed accounts); or
d. terminate the Securities Loan Agreement in accordance with its terms.
If there are Loaned Securities subject to an outstanding loan at the time you elect any of the options 2a. through 2d. above, such Loaned Securities (or securities equivalent to the Loaned Securities) will be returned to your account, and the loan terminated, each in accordance with the terms of the Securities Loan Agreement and subject to the limitations described in paragraph 3 below.
5Please note that once you identify the specific securities that you do not want made available for lending through the Program, all of those specific securities in each of your enrolled accounts will become unavailable for lending, and any loans involving Loaned Securities with the same CUSIP as those specific securities will be terminated.
3. Your Rights to Sell the Loaned Securities and Terminate the Loan:
a. Selling Loaned Securities: You have the right to sell some or all of the Loaned Securities. This action may be taken prior to the return of the Loaned Securities to your enrolled account. If you sell any Loaned Securities, MSSB will deliver to you the proceeds from such sale by 4:00 p.m. New York time on the date that is one standard settlement cycle after such sale. Upon the sale of all of the Loaned Securities that are subject to an outstanding loan, the loan will be terminated.
b. Terminating a Loan: You also have the right to terminate a loan, subject to the delay described further below, by electing any of the options 2a. through 2d. above. If you terminate a loan, then, under the Securities Loan Agreement, MSSB has agreed to return the Loaned Securities (or securities equivalent to the Loaned Securities) promptly, but in any event no later than 4:00 p.m. New York time on the date that is five (5) business days after you terminate the loan. The amount of time it may take to physically deliver the Loaned Securities (or an amount of equivalent securities) back into your account upon termination of the loan may be delayed due to market conditions or MSSB having insufficient securities in its possession and control with respect to its clients’ fully paid securities.
If your Loaned Securities (or securities equivalent to your Loaned Securities) are not returned within five (5) business days after you have terminated a loan (other than by sale of the Loaned Securities), MSSB will be in default, at which point your rights under the Securities Loan Agreement to foreclose on the collateral and buy replacement securities accrue (subject to the five (5) business day period described in paragraph 8b. below).
4. Loss of Voting Rights With Respect to Loaned Securities: While a securities loan is outstanding, and unless and until Loaned Securities are transferred back to your account upon termination of a loan for reason other than a sale, you will lose your right to vote the Loaned Securities. If you wish to vote Loaned Securities that are subject to an outstanding loan, you can terminate the loan as described in paragraph 3 above, and MSSB will return the Loaned Securities (or securities equivalent to the Loaned Securities) to your enrolled account, subject to the following limitations.
MSSB will attempt to return the Loaned Securities (or securities equivalent to the Loaned Securities) on a best-efforts basis, however, MSSB will not be liable for any loss you might incur as a result of your inability to vote the securities due to MSSB’s failure to return the Loaned Securities (or securities equivalent to the Loaned Securities) to you. However, MSSB will continue to compensate you for any dividends or distributions made on the Loaned Securities until MSSB delivers the Loaned Securities to you. See the Securities Loan Agreement and paragraphs 3 and 7 for additional information on when MSSB may be deemed in default because of a failure to return Loaned Securities (or securities equivalent to the Loaned Securities) and your rights to the collateral.
5. Retention of Ownership: Notwithstanding the loss of voting rights described in paragraph 4 above, you continue to own the Loaned Securities and continue to have market risk on those positions.
6. Compensation for You, MSSB, and its Affiliates: MSSB charges a loan rate when it relends your Loaned Securities. That rate is based on MSSB’s relending of the aggregate inventory of securities that MSSB borrows from customers (rather than any individual customer’s position) and subsequently loans out to other parties as well as its affiliates, including Morgan Stanley & Co. LLC ("MS & Co."). The loan rate will be calculated daily at a rate determined by MSSB in its discretion during the life of the loan. The primary factor in determining the loan rate will be supply and demand. Other factors that could impact the loan rate include perceived borrow stability, loan size and supply concentration.
a. Your Compensation With Respect to Loaned Securities: MSSB will pay the majority of the loan rate it receives on your Loaned Securities to you in the form of a lending fee.6 Your lending fee will accrue daily for outstanding loans and be credited monthly into your brokerage account by no later than the fifteenth (15th) business day of the following month.
b. MSSB’s and MSSB’s Associated Persons’ Compensation with Respect to Loaned Securities: MSSB will keep the remaining portion of the loan rate to compensate MSSB, your Financial Advisor (if applicable) and other associated persons for its and their services.
c. MSSB Affiliates’ Compensation With Respect to Loaned Securities: MS & Co. may receive compensation in connection with its use of your Loaned Securities, including in connection with facilitating settlement of short sales by MS & Co., its affiliates and/or its customers. The compensation earned by MS & Co. generally will be earned by adding a fee to securities distributed to MS & Co. clients. MS & Co. will not receive any part of the above-described loan rate charged by MSSB.
6The percentage rate to be paid to you will be disclosed on a schedule or confirmation provided to you when MSSB borrows your Loaned Securities. The percentage rate is also available upon request by calling 800-387-2331 or your Financial Advisor, if applicable, anytime or by logging on to your account and sending a secure message.
7. Collateral for Loaned Securities:
a. You Will be Granted a Security Interest in the Collateral: Pursuant to the terms of the Securities Loan Agreement, in exchange for the Loaned Securities, MSSB will deliver cash collateral in an amount at least equal to 102% of the market value of the Loaned Securities as of the prior business day to the Collateral Account for your benefit. This additional 2% of collateral is intended to mitigate against the risk of market movement affecting the Loaned Securities. The Collateral Agent provides certain administrative, recordkeeping, and other services with respect to the operation of the collateral program on your behalf and at your direction pursuant to the Agreement. The collateral delivered to the Collateral Account at the Banks will be deposited into one or more accounts which also contain collateral pledged for securities loans made between MSSB and other lenders of securities to MSSB and that the collateral in such account is allocated to the lenders in accordance with the calculations contained in Securities Loan Agreement which will be reflected on a schedule and provided by MSSB to the Collateral Agent on a daily basis.
MSSB will grant the Collateral Agent, for your benefit, a continuing first-priority security interest in, and a lien upon, the collateral, including all the rights and remedies of a secured party under the New York Uniform Commercial Code. These rights will attach when you transfer the Loaned Securities to us and cease (i) upon the transfer of the Loaned Securities back to you or (ii) in the event of a sale of Loaned Securities, the delivery to you of the proceeds from such sale.
Collateral that is delivered to the Collateral Account constitutes a deposit at such banks and is not an obligation of MSSB. To the extent that the amount of deposits you have in any such bank exceeds $250,000, you understand that the cash collateral may exceed FDIC insurance coverage limits. Banks utilized in the sweep program to hold collateral provided to you for Loaned Securities may also participate in MSSB’s regular brokerage cash sweep program and accordingly may also maintain deposits for you in connection with cash balances swept from your MSSB brokerage account, which may impact the FDIC overage limits. You should carefully consider all deposit balances you may have at a particular bank in evaluating your FDIC coverage.
b. The Collateral Will be Marked to Market Daily: Pursuant to the Securities Loan Agreement and applicable regulations, on a daily basis MSSB will calculate the market value of the aggregate of the Loaned Securities subject to all of your outstanding loans and provide such market value to the Collateral Agent. The Collateral Agent will, on a daily basis, compare the total aggregate amount of collateral that MSSB is required to pledge to you and other lenders of securities participating in the Program to the total aggregate amount of collateral in the Collateral Account and, if necessary, MSSB will add or deduct collateral to or from your account no later than the close of business on the next business day so that the market value of the collateral is at least equal to 102% of the market value of the Loaned Securities as of the prior business day. However, because the Loaned Securities are subject to market risk, it is possible that a shift in the market value of the Loaned Securities could result in the Loaned Securities becoming temporarily undercollateralized (i.e., until additional collateral is posted by MSSB).
As described in further detail below, in the event of a default by MSSB, you will only have the right to collateral equal to the value of the Loaned Securities (if MSSB is in default due to an Act of Insolvency, as defined in the Securities Loan Agreement, the value will be limited to that which was last communicated by MSSB to the Collateral Agent before such default), plus any other obligations of MSSB to you under the Securities Loan Agreement. Therefore, if MSSB defaults and the market value of the Loaned Securities increases in value on the day MSSB defaults, the cash collateral provided by MSSB may be insufficient to fully collateralize the Loaned Securities. MSSB will retain the right to any excess collateral beyond that amount.
c. Collateral Statements: You will be able to see that the collateral has been pledged for your Loaned Securities by logging onto your online account. Collateral information will also be reflected on your monthly account statements.
d. Your Right to Access the Collateral Upon a Default by MSSB: In the event of a default, as defined in the Securities Loan Agreement, by MSSB, you may not receive back the Loaned Securities (or securities equivalent to the Loaned Securities). In this situation, you will only have a claim against MSSB for the value of the Loaned Securities (if MSSB is in default due to an Act of Insolvency, the value will be limited to that which was last communicated by MSSB to the Collateral Agent before such default), and any other amounts owed by MSSB to you pursuant to the Securities Loan Agreement. The provisions of SIPA may not protect you with respect to the Loaned Securities.
In addition, if MSSB is in default due to an Act of Insolvency, MSSB’s obligations to meet daily collateral calls and mark-to-market the collateral will cease; thereafter, the collateral will not be required to be marked-to-market and you will bear all price risk on the Loaned Securities during all periods after the default. As a result, there may be insufficient collateral to meet MSSB’s obligations to you under the Securities Loan Agreement. As noted above, MSSB will pledge collateral with a market value that is at least equal to 102% of the market value of the Loaned Securities in an effort to mitigate the potential impact of these risks. In addition, MSSB will remain liable to you for any additional obligations under the Securities Loan Agreement which exceed the value of the collateral; however, your claim to any such additional obligations will be as a general unsecured creditor.
Unless and until there is a default by MSSB under the Securities Loan Agreement, and subject to the delays described further below in paragraph 8, you will not have any rights to the collateral (e.g., you will not be able to pledge, sell, use, margin or transfer the collateral in any way).
8. Your Rights Upon MSSB’s Default:
a. If MSSB is in default due to an Act of Insolvency, as defined in the Securities Loan Agreement:
i. All loans under the Securities Loan Agreement will be terminated.
ii. Subject to the lifting, expiration or termination of any stays mandated by applicable law and any conditions or limitations imposed pursuant to the Securities Loan Agreement, the Collateral Agent will promptly instruct the banks to transfer to you an amount of collateral equal to the last market value of the Loaned Securities that was communicated by MSSB to the Collateral Agent before MSSB’s default due to an Act of Insolvency under the Securities Loan Agreement. Any collateral in excess of this initial distribution on your behalf will remain in the deposit account at the banks until the final determination of any additional amounts (if any) owed to you by MSSB by the trustee or receiver appointed in connection with MSSB’s default, or the court presiding over MSSB’s bankruptcy case. After transferring to you any such additional amounts (if any), the Collateral Agent will apply the remaining collateral to any fees owed to the banks and the Collateral Agent and then will return any remaining collateral to MSSB’s estate.
iii. You will have the right to, in the event that the collateral securing your loans is insufficient to fulfill all of MSSB’s obligations under the Securities Loan Agreement, bring a claim as a general unsecured creditor against MSSB to recover any remaining amounts owed to you under the Securities Loan Agreement (e.g., cash distributions owed to you that were not paid prior to MSSB’s default under the Securities Loan Agreement). As security for MSSB’s obligation to pay such deficit, you will also have a security interest in any property of MSSB held by you or for you.
b. If MSSB is in default, as defined in the Securities Loan Agreement, but not due to an Act of Insolvency, following your delivery to the Collateral Agent of a notice of default:
i. You will have the right to:
1. purchase (or make a deemed purchase of) a like amount of replacement securities;
2. instruct the Collateral Agent to direct each applicable Bank to send collateral in an amount specified by the Collateral Agent to you; and
3. apply and set off the collateral against (A) the purchase price or deemed purchase price for the replacement securities, and (B) any other amounts due to you under the Securities Loan Agreement.
ii. Upon receiving your notice of default, the Collateral Agent will notify the relevant banks and will wait five (5) business days before acting upon the instructions you provide. In the event that you and MSSB determine that an event of default has not occurred, or has been resolved to your mutual satisfaction, you must promptly notify the Collateral Agent that you are revoking your notice of default, prior to the expiration of the five (5) business day period.
iii. Upon the passage of such five (5) business day period, if you do not notify the Collateral Agent that you are rescinding your notice of default, the Collateral Agent will distribute the collateral to you at the address provided by MSSB to the Collateral Agent.
c. You should consult with legal counsel regarding your rights and responsibilities in the event of a default by MSSB.
9. MSSB Rights Upon Your Default:
a. MSSB will have the right to liquidate a loan if an event of default, as defined in the Securities Loan Agreement, occurs with respect to you. An event of default includes, but is not limited to, if you:
i. apply for or consent to, or become the subject of an application for, the appointment of or the taking of possession by a receiver, custodian, trustee, or liquidator of itself or of all or a substantial part of your property;
ii. admit in writing your inability, or become generally unable, to pay your debts as such debts become due;
iii. make a general assignment for the benefit of your creditors; or
iv. file, or have filed against you, a bankruptcy petition under Title 11 of the United States Code, or have filed against you an application for a protective decree under Section 5 of SIPA or under the Orderly Liquidation Authority under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, unless the right to liquidate such transaction is stayed, avoided, or otherwise limited by an order authorized under the provisions of SIPA or any statute administered by the SEC.
b. If you are in default, MSSB will have the right to:
i. terminate all of your loans;
ii. transfer the Collateral for such loans to MSSB; and
iii. set off claims and apply any of your property held by MSSB against any obligations that you owe to MSSB under the Securities Loan Agreement. In the event that the value of such property is insufficient to satisfy the amounts owing to MSSB by you, you shall be liable to MSSB for the amount of any such deficiency, together with interest on such amounts.
10. Potential Tax Implications with Respect to Loaned Securities: During the term of any securities loan, you are entitled to receive the amount of all dividends and distributions made on or in respect of your Loaned Securities. However, you will receive substitute payments from MSSB (e.g., you will receive cash substitute payments) in lieu of receiving dividends or distributions directly from the issuer. In other words, when a dividend or distribution is declared and paid on your Loaned Securities, you will receive a cash payment from MSSB that is equal in value to the amount of the dividend or distribution paid on the Loaned Securities, but you will not receive the actual dividend or distribution paid by the issuer. Certain unique distributions may not be capable of being exactly replicated as a substitute payment by MSSB.
a. If you are a US taxpayer, cash payments in lieu of dividends will not be treated as qualified dividends for tax purposes and are likely to be taxed at a higher tax rate instead of the preferential qualified dividend rate. MSSB will pay you additional cash to compensate for being taxed at such higher rate, as calculated in MSSB’s sole discretion. For the avoidance of doubt, MSSB will not pay additional cash to you if the cash payment in lieu of dividends is payable to a tax-qualified account (e.g., Individual Retirement Account) in respect of Loaned Securities from such account.
b. MSSB may be required to withhold tax on payments in lieu of dividends and loan rates to you unless an exception applies. MSSB will not compensate you for (i) any tax amount that would have been imposed had the dividend or distribution been paid directly to you, or (ii) any tax amount for which you are eligible to receive an exemption or rate reduction subject to the provision of a certificate or other documentation, but for which you fail to timely provide a certificate or other documentation of such eligibility.
c. You should consult a tax advisor regarding the tax implications of entering into a securities loan with MSSB, including but not limited to the treatment of cash payments in lieu of dividends under US state tax laws and the Internal Revenue Code, as well as any foreign tax regulations, as applicable. In certain circumstances (e.g., certain failures of MSSB to return the Loaned Securities (or securities equivalent to the Loaned Securities) as required by the Securities Loan Agreement and certain other events of default by MSSB) you could be required to recognize a gain or loss, and if you are a tax-exempt entity you could be required to recognize unrelated business taxable income, with respect to a securities loan or the Loaned Securities. You should also consult your tax advisor in this regard.
11. Corporate Actions: You have the right to elect into a corporate action with respect to any Loaned Securities. Additionally, in the event that you are entitled to elect a type of dividend or distribution to be received from two or more alternatives, you will have the right to make such election. MSSB will accept and process your elections if made in a timely and appropriate manner. However, as discussed in paragraph 4 above, you may be unable to vote or physically tender the securities if MSSB is unable to timely re-deliver the Loaned Securities to you.
If the issuer of any Loaned Security engages in a recapitalization, merger, consolidation or other corporate action, such that a new or different security is exchanged for the Loaned Security, such new or different security will, effective upon such exchange, be deemed to become a Loaned Security in substitution for the former Loaned Security.
13. Employee Benefit Plans and Retirement Accounts:7 If the eligible account you enroll in the Program is a Retirement Account, the loans from the Retirement Account will be conducted in accordance with the terms and conditions of Department of Labor Prohibited Transaction Exemption (“PTE”) 2006-16. Pursuant to the Securities Loan Agreement and PTE 2006-16, MSSB, its affiliates, and its employees (including, but not limited to, your Financial Advisor, if applicable) will not have any discretionary authority or control with respect to the assets of the Retirement Account involved in the loan and will not render any fiduciary investment advice (within the meaning of ERISA or the Code) with respect to such assets. Accordingly, you agree that (a) you will not rely on any advice or recommendations (if any) that MSSB, its affiliates or its employees (including, but not limited to, your Financial Advisor, if applicable) may give you as a primary basis for any decision to enter into the Securities Loan Agreement or any loan; and (b) you may need to obtain advice, as you deem necessary, from parties unrelated to MSSB. In accordance with the Securities Loan Agreement and PTE 2006-16, MSSB is furnishing to you its most recent financial statement by posting the same to its public website, which can be found by navigating to www.morganstanley.com/about-us-ir/sec-filing and clicking on the most recent audited financial statements on form 10-K and unaudited financial statements on form 10-Q.
7Retirement Accounts include an Individual Retirement Account (“IRA”), a Roth IRA, an account for an employee benefit plan covered by Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or an account for a qualified retirement plan described in Section 4975(e)(1)(A) of the Internal Revenue Code of 1986, as amended (“Code”).
Morgan Stanley Smith Barney LLC Securities Loan Agreement
1. Applicability and Definitions.
1.1 Capitalized terms not otherwise defined herein shall have the meanings provided in Section 26.
1.2 From time to time, Borrower and Lender may enter into transactions in which Borrower will borrow from Lender any Securities:
(a) that are Fully Paid, (b) that are available in any Enrolled Account, and (c) that Lender has not removed from the Program (pursuant to Section 7.1(b) or (c) herein), against a transfer of Collateral by Borrower to the Collateral Account established at one or more banks (collectively, the “Banks”) for Lender’s benefit. Each such transaction with respect to Securities of the same CUSIP shall be referred to herein as a “Loan” and shall be governed by this Agreement, including any supplemental terms or conditions contained in an Annex hereto.
2. Loans of Securities.
2.1 Subject to the terms and conditions of this Agreement, Borrower may, from time to time and at any time, in its sole discretion, initiate a Loan and thereafter adjust the amount of Loaned Securities, without prior consultation with Lender. The terms of each Loan, including the issuer of the Securities, the amount of Securities to be loaned, the basis of compensation, the amount of Collateral to be transferred by Borrower, and any additional terms (which terms may be amended during the Loan), will be determined by, and may be changed by, Borrower, in accordance with the terms of this Agreement.
2.2 Borrower shall inform Lender of any initiation of a new Loan either by way of a notification or via the online interfaces available in respect of Lender’s Enrolled Account. Borrower is not obligated to inform Lender upon changes to the terms of any Loan, including but not limited to any increase or decrease in the amount of Securities loaned or the Lending Fee.
3. Transfer of Loaned Securities.
3.1 Borrower shall initiate a new Loan by transferring Loaned Securities out of Lender’s Enrolled Account.
3.2 Notwithstanding any other provision in this Agreement, Borrower and Lender agree that they intend the Loans hereunder to be loans of Securities. If, however, any Loan is deemed to be a loan of money by Borrower to Lender, then Borrower shall have, and Lender shall be deemed to have granted, a security interest in the Loaned Securities and the proceeds thereof.
4. Collateral.
4.1 Borrower shall, prior to or concurrently with the transfer of the Loaned Securities to Borrower, but in no case later than the Close of Business on the day of such transfer, transfer to the Collateral Account for Lender’s benefit sufficient Collateral with a Market Value at least equal to 102% of the Market Value of the Loaned Securities. Lender will not have any rights to Retransfer the Collateral in any way (i) unless there is a Default by Borrower pursuant to Section 13.1, and (ii) until following the expiration of the waiting period provided for under Section 13.1. Collateral may be adjusted in the manner set forth in Section 10 herein, and shall be returned in the manner set forth in Section 7 herein.
4.2 The Collateral transferred by Borrower to the Collateral Account for Lender’s benefit, as adjusted pursuant to Section 10, shall be security for Borrower’s obligations in respect of such Loan and for any other obligations of Borrower to Lender hereunder. Borrower hereby pledges with, assigns to, and grants Collateral Agent for the benefit of Lender a continuing first priority security interest in, and a lien upon, the Collateral, which shall attach upon the transfer of the Loaned Securities by Lender to Borrower and which shall cease upon (i) the transfer of the Loaned Securities by Borrower to Lender or (ii) in the event of a sale of the Loaned Securities by Lender, the delivery of the proceeds from such sale by Borrower to Lender. In addition to the rights given to Collateral Agent for the benefit of the Lender, Collateral Agent on behalf of Lender shall have all rights and remedies of a secured party under the UCC. Lender understands and agrees that the Collateral will be deposited into one or more accounts which also contain collateral pledged for securities loans made between Borrower and other lenders of securities to Borrower and that the Collateral in such account is allocated to Lender in accordance with the calculations contained in Section 10 of this Agreement, as reflected on a schedule (the “Collateral Schedule”) which Borrower shall provide to the Collateral Agent on a daily basis.
4.3 If Borrower transfers Collateral to the Collateral Account for the benefit of Lender, as provided in Section 4.1, but the Loaned Securities are not transferred to Borrower, Borrower shall have the absolute right to the return of the Collateral.
4.4 If Borrower transfers Loaned Securities out of Lender’s Enrolled Account, as provided in Section 3.1, but Borrower does not transfer Collateral to the Collateral Account for the benefit of Lender as provided in Section 4.1, Lender shall have the absolute right to the return of the Loaned Securities.
5. Appointment of Collateral Agent
5.1 Lender appoints Collateral Agent, to act on behalf of and for the benefit of Lender with respect to Collateral pledged by Borrower pursuant to the Collateral Agent Protocols, a copy of which is attached to this Agreement as Annex I. Collateral Agent hereby accepts such appointment on behalf and for the benefit of Lender. Borrower agrees to pay Collateral Agent a fee for its services on behalf of Lender in the amounts agreed to by Borrower and Collateral Agent. The Parties agree to the Collateral Agent Protocols, which are hereby incorporated into this Agreement by reference.
5.2 Lender appoints and instructs Collateral Agent to appoint the Banks as depositary banks for the Collateral pursuant to the terms of the Collateral Account Control Agreements between and among Borrower, each Bank, and Collateral Agent (the “Control Agreements”) as may be amended, supplemented or modified from time to time. By agreeing to this Agreement, Lender instructs Collateral Agent to agree on behalf of itself and Lender to the terms and provisions set forth in the Control Agreements.
5.3 Pursuant to the Collateral Agent Protocols, Collateral Agent shall not be charged with knowledge of any Default unless Collateral Agent has actual knowledge of such Default; provided, that Collateral Agent shall be deemed to have actual knowledge of an Act of Insolvency with respect to Borrower pursuant to Section 13.1(e) of this Agreement upon the public filing of any case, proceeding, petition or decree against Borrower under Chapter 7 or Chapter 11 of the Bankruptcy Code, under SIPA or under the Orderly Liquidation Authority under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act as more fully described in the Collateral Agent Protocols.
5.4 Borrower reserves the right to require Collateral Agent to change one or more Banks upon receipt of written notice provided to Collateral Agent by Borrower not less than ninety (90) days in advance. Lender instructs Collateral Agent to approve the successor to such Bank and to enter into one or more control agreements among Borrower, Collateral Agent and the successor to the Bank to establish Collateral Agent’s “control” (within the meaning of the UCC) over the applicable accounts in order to perfect Collateral Agent’s security interest in the Collateral on behalf of and for the benefit of Lender.
6. Fees for Loan.
6.1 Borrower agrees to pay Lender a lending fee (a “Lending Fee”), computed daily on each Loan, at such rates as Borrower determines in its discretion. The Lending Fee shall generally be calculated based on a percentage of the overall compensation Borrower earns in connection with relending Securities of the same CUSIP as the Loaned Securities. Lending Fees shall accrue from and including the date on which the Loaned Securities are transferred to Borrower to, but excluding, the date on which such Loaned Securities are returned to Lender.
6.2 Any Lending Fee payable hereunder shall be paid to Lender’s Enrolled Account by no later than the fifteenth (15th) business day of the calendar month following the calendar month in which the Lending Fee was incurred.
7. Termination of the Loan.
7.1 In addition to the provisions in Section 13 of this Agreement:
(a) Borrower may terminate a Loan in whole, or reduce the amount of Loaned Securities, at any time and in its sole discretion. In the event that Borrower terminates a Loan in whole, Borrower shall inform Lender of such termination either by way of a notification or via the online interfaces available in respect of Lender’s Enrolled Account.
(b) Lender may terminate a Loan in whole by engaging in any of the following:
(i) selling all of the Loaned Securities;
(ii) affirmatively identifying the Loaned Securities as Securities that Lender does not want made available to Loan, provided that any such affirmative identification of only a portion of the Loaned Securities shall be treated as an affirmative identification of all of the Loaned Securities;
(iii) unenrolling an Enrolled Account from the Program;
(iv) placing a hold on Lender’s participation in the Program, provided that this option is not available for E*TRADE from Morgan Stanley self-directed accounts; or
(v) terminating this Agreement in accordance with its terms.
(c) Lender may reduce the amount of Loaned Securities by selling a portion of the Loaned Securities.
7.2 To the extent that Lender has not sold the Loaned Securities, then, upon termination of a Loan in whole, or upon a reduction in the amount of Loaned Securities, by either Borrower or Lender, Borrower shall promptly, but in any event no later than 4:00 pm NY time on the date that is five (5) Business Days after such termination or reduction (the “Return Date”), transfer to Lender the Loaned Securities subject to the Loan that has been terminated or for the amount of the Loan that has been reduced, as applicable. Borrower shall not be liable for any loss Lender may incur as a result of Lender’s inability to vote or physically tender the Loaned Securities due to Borrower’s failure to re-deliver the Loaned Securities to Lender by the Return Date, provided that Borrower’s obligations under Sections 9.1 and 9.2 continue until Borrower delivers the Loaned Securities to Lender.
7.3 To the extent Lender has sold Loaned Securities, Borrower shall, on or before 4:00 pm NY time on the date that is one Standard Settlement Cycle after such sale (the “Transfer Proceeds Date”), transfer the proceeds from such sale to Lender. Upon a transfer of the proceeds from such a sale of Loaned Securities, Borrower’s obligation to return a like amount of the Loaned Securities shall terminate.
7.4 Upon the termination or reduction of the Loan and the return of the Loaned Securities or proceeds from a sale of the Loaned Securities, as applicable, to Lender’s Enrolled Account, Borrower shall instruct the Banks to transfer from the Collateral Account to Borrower the Collateral (as adjusted for marks-to-market pursuant to Section 10) for the Loan that has been terminated, or for the amount of Loaned Securities that was reduced, by the Close of Business on the date that the Loaned Securities or proceeds from a sale of the Loaned Securities, as applicable, are transferred back to Lender or, if such transfer occurs after the Close of Business on such date or is otherwise unable to be effected on such date, by the Close of Business on the next day on which such transfer may be effected.
8. Rights in Respect of Loaned Securities.
8.1 Except as set forth in Sections 9.1 and 9.2, until the Return Date for the Loaned Securities, if applicable, Borrower shall have all of the incidents of ownership of the Loaned Securities, including the right to transfer the Loaned Securities to others. Lender hereby waives the right to vote, or to provide any consent or to take any similar action with respect to, the Loaned Securities in the event that the record date or deadline for such vote, consent or other action falls during the term of the Loan.
8.2 Lender acknowledges that, notwithstanding Section 8.1, during the term of a Loan, Lender continues to retain market risk for the Loaned Securities, including exposure to any decrease in the value of the Loaned Securities.
9. Distributions on Loaned Securities and Collateral.
9.1 Subject to Section 9.5, Lender shall be entitled to receive all Distributions made on or in respect of the Loaned Securities which are not otherwise received by Lender, to the full extent it would be so entitled if the Loaned Securities had not been loaned to Borrower. In the event that the holder of a Security is entitled to elect the type of Distribution to be received from two or more alternatives, such election shall be made by Lender, in the case of a Distribution in respect of the Loaned Securities.
9.2 Subject to Section 9.5, any cash Distributions made on or in respect of the Loaned Securities, which Lender is entitled to receive pursuant to Section 9.1, shall be paid by the transfer of cash to Lender’s Enrolled Account by Borrower, on the date any such Distribution is paid, in an amount equal to such cash Distribution, so long as Lender is not in Default at the time of such payment. Non-cash Distributions that Lender is entitled to receive pursuant to Section 9.1 may, in Borrower’s sole discretion, be added to the Loaned Securities on the date of Distribution and be considered Loaned Securities for all purposes or may be transferred to Lender’s Enrolled Account on the date of Distribution, except that if the Loan has terminated, Borrower shall forthwith transfer the same to Lender.
9.3 Borrower shall be entitled to receive all Distributions made on or in respect of Collateral which are not otherwise received by Borrower, to the full extent it would be so entitled if the Collateral had not been transferred to the Collateral Account for Lender’s benefit.
9.4 Any Distributions made on or in respect of Collateral, which Borrower is entitled to receive pursuant to Section 9.3, shall be paid by the transfer of cash to Borrower by the Banks, on the date any such Distribution is paid, in an amount equal to such cash Distribution, so long as Borrower is not in Default at the time of such payment.
9.5 (a) If (i) Borrower is required to make a payment (a “Borrower Payment”) with respect to cash Distributions on Loaned Securities under Sections 9.1 and 9.2 (“Securities Distributions”), or (ii) Lender is required to make a payment (a “Lender Payment”) with respect to cash Distributions on Collateral under Sections 9.3 and 9.4 (“Collateral Distributions”), and (iii) Borrower or Lender, as the case may be (“Payor”), shall be required by law to collect any withholding or other tax, duty, fee, levy or charge required to be deducted or withheld from such Borrower Payment or Lender Payment (“Tax”), Payor shall (subject to subsections (b) and (c) and (d) below), pay such additional amounts as may be necessary in order that the net amount of the Borrower Payment or Lender Payment received by Lender or Borrower, as the case may be (“Payee”), after payment of such Tax equals the net amount of the Securities Distribution or Collateral Distribution that would have been received if such Securities Distribution or Collateral Distribution had been paid directly to Payee.
Notwithstanding anything to the contrary contained herein, the term “Tax” shall not include any tax imposed pursuant to Sections 1471 through 1474 of the Internal Revenue Code of 1986, as amended (the “Code”) (or the United States Treasury regulations or other guidance issued thereunder or official interpretations thereof), any agreement entered into pursuant to Section 1471(b) of the Code, or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such Sections of the Code, and no additional amounts shall be payable under this subsection 9.5(a) for any such tax.
(b) No additional amounts shall be payable to Payee under subsection (a) above to the extent that Tax would have been imposed on a Securities Distribution or Collateral Distribution paid directly to Payee.
(c) No additional amounts shall be payable to Payee under subsection (a) above to the extent that such Payee is entitled to an exemption from, or a reduction in the rate of, Tax on a Borrower Payment or Lender Payment subject to the provision of a certificate or other documentation but has failed timely to provide such certificate or other documentation.
(d) No Distributions or additional amounts under subsection (a) above shall be payable to a Payee if the date the relevant Distribution is paid on the Loaned Securities is on or after a date on which (i) the Loaned Securities have been returned to Lender or (ii) the Loaned Securities have been sold by Lender.
9.6 To the extent that, under the provisions of Sections 9.1 through 9.5, (a) a transfer of cash or other property by Borrower would give rise to a Margin Excess or (b) a transfer of cash or other property by Lender would give rise to a Margin Deficit, Borrower or Lender (as the case may be) shall not be obligated to make such transfer of cash or other property in accordance with such Sections but shall in lieu of such transfer immediately credit the amounts that would have been transferable under such Sections to the account of Lender or Borrower (as the case may be), and Lender hereby authorizes Borrower to effect such transfer.
10. Mark to Market.
10.1 Borrower shall daily mark to market any Loan hereunder, and in the event that at the Close of Trading on any Business Day the Market Value of the Collateral for any Loan to Borrower shall be less than 102% of the Market Value of all the outstanding Loaned Securities subject to such Loan, Borrower shall transfer additional Collateral to the Collateral Account for Lender’s benefit no later than the Close of Business on the next Business Day so that the Market Value of such additional Collateral, when added to the Market Value of the other existing Collateral for such Loan, shall equal 102% of the Market Value of the Loaned Securities. On a daily basis, Borrower shall provide the Collateral Schedule to Collateral Agent, which shall contain mark-to-market information identifying the amount of Collateral that Borrower pledges to Lender for the Loans hereunder. The Collateral Agent shall on a daily basis compare the total aggregate amount of collateral that Borrower is required to pledge to Lender and other lenders of securities participating in the Program as reflected on the Collateral Schedule to the total aggregate amount of collateral posted by Borrower to the Collateral Account for such day and notify Borrower in the event of any shortfall. Collateral Agent may rely upon, and be fully protected in relying upon, such mark-to-market information provided by Borrower which Collateral Agent reasonably believes to be genuine.
10.2 If at any time the aggregate Market Value of all Collateral for Loans by Lender shall be less than 102% of the Market Value of all the outstanding Loaned Securities subject to such Loans (a “Margin Deficit”), Borrower shall transfer additional Collateral no later than the Close of Business on the next Business Day so that the Market Value of such additional Collateral, when added to the Market Value of the other Collateral for such Loan, shall equal or exceed 102% of the Market Value of the Loaned Securities.
10.3 Subject to Borrower’s obligations under Section 10.1, if at any time the Market Value of all Collateral for Loans to Borrower shall be greater than 102% of the Market Value of all the outstanding Loaned Securities subject to such Loans (a “Margin Excess”), Lender hereby authorizes Collateral Agent to transfer to Borrower such amount of the Collateral selected by Borrower so long as the Market Value of the Collateral for such Loans, after deduction of such amounts, shall thereupon not be less than 102% of the Market Value of the Loaned Securities.
11. Representations.
The Parties to this Agreement hereby make the following representations and warranties, which shall continue during the term of any Loan hereunder:
11.1 Each Party hereto represents and warrants that (a) it has the power to execute and deliver this Agreement and to perform its obligations hereunder, (b) it has taken all necessary action to authorize such execution, delivery and performance, and (c) this Agreement constitutes a legal, valid, and binding obligation enforceable against it in accordance with its terms.
11.2 Borrower and Lender each represents and warrants that it has the power to enter into the Loans contemplated hereby.
11.3 Borrower and Lender each represents and warrants that it has not relied on the other for any tax or accounting advice concerning this Agreement and that it has made its own determination as to the tax and accounting treatment of any Loan and any dividends, remuneration or other funds received hereunder.
11.4 Borrower and Lender each represents and warrants that it is acting for its own account or an account on behalf of which it is authorized to act.
11.5 Borrower represents and warrants that it has, or will have at the time of transfer of any Collateral, the right to grant a first priority security interest therein subject to the terms and conditions hereof.
11.6 Borrower represents and warrants that, unless an applicable exemption from Regulation T applies, it (or the person to whom it relends the Loaned Securities) is borrowing or will borrow Loaned Securities that are Equity Securities for the purpose of making delivery of such Loaned Securities in the case of short sales, failure to receive securities required to be delivered, or as otherwise permitted pursuant to Regulation T as in effect from time to time.
11.7 Lender represents and warrants that it has, or will have at the time of transfer of any Loaned Securities, the right to transfer the Loaned Securities subject to the terms and conditions hereof.
11.8 Lender represents, warrants and, to the extent applicable, covenants, that:
(a) if Lender currently is or becomes (i) an “affiliate” of an issuer of any of the Securities in an Enrolled Account or (ii) the “beneficial owner” of more than 10% of the outstanding class of any of the Securities in an Enrolled Account, then Lender will notify Borrower promptly and will immediately remove any such Securities from the Enrolled Account or opt such Securities out of the Program. For purposes of this Section 11.8(a), “affiliate” has the meaning as set forth in Rule 144(a)(1) under the Securities Act and “beneficial owner” has the meaning as set forth in Rule 13d-3 under the Exchange Act; and
(b) if any of the Securities in an Enrolled Account currently are or become “restricted securities,” as such term is defined in Rule 144(a)(3) under the Securities Act, Lender will notify Borrower promptly and will immediately remove any such Securities from the Enrolled Account or opt such Securities out of the Program.
1.9 Lender further represents and warrants, without limiting any warranties, covenants, disclosures or representations by Borrower and Lender in this Agreement, the Lending Disclosure Document or as otherwise provided, that:
(a) it has consulted with legal counsel, as necessary or appropriate, and understands its Loan arrangements with Borrower and the terms of this Agreement, is willing and able to assume the risks in connection with such arrangements, and is of legal age and has legal capacity to contract; and
(b) it agrees that Borrower has not acted and will not act as its fiduciary or investment advisor, and that Borrower does not and will not have any duty or responsibility to inquire into, or make recommendations, supervise or determine the appropriateness of the arrangements contemplated hereby, except as otherwise required by law, regulation or rule.
11.10 If Lender is a revocable trust, acting through one or more Trustee(s), (a “Trust”) and has authorized or will authorize Borrower to borrow Securities from a Trust account, Lender further represents and warrants that:
(a) the Trust is in full force and effect, that the representations made herein are accurate and represent a valid, legal and binding obligation of the Trust, and that the below information is true and complete;
(b) the Loan transactions and related obligations to be entered into and performed by the Trust under this Agreement are permitted by the Trust, will or other document by which the Trust was created (“Operative Document”) and all substantive laws that govern or apply to the Operative Document (“Governing Law”);
(c) the Trust was validly created and the signatories herein are the only Trustees of the Trust. If only one individual is named as Trustee in this Agreement, Lender hereby certifies to Borrower that the individual is the sole Trustee, and, where applicable, plural references herein shall be deemed to be singular;
(d) the Trustee(s) are duly appointed and acting as current Trustee(s) of the Trust and are bound by the terms of the Operative Document and its Governing Law;
(e) the Trustee(s) are authorized under the Operative Document and its Governing Law to enter into the Agreement, perform the obligations set forth in the Agreement, give binding instructions to Borrower on behalf of the Trust (including authorization to lend Securities and receive Collateral) and to execute any documents necessary to open or maintain an account for the Trust from which Borrower may borrow Securities. To the extent that any instruction requires a delegation of the Trustee(s) fiduciary authority to act on behalf of and bind the Trust with third parties, such Trustee(s) are fully empowered to make such a delegation under the Operative Document and Governing Law, and have undertaken all acts necessary for such delegation to be effective;
(f) any one Trustee may independently exercise any of the powers certified to herein and may individually act on behalf of and bind the Trust, as well as execute any documents on behalf of the Trust that Borrower requires. Lender agrees that if Lender intends to name a delegate other than a Trustee, that Lender has the power to do so under the terms of the Operative Document or Governing Law and that Lender will execute Borrower’s discretionary documentation or provide Borrower with alternative documentation acceptable to Borrower;
(g) if Borrower receives conflicting instructions from different Trustees, or reasonably believes instructions from one Trustee might conflict with the wishes of another Trustee, Borrower may do any of the following: (i) choose which instructions to follow and which to disregard, (ii) suspend all activity under this Agreement until written instructions signed by all Trustees are received, and/or (iii) take other legal action. Lender agrees that Borrower retains the right to require joint action of all Trustees and/or authorized persons with respect to any activity relating to the Trust account whenever such joint action may be deemed necessary in Borrower’s sole discretion;
(h) Lender is solely responsible for any and all tax consequences of any kind and nature related to any Loan as certified herein. Lender acknowledges that each Loan and each Distribution made in connection with any Loan may carry international, federal, state or local income tax, gift tax, estate tax, and/or generation skipping transfer tax consequences, and that Lender will consult as necessary with qualified professionals to identify and evaluate any such consequences;
(i) Lender will immediately notify Borrower, in writing, if there are any amendments to the Operative Document that would affect or alter the accuracy of the information provided in this Agreement or in connection with any Loan, including changes in the identity of the Trustees and the persons authorized to act on behalf of the Trust. Borrower may rely on the information provided by Lender and the representations and warranties contained herein until it receives such written notice by all of the Trustees; and
(j) neither the Operative Document nor Governing Law place any restriction or limitation on the Trust with respect to any Loan or obligation under the Agreement.
12. Covenants.
In addition to the covenants in Section 11.8 above, the Parties to this Agreement hereby make the following covenants:
12.1 Borrower and Lender each agrees to be liable as principal with respect to the obligations hereunder.
12.2 Lender acknowledges and agrees that it is solely responsible for the accuracy, completeness and reliability of any information it provides to Borrower under this Agreement or in connection with its account(s) at Borrower. Lender further acknowledges and agrees that Borrower is relying on such information to perform Borrower’s obligations under this Agreement and the Control Agreements, and Borrower shall not be liable for any inaccuracies, incompleteness or defects in the information contained in any notice or other communication furnished by Lender to Borrower, Collateral Agent or the Banks, including with respect to any information furnished by Borrower to Collateral Agent or the Banks on Lender’s behalf.
13. Events of Default.
13.1 All Loans hereunder may, at the option of the non-defaulting party (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), be terminated immediately upon the occurrence of any one or more of the following events (individually, a “Default”). However, upon the occurrence of a Default by Borrower other than an Act of Insolvency, before such termination becomes effective there will be a five (5) business day waiting period after Lender contacts Collateral Agent in accordance with Section 14.1 and declares the Default:
(a) if Borrower shall fail to transfer any Loaned Securities or proceeds from the sale of Loaned Securities by the Return Date or Transfer Proceeds Date, respectively, upon termination of the Loan in whole, or upon a reduction in the amount of Loaned Securities, as required by Section 7;
(b) if Lender shall interfere with the return of any Collateral to Borrower as required by Section 7 or Section 10.3;
(c) if Borrower shall fail to transfer Collateral as required by Section 10;
(d) if Borrower shall fail to transfer to the Lender amounts in respect of Distributions required to be transferred by Sections 9.1 and 9.2;
(e) if an Act of Insolvency occurs with respect to Lender or Borrower;
(f) if any representation made by Lender or Borrower in respect of this Agreement or any Loan or Loans hereunder shall be incorrect or untrue in any material respect during the term of any Loan hereunder;
(g) if Lender or Borrower notifies the other of its inability to or its intention not to perform its material obligations hereunder or otherwise disaffirms, rejects or repudiates any of its obligations hereunder; or
(h) if Lender or Borrower shall fail to perform any material obligation under this Agreement not specifically set forth in Sections 13.1(a) through 13.1(g), above, including but not limited to the payment of fees as required by Section 6 and the payment of transfer taxes as required by Section 15.
13.2 The non-defaulting party shall (except upon the occurrence of an Act of Insolvency) give notice (“Default Notice”) as promptly as practicable to the Defaulting Party of the exercise of its option to terminate all Loans hereunder pursuant to this Section 13; provided, that if Lender is the non-defaulting party, such notice shall (except upon the occurrence of an Act of Insolvency) be given by Collateral Agent following its receipt of Lender’s Default Notice to Collateral Agent pursuant to Section 14.1. In the event of the occurrence of an Act of Insolvency with respect to Borrower, such Default Notice and termination of all Loans hereunder shall be deemed to have been given upon the public filing of any case, proceeding, petition or decree against the Borrower under Chapter 7 or Chapter 11 of the Bankruptcy Code, under SIPA or under the Orderly Liquidation Authority under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
14. Remedies.
14.1 Remedies of Lender
(a) In the event that Lender decides to exercise its rights under this Section, Lender shall contact Collateral Agent at 1-800-433-1918 or RTIDOps@rnt.com to submit its Default Notice. Collateral Agent and the Banks reserve the right to require Lender to present any information, identification, certification or any other documentation reasonably deemed necessary by Collateral Agent or the Banks to establish Lender’s identity and entitlement to funds prior to disbursing any funds to Lender. Upon Collateral Agent’s verification of Lender’s identity and entitlement to the funds held at the Banks, Collateral Agent may rely upon, and be fully protected in relying upon, any instructions from Lender which it reasonably believes to be genuine and will have no obligation to determine or verify the occurrence or continuation of the Default referenced in such Default Notice. Upon actual knowledge of the occurrence of an Act of Insolvency with respect to Borrower pursuant to Section 5.3, Collateral Agent shall, on Lender’s behalf, immediately commence the exercise of Lender’s remedies as set forth in this Section 14.1.
(i) Consistent with the Collateral Agent Protocols, Collateral Agent may at any time solicit written confirmatory instructions from Lender or request an order of a court of competent jurisdiction as to any action that it may be requested or required to take, or that it may propose to take, in the performance of any of its obligations and may suspend performance of such obligations as it determines to be appropriate until it receives such instructions or order.
(ii) Absent Collateral Agent’s receipt and acceptance of contrary written confirmatory instructions from Lender or as set forth in an order of a court of competent jurisdiction, upon Collateral Agent’s actual knowledge of the occurrence of an Act of Insolvency with respect to Borrower pursuant to Section 5.3, Lender authorizes and instructs Collateral Agent to direct each applicable Bank to remit Collateral in the amount that Collateral Agent instructs based on the Collateral Schedule provided by Borrower to Collateral Agent on the date that Lender’s Default Notice was submitted or was deemed to have been submitted (or, if no Collateral Schedule was provided by Borrower to Collateral Agent on such date, on the most recently provided Collateral Schedule prior to such date), to Lender at the address provided to the Collateral Agent by Borrower.
(b) Upon the occurrence of a Default by Borrower under Section 13 entitling Lender to terminate all Loans hereunder, and (other than upon the occurrence of an Act of Insolvency with respect to Borrower) following Lender’s submission of a Default Notice to Collateral Agent in accordance with this Section 14.1 and the expiration of the five (5) Business Day waiting period, Lender shall have the right, in addition to any other remedies provided herein, (i) to purchase a like amount of Loaned Securities (“Replacement Securities”) in the principal market for such Loaned Securities in a commercially reasonable manner, (ii) to instruct Collateral Agent to direct each applicable Bank to remit to Lender Collateral in the amount that is allocated to Lender based on the Collateral Schedule provided by Borrower to Collateral Agent on the date that Lender’s Default Notice was submitted or was deemed to have been submitted (or, if no Collateral Schedule was provided by Borrower to Collateral Agent on such date, on the most recently provided Collateral Schedule prior to such date) and/or (iii) to apply and set off the Collateral against the payment of the purchase price for such Replacement Securities and any amounts due to Lender under Sections 6, 9, 15 and 17. Collateral Agent may rely upon, and be fully protected in relying upon, any notice received from Lender which it reasonably believes to be genuine relating to a Default with respect to Borrower and Lender’s instruction to Collateral Agent to cause Collateral to be remitted from each applicable Bank to Lender.
(c) In the event that Lender shall exercise such rights, Borrower’s obligation to return a like amount of the Loaned Securities shall terminate and Borrower shall retain the right to any remaining Loaned Securities. Lender may similarly apply the Collateral to any other obligation of Borrower under this Agreement, including Borrower’s obligations with respect to Distributions paid to Borrower (and not forwarded to Lender) in respect of Loaned Securities, provided that Lender acknowledges that the amount of such obligations may be determined on a final basis by the trustee or receiver appointed in connection with an insolvency of Borrower or the court presiding over Borrower’s bankruptcy case. In the event that (i) the purchase price of Replacement Securities (plus all other amounts, if any, due to Lender hereunder) exceeds (ii) the amount of the Collateral, Borrower shall be liable to Lender for the amount of such excess together with interest thereon at a rate equal to (A) the Secured Overnight Funding Rate, or (B) such other rate as may be specified, in each case as such rate fluctuates from day to day, from the date of such purchase until the date of payment of such excess. As security for Borrower’s obligation to pay such excess, Lender shall have, and Borrower hereby grants, a security interest in any property of Borrower then held by or for Lender and a right of setoff with respect to such property and any other amount payable by Lender to Borrower. For any remaining amount, Lender shall have a claim against Borrower as a general unsecured creditor for the amount of such excess. The purchase price of Replacement Securities purchased under this Section 14.1 shall include broker’s fees and commissions and all other reasonable costs, fees, and expenses (including reasonable attorney’s fees incurred by lender for legal action arising out of default on the loans, plus interest at a reasonable rate) related to such purchase. In the event Lender exercises its rights under this Section 14.1, Lender may elect in its sole discretion, in lieu of purchasing all or a portion of the Replacement Securities, to be deemed to have made, respectively, such purchase of Replacement Securities for an amount equal to the price therefor on the date of such exercise obtained from a generally recognized source or the last bid quotation from such a source at the most recent Close of Trading. Subject to Section 19, upon the satisfaction of all obligations hereunder, any remaining Collateral shall be returned to Borrower (or its insolvency estate) by Collateral Agent or Lender, as applicable.
14.2 Remedies of Borrower:
(a) Upon the occurrence of a Default under Section 13 entitling Borrower to terminate all Loans hereunder, Borrower shall have the right, in addition to any other remedies provided herein, (i) to terminate such Loans, (ii) to return the Loaned Securities to Lender and (iii) to effect the transfer of the Collateral for such Loans to Borrower.
(b) Borrower shall be entitled to set off claims and apply any property of Lender held by Borrower against any obligations to Borrower owing by Lender under this Agreement. In the event that the value of the property of Lender held by Borrower is insufficient to satisfy the amounts owing to Borrower by Lender hereunder, Lender shall be liable to Borrower for the amount of any such deficiency, together with interest on such amounts at a rate equal to (A) the Secured Overnight Funding Rate or (B) such other rate as may be specified, in each case as such rate fluctuates from day to day, from the date of such sale until the date of payment of such deficiency. Subject to Section 19, upon the satisfaction of all Lender’s obligations hereunder, any remaining Loaned Securities (or remaining cash proceeds thereof) shall be returned to Lender.
14.3 Borrower and Lender acknowledge and agree that (a) the Loaned Securities are of a type traded in a recognized market, (b) in the absence of a generally recognized source for prices or bid or offer quotations for any security, the non-defaulting party may establish the source therefor in its sole discretion, and (c) all prices and bid and offer quotations shall be increased to include accrued interest to the extent not already included therein (except to the extent contrary to market practice with respect to the relevant Securities).
14.4 In addition to its rights hereunder, the non-defaulting party shall have any rights otherwise available to it under any other agreement or applicable law.
14.5 The event of Default which entitles Borrower or Lender to exercise its rights under this Section 14 must be continuing as of the time at which such party seeks to exercise its rights under this Section 14. To the extent an event of Default has been cured or is no longer continuing as of the time at which Borrower or Lender seeks to exercise its rights under this Section 14, such party shall no longer have the rights afforded by this Section 14 with respect to that event of Default.
15. Transfer Taxes.
All transfer taxes with respect to the transfer of the Loaned Securities by Lender to Borrower and by Borrower to Lender upon termination of the Loan and with respect to the transfer of Collateral by Borrower to the Collateral Account for Lender’s benefit and from the Collateral Account to Borrower upon termination of the Loan or pursuant to Section 10 shall be paid by Borrower.
16. Transfers.
16.1 For the avoidance of doubt:
(a) a transfer of Loaned Securities from Lender includes, but is not limited to, a transfer of Loaned Securities from any of Lender’s Enrolled Accounts or any other account that is eligible for and enrolled in the Program under the standards set by Borrower now or at any time in the future; and
(b) a transfer of Loaned Securities to Lender includes, but is not limited to, a transfer of Loaned Securities to any of Lender’s Enrolled Accounts or any other account that is eligible for and enrolled in the Program under the standards set by Borrower now or at any time in the future.
16.2 For the avoidance of doubt, Borrower and Lender agree and acknowledge that the term “securities,” as used herein (except in this Section 16), shall include any “security entitlements” with respect to such securities (within the meaning of the UCC). In every transfer of “financial assets” (within the meaning of the UCC) hereunder, the transferor shall take all steps necessary (a) to effect a delivery to the transferee under Section 8-301 of the UCC, or to cause the creation of a security entitlement in favor of the transferee under Section 8-501 of the UCC, (b) to enable the transferee to obtain “control” (within the meaning of Section 8-106 of the UCC), and (c) to provide the transferee with comparable rights under any applicable foreign law or regulation.
17. Contractual Currency.
17.1 Borrower and Lender agree that (a) any payment in respect of a Distribution under Section 9 shall be made in the currency in which the underlying Distribution of cash was made, (b) any return of cash shall be made in the currency in which the underlying transfer of cash was made, and (c) any other payment of cash in connection with a Loan under this Agreement shall be in U.S. dollars (the “Contractual Currency”). Notwithstanding the foregoing, the payee of any such payment may, at its option, accept tender thereof in any other currency; provided, however, that, to the extent permitted by applicable law, the obligation of the payor to make such payment will be discharged only to the extent of the amount of Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency (after deduction of any premium and costs of exchange) on the banking day next succeeding its receipt of such currency.
17.2 If for any reason the amount in the Contractual Currency received under Section 17.1, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due in respect of this Agreement, the party required to make the payment will (unless a Default has occurred and such party is the non-defaulting party) as a separate and independent obligation and to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall.
17.3 If for any reason the amount in the Contractual Currency received under Section 17.1 exceeds the amount in the Contractual Currency due in respect of this Agreement, then the party receiving the payment will (unless a Default has occurred and such party is the non-defaulting party) refund promptly the amount of such excess.
18. Employee Benefit Plans and Retirement Accounts
Lender shall, if any of the Securities transferred to the Borrower hereunder for any Loan have been or shall be obtained, directly or indirectly, from or using the assets of any Plan, so notify Borrower in writing upon the execution of this Agreement or upon initiation of such Loan under Section 2.1. If Lender so notifies Borrower, then Borrower and Lender shall conduct the Loan in accordance with the terms and conditions of Department of Labor Prohibited Transaction Exemption (“PTE”) 2006-16 (71 Fed. Reg. 63786, Oct. 31, 2006, or any successor thereto) (unless Borrower and Lender have agreed prior to entering into a Loan that such Loan will be conducted in reliance on another exemption, or without relying on any exemption, from the prohibited transaction provisions of Section 406 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and Section 4975 of the Code). Without limiting the foregoing and notwithstanding any other provision of this Agreement, if the Loan will be conducted in accordance with PTE 2006-16, then:
18.1 Borrower represents and warrants to Lender that it is either: (a) a bank as defined under Section 202(a)(2) of the Investment Advisers Act of 1940 (the “1940 Act”) or (b) a broker-dealer registered under the Exchange Act or exempted from registration under Section 15(a)(1) of the Exchange Act as a dealer in exempted government securities (as defined in Section 3(a)(12) of the Exchange Act).
18.2 Lender represents and warrants that, during the term of any Loan hereunder, neither Borrower nor any affiliate of Borrower has any discretionary authority or control with respect to the investment of the assets of the Plan involved in the Loan or renders investment advice (within the meaning of ERISA and/or Section 4975 of the Code) with respect to the assets of the Plan involved in the Loan.
18.3 Borrower shall mark to market daily each Loan hereunder pursuant to Section 10.1 as is required. Borrower and Lender otherwise agree to comply with the applicable requirements of PTE 2006-16 regarding the amount, type, delivery and holding of Collateral posted by the Borrower.
18.4 Borrower and Lender agree that:
(a) for the purposes of this Section 18, the term “Collateral” shall mean the Collateral transferred to the Collateral Account pursuant to this Agreement which shall consist of US dollar cash;
(b) prior to the making of any Loans hereunder, Borrower shall provide Lender with (i) the most recent available audited statement of Borrower’s financial condition as audited by a United States certified public accounting firm and (ii) the most recent available unaudited statement of Borrower’s financial condition (if more recent than the most recent audited statement), it being agreed by Lender and Borrower that Borrower may furnish such statement(s) by posting the same to its website which can be found by navigating to www.morganstanley.com/about-us-ir/sec-filings and clicking on the most recent audited financial statements on form 10-K and unaudited financial statements on form 10-Q, and each Loan made hereunder shall be deemed a representation by Borrower that there has been no material adverse change in Borrower’s financial condition subsequent to the date of the latest financial statements or information furnished in accordance herewith;
(c) the Loan may be terminated by Lender at any time, whereupon Borrower shall deliver the Loaned Securities to Lender promptly, but in any event no later than the date that is five (5) Business Days after such termination;
(d) the Collateral transferred shall be security only for obligations of Borrower to the Plan with respect to Loans, and shall not be security for any obligation of Borrower to any agent or affiliate of the Plan; and
(e) Borrower has and its affiliates have a financial interest in Lender entering into the Agreement and each Loan and will receive compensation in connection therewith as set forth in the Agreement.
18.5 Lender represents and warrants that, at all times while the Agreement is outstanding, (i) the terms of the Agreement are at least as favorable to Lender as an arm’s length transaction with an unrelated party would be, and (ii) all fees and other consideration received by Borrower in connection with each Loan are reasonable.
18.6 Lender represents and warrants that it has made a good faith determination that in connection with such Loan, each such Plan will receive no less, and pay no more, than adequate consideration (as defined in Section 408(b)(17)(B) of ERISA or Section 4975(f)(10) of the Code).
18.7 Lender represents and warrants that, at all times while the Agreement is outstanding, (i) it has obtained advice, as it deems necessary, with respect to the provisions of this Agreement from parties unrelated to Borrower, and it is not relying on any advice or recommendation (if any) that Borrower may give as a primary basis for any decision to enter into this Agreement and any Loan, and (ii) it is capable of evaluating investment risks independently, both in general and with regard to particular transactions.
18.8 Lender represents that if Lender is a governmental, church or other plan not subject to ERISA and/or Section 4975 of the Code, the execution, delivery and performance of the Agreement and the Transactions will not constitute or result in a violation of any law, rule or restriction similar to Section 406 of ERISA and/or Section 4975 of the Code applicable to Lender.
19. Single Agreement.
Borrower and Lender acknowledge that, and have entered into this Agreement in reliance on the fact that, all Loans hereunder constitute a single business and contractual relationship and have been entered into in consideration of each other. Accordingly, Borrower and Lender hereby agree that payments, deliveries and other transfers made by either of them in respect of any Loan shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Loan hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. In addition, Borrower and Lender acknowledge that, and have entered into this Agreement in reliance on the fact that, all Loans hereunder have been entered into in consideration of each other. Accordingly, Borrower and Lender hereby agree that (a) each shall perform all of its obligations in respect of each Loan hereunder, and that a default in the performance of any such obligation by Borrower or by Lender (the “Defaulting Party”) in any Loan hereunder shall constitute a default by the Defaulting Party under all such Loans hereunder, and (b) the non-defaulting party shall be entitled to set off claims and apply property held by it in respect of any Loan hereunder against obligations owing to it in respect of any other Loan with the Defaulting Party.
20. APPLICABLE LAW.
THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
21. Waiver.
The failure of a Party to this Agreement 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. All waivers in respect of a Default must be in writing.
22. Survival of Remedies.
All remedies hereunder and all obligations with respect to any Loan shall survive the termination of the relevant Loan, return of Loaned Securities or Collateral and termination of this Agreement.
23. Notices and Other Communications.
23.1 Any and all notices, statements, demands or other communications hereunder to be provided by Lender to Borrower may be given to Lender’s financial advisor (if applicable) at Borrower, or made through Borrower’s online interfaces, if applicable, provided, however, that any notice by Lender to Borrower by telephone shall be deemed effective only if (a) such notice is followed by written confirmation thereof, and (b) at least one of the other means of providing notice that are specifically listed above has previously been attempted in good faith by Lender.
23.2 A Default Notice provided by Lender to Collateral Agent shall be submitted in accordance with the provisions set forth in Section 14.1 of this Agreement.
23.3 Any and all notices, statements, demands or other communications hereunder to be provided by Borrower to Lender, including but not limited to a Default Notice, may be given via Lender’s financial advisor (if applicable), at Borrower, Borrower’s online interfaces, telephone, mail, facsimile, email, electronic message, telegraph, messenger or otherwise to Lender’s contact information maintained by Borrower in its books and records for such party. Lender shall promptly notify Borrower of any change to its email address, telephone number or mailing address, and Borrower shall, upon receipt of such notice, thereafter promptly inform Collateral Agent of such change.
23.4 Any notice, statement, demand or other communication hereunder, including but not limited to a Default Notice, will be deemed effective on the day and at the time on which it is received or, if not received, on the day and at the time on which its delivery was in good faith attempted.
24. PREDISPUTE ARBITRATION.
24.1 This agreement contains a predispute arbitration clause. By signing an arbitration agreement the Parties agree as follows:
(a) All Parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.
(b) Arbitration awards are generally final and binding; a Party’s ability to have a court reverse or modify an arbitration award is very limited.
(c) The ability of the Parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
(d) The arbitrators do not have to explain the reason(s) for their award unless, in an eligible case, a joint request for an explained decision has been submitted by all Parties to the panel at least 20 days prior to the first scheduled hearing date.
(e) The panel of arbitrators may include a minority of arbitrators who were or are affiliated with the securities industry.
(f) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is ineligible for arbitration may be brought in court.
(g) The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.
24.2 No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein.
24.3 THE PARTIES HEREBY AGREE THAT ANY DISPUTE, CONTROVERSY, OR CLAIM BETWEEN THE PARTIES ARISING OUT OF THIS AGREEMENT OR ANY LOAN HEREUNDER SHALL BE SUBJECT TO THE MANDATORY ARBITRATION PROVISION CONTAINED IN ANY CUSTOMER ACCOUNT OR SIMILAR AGREEMENT ENTERED INTO BETWEEN SUCH PARTIES, OR, IN THE ABSENCE OF SUCH AGREEMENT, EACH PARTY HERBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS LOCATED IN THE SOUTHERN DISTRICT OF NEW YORK, NEW YORK, AND WAIVES ANY RIGHT THAT IT MAY HAVE TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY LOAN HEREUNDER.
25. Miscellaneous.
25.1 Except as otherwise agreed by the Parties, this Agreement supersedes any other agreement between the Parties hereto concerning loans of Securities between Borrower and Lender.
25.2 This Agreement shall not be assigned by Lender, Collateral Agent or Borrower without the prior written consent of the others, and any attempted assignment without such consent shall be null and void. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of Lender and Collateral Agent and their respective heirs, representatives, successors, executors, administrators and permitted assigns. Notwithstanding the above, Borrower may assign this Agreement to any present or future affiliate of Borrower without prior consent from or prior written notice to Lender, provided that such assignment does not adversely affect the first priority perfected security interest in the Collateral granted pursuant to this Agreement. Subject to the foregoing, this Agreement shall inure to the benefit of Borrower’s successors and assigns.
25.3 This Agreement may be terminated by Borrower or Lender by giving notice consistent with Section 23, subject only to fulfillment of any obligations then outstanding.
25.4 This Agreement shall not be modified or amended by Lender or Collateral Agent except by a written agreement executed by the Parties hereto. This Agreement may be modified or amended by Borrower, provided that Collateral Agent has agreed to such changes in writing, by giving notice to Lender; any notice posted to the online interfaces available in respect of Lender’s Enrolled Account shall constitute proper notice to Lender. While Borrower will endeavor to provide 30 days prior notice of any such amendment or modification of this Agreement to Lender, Lender understands that any amendment or modification to this Agreement will be effective as of the designated effective date. If Lender continues to remain enrolled in the Program after such notice, Lender will be deemed to have accepted such changes and will be legally bound by such amended Agreement.
25.5 The Parties hereto acknowledge and agree that, in connection with this Agreement and each Loan hereunder, time is of the essence.
25.6 Each provision and agreement herein shall be treated as separate and independent from any other provision herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.
25.7 This Agreement may be executed in any number of counterparts by means of (i) a DocuSign® electronic signature, (ii) an original, manual signature, or (iii) a faxed, scanned or photocopied manual signature. Each DocuSign,® faxed, scanned or photocopied manual signature shall for all purposes have the same validity, legal effect and admissibility in evidence as an original manual signature and the Parties hereby waive any objection to the contrary. Each such counterpart shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.
25.8 No Party shall be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruptions, loss or malfunctions of utilities, computer (hardware or software) or communications service, including those resulting from a cyberattack or other cybersecurity incident; accidents; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation.
26. Definitions.
For the purposes hereof:
26.1 “Act of Insolvency” shall mean, with respect to Borrower or Lender, (a) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party’s seeking the appointment or election of a receiver, conservator, trustee, custodian, or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (b) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election or the filing against such party of an application for a protective decree under the provisions of SIPA, which (i) is consented to or not timely contested by such party, (ii) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (iii) is not dismissed within 15 days, (c) the making by such party of a general assignment for the benefit of creditors, or (d) the admission in writing by such party of such party’s inability to pay such party’s debts as they become due.
26.2 “Agreement” shall mean this Morgan Stanley Smith Barney LLC Securities Loan Agreement among Borrower, Lender and Collateral Agent.
26.3 “Bank” or “Banks” shall have the meaning assigned in Section 1.2.
26.4 “Bankruptcy Code” shall mean Title 11 of the United States Code, as amended.
26.5 “Borrower” shall mean Morgan Stanley Smith Barney LLC.
26.6 “Borrower Payment” shall have the meaning assigned in Section 9.5(a).
26.7 “Business Day” shall mean, with respect to any Loan hereunder, a day on which regular trading occurs in the principal market for the Loaned Securities subject to such Loan, provided, however, that for purposes of determining the Market Value of any Securities hereunder, such term shall mean a day on which regular trading occurs in the principal market for the Securities whose value is being determined. Notwithstanding the foregoing, (a) for purposes of Section 10, “Business Day” shall mean any day on which regular trading occurs in the principal market for any Loaned Securities under any outstanding Loan hereunder, and “next Business Day” shall mean the next day on which a transfer of Collateral may be effected, and (b) in no event shall a Saturday or Sunday be considered a Business Day.
26.8 “Close of Business” shall be determined in accordance with market practice, but shall in no event be later than the closing of the Federal Reserve Wire Network (Fedwire Funds Service) on any Business Day.
26.9 “Close of Trading” shall mean, with respect to any Security, the end of the primary trading session established by the principal market for such Security on a Business Day.
26.10 “Code” shall have the meaning assigned in Section 9.5(a).
26.11 “Collateral” shall mean US dollar cash pledged by Borrower for Lender’s benefit as security for Borrower’s obligations in respect of Loans and for any other obligations of Borrower to Lender under this Agreement.
26.12 “Collateral Account” shall mean, collectively, any demand “deposit accounts” (as defined in Section 9-102(29) of the UCC), established and maintained at the Banks in the name of Collateral Agent for the benefit of Borrower’s Customers participating in the Program.
26.13 “Collateral Agent” shall have the meaning assigned in the first paragraph of this Agreement.
26.14 “Collateral Agent Protocols” shall have the meaning assigned in Section 5.2.
26.15 “Collateral Distributions” shall have the meaning assigned in Section 9.5(a).
26.16 “Collateral Schedule” shall have the meaning assigned in Section 4.2.
26.17 “Contractual Currency” shall have the meaning assigned in Section 17.1.
26.18 “Control Agreements” shall have the meaning assigned in Section 5.2.
26.19 “Customer” shall mean any person that is a customer of Borrower under Rule 15c3-3 under the Exchange Act.
26.20 “Default” shall have the meaning assigned in Section 13.1.
26.21 “Default Notice” shall have the meaning assigned in Section 13.2.
26.22 “Defaulting Party” shall have the meaning assigned in Section 19.
26.23 “Distribution” shall mean, with respect to any Security at any time, any distribution made on or in respect of such Security, including, but not limited to: (a) cash and all other property, (b) stock dividends, (c) Securities received as a result of split ups of such Security and distributions in respect thereof, (d) interest payments, (e) all rights to purchase additional Securities, and (f ) any cash or other consideration paid or provided by the issuer of such Security in exchange for any vote, consent or the taking of any similar action in respect of such Security (regardless of whether the record date for such vote, consent or other action falls during the term of the Loan). With respect to cash Collateral, “Distribution” shall mean interest on such cash Collateral.
26.24 “Enrolled Account” shall mean any account at Borrower that is eligible to participate in the Program under Borrower’s policies and procedures, which may change from time to time and at Borrower’s sole discretion, that Lender has enrolled in the Program.
26.25 “Equity Security” shall mean any security (as defined in the Exchange Act) other than a “nonequity security,” as defined in Regulation T.
26.26 “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
26.27 “FDIA” shall mean the Federal Deposit Insurance Act, as amended.
26.28 “FDICIA” shall mean the Federal Deposit Insurance Corporation Improvement Act of 1991, as amended.
26.29 “Foreign Securities” shall mean Securities that are principally cleared and settled outside the United States.
26.30 “Fully Paid,” when describing Securities, shall mean Securities that have been paid for completely and that are not being pledged as collateral to support the purchase of other securities on margin or otherwise being borrowed against.
26.31 “Governing Law” shall have the meaning assigned in Section 11.10(b).
26.32 “Lender” shall mean the undersigned Customer identified on the signature page of this Agreement.
26.33 “Lender Payment” shall have the meaning assigned in Section 9.5(a).
26.34 “Lending Disclosure Document” shall mean the document titled “Important Disclosures with Respect to Fully Paid Securities Lending Transactions.”
26.35 “Lending Fee” shall have the meaning assigned in Section 6.1.
26.36 “Loan” shall have the meaning assigned in Section 1.2.
26.37 “Loaned Security” shall mean any Security transferred in a Loan hereunder until such Security (or an identical Security) is transferred back to Lender’s Enrolled Account hereunder, except that, if any new or different Security shall be exchanged for any Loaned Security by recapitalization, merger, consolidation or other corporate action, such new or different Security shall, effective upon such exchange, be deemed to become a Loaned Security in substitution for the former Loaned Security for which such exchange is made. For purposes of return of Loaned Securities by Borrower or purchase or sale of Securities pursuant to Section 14, such term shall include Securities of the same CUSIP and quantity as the Loaned Securities, as adjusted pursuant to the preceding sentence.
26.38 “Margin Deficit” shall have the meaning assigned in Section 10.2.
26.39 “Margin Excess” shall have the meaning assigned in Section 10.3.
26.40 “Market Value” shall mean the price (which may be a market or evaluated price, usually from the previous business day) made available by a recognized pricing service, plus any accrued interest on such securities (to the extent not reflected in such pricing). If no price is available, Borrower may price such securities in accordance with the methodology used in its ordinary course of business. With respect to cash Collateral, “Market Value” means the face amount of such cash.
26.41 “Operative Document” shall have the meaning assigned in Section 11.10(b).
26.42 “Payee” shall have the meaning assigned in Section 9.5(a).
26.43 “Payor” shall have the meaning assigned in Section 9.5(a).
26.44 “Plan” shall mean: (a) any “employee benefit plan” as defined in Section 3(3) of ERISA which is subject to Part 4 of Subtitle B of Title I of such Act; (b) any “plan” as defined in Section 4975(e)(1) of the Code; or (c) any entity the assets of which are deemed to be assets of any such “employee benefit plan” or “plan” by reason of 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA.
26.45 “Program” shall mean Borrower’s program for borrowing Fully Paid Securities from Customers’ Enrolled Accounts.
26.46 “Regulation T” shall mean Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time.
26.47 “Replacement Securities” shall have the meaning assigned in Section 14.1(b).
26.48 “Retransfer” shall mean, with respect to any Collateral, to directly or indirectly pledge, repledge, hypothecate, rehypothecate, lend, relend, sell, use, margin or otherwise transfer such Collateral, or to re-register any such Collateral evidenced by physical certificates in any name other than Borrower’s.
26.49 “Return Date” shall have the meaning assigned in Section 7.2.
26.50 “Securities” shall mean securities or, if agreed by Borrower and Lender in writing, other assets.
26.51 “Securities Act” shall mean the Securities Act of 1933, as amended.
26.52 “Securities Distributions” shall have the meaning assigned in Section 9.5(a).
26.53 “SIPA” shall mean the Securities Investor Protection Act of 1970, as amended.
26.54 “Standard Settlement Cycle” shall mean the standard settlement date that would apply to a purchase or sale of Securities in the principal market for such Securities or five (5) Business Days, whichever is less.
26.55 “Tax” shall have the meaning assigned in Section 9.5(a).
26.56 “Transfer Proceeds Date” shall have the meaning assigned in Section 7.3.
26.57 “Trust” shall have the meaning assigned in Section 11.10.
26.58 “UCC” shall mean the New York Uniform Commercial Code.
27. Intent.
27.1 Borrower and Lender recognize that each Loan hereunder is a “securities contract,” as such term is defined in Section 741 of the Bankruptcy Code (except insofar as the type of assets subject to the Loan would render such definition inapplicable).
27.2 It is understood that each and every transfer of funds, securities and other property under this Agreement and each Loan hereunder is a “margin payment,” “settlement payment” or “transfer” as such terms are used in Sections 362(b)(6) and 546(e) of the Bankruptcy Code.
27.3 It is understood that the rights given to Borrower and Lender hereunder upon a Default by the other constitute the right to cause the liquidation of a securities contract and the right to set off mutual debts and claims in connection with a securities contract, as such terms are used in Sections 555 and 362(b)(6) of the Bankruptcy Code.
27.4 Borrower and Lender agree and acknowledge that if Lender is an “insured depository institution,” as such term is defined in the FDIA, then each Loan hereunder is a “securities contract” and “qualified financial contract,” as such terms are defined in the FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to the Loan would render such definitions inapplicable).
27.5 It is understood that this Agreement constitutes a “netting contract” as defined in and subject to Title IV of the FDICIA and each payment obligation under any Loan hereunder shall constitute a “covered contractual payment entitlement” or “covered contractual payment obligation,” respectively, as defined in and subject to FDICIA (except insofar as neither Lender nor Borrower is a “financial institution” as that term is defined in FDICIA).
27.6 Except to the extent required by applicable law or regulation or as otherwise agreed, Borrower and Lender agree that Loans hereunder shall in no event be “exchange contracts” for purposes of the rules of any securities exchange and that Loans hereunder shall not be governed by the buy-in or similar rules of any such exchange, registered national securities association or other self-regulatory organization.
27.7 Borrower and Lender agree that they intend the Loans hereunder to meet the requirements of Section 1058(b) of the Code.
28. ACKNOWLEDGEMENT OF DISCLOSURES.
28.1 LENDER REPRESENTS AND WARRANTS THAT IT HAS RECEIVED A COPY OF, AND HAS READ, UNDERSTANDS AND AGREES TO THE TERMS OF, THE LENDING DISCLOSURE DOCUMENT.
28.2 WITHOUT WAIVING ANY RIGHTS GIVEN TO LENDER HEREUNDER, LENDER UNDERSTANDS AND AGREES THAT THE PROVISIONS OF SIPA MAY NOT PROTECT LENDER WITH RESPECT TO LOANED SECURITIES HEREUNDER ONCE SUCH SECURITIES ARE REMOVED FROM LENDER’S ENROLLED ACCOUNT AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO THE COLLATERAL ACCOUNT FOR LENDER’S BENEFIT MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF BORROWER’S OBLIGATIONS IN THE EVENT BORROWER FAILS TO RETURN THE LOANED SECURITIES.
28.3 LENDER UNDERSTANDS, AGREES AND ACKNOWLEDGES THAT, PURSUANT TO SECTION 24 OF THIS AGREEMENT, LENDER IS AGREEING TO A PRE-DISPUTE ARBITRATION CLAUSE AND LENDER WILL ARBITRATE CONTROVERSIES THAT MAY ARISE.
28.4 LENDER ACKNOWLEDGES THAT IT HAS RECEIVED A COPY OF, AND UNDERSTANDS, THE COLLATERAL AGENT PROTOCOLS.
Client
By clicking “Agree & Accept” to enroll in the Fully Paid Lending Program, Client has electronically signed, as a counterparty to, this Master Securities Loan Agreement. Such signature will be dated as of the date and time Client clicks “Agree & Accept.”
Stable Custody Group II LLC
Morgan Stanley Smith Barney LLC
Annex I
FULLY PAID LENDING PROGRAM:
COLLATERAL AGENT PROTOCOLS
These Collateral Agent Protocols (“Protocols”) are referred to in, and incorporated into, Section 5.1 of the Borrower Securities Loan Agreement (the “Agreement”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed in the Agreement.
1. POWERS OF COLLATERAL AGENT
1.1 Powers of Collateral Agent
Collateral Agent is irrevocably authorized and empowered to enter into and perform its obligations and protect, perfect, exercise and enforce its interest, rights, powers and remedies under the Agreement and the Control Agreements (the Agreement and the Control Agreements, collectively, the “FPL Agreements”) and applicable law and in equity and to act as set forth in this Section 1 and Section 2 of these Protocols or as requested in any lawful directions given to it from time to time in respect of any matter by Lender, provided such directions are consistent with the FPL Agreements.
1.2 Rights and Powers Exercised for Sole and Exclusive Benefit of Lender
Collateral Agent agrees that its rights and powers with respect to the Collateral hereunder are exercised solely and exclusively for the benefit of Lender. Collateral Agent will accept, hold, administer and enforce the security interest in the Collateral at any time transferred or delivered to it and all other interests, rights, powers and remedies at any time granted to or enforceable by Collateral Agent solely and exclusively for the benefit of Lender, and will distribute or cause to be distributed all proceeds received by it in realization thereon or from enforcement thereof solely and exclusively pursuant to the provisions of these Protocols and the FPL Agreements.
2. OBLIGATIONS OF COLLATERAL AGENT
2.1 Undertakings of Collateral Agent
(a) Collateral Agent will act as collateral agent for the benefit solely and exclusively of Lender in accordance with Lender’s respective interest in the Collateral as set forth in the Collateral Schedule prepared by Borrower and furnished to Collateral Agent daily and upon its request.
(b) Collateral Agent shall, for the benefit of Lender, perform Collateral Agent’s obligations under these Protocols, and the FPL Agreements, and protect, exercise and enforce the liens in favor of Collateral Agent created under the Agreement and all interests, rights, powers and remedies granted or available to Collateral Agent under, pursuant to or in connection with the FPL Agreements.
(c) On a daily basis, Collateral Agent shall compare the total aggregate amount of collateral that Borrower is required to pledge to Lender and other lenders of securities to Borrower as reflected on the Collateral Schedule to the total aggregate amount of collateral posted by Borrower to the Collateral Account for such day. In the event Borrower’s deposit to the Collateral Account is less than the total aggregate amount of collateral that Borrower is required to pledge for such day, Collateral Agent shall promptly, and in no event later than the close of business, notify Borrower of such shortfall. Collateral Agent shall perform such activities as may be required to facilitate the transfer of any amounts of Margin Excess amount to Borrower as permitted under Section 10.3 of the Agreement.
(d) Collateral Agent shall maintain adequate personnel, including personnel employed by affiliates of Collateral Agent (as described in Section 5.1 of the Protocols), to monitor for and respond to a notice from Lender that Lender is exercising its rights under Section 14.1 of the Agreement in connection with a Default (other than an Act of Insolvency) by Borrower (“Notice of Default”), as such Notice of Default may be submitted to Collateral Agent at 1-800-433-1918 or or RTIDOps@rnt.com as specified in Section 14.1 of the Agreement. Should Collateral Agent change the 1-800 number or email address listed in Section 14.1 of the Agreement, Collateral Agent shall notify Borrower and Lender in writing as promptly as practicable.
(e) Upon receipt of a Notice of Default from Lender pursuant to Section 14.1 of the Agreement, Collateral Agent shall notify Borrower as promptly as practicable of the receipt of such Notice of Default and shall, in accordance with Sections 13.1 and 14.1 of the Agreement, refrain from acting upon such Notice of Default until the expiration of five (5) business days (the “Delay Period”). Upon the expiration of the Delay Period, Collateral Agent shall, unless notified by Lender that Lender is rescinding the Notice of Default, instruct the Banks as to the disposition of the Collateral and apply the proceeds of the Collateral as provided herein. Collateral Agent shall remit to Lender, or cause the Banks to remit to Lender, proceeds of Collateral deliverable to Lender pursuant to Section 2.2 of these Protocols according to Lender’s instruction.
(f) Upon the occurrence of a Default due to an Act of Insolvency by Borrower, of which Collateral Agent shall be deemed to have actual knowledge upon the occurrence of the conditions set forth in Section 2.1(g) of these Protocols, Collateral Agent shall deem a notice of Default to have been submitted by Lender and shall immediately instruct the Banks as to the disposition of the Collateral and apply the proceeds of the Collateral as provided herein. Collateral Agent shall remit to Lender, or cause the Banks to remit to Lender, proceeds of Collateral deliverable to Lender pursuant to Section 2.2 of these Protocols in accordance with Lender’s instructions and the Banks’ credential verification and distribution procedures.
(g) Notwithstanding anything to the contrary contained in these Protocols or the FPL Agreements, Collateral Agent shall not commence any exercise of remedies or otherwise take any action or proceeding against any of the Collateral (other than actions as necessary to protect, exercise or enforce the liens securing the obligations of Borrower under the Agreement) unless and until it has actual knowledge that a Default has occurred. Collateral Agent shall be deemed to have actual knowledge that a Default has occurred (i) upon receipt of a Notice of Default from Lender or notice from Borrower that a Default by Borrower has occurred, or (ii) with respect to an Act of Insolvency by Borrower, upon Collateral Agent’s actual knowledge that an Act of Insolvency by Borrower has occurred. For purposes of the Agreement and these Protocols, Collateral Agent shall be deemed to have actual knowledge of a Default due to an Act of Insolvency by Borrower upon the public filing of any case, proceeding, petition or decree against Borrower under Chapter 7 or Chapter 11 of the Bankruptcy Code, under SIPA or under the Orderly Liquidation Authority under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(h) Upon receipt of such notice or deemed notice, Collateral Agent shall, at the request and direction (or deemed direction) of Lender, instruct the Banks as to the disposition of the Collateral in accordance with the Banks’ credential verification and distribution processes and apply the proceeds of the Collateral as provided herein. Collateral Agent shall cause the Banks to remit to Lender, proceeds of Collateral deliverable to Lender pursuant to Section 2.2 of these Protocols at Lender’s instruction.
2.2 Application of Proceeds
Collateral Agent will apply or direct the application of the proceeds of any collection, sale, foreclosure or other realization upon any Collateral in the following order of application:
(a) First, to the payment in full of the amounts payable to Lender pursuant to the Agreement based on the Collateral Schedule provided by Borrower to Collateral Agent on the date that the Notice of Default was submitted or was deemed to have been submitted (or, if no Collateral Schedule was provided by Borrower to Collateral Agent on such date, on the most recently provided Collateral Schedule prior to such date);
(b) Second, to the payment in full of all other amounts owed to Lender under the Agreement (which, if a Default by Borrower due to an Act of Insolvency has occurred, may be determined on a final basis by the trustee or receiver appointed in connection with an insolvency of Borrower or the court presiding over Borrower’s bankruptcy case);
Then, if and only if a Default by Borrower due to an Act of Insolvency has occurred:
(c) Third, to the Banks on account of their fees and any reasonable legal fees, costs and expenses or other liabilities of any kind incurred by it or any agent thereof to the extent it would be entitled to the same under the Control Agreements;
(d) Fourth, to Collateral Agent on account of Collateral Agent’s fees and any reasonable legal fees, costs and expenses or other liabilities of any kind incurred by Collateral Agent or any agent of Collateral Agent to the extent it would be entitled to the same under the Agreement and these Protocols; and
(e) Finally, to Borrower any surplus remaining after the payment in full in cash of the amounts described in the preceding clauses, its successors or assigns, or as a court of competent jurisdiction may direct.
2.3 Amendment of FPL Agreements
Collateral Agent will not agree or consent to any amendment of a FPL Agreement without the consent of Lender (which, pursuant to Section 25.4 of the Agreement will take the form of negative consent following notice of the amendments to Lender), except that no consent of Lender shall be required for any amendment that has the effect solely of:
(a) adding or maintaining Collateral;
(b) preserving, perfecting or establishing the priority of the security interests in favor of Lender on Collateral or the rights of Collateral Agent therein; or
(c) curing any ambiguity, omission, defect or inconsistency; provided that such amendment does not adversely affect any security interest in Collateral securing the obligations of Borrower to Lender under the FPL Agreements or perfection thereof or the rights of Lender.
3. IMMUNITIES OF COLLATERAL AGENT
3.1 No Implied Duty
Collateral Agent will not have any fiduciary duties, nor will it have responsibilities or obligations other than those expressly assumed by it in the FPL Agreements and these Protocols. No implied duties or responsibilities on behalf of Collateral Agent shall be read into this Agreement or otherwise exist. Collateral Agent will not be required to take any action that is contrary to applicable law or any provision of the FPL Agreements and these Protocols.
3.2 Solicitation of Instructions
(a) Collateral Agent may at any time solicit written confirmatory instructions from Lender or request an order of a court of competent jurisdiction as to any action that it may be requested or required to take, or that it may propose to take, in the performance of any of its obligations under the FPL Agreements or these Protocols and may suspend performance of such obligations as it determines to be appropriate until it receives such instructions or order.
(b) No instruction or direction given to Collateral Agent by Lender that in the sole judgment of Collateral Agent imposes, purports to impose or might reasonably be expected to impose upon Collateral Agent any obligation or liability not set forth in or arising under the FPL Agreements or these Protocols will be binding upon Collateral Agent unless Collateral Agent elects, at its sole option, to accept such direction.
3.3 Limitation of Liability
Collateral Agent will not be responsible or liable for any action taken or omitted to be taken by it under these Protocols, except for its own gross negligence, bad faith, reckless disregard or willful misconduct.
3.4 Documents in Satisfactory Form
Collateral Agent will be entitled to require that all agreements, certificates, opinions, instruments, instructions and other documents at any time submitted to it, including those expressly provided for in the FPL Agreements, be delivered to it in a form and with substantive provisions and information it deems to be reasonably satisfactory.
3.5 Reliance
Collateral Agent may seek and rely upon, and will be fully protected in relying upon, any judicial order or judgment, upon any advice, opinion or statement of legal counsel, independent consultants and other experts selected by it in good faith without being required to determine the authenticity thereof or the correctness of any fact stated therein or the propriety or validity of service thereof. Collateral Agent may act in reliance upon any instrument comporting with the provisions of the FPL Agreements or any signature reasonably believed by it to be genuine and may assume that any person purporting to give notice or receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so.
3.6 Events of Default
(a) As set forth in Section 2.1 of these Protocols, Collateral Agent agrees to monitor for an Act of Insolvency with respect to Borrower and will declare such an Act of Insolvency to have occurred upon the public filing of any case, proceeding, petition or decree against Borrower under Chapter 7 or Chapter 11 of the Bankruptcy Code, under SIPA or under the Orderly Liquidation Authority under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(b) Other than the obligation to monitor for an Act of Insolvency by Borrower as described in paragraph (a), Collateral Agent will not be obligated to inquire as to the occurrence or absence of any Default and will not be affected by or required to act upon any notice or knowledge as to the occurrence of any Default unless and until it receives a Notice of Default from Lender or notice from Borrower stating that a Default has occurred and is continuing. Collateral Agent may rely upon, and be fully protected in relying upon, any such notice which it reasonably believes to be genuine and shall have no obligation to verify the occurrence or continuation of a Default.
3.7 Actions by Collateral Agent
As to any matter not expressly provided for by the FPL Agreements and these Protocols, Collateral Agent may act or refrain from acting as directed by Lender and will be fully protected if it does so, and any action taken, suffered or omitted pursuant to this Section 3.8 of these Protocols shall be binding on Lender.
3.8 Security or Indemnity in Favor of Collateral Agent
Collateral Agent will not be required to advance or expend any funds or otherwise incur any financial liability in the performance of its duties or the exercise of its powers or rights hereunder, including, without limitation, making any filings or other appearances on behalf of Lender or otherwise in any insolvency proceeding, unless it has been provided with security or indemnity reasonably satisfactory to it against any and all liability or expense which may be incurred by it by reason of taking or continuing to take such action.
3.9 Rights of Collateral Agent
If any disagreement among the Parties to the FPL Agreements results in conflicting claims or demands being made in connection with the Collateral and if the terms of the FPL Agreements and these Protocols do not unambiguously and specifically mandate the action Collateral Agent is required to take or not to take in connection therewith under the circumstances then existing, or if Collateral Agent is in doubt as to what action it is required to take or not to take under the FPL Agreements or these Protocols, it will be entitled to refrain from taking any action, and will incur no liability for doing so, until directed otherwise in writing by a request signed jointly by the Parties entitled to give such direction or by order of a court of competent jurisdiction, accompanied by all security or indemnity reasonably requested by Collateral Agent against any and all liability or expense which may be incurred by it in acting upon such direction.
3.10 Limitations on Duty of Collateral Agent in Respect of Collateral
(a) Beyond the exercise of reasonable care in the custody of Collateral in its possession (if any), Collateral Agent will have no duty as to any Collateral in its possession or in the possession of any agent or bailee or any income thereon or as to preservation of rights against prior parties or any other rights pertaining thereto and Collateral Agent will not be responsible for filing any financing or continuation statements or recording any documents or instruments in any public office at any time. Collateral Agent will be deemed to have exercised reasonable care in the custody of the Collateral in its possession (if any) if the Collateral is accorded treatment with substantially the same degree of care which it accords its own property, and Collateral Agent will not be liable or responsible for any loss or diminution in the value of any of the Collateral by reason of the act or omission of any carrier, forwarding agency or other agent or bailee selected by Collateral Agent in good faith.
(b) With respect to the Collateral held by Collateral Agent for the benefit of Lender at a Bank pursuant to the FPL Agreements, Collateral Agent will not be responsible for the validity of the title of Borrower to the Collateral, for insuring the Collateral or for the payment of taxes, charges, assessments or liens upon the Collateral.
4. RESIGNATION AND REMOVAL OF COLLATERAL AGENT
4.1 Resignation or Removal of Collateral Agent
Subject to the appointment of a successor Collateral Agent as provided in Section 4.2 of these Protocols (“Successor Collateral Agent”), and the acceptance of such appointment by the Successor Collateral Agent:
(a) Collateral Agent may resign at any time by giving not less than ninety (90) days’ notice of resignation to Borrower and Lender or be removed by Borrower at any time without notice for failure to perform or for any other reason by giving not less than thirty (30) days’ notice of termination to Collateral Agent and Lender; and
(b) Lender will be notified of the Successor Collateral Agent by Borrower within reasonable time of the effective change.
4.2 Appointment of Successor Collateral Agent
Upon the resignation or removal of Collateral Agent, a Successor Collateral Agent may be appointed by Borrower (at the expense of Borrower) with Lender’s consent (which, pursuant to Section 25.4 of the Agreement will take the form of negative consent following notice of the amendments to Lender) or Collateral Agent may petition a court of competent jurisdiction for appointment of a Successor Collateral Agent, which must be:
(a) A bank or trust company authorized to exercise corporate agency powers; or
(b) Such other institution or entity determined by a court of competent jurisdiction and affirmed by Borrower to be a legally and financially suitable, appropriate and competent successor collateral agent.
Collateral Agent will fulfill its obligations hereunder until a Successor Collateral Agent meeting the requirements of this Section 4.2 of these Protocols has accepted its appointment as Collateral Agent and the provisions of this Section 4.2 of these Protocols have been satisfied.
4.3 Succession
When the person or entity so appointed as Successor Collateral Agent accepts such appointment:
(a) such person or entity will succeed to and become vested with all the rights, powers, privileges and duties of the predecessor Collateral Agent, and the predecessor Collateral Agent will be discharged from its duties and obligations hereunder; and
(b) the predecessor Collateral Agent will (at the expense of Borrower) promptly transfer all liens and Collateral within its possession or control to the possession or control of the Successor Collateral Agent and Collateral Agent and Borrower will each execute instruments and assignments as may be necessary or desirable or reasonably requested by the Successor Collateral Agent to transfer to the Successor Collateral Agent all liens, interests, rights, powers and remedies of the predecessor Collateral Agent in respect of the FPL Agreements and the Collateral.
Thereafter the predecessor Collateral Agent will remain entitled to enforce the immunities granted to it in Section 3 of these Protocols.
4.4 Merger, Conversion or Consolidation of Collateral Agent
Any person or entity into which Collateral Agent may be merged or converted or with which it may be consolidated, or any person or entity resulting from any merger, conversion or consolidation to which Collateral Agent is a party, or any person or entity succeeding to the business of Collateral Agent will be the successor of Collateral Agent pursuant to Section 4.3 of these Protocols, without the execution or filing of any paper with any party hereto or any further act on the part of any of the Parties hereto (except where an instrument of transfer or assignment is required by law to effect such succession), if (a) such person or entity satisfies the eligibility requirements set forth in Section 4.2 of these Protocols and (b) prior to any such merger, conversion or consolidation, Collateral Agent has notified Borrower and Lender thereof in writing and obtained Lender’s consent (which, pursuant to Section 25.4 of the Agreement, will take the form of negative consent following notice of the amendments to Lender) to the appointment of Collateral Agent’s successor in interest by operation of law.
4.5 Event or Occurrence of Bankruptcy or Insolvency of Collateral Agent
In the event that Collateral Agent becomes insolvent as declared pursuant to the public filing of any case, proceeding, petition or decree against Collateral Agent under Chapter 7 or Chapter 11 of the Bankruptcy Code, or any other applicable U.S. law or regulation, Borrower may: (a) appoint a Successor Collateral Agent (at Borrower’s expense) subject to Lender’s consent (which, pursuant to Section 25.4 of the Agreement will take the form of negative consent following notice of the amendments to Lender); (b) petition a court of competent jurisdiction for appointment of a Successor Collateral Agent subject to the terms and qualifications set forth in Section 4.2 of these Protocols, or (c) terminate the FPL Agreements and return the Loaned Securities to Lender. Collateral Agent at all times accepts, holds, administers and enforces the security interest in the Collateral, the Collateral, and any accounts in which the Collateral is held solely and exclusively as the Collateral Agent for the benefit of Lender. Upon the insolvency or bankruptcy of Collateral Agent, the Collateral shall not be treated as property of Collateral Agent or Collateral Agent’s estate and Collateral Agent or the estate of Collateral Agent shall not have any claim or other interest in the Collateral or any account in which the Collateral is held.
5. MISCELLANEOUS COLLATERAL AGENT PROTOCOLS
5.1 Successors and Assigns
Except as provided in Section 4.1 and Section 4.4 of these Protocols, Collateral Agent may not, in its capacity as such, delegate any of its duties or assign any of its rights hereunder, and any attempted delegation or assignment of any such duties or rights will be null and void; provided, however, that Collateral Agent’s subsidiaries and affiliates may perform administrative services on behalf of Collateral Agent pursuant to the Agreement, including these Protocols. All obligations of Collateral Agent hereunder will inure to the sole and exclusive benefit of, and be enforceable by, Lender.
5.2 Delay and Waiver
No failure to exercise, no course of dealing with respect to the exercise of, and no delay in exercising, any right, power or remedy arising under these Protocols or the Agreement will impair any such right, power or remedy or operate as a waiver thereof. No single or partial exercise of any such right, power or remedy will preclude any other or future exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law.
5.3 Compensation; Expenses
Borrower agrees to pay, promptly upon demand:
(a) such compensation to Collateral Agent and its agents as Borrower and Collateral Agent may agree in writing from time to time;
(b) all reasonable fees, expenses and disbursements of legal counsel and any auditors, accountants, consultants or appraisers or other professional advisors and agents engaged by Collateral Agent incurred in connection with the administration, performance or enforcement of the FPL Agreements or these Protocols or any consent, amendment, waiver or other modification relating hereto or thereto and the transactions contemplated hereby or thereby or the exercise of rights or performance of obligations by Collateral Agent hereunder or thereunder;
(c) all reasonable out-of-pocket costs and expenses incurred by Collateral Agent and its agents in creating, perfecting, preserving, releasing or enforcing Collateral Agent’s security interest in the Collateral, including filing and recording fees, expenses and taxes, stamp or documentary taxes and search fees;
(d) after the occurrence of any Default with respect to Borrower, all costs and expenses incurred by Collateral Agent and its agents in connection with the preservation, collection, foreclosure or enforcement of the Collateral or any interest, right, power or remedy of Collateral Agent or in connection with the collection or enforcement of any of the obligations of Borrower to Lender under the FPL Agreements or the proof, protection, administration or resolution of any claim based upon such obligations in any insolvency or liquidation proceeding, including the reasonable fees and disbursements of attorneys, accountants, auditors, consultants, appraisers and other professionals engaged by Collateral Agent or its agents.
The agreements in this Section 5.3 of these Protocols will survive payment of all Borrower’s obligations to Lender and the removal or resignation of Collateral Agent.
5.4 Indemnity
(a) Borrower agrees to defend, indemnify, pay and hold harmless Collateral Agent and each of its directors, officers, partners, trustees, employees, attorneys and agents, and their respective heirs, representatives, successors and assigns (each of the foregoing, an “Indemnitee”) from and against any and all actions taken pursuant to the FPL Agreements and these Protocols (an “Indemnified Liability”); provided, no Indemnitee will be entitled to indemnification hereunder with respect to any Indemnified Liability to the extent such Indemnified Liability has resulted from the gross negligence, bad faith, reckless disregard or willful misconduct of such Indemnitee.
(b) All amounts due under this Section 5.4 of these Protocols will be payable upon demand.
(c) To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in Section 5.4(a) of these Protocols may be unenforceable in whole or in part because they violate any law or public policy, Borrower will contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them.
(d) Borrower will not assert any claim against any Indemnitee, on any theory of liability, for any lost profits or special, indirect or consequential damages or (to the fullest extent a claim for punitive damages may lawfully be waived) any punitive damages arising out of, in connection with, or as a result of, the FPL Agreements or any agreement or instrument or transaction contemplated thereby or relating in any respect to any Indemnified Liability, and (to the fullest extent lawful) Borrower hereby forever waives, releases and agrees not to sue upon any claim for any such lost profits or special, indirect, consequential or (to the fullest extent lawful) punitive damages, whether or not accrued and whether or not known or suspected to exist in its favor.
(e) The agreements in this Section 5.4 of these Protocols will survive repayment of all obligations of Borrower under these Protocols or the Agreement and the removal or resignation of Collateral Agent.
5.5 Amendment
These Protocols may only be amended (a) by Borrower by sending Lender and Collateral Agent a written notice of such amendment, provided that such action does not adversely affect (i) the first priority perfected security interest granted pursuant to the FPL Agreements or (ii) the duties of Collateral Agent to Lender pursuant to these Protocols or (b) with the written consent of all the Parties to the Agreement.
5.6 Governing Law
These Protocols shall be governed by, and construed in accordance with, the laws of the State of New York.