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 securities 2 (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:
1 These 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.
3 If 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.
4 You 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.
5 Please 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.
6 The 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.
12. Conflicts of Interest: As discussed in greater detail in paragraph 2 above, your Loaned Securities may be on-loaned by MSSB to its affiliate, MS & Co., to be used in connection with short sales. Each of MS & Co., MSSB, your Financial Advisor and their associated persons (if applicable) will earn compensation in connection with such use of your Loaned Securities, as described in greater detail in paragraph 6 above. Because short sales may put downward pressure on the price of your Loaned Securities, the interests of MSSB, MS & Co., your Financial Advisor and their associated persons (if applicable) may not be aligned with yours.
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.
7 Retirement 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”).
Among: THE UNDERSIGNED CUSTOMER (“Lender”) and MORGAN STANLEY SMITH BARNEY LLC (“Borrower”) and STABLE CUSTODY GROUP II LLC acting as collateral agent for Lender (“Collateral Agent”) (collectively, the “Parties”).
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.
2.1 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.
3.1 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.
4.1 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.
5.1 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.
6.1 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.
7.1 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.
8.1 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.
9.1 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.
10.1 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.
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.
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.
13.1 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.
14.1 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.
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.