National Securities Corporation
August 23, 2001
CLEARING AGREEMENT
THIS CLEARING AGREEMENT, dated as of this 23rd day of August 2001 (this
"Agreement") between FIRST CLEARING CORPORATION (hereinafter referred to as the
"Clearing Firm") and NATIONAL SECURITIES CORPORATION, a Washington corporation
(hereinafter referred to as the "Introducing Firm"),
WITNESSETH THAT:
WHEREAS, the Introducing Firm is desirous of availing itself of
clearing, execution and other services related to the securities business as
more fully set forth herein; and
WHEREAS, the Clearing Firm desires to extend the foregoing types of
services to the Introducing Firm.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth
and other good and valuable consideration the receipt of which is hereby
acknowledged, the parties hereto hereby covenant and agree as follows:
I. Services
A. Services to be Performed by the Clearing Firm
---------------------------------------------
(i) The Clearing Firm shall execute orders for the Introducing
Firm's customers whose cash or margin accounts have been
accepted by Clearing Firm ("Introduced Accounts"), but only
insofar as such orders are transmitted by the Introducing
Firm to the Clearing Firm. For purposes of the Securities
Investor Protection Act of 1970, as amended, and the
broker-dealer financial responsibility rules promulgated by
the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934, as amended (the
"SEA"), the Introducing Firm's customers who have
Introduced Accounts shall be customers of the Clearing
Firm, and not of the Introducing Firm.
(ii) The Clearing Firm shall generate, prepare and, to the
extent mutually agreed upon by the parties hereto, mail
confirmations respecting each of the Introduced Accounts.
Upon mutual agreement of the parties hereto, the Clearing
Firm may transmit the necessary information via the
available communication facilities in order to effect the
printing of confirmations at the location of the
Introducing Firm.
(iii)The Clearing Firm shall prepare and mail the summary
monthly statements (or quarterly statements if no activity
in any Introduced Account occurs during any quarter covered
by such statement) to every Introduced Account.
(iv) The Clearing Firm shall settle contracts and transactions
in securities (including options to buy or sell securities)
(i) between the Introducing Firm and other brokers and
dealers, (ii) between the Introducing Firm and the
Introduced Accounts, and (iii) between the Introducing Firm
and persons other than the Introduced Accounts or other
brokers and dealers.
(v) The Clearing Firm shall engage in all cashiering functions
for the Introduced Accounts, including the receipt,
delivery and transfer of securities purchased, sold,
borrowed and loaned, receiving and distributing payment
therefor, holding in custody and safekeeping all securities
and payments so received, the handling of margin accounts,
the receipt and distribution of dividends and other
distributions, and the processing of exchange offers,
rights offerings, warrants, tender offers and redemptions
only to the extent the Clearing Firm is timely notified of
such transactions by the appropriate third parties. The
Clearing Firm shall not be responsible for errors caused by
such third parties with respect to such transactions. Upon
mutual agreement of the parties hereto, the cashiering
functions with respect to the receipt of securities and the
making and receiving payment therefore may be relinquished
to the Introducing Firm. All deposits for Introduced
Accounts, which constitute Individual Retirement Account
contributions, must be physically received by the Clearing
Firm (or deposited into the local bank deposit account
established on behalf of the Introducing Firm's customers
pursuant to this Agreement) on the date they are due, or
they may be rejected by the Clearing Firm in its sole
discretion).
(vi) The Clearing Firm shall construct and maintain books and
records of all transactions executed or cleared through it
and not specifically charged to the Introducing Firm
pursuant to the terms of this Agreement, including a daily
record of required margin and other information required by
Rule 432(a) of the rules of the Board of Governors of the
New York Stock Exchange, Inc. (the "Rules"), or by the
constitution, articles of incorporation, by-laws (or
comparable instruments) or rules, regulations or other
instruments corresponding to the foregoing, and the stated
policies or practices of any other securities exchange (the
"Standards"), including but not otherwise limited to any
national securities exchange registered under the SEA
("National Securities Exchange") or the by-laws or rules of
the National Association of Securities Dealers, Inc.
("NASD").
(vii) The Clearing Firm shall report all transactions cleared and
settled for Introducing Firm in Nasdaq NMS and Small Cap
securities, and convertible bonds on behalf of Introducing
Firm in accordance with NASD rules governing the NASD Order
Audit Trail System ("OATS"). The Clearing Firm represents
that it (a) is familiar with OATS rules and the OATS
Reporting Technical Specifications; (b) completed testing,
as described in the OATS Technical Specifications; (c)
agrees to make reports to OATS in compliance with OATS
rules and Technical Specifications, and any subsequent
modifications thereto; (d) agrees that the records of OATS
-2-
data prepared on behalf of Introducing Firm and maintained
by the Clearing Firm is property of the Introducing Firm
and shall be surrendered upon the Introducing Firm's
request; (e) agrees to permit examination of any records of
OATS data prepared on behalf of Introducing Firm and
maintained by the Clearing Firm at any time or from time to
time during normal business hours by representatives of
NASD Regulation and to promptly furnish to NASD Regulation
or its designee true, correct, complete, and current hard
copy of any of these records; (f) has processes and
procedures reasonably designed to ensure compliance with
OATS requirements; and (g) agrees to promptly notify the
Introducing Firm upon the occurrence of any event,
including physical damage to the Clearing Firm's facilities
or legal proceedings involving the Clearing Firm that would
materially affect the Clearing Firm's ability to make OATS
reports on behalf of Introducing Firm. The Clearing Firm's
agreement to undertake OATS reporting on behalf of
Introducing Firm does not relieve Introducing Firm of its
responsibilities under OATS rules or Rules 17a-3 and 17a-4
under the SEA. The Clearing Firm may in its sole and
absolute discretion, upon ninety (90) days written notice,
stop performing OATS reporting on behalf of the Introducing
Firm, and this Agreement shall be deemed to have terminated
under Section K(iv) of Article XVII of this Agreement if
and when the Clearing Firm so stops performing OATS
reporting.
(viii) Introducing Firm authorizes and directs the Clearing Firm
to forward promptly any written customer complaints
received by the Clearing Firm regarding the Introducing
Firm or any of its associated persons relating to any of
the functions and responsibilities allocated to the
Introducing Firm under this Agreement directly to: (a)
Introducing Firm and (b) the Introducing Firm's examining
authority designated under Section 17 of the SEA ("DEA").
In addition, Introducing Firm acknowledges and understands
that the Clearing Firm is required to notify any such
customers in writing that the Clearing Firm has received
the written complaint and that the complaint has been
forwarded to the Introducing Firm and the Introducing
Firm's DEA.
B. Services which shall not be Performed by the Clearing Firm
----------------------------------------------------------
Unless otherwise agreed to in a writing executed by the
parties hereto, the Clearing Firm shall not engage in any of
the following services, nor be responsible for the same, on
behalf of the Introducing Firm:
(a) Accounting, bookkeeping or recordkeeping,
cashiering, or any other services with respect to
any transaction other than securities transactions.
(b) Preparation of the Introducing Firm's payroll
records, financial statements or any analysis or
review thereof or any recommendation relating
thereto.
-3-
(c) Preparation or issuance of checks in payment of the
Introducing Firm's expenses, other than expenses
(incurred by the Clearing Firm on behalf of the
Introducing Firm) pursuant to this Agreement.
(d) Payment of commissions, salaries or other
remuneration to the Introducing Firm's salesmen or
any other employees of the Introducing Firm.
(e) Preparation and filing of reports (the "Reports")
with the SEC, any state securities commission, any
National Securities Exchange, or other securities
exchange or securities association or any other
regulatory or self-regulatory body or agency with
which the Introducing Firm is associated and/or by
which it is regulated. Notwithstanding the
foregoing, the Clearing Firm shall, at the request
of the Introducing Firm, furnish the Introducing
Firm with any necessary information and data
contained in books and records kept by the Clearing
Firm and not otherwise reasonably available to the
Introducing Firm if such information is required in
connection with the preparation and filing of
Reports by the Introducing Firm.
(f) Making and maintaining reports and records required
to be kept by the Introducing Firm by the Currency
and Foreign Transactions Reporting Act of 1970 and
the regulations promulgated pursuant thereto, or any
similar law or regulations enacted or adopted
hereafter.
(g) Obtaining and verifying new account information, and
insuring that such information meets the
requirements of Rule 405(1) of the Rules and any
other Laws, Regulations or applicable Standards as
defined herein.
(h) Maintaining a record of all personal and financial
information concerning any Introduced Account and
all orders received therefrom, and maintaining
documents and agreements executed by an Introduced
Account.
(i) Accepting deposits from the Introducing Firm in the
form of coin or currency of the United States or any
other country.
II. Clearing Charges
A. Incorporation of Appendix. See Appendix I attached hereto and
incorporated herein by reference.
B. No Contravention of Laws and Regulations. In no event shall the
fees charged in this Article II for the above services be in
contravention of the Securities Act of 1933, as amended, the SEA,
the Investment Advisers Act of 1940, as amended, and the Employee
Retirement Income Security Act of 1974, as amended, or any rules
or regulations thereunder, or any other law, rule or regulation,
federal, state or local, or any constitution, by-law, rule,
regulation or instrument corresponding to the foregoing, or stated
policy, rule or practice of any National Securities Exchange or
-4-
other securities exchange or association or other regulatory or
self-regulatory body or agency ("Laws and Regulations"). In the
event that such fees are deemed by the Clearing Firm to be in
contravention of the Laws and Regulations, they shall be replaced
with fees mutually agreed upon by the Clearing Firm and the
Introducing Firm.
III. Interest
Interest income earned through charges on debit balances in any
Introduced Account shall be proprietary to and fully retained by the
Clearing Firm. No interest shall be paid or credit given for any credit
balances which from time to time may be left on deposit with the
Clearing Firm, unless otherwise mutually agreed upon by the Clearing
Firm and the Introducing Firm as noted in Appendix I.
IV. Notations on Statements and Confirmations
The Clearing Firm shall carry all Introduced Accounts in the name of
the Introducing Firm's customer, with a notation on its books and
records and on all monthly or quarterly statements, and confirmation
that such Introduced Accounts were introduced by the Introducing Firm.
The role of the Clearing Firm is to perform only the clearing functions
and related services expressly set forth herein, and the Introducing
Firm shall continue as broker for the Introduced Accounts. Inadvertent
omission of such notations shall not be deemed to constitute a breach
of this Agreement. Copies of the forms covering all of the foregoing
shall be furnished by the Clearing Firm to the Introducing Firm.
V. Opening of Accounts
A. At the time of the opening of each Introduced Account, the
Introducing Firm shall furnish the Clearing Firm with all
financial and personal information concerning such Introduced
Accounts as the Clearing Firm may reasonably require including but
not limited to the tax identification number for each Introduced
Account. At the time of the opening of Introduced Accounts that
are margin accounts, the Introducing Firm shall furnish the
Clearing Firm with executed customers' agreements, hypothecation
agreements and consents to loans of securities (collectively, the
"margin agreement"). With respect to Introduced Accounts which are
Individual Retirement Accounts for which the Clearing Firm serves
as custodian, the Introducing Firm shall furnish such
documentation and information as may be required by the Clearing
Firm. The Clearing Firm shall supply the Introducing Firm with
"new account" and margin agreement forms regarding margin accounts
in sufficient quantities. If any Introduced Account may have been
opened without the Clearing Firm having previously received the
foregoing information or, in the case of a margin account, without
the Clearing Firm having previously received properly executed
margin agreements, failure of the Clearing Firm to receive such
information or margin agreements shall not be deemed to be a
waiver of the information requirements set forth herein. The
Introducing Firm shall make and maintain copies of all agreements
executed by or related to Introduced Accounts, including but not
limited to tax identification number and appropriate certification
-5-
thereof. Upon the written and/or oral request of the Clearing
Firm, the Introducing Firm shall furnish the Clearing Firm with
any other documents and agreements executed by the Introduced
Account on forms which shall be supplied by the Clearing Firm in
sufficient quantities and which may reasonably be required by the
Clearing Firm in connection with the opening, operating or
maintaining of Introduced Accounts. The Clearing Firm may, at its
option, mail margin agreements and/or option agreements directly
to the Introduced Accounts upon notification to the Introducing
Firm and/or require completion of its own margin agreement or new
account form and, if required, option account agreement for an
Introduced Account. The Introducing Firm shall promptly provide
the Clearing Firm with basic data and copies of documents relating
to each of the Introduced Accounts, including, but not otherwise
limited to, copies of records of any receipts of the Introduced
Accounts' funds and/or securities received directly by the
Introducing Firm, as shall be necessary for the Clearing Firm to
discharge its service obligations under this Agreement.
B. All transactions in any Introduced Account are to be considered
cash transactions until such time as the Clearing Firm has
received margin agreements, duly and validly executed in respect
of such Introduced Account. Nevertheless, it is intended that the
Introducing Firm shall obtain executed margin agreements within
fifteen (15) days after the opening of Introduced Accounts that
are margin accounts. In the event that the Clearing Firm has not
received an executed margin agreement within fifteen (15) days of
opening, the Clearing Firm has the right to place limitations on
the trading of the account, including, but not limited to,
restricting the account to a cash basis. In the event credit is
inadvertently extended with respect to such Introduced Accounts,
the Introducing Firm shall indemnify and hold the Clearing Firm
harmless from and against all loss, liability, damage, cost and
expense (including, but not otherwise limited to fees and expenses
of legal counsel arising therefrom); provided, however, that if
the Clearing Firm is the cause of such an inadvertent extension of
credit, the Clearing Firm shall share with the Introducing Firm,
on a reasonable basis, the costs and expenses for which the
Introducing Firm is required by this sentence to indemnify and
hold harmless the Clearing Firm.
C. At the time of the opening of any agency Introduced Account,
including any account for which the Introducing Firm is acting
pursuant to discretionary authority or a power of attorney, the
Introducing Firm shall obtain appropriate written authority from
the Introduced Account and upon request shall furnish the Clearing
Firm with the name of any principal for whom the Introducing Firm
is acting as agent, and written evidence of such authority. With
respect to Delivery vs. Payment Accounts, it is the responsibility
of the Introducing Firm to obtain a written assurance from the
client that all trades shall be settled pursuant to Section 64 of
the NASD Uniform Practices Code and Section 387 of the New York
Stock Exchange ("NYSE").
D. The Introducing Firm shall have the sole and exclusive
responsibility for compliance with Rule 405(3) of the Rules and
shall specifically approve the opening of any new account before
forwarding such account to the Clearing Firm as a potential
Introduced Account. The Clearing Firm, in its reasonable business
-6-
judgment, reserves the right to reject any account which the
Introducing Firm may tender to the Clearing Firm as a potential
Introduced Account within five (5) business days of such tender.
The Clearing Firm also reserves the right to terminate any account
previously accepted by it as an Introduced Account five (5)
business days after giving written notice to the Introducing Firm
of the Clearing Firm's intention to terminate the Introduced
Account.
E. Pursuant to written notification received by the Introducing Firm
and forwarded to the Clearing Firm, any account of the Introducing
Firm may choose to reject the services to be performed by the
Clearing Firm pursuant to this Agreement and thus choose not to be
serviced as an Introduced Account pursuant hereto. Upon notice
from another member organization that an Introduced Account
intends to transfer his account thereto, the Clearing Firm shall
expedite such transfer and shall have the sole and exclusive
responsibility for compliance with Rule 412 of the Rules.
F. It shall be the sole and exclusive responsibility of the
Introducing Firm to make every reasonable effort to ascertain the
essential facts relative to any Introduced Account and any order
therefor, in compliance with Rule 405(1) of the Rules, including
but not otherwise limited to ascertaining the authority of all
orders for Introduced Accounts, and the genuineness of all
certificates, papers and signatures provided by each Introduced
Account. Any investment advice furnished to an Introduced Account
shall be the sole and exclusive responsibility of the Introducing
Firm.
G. The Introducing Firm shall be solely and exclusively responsible
for the handling and supervisory review of any Introduced Accounts
over which the Introducing Firm's partners, officers or employees
have discretionary authority, as required by Rule 408 of the Rules
and any other applicable Laws and Regulations. The Introducing
Firm shall furnish the Clearing Firm with such documentation with
respect thereto as may be requested by the Clearing Firm. The
Introducing Firm hereby agrees to indemnify and hold the Clearing
Firm harmless against any loss, liability (including but not
otherwise limited to liability as to controlling persons and other
liability pursuant to Section 20 of the SEA), damage, cost or
expense (including but not otherwise limited to fees and expenses
of legal counsel) suffered or incurred by the Clearing Firm
directly or indirectly as a result of any liabilities or claims
arising from the exercise by the Introducing Firm, its partners,
officers or employees of discretionary authority over Introduced
Accounts. The Introducing Firm hereby warrants that with regard to
any order or instructions given by the Introducing Firm with
respect to such discretionary accounts, its partners, officers or
employees shall have been fully and properly authorized relative
thereto and that the execution of such orders shall not be in
violation of the Laws and Regulations. Furthermore, the
Introducing Firm hereby agrees to indemnify and hold the Clearing
Firm harmless against any loss, liability (including but not
otherwise limited to liability as to controlling persons and other
liability pursuant to Section 20 of the SEA), damage, cost or
expense (including but not otherwise limited to fees and expenses
of legal counsel) suffered or incurred by the Clearing Firm
-7-
directly or indirectly as a result of any breach of the
Introducing Firm's said warranty. The Introducing Firm hereby
agrees and warrants that it shall maintain appropriate blanket
brokers bond insurance policies covering any and all acts of its
employees, agents and partners, each of which policies shall by
rider name the Clearing Firm as a loss payee thereunder and shall
be adequate to fully protect and indemnify the Clearing Firm
against any loss, liability (including but not otherwise limited
to liability as to controlling persons and other liability
pursuant to Section 20 of the SEA), damage, cost or expense
(including but not otherwise limited to fees and expenses of legal
counsel) which the Clearing Firm may suffer or incur, directly or
indirectly, as a result of any act or omission of the Introducing
Firm's employees, agents or partners. Each such policy shall
further include a rider that it may be cancelled, and that a
material provision thereof may be modified, only upon thirty (30)
days' prior written notice to the Clearing Firm.
H. The Introducing Firm shall have the sole and exclusive
responsibility for the handling and supervisory review of any
Introduced Account for an employee or officer of any member
organization, self-regulatory organization, bank, trust company,
insurance company or other organization engaged in the securities
business, and for compliance with Rule 407 of the Rules relating
thereto. The Introducing Firm shall furnish the Clearing Firm with
such documentation with respect thereto as may be requested by the
Clearing Firm.
I. The Introducing Firm shall have the sole and exclusive
responsibility to insure that those of its customers who become
Introduced Accounts under this Agreement shall not be minors or
subject to those prohibitions existing under the Laws and
Regulations generally relating to the incapacity of any Introduced
Account or any conflict of interest relating to such Introduced
Account.
J. The Introducing Firm shall be solely and exclusively responsible
for the loss, liability, damage, cost or expense (including but
not otherwise limited to fees and expense of legal counsel)
sustained or incurred by either the Introducing Firm or the
Clearing Firm, arising out of or resulting from any orders the
Introducing Firm has taken from Introduced Accounts residing or
being domiciled in jurisdictions in which the Introducing Firm or
its representatives have not been or are no longer authorized or
registered to do business.
K. It shall be the sole and exclusive responsibility of the
Introducing Firm to comply with any and all prospectus delivery
requirements in connection with Introduced Accounts which are
option accounts.
L. In addition to the previous requirements for opening accounts, the
following conditions govern the conversion of the Introduced
Accounts of Introducing Firm, and all positions in such accounts,
from the clearing firm which had previously cleared such accounts
for Introducing Firm to the Clearing Firm pursuant to this
Agreement ("Conversion"). The date as of which Conversion is
completed shall hereinafter be called the "Conversion Date." The
Introducing Firm shall obtain from such customers executed copies
of the Clearing Firm's Margin and Automatic Cash Investment
Agreements (and such other agreements which the Clearing Firm
-8-
shall reasonably require in connection with Conversion). Further,
the Introducing Firm certifies and warrants with respect to such
converted Introduced Accounts that it has obtained with respect to
each Introduced Account the correct taxpayer identification number
for the Introduced Account to the extent required by Section 3406
of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder together with the certifications required
by such Section 3406 and the regulations thereunder. The Clearing
Firm agrees to work diligently and in good faith to complete
Conversion within ninety (90) days after August 23, 2001, which
shall be the effective date of this Agreement (the "Effective
Date"). The Introducing Firm agrees to cooperate diligently and in
good faith with the Clearing Firm to complete Conversion. The
Introducing Firm shall indemnify the Clearing Firm for any loss,
liability, damage, cost or expense (including but not limited to
fees and expenses of legal counsel) sustained or incurred as a
result of the Introducing Firm's failure to fulfill its
obligations under this Section L. The Clearing Firm shall provide
the Introducing Firm sufficient quantities of such Agreements.
Unless specifically requested to the contrary by Clearing Firm,
Introducing Firm shall provide Clearing Firm with copies of all
Introduced Accounts' taxpayer identification number certifications
immediately upon Conversion.
M. Clearing Firm Acting as Executing Broker
If the Clearing Firm agrees in its sole discretion to act as an
"Executing Broker" as such term is understood in that certain
letter dated January 25, 1994 from the Division of Market
Regulation of the SEC, as the same may be amended, modified or
supplemented from time to time (the "No-Action Letter"), then all
terms herein shall have the same meaning as ascribed thereto
either in this Agreement or in the No-Action Letter as the sense
thereof shall require.
The Clearing Firm may, from time to time, execute trades for Prime
Brokerage Accounts in compliance with the requirements of the
No-Action Letter. The No-Action Letter requires, inter alia, that
a contract be executed between the Executing Broker and the Prime
Broker and the Prime Broker and Prime Brokerage Customer prior to
the transaction of any business under this Agreement. Introducing
Broker agrees to arrange for execution by the Prime Broker, and
the Prime Brokerage Customer, of any contracts prepared by and
provided by the Clearing Broker.
Introducing Broker shall promptly notify Clearing Broker of any
trades to be cleared under this Agreement, and such notification
shall be given not later than 5:00 p.m. Eastern standard time on
the day when the trade was executed on an exchange or other market
(the "Trade Date"). Notification shall be given in a mutually
acceptable fashion, in sufficient detail for Clearing Broker to be
able to report and transfer any trade executed by Introducing
Broker on behalf of a Prime Brokerage Account to the appropriate
Prime Broker.
Introducing Broker understands and agrees that if Prime Broker
shall disaffirm or "DK" any trade executed by Introducing Broker
on behalf of a Prime Brokerage Account, Introducing Broker shall
open an account for such Prime Brokerage Account in its range of
-9-
accounts and shall transfer or deliver the trade to such account
at the risk and expense of Introducing Broker to the same extent
as for any account introduced by Introducing Broker pursuant to
this Agreement.
Introducing Broker understands and agrees that all Prime Brokerage
Accounts shall be conducted in accordance with the requirements of
the No-Action Letter and any relevant agreement between
Introducing Broker and a Prime Brokerage Customer, or between
Clearing Broker and the relevant Prime Broker. Introducing Broker
further agrees to supply Clearing Broker with such documents and
information which, from time to time, may be required by Clearing
Broker to carry out the intention of this Section M.
Introducing Broker agrees that it "shall know its customer,"
obtain appropriate documentation, including new account forms,
conduct its own credit check with respect to the Prime Brokerage
Customer, and determine the availability of shares for any short
sales. Introducing Broker shall make arrangements, by written
contract, for the clearance of any disaffirmed trades.
N. Clearing Firm Acting as Prime Broker
If, in its sole discretion, the Clearing Broker agrees to act, in
accordance with the requirements of the No-Action Letter, as a
Prime Broker on behalf of the Introducing Broker or on behalf of a
customer of the Introducing Broker (the "Prime Broker Customer"),
the Prime Broker Customer agrees to execute and comply with a
separate Customer Prime Broker Agreement provided for execution by
the Clearing Broker, which is incorporated by reference herein. In
addition, the Introducing Broker shall execute, or shall arrange
for its Prime Broker Customer, to execute, any other documents
required by the Clearing Broker, or by the No-Action Letter, in
order to carry out the intention of this Article or shall provide
any information which may be required in that connection either by
the Clearing Broker or by the No-Action Letter.
VI. Financial Responsibility
A. Hypothecation of Customer Securities
Clearing Firm shall maintain possession and control of Introducing
Firm's customer funds and securities in accordance with the
broker-dealer financial responsibility rules promulgated under the
SEA and other applicable laws, rules or regulations. Within
limitations imposed by applicable laws, rules and regulations,
securities and other property in Introducing Firm's customer and
proprietary accounts may be pledged and hypothecated by Clearing
Firm from time to time, without notice to Introducing Firm.
Clearing Firm may do so without retaining in its possession or
under its control for delivery a like amount of similar securities
or other property.
-10-
B. PAIB Reserve Computation
(i) The Clearing Firm agrees to perform a computation for
Proprietary Accounts of Introducing Firm assets ("PAIB
reserve computation") in accordance with the customer
reserve computation set forth in Rule 15c3-3 ("customer
reserve formula") modified as follows:
(a) Any credit (including a credit applied to reduce a
debit) that is included in the customer reserve
formula cannot be included as a credit in the PAIB
reserve computation;
(b) Note E(3) to Rule 15c3-3a which reduces debit
balances by 1% under the basic method and
subparagraph (a)(1)(ii)(A) of Rule 15c3-1 under the
SEA which reduces debit balances by 3% under the
alternative method shall not apply; and
(c) Neither Note E (1) to Rule 15c3-3a nor NYSE
Interpretation /04 to Item 10 of Rule 15c3-3a
regarding securities concentration charges is
applicable to the PAIB reserve computation.
(ii) Clearing Firm agrees that all PAIB assets shall be kept
separate and distinct from customer assets under the
customer reserve formula in Rule 15c3-3;
(iii) Clearing Firm agrees that the PAIB reserve computation
shall be prepared within the same time frames as those
prescribed by Rule 15c3-3 for the customer reserve formula;
(iv) Clearing Firm agrees to establish and maintain a separate
"Special Reserve Account for the Exclusive Benefit of
Customers" with a bank in conformity with paragraph (f) of
Rule 15c3-3 ("PAIB Reserve Account"). Cash and/or qualified
securities as defined in the customer reserve formula must
be maintained in the PAIB reserve requirement;
(v) Clearing Firm and Introducing Firm agree that if the PAIB
reserve computation results in a deposit requirement, the
requirement can be satisfied to the extent of any excess
debit in the customer reserve formula on the same date;
(vi) Introducing Firm agrees that commissions receivable and
other receivables of Introducing Firm (excluding clearing
deposits) that are otherwise allowable assets under Rule
15c3-1 shall not be included in the PAIB reserve
computation, and to identify them as receivables on the
books and records of Introducing Firm and as payables on
the books of Clearing Firm;
(vii) Clearing Firm and Introducing Firm agree that the
proprietary account of Introducing Firm that is a
guaranteed subsidiary of a clearing firm or who guarantees
a clearing firm is to be excluded from the PAIB reserve
computation; and
-11-
(viii) Introducing Firm understands and agrees that upon discovery
that any deposit made to the PAIB Reserve Account did not
satisfy its deposit requirement, the Clearing Firm shall by
facsimile or telegram immediately notify its designated
examining authority, the SEC and the Introducing Firm.
Unless a corrective plan is found acceptable by the SEC and
the designated examining authority, Clearing Firm shall
provide written notification within five (5) business days
of the date of discovery to Introducing Firm that PAIB
assets held by Clearing Firm shall not be deemed allowable
assets for net capital purposes. These assets shall become
non-allowable on the last day of the subsequent month
unless the deposit requirement with respect to those assets
is satisfied.
VII. Concentration of Positions
Introducing Firm shall ensure that its net aggregate proprietary
and customer positions for any particular security (and/or options
or warrants thereon) ("net aggregate position of Introduced
Accounts") carried by the Clearing Firm for Introducing Firm shall
not exceed such limits as may be set by Clearing Firm
("concentration limits") in a schedule of concentration limits, as
amended by Clearing Firm from time to time and communicated in
writing to the Introducing Firm. The Clearing Firm may at any time
refuse to execute, clear and/or settle transactions that would
otherwise increase the Introducing Firm's net aggregate position
of Introduced Accounts in excess of the applicable concentration
limit. The Clearing Firm also may at any time require the
Introducing Firm to promptly take steps to reduce the Introducing
Firm's net aggregate position of Introduced Accounts below the
applicable concentration limit. If such position is not so reduced
by the Introducing Firm in a timely manner as determined by the
Clearing Firm and promptly communicated to the Introducing Firm,
the Clearing Firm in its sole and absolute discretion and without
further notice, is authorized to sell or otherwise dispose of (in
the case of a net aggregate long position), or purchase or
otherwise acquire (in the case of a net aggregate short position)
such securities (and/or options or warrants thereon) in an amount
and manner sufficient to reduce the net aggregate position of
Introduced Accounts below the applicable concentration limit.
Introducing Firm agrees to indemnify and hold the Clearing Firm
harmless from and against any loss, liability, damage, cost or
expense, penalties or taxes, (including but not otherwise limited
to fees and expenses of legal counsel) arising out of or resulting
from Introducing Firm's failure to comply with the terms of this
Article VII.
VIII. Transactions and Margin
A. It is understood that with respect to Introduced Accounts
which are margin accounts the Clearing Firm is responsible
for compliance with Regulation T, 12 C.F.R. Part 220, the
federal margin regulation promulgated by the Board of
Governors of the Federal Reserve System (the "Board"), and
any interpretive ruling issued by the Board, and letter
rulings of the Federal Reserve Bank of New York, Rules and
Interpretations of the NYSE and any other applicable margin
and margin maintenance requirements of the Laws and
Regulations. The Introducing Firm is responsible to the
Clearing Firm for the collection of the margin required to
support each transaction for, and to maintain margin in,
each Introduced Account, in conformity with the above
margin and margin maintenance requirements. After such
-12-
initial margin on each transaction has been received,
maintenance margin calls shall be generated by the Clearing
Firm and made by the Clearing Firm. The Clearing Firm shall
have the right to modify, in its sole discretion, any
margin requirements of any Introduced Account from time to
time so that the Clearing Firm may call for additional
margin. Therefore, the Clearing Firm shall be the sole
judge as to the amount of margin to be required of and
maintained by Introduced Accounts, which may be imposed by
security or specific Introduced Accounts and need not be of
general application. The Clearing Firm shall impose no fees
on the Introducing Firm, other than any fees or charges
imposed directly by a regulatory body with regard to margin
extensions granted by the Clearing Firm pursuant to written
requests from a principal of the Introducing Firm.
B. Subject to Article XIII of this Agreement, the Introducing
Firm shall be solely and exclusively responsible to the
Clearing Firm on all transactions for any loss, liability,
damage, cost or expense (including but not otherwise
limited to fees and expenses of legal counsel) incurred or
sustained by the Introducing Firm or the Clearing Firm as a
result of the failure of any Introduced Account to make
timely payment for the securities purchased by it or timely
and good delivery of securities sold for it, or timely
compliance by it with margin or margin maintenance calls
(provided that the Clearing Firm has timely issued under
its then current policies such call and given notice
thereof to the Introducing Firm), whether or not any margin
extensions have been granted by the Clearing Firm pursuant
to the request of the Introducing Firm, except that no
interest shall be charged by the Clearing Firm for cash
shorts in Introduced Accounts. The Introducing Firm agrees
to be solely and exclusively responsible to the Clearing
Firm for any loss or liability whatsoever should any check
or draft given to the Clearing Firm by any of the
Introduced Accounts be returned to the Clearing Firm
unpaid. The Introducing Firm furthermore agrees to be
solely and exclusively responsible for the payment and
delivery of all "when issued" or "when distributed"
transactions which the Clearing Firm may accept, forward or
execute for Introduced Accounts.
C. On all over-the-counter transactions for Introduced
Accounts, the Introducing Firm shall furnish the Clearing
Firm with the names of the respective purchasing and
selling broker/dealers (except as otherwise provided in
Section D of this Article VIII, as set forth below), the
names of the purchasing and selling customers, and the
wholesale and retail purchase and sale prices and any other
information required by the Clearing Firm.
D. Should the Introducing Firm give an order in an
over-the-counter security to the Clearing Firm and the
counter party is left to the Clearing Firm's discretion,
the Clearing Firm shall assume the responsibility of paying
the Introducing Firm that which the counter party has
failed to pay pursuant to the over-the-counter transaction
("del credere risk"). In case the Introducing Firm executes
its own over-the-counter order or designates the counter
party, it shall be understood that in the event the
over-the-counter dealer with whom the Introducing Firm
dealt or whom it designated fails to live up to its part of
-13-
the transaction, the Introducing Firm shall assume the del
credere risk and reimburse the Clearing Firm for any loss
sustained thereby.
E. The Introducing Firm shall be solely and exclusively
responsible for approving all orders for the Introduced
Accounts and for establishing procedures to insure that
such approved orders are transmitted properly to the
Clearing Firm for execution. The Clearing Firm, in its
reasonable business judgement, reserves the right to reject
any order which the Introducing Firm may transmit to the
Clearing Firm for execution.
F. The Introducing Firm shall be solely and exclusively
responsible for the supervisory review of all orders for
the Introduced Accounts and shall insure that any orders
and instructions given by it or any of its employees to the
Clearing Firm pursuant to the terms of this Agreement shall
have been properly authorized in advance.
G. The Introducing Firm shall be solely and exclusively
responsible for sales and purchases for the Introduced
Accounts that may create or result in a violation of any of
the Laws and Regulations, Rules or Standards.
H. All transactions pursuant to the Terms of this Agreement
shall be subject to the constitution, rules, by-laws,
regulations, stated policies, practices, and customs and
any modifications thereof of any National Securities
Exchange or other securities exchange or market and its
clearing house, if any, where executed, and the Laws and
Regulations. It is understood that the Introducing Firm
assumes sole and exclusive responsibility for compliance
with the Laws and Regulations in the same manner and to the
same degree as if the Introducing Firm were performing the
services for the Introduced Accounts that have been
performed by the Clearing Firm pursuant to this Agreement,
except insofar as the Clearing Firm may, pursuant to
Section D of this Article VIII, as set forth above, select
the counter party to a particular transaction.
I. All Transactions hereto between the Introducing Firm and
the Clearing Firm with respect to orders given by or for
the Introduced Accounts and cleared through the Clearing
Firm shall be subject to the provisions of this Agreement.
IX. Supervisory Responsibility
A. The Introducing Firm shall have the sole and exclusive
responsibility for the review of all Introduced Accounts,
including an introduced IRA account for which the Clearing
Firm serves as custodian, and for compliance with any
supervisory responsibility under Rule 405(2) of the Rules,
including but not otherwise limited to matters involving
the investments made by the Introduced Accounts, the
reasonable basis for recommendations made to Introduced
Accounts, and the frequency of trading in the Introductory
Accounts, whether or not such transactions are instituted
by the Introducing Firm, its partners, employees or any
registered investment advisor.
-14-
B. The Introducing Firm and the Clearing Firm shall each be
responsible for compliance with any supervisory procedures
under Rules 342 and 351 of the Rules and, to the extent
applicable, any other provisions of the Laws and
Regulations, including but not otherwise limited to
supervising the activities and training of their respective
registered representatives, as well as all of their other
respective employees in the performance of functions
specifically allocated to them pursuant to the terms of
this Agreement.
C. Introducing Firm shall maintain compliance and supervisory
procedures which are adequate to assure compliance with
restricted/control stock requirements.
X. Information to be Provided by the Introducing Firm
A. The Introducing Firm shall provide the Clearing Firm with
copies of all financial information and reports filed by
the Introducing Firm with the NYSE (if a member), the NASD,
the SEC, and any other National Securities Exchange (where
a member) (including but not otherwise limited to monthly
and quarterly Financial and Operational Combined Uniform
Single Reports, i.e., "FOCUS" Reports) simultaneous with
the filing therewith.
B. The Introducing Firm shall submit to the Clearing Firm on a
monthly basis or, if so requested by the Clearing Firm, at
more frequent intervals, information and reports relating
to the Introducing Firm's financial integrity, including
but not otherwise limited to information regarding the
Introducing Firm's aggregate indebtedness ratio and net
capital.
C. The Introducing Firm shall provide the Clearing Firm with
all appropriate data in its possession pertinent to the
proper performance and supervision of any function or
responsibility specifically allocated to the Clearing Firm
pursuant to the terms of this Agreement.
D. The Introducing Firm shall provide the Clearing Firm with
any amendment or supplement to the Form BD of the
Introducing Firm.
XI. Information to be Provided by the Clearing Firm
A. The Clearing Firm shall provide the Introducing Firm with
all appropriate data in its possession pertinent to the
proper performance and supervision of any function
specifically allocated to the Introducing Firm pursuant to
the terms of this Agreement.
B. No later than December 31, 2001, and thereafter within ten
(10) business days prior to each anniversary of such date,
Clearing Firm shall provide Introducing Firm with a list or
description of all reports (exception and other types of
reports) which Clearing Firm offers to Introducing Firm to
assist Introducing Firm in supervising Introducing Firm's
activities, monitoring Introducing Firm's customer accounts
and carrying out its functions and responsibilities under
the Clearing Agreement. After receipt of this information,
Introducing Firm agrees to promptly notify Clearing Firm in
writing of the specific reports offered by Clearing Firm
-15-
that Introducing Firm requires to supervise and monitor its
customer accounts.
C.
As part of its books and records, Clearing Firm shall
retain copies of the reports requested by or provided to
Introducing Firm by Clearing Firm (or alternatively,
Clearing Firm may retain the data from which such original
report was produced and at the request of Introducing
Firm's DEA, Clearing Firm can either recreate the report or
provide the data and the data formatting that was used by
Clearing Firm to prepare the report).
D.
Each year, no later than July 31, Clearing Firm shall
provide written notification to the chief executive officer
and chief compliance officer of Introducing Firm (with a
copy of such notification to the Introducing Firm's DEA) of
the reports offered by Clearing Firm and the reports
requested by or supplied to Introducing Firm as of the date
of such notification.
XII. Customer Notification and Correspondence
A.
The Introducing Firm shall be solely and exclusively
responsible for informing its customers in a written
correspondence, the form and substance of which shall be
mutually agreed upon, prior to the Conversion Date, as to
the general nature of the services to be provided by the
Clearing Firm pursuant to this Agreement and the right of
such customers to reject the services provided herein. Any
new customers of the Introducing Firm shall be so informed
on or about the date such customers become Introduced
Accounts by the Clearing Firm.
B.
The Introducing Firm shall inform its customers pursuant to
such written correspondence that all inquiries and
correspondence should be directed to the Introducing Firm.
All customer correspondence shall be reviewed and responded
to by the party responsible for the specific area to which
the inquiry or complaint relates pursuant to the terms of
this Agreement. In the event such correspondence is not
directed to such party originally, the Introducing Firm or
Clearing Firm shall expeditiously forward such
correspondence to the appropriate party.
XIII. Errors, Controversies and Indemnities
A. Errors, misunderstandings or controversies, except those
specifically otherwise covered in this Agreement, between
the Introduced Accounts and the Introducing Firm or any of
its employees, which shall arise out of acts or omissions
of the Introducing Firm or any of its employees (including,
without limiting the foregoing, the failure of the
Introducing Firm to deliver promptly to the Clearing Firm
any instructions received by the Introducing Firm from an
Introduced Account with respect to the voting, tender or
exchange of shares held in such Introduced Account), shall
be the sole and exclusive responsibility and liability of
the Introducing Firm. In the event, however, that by reason
of such error, misunderstanding or controversy, the
Introducing Firm in its discretion deems it advisable to
commence an action or proceeding against an Introduced
Account, the Introducing Firm shall indemnify and hold the
Clearing Firm harmless from any loss, liability, damage,
-16-
cost or expense, penalties or taxes (including but not
otherwise limited to fees and expenses of legal counsel)
which the Clearing Firm may incur or sustain in connection
therewith or under any settlement thereof. If such error,
misunderstanding or controversy shall result in the
bringing of an action or proceeding against the Clearing
Firm, the Introducing Firm shall indemnify and hold the
Clearing Firm harmless from any loss, liability, damage,
cost or expense, penalties or taxes, (including but not
otherwise limited to fees and expenses of legal counsel)
which the Clearing Firm may incur or sustain in connection
therewith or under any settlement thereof.
B. Errors, misunderstandings or controversies, except those
specifically otherwise covered in this Agreement, between
the Introduced Accounts and the Introducing Firm or any of
its employees, which shall arise out of acts or omissions
of the Clearing Firm or any of its employees, shall be the
sole and exclusive responsibility and liability of the
Clearing Firm. In the event, however, that by reason of
such error, misunderstanding or controversy, the Clearing
Firm in its discretion deems it advisable to commence an
action or proceeding against an Introduced Account, the
Clearing Firm shall indemnify and hold the Introducing Firm
harmless from any loss, liability, damage, cost or expense,
penalties or taxes, (including but not otherwise limited to
fees and expenses of legal counsel) which the Introducing
Firm may incur or sustain in connection therewith or under
any settlement thereof. If such error, misunderstanding or
controversy shall result in the bringing of an action or
proceeding against the Introducing Firm, the Clearing Firm
shall indemnify and hold the Introducing Firm harmless from
any loss, liability, damage, cost or expense, penalties or
taxes, (including but not otherwise limited to fees and
expenses of legal counsel) which the Introducing Firm may
incur or sustain in connection therewith or under any
settlement thereof.
C. The Clearing Firm and the Introducing Firm both agree to
indemnify the other and hold the other harmless from and
against any loss, liability, damage, cost or expense,
penalties or taxes, (including but not otherwise limited to
fees and expenses of legal counsel) arising out of or
resulting from any failure by the indemnifying party or any
of its employees to carry out fully the duties and
responsibilities placed upon the indemnifying party by
state or federal law, rule or regulation, or the rules and
regulations of any stock exchange or other applicable
self-regulatory organization, or assigned to the
indemnifying party herein (including, without limitation,
the indemnification obligations contained in this
Agreement) or any breach of any representation or warranty
herein by the indemnifying party under this Agreement. The
Introducing Firm hereby agrees to indemnify and hold the
Clearing Firm harmless from and against any loss,
liability, damage, cost or expense, penalties or taxes,
(including but not otherwise limited to fees and expenses
of legal counsel) sustained or incurred in connection
herewith in the event any Introduced Account fails to meet
any initial margin call or maintenance call, in conformity
with Article VIII hereof.
-17-
D. The indemnification provisions in this Agreement shall
remain operative and in full force and effect, regardless
of the termination of this Agreement, and shall survive any
such termination.
E. Introducing Firm agrees to maintain, and to provide a
certificate of insurance thereof to the Clearing Firm,
brokers indemnity bond insurance providing coverage for an
Introducing Firm that acts in the capacity of market maker
equal to the greater of (a) $1,000,000 or (b) the minimum
coverage as required under the rules of whichever or both
of NASD or NYSE are applicable to it ("Applicable Rules"),
and for all other Introducing Firms, the minimum coverage
as required under Applicable Rules and other applicable law
(or other such reasonable indemnity bond insurance
requirements as communicated in writing upon thirty (30)
days notice to Introducing Firm) covering any and all acts
of its employees, agents and partners, listing the Clearing
Firm as an additional insured party and permitting the
Clearing Firm to assume the policy in the event of the
Introducing Firm ceasing operations. Such indemnity bond
insurance shall contain a rider or provision whereby the
insurance company shall notify the Clearing Firm, as an
insured party, of any modification to or claims under such
policy by the Introducing Firm.
XIV. Representations, Warranties and Covenants
A. The Introducing Firm represents, warrants and covenants as
follows:
(i) The Introducing Firm will (a) maintain at all times
a net capital computed in accordance with Rule
15c3-1 of at least the amount set forth in the next
sentence of this paragraph (i) of Section A in
excess of the minimum net capital required by such
rule and (b) immediately notify the Clearing Firm
when (i) its net capital is less than the applicable
amount set forth in (a) above, (ii) its Aggregate
Indebtedness Ratio reaches or exceeds 10 to 1 or
(iii) if the Introducing Firm has elected to operate
under paragraph (f) of Rule 15c3-1 of the Securities
Exchange Act of 1934, as amended, when its net
capital is less than 5% of aggregate debit items
computed in accordance with Rule 15c3-3. The amount
required by clause (a) of the immediately preceding
sentence shall be One Million Dollars ($1,000,000)
until the Third Advance as defined in the Promissory
Note shall have been made, at which time such
required amount shall be One Million Five Hundred
Thousand Dollars ($1,500,000); provided, however,
that when, and only so long as, the principal amount
outstanding on the Promissory Note after the Third
Advance shall have been made shall have been reduced
to not more than Two Million Dollars ($2,000,000),
such required amount shall be One Million Dollars
($1,000,000), otherwise it shall be One Million Five
Hundred Thousand Dollars ($1,500,000). The
applicable amount identified in the immediately
preceding sentence in excess of such minimum net
capital shall be the "Clearing Agreement Excess Net
Capital" which is described and defined in the
hereinafter defined "Promissory Note."
-18-
(ii)
The Introducing Firm is a member in good standing of
the NASD or other self-regulatory organization. The
Introducing Firm shall promptly notify the Clearing
Firm of any additional exchange memberships or
affiliations. The Introducing Firm shall also comply
with whatever non-member access rules have been
promulgated by any National Securities Exchange or
any other securities exchange of which it is not a
member.
(iii)
The Introducing Firm and its representatives are and
during the term of this Agreement shall remain duly
registered or licensed and in good standing as a
broker/dealer and registered representatives under
all applicable Laws and Regulations and, except as
relief may be granted by the SEC pursuant to Rule
19h-1 of the SEA, shall not be subject to a
"statutory disqualification" as such term is defined
in Section 3(a)(39) of the SEA.
(iv)
The Introducing Firm has all the requisite authority
in conformity with all applicable Laws and
Regulations to enter into this Agreement and to
retain the services of the Clearing Firm in
accordance with the terms hereof.
(v)
The Introducing Firm is in compliance, and during
the term of this Agreement shall remain in
compliance with (i) the capital and financial
reporting requirements of every National Securities
Exchange or other securities exchange and/or
securities association of which the Introducing Firm
is a member, (ii) the capital requirements of every
state in which the Introducing Firm is licensed as a
broker/dealer. In the event that the Introducing
Firm is notified at anytime by any regulatory
authority of a net capital deficiency or similar
notice, a copy shall be provided immediately to the
Clearing Firm. The Introducing Firm, in addition,
shall provide to the Clearing Firm copies of any and
all net capital deficiency notices or reports that
the Introducing Firm files with such regulatory
authorities including, but not limited to, notices
and reports made pursuant to section 17a(11) of the
SEA.
(vi)
The Introducing Firm shall not generate and/or
prepare any statements, billings or confirmations
respecting any Introduced Account unless expressly
so instructed in writing by the Clearing Firm.
(vii)
The Introducing Firm shall keep confidential any
information it may acquire as a result of this
Agreement regarding the business and affairs of the
Clearing Firm, which requirement shall survive the
life of this Agreement.
(viii) The Introducing Firm agrees that it shall not use
the name of or make any representations on behalf of
the Clearing Firm or any of its affiliates without
the express written consent of the Clearing Firm.
(ix) The Introducing Firm shall at all times comply with
the annual and periodic reporting requirements of
Rule 17a-5 of the SEA and, in addition, shall
-19-
provide the Clearing Firm copies of any and all
reports filed pursuant to such Rule 17a-5 within
twenty four (24) hours of the date on which such
reports are filed with the SEC.
(x) The Introducing Firm shall at no time be subject to
an order of the SEC pursuant to Section 15(b)(4) of
the SEA.
(xi) The Introducing Firm shall keep confidential, and
not share with anyone other than the Clearing Firm
and others entitled thereby by applicable law, any
and all proprietary information relating to the
Introducing Firm, including but not limited to all
or any portion of the names, addresses and taxpayer
identification numbers of any one or more or all of
(a) the brokers, dealers and investment advisers of
the Introducing Firm (whether they be independent
contractors or employees), and (b) the customers of
the Introducing Firm.
(xii) The Introducing Firm shall not obtain services of
the type being provided by the Clearing Firm under
this Agreement from any party other than the
Clearing Firm; provided that (i) the Clearing Firm
acknowledges that the Introducing Firm obtains as of
the date of this Agreement clearing services from
other clearing firms previously disclosed in writing
to the Clearing Firm and shall use its reasonable
efforts to convert at least ninety percent (90%) of
its cleared trades to the Clearing Firm in a
commercially reasonable manner in a period not to
exceed twelve (12) months from the date of this
Agreement, and (ii) the Introducing Firm shall, from
time to time, acquire the securities or assets of
other firms which obtain clearing services from
entities other than the Clearing Firm and the
Introducing Firm shall use its reasonable efforts to
convert each such firm to the Clearing Firm in a
commercially reasonable manner in a period not to
exceed twelve (12) months from the date of
acquisition of the securities or assets of that
firm.
(xiii) The Introducing Firm is organized under the laws of
the State of Washington and has not changed the
jurisdiction of its organization within the five (5)
years preceding the date hereof except as previously
reported in writing to the Clearing Firm. The
principal place of business of the Introducing Firm
is at 1001 Fourth Avenue, Suite 2200, Seattle,
Washington 98154. The Introducing Firm's
organizational identification number assigned by the
jurisdiction of its organization is 178077585.
B. The Clearing Firm represents, warrants and covenants as
follows:
(i) The Clearing Firm is a member in good standing of
the NASD and the NYSE
(ii) The Clearing Firm is and during the term of this
Agreement shall remain duly licensed and in good
standing as a broker/dealer under all applicable
Laws and Regulations.
-20-
(iii) The Clearing Firm has all the requisite authority,
in conformity with all applicable Laws and
Regulations, to enter into and perform this
Agreement.
(iv) The Clearing Firm is in compliance, and during the
term of this Agreement shall remain in compliance
with (i) the capital and financial and other
reporting requirements of every National Securities
Exchange and/or other securities exchange or
association of which it is a member, (ii) the
capital requirements of the SEC, and (iii) the
capital requirements of every state in which it is
licensed as a broker/dealer.
(v) The Clearing Firm represents and warrants that the
names and addresses of the Introducing Firm's
customers which have or which may come to its
attention in connection with the clearing and
related functions it has assumed under this
Agreement are confidential and shall not be utilized
by the Clearing Firm except in connection with the
functions performed by the Clearing Firm pursuant to
this Agreement. The Clearing Firm shall send no
written information to such customers other than
statements, bills or notices of transactions in
connection with its role as the Clearing Firm.
Notwithstanding the foregoing, should a client who
has an Introduced Account request, on an unsolicited
basis, that the Clearing Firm or an organization
affiliated with the Clearing Firm become its broker,
acceptance of such client by the Clearing Firm or
such affiliated organization shall in no way violate
this representation and warranty, nor result in a
breach of this Agreement.
(vi) The Clearing Firm shall keep confidential any
information it may acquire as a result of this
Agreement regarding the business and affairs of the
Introducing Firm, which requirement shall survive
the life of this Agreement.
XV. Termination - Events of Default
Notwithstanding any provision in this Agreement, the following events or
occurrences shall constitute an Event of Default under this Agreement
(each, an "Event of Default"):
(1) the Introducing Firm shall fail to maintain net capital set forth
in Section A(i)(a) of Article XIV; or
(2) either the Clearing Firm or the Introducing Firm shall fail to
perform or observe any term, covenant or condition to be performed
or observed by it under this Agreement and such failure shall
continue to be unremedied for a period of thirty (30) days (ten
(10) business days in the case of a violation or any
representation, warranty or covenant set forth above in Sections
A(viii), A(ix) and A(x) of Article XIV) after written notice from
the non-defaulting party to the defaulting party specifying the
failure and demanding that the same be remedied; or
-21-
(3) any representation or warranty made by either the Clearing Firm or
the Introducing Firm herein shall prove to be incorrect at any
time in any material respect; or
(4) a receiver, liquidator or trustee of either the Clearing Firm or
the Introducing Firm, or of its property, held by either party is
appointed by court order and such order remains in effect for more
than thirty (30) days; or either the Clearing Firm or the
Introducing Firm is adjudicated bankrupt or insolvent; or any of
its property is sequestered by court order and such order remains
in effect for more than thirty (30) days; or a petition is filed
against either the Clearing Firm or the Introducing Firm under any
bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt, dissolution or liquidation law of any jurisdiction,
whether now or hereafter in effect, and is not dismissed within
thirty (30) days after such filing; or
(5) either the Clearing Firm or the Introducing Firm files a petition
in voluntary bankruptcy or seeking relief under any provision of
any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect, or consents to
the filing of any petition against it under any such law; or
(6) either the Clearing Firm or the Introducing Firm makes an
assignment for the benefit of its creditors, or admits in writing
its inability to pay its debts generally as they become due, or
consents to the appointment of a receiver, trustee or liquidator
of either the Clearing Firm or the Introducing Firm, or of any
property held by either party; or
(7) any Event of Default occurs under the Promissory Note of even date
herewith made by Olympic Cascade Financial Corporation in the
amount of Six Million Dollars ($6,000,000) payable to the order of
the Clearing Firm (the "Promissory Note"); or
(8) any change in the financial condition of the Introducing Firm
occurs which the Clearing Firm reasonably determines to be
material and adverse in that it causes the Clearing Firm to
question, in the reasonable exercise of its judgment, whether the
Introducing Firm will be able to meet its obligations under this
Agreement.
XVI. Additional Provisions as to Remedies
A. Upon the occurrence of any such Event of Default, the
non-defaulting party shall have the right, exercisable at its
option by notice to the defaulting party, to declare that this
Agreement shall be thereby terminated and such termination shall
be effective as of the date such notice has been sent or
communicated to the defaulting party. Notwithstanding the
foregoing, if a notice of termination is given upon the occurrence
of any such Event of Default with respect to the Introducing Firm,
the Clearing Firm shall remain entitled to exercise any or all of
the rights and remedies provided it by this Agreement (including
but not limited to those with respect to indemnities) with respect
to acts, inactions and omissions in the period prior to such
-2-
termination, the Introducing Firm and the Clearing Firm expressly
agreeing that all such rights, remedies and indemnities shall
survive the termination of this Agreement and remain in full force
and effect.
B. Without limitation upon the foregoing, upon the occurrence of an
Event of Default with respect to the Introducing Firm, the
Clearing Firm shall have the right, exercisable at its option, to
offset any and all liabilities, costs and expenses due it from the
Introducing Firm which remain unpaid as of the date of such Event
of Default against the amount in the Deposit Account (hereinafter
defined in Section A of Article XVIII) and the commission revenue
and proprietary account balances then in the possession of the
Clearing Firm.
C. Without limitation upon any of the Clearing Firm's other rights
and remedies under this Agreement (including but not limited to
rights to be indemnified by the Introducing Firm), if at any time
and from time to time (1) the Clearing Firm has a claim against
the Introducing Firm which arises in any manner under this
Agreement, (2) an Introduced Account has made a claim against the
Clearing Firm which arises as a consequence of the Introducing
Firm's actions, inactions or omissions under this Agreement, or
(3) the Introducing Firm is otherwise obligated to indemnify the
Clearing Firm under this Agreement, and the Introducing Firm fails
or refuses to satisfy its obligation under any one or more or all
of clause (1), (2) or (3) of this Section C (the obligation
arising with respect to each such failure or refusal being
hereinafter called an "Outstanding Obligation") within five (5)
business days after receipt of notice from the Clearing Firm of
that Outstanding Obligation, the Clearing Firm shall have the
right, without notice or demand, to (i) deduct the amount of that
Outstanding Obligation from commissions owed to the Introducing
Firm at that time or thereafter and pay the amount so deducted to
satisfy that Outstanding Obligation, and (ii) if the amount of
such commissions are not at any one time sufficient to satisfy
that Outstanding Obligation, withdraw such amount from any one or
more of the Deposit Account and the Introducing Firm's proprietary
accounts and pay the amount so withdrawn to satisfy that
Outstanding Obligation. After the satisfaction of that Outstanding
Obligation, the Introducing Firm shall promptly deposit additional
cash into the Deposit Account so that the principal balance
thereof equals the amount hereinafter required by Section A of
Article XVIII.
D. The enumeration in this Agreement of specific remedies shall not
be exclusive of any other remedies. Any delay or failure by any
party to this Agreement to exercise any right, power, remedy or
privilege herein contained, or now or hereafter existing under any
applicable statute or law, shall not be construed to be a waiver
of such right, power, remedy or privilege or to limit the exercise
of such right, power, remedy or privilege. No single, partial or
other exercise of any such right, power, remedy or privilege shall
preclude the further exercise thereof or the exercise of any other
right, power, remedy or privilege.
XVII. Miscellaneous
-23-
A. As of the Conversion Date, the Clearing Firm shall not convert to
its records as Introduced Accounts customer accounts of the
Introducing Firm that are partially or totally unsecured,
securities in the name of the Introducing Firm's customers, or
legal transfer securities (securities in the name of estates,
trust, joint ownership and such).
B. The Clearing Firm shall have the power to place open orders as
instructed by the Introducing Firm as of the Conversion Date, and
appropriate adjustments shall be made by the Clearing Firm to
reflect that the Clearing Firm has acted as broker on the open
orders with specialists on any National Securities Exchange or
other securities exchange.
C. The Clearing Firm shall have the power to effect appropriate
adjustments with respect to pending dividends and other
distributions from the Conversion Date through the last payable
date of such pending dividends.
D. The Introducing Firm shall be responsible for providing annual
dividend and distribution information as contained in IRS Form
1087 and any other information required to be reported by federal,
state, or local tax laws, rules or regulations, to its customers
until the Conversion Date, whereupon the Clearing Firm shall
assume this function as to Introduced Accounts.
E. The Clearing Firm shall have the power to allocate and make
appropriate adjustments for fails, reorganization accounts, other
work in process accounts, and coverages relating to accounts of
the customers of the Introducing Firm that have become Introduced
Accounts pursuant to the terms of this Agreement.
F. The Introducing Firm shall assume all liabilities in connection
with uncompared principal trades. The Introducing Firm shall also
assume all liabilities in connection with the bad debts of all
Introduced Accounts. Unsecured debits in the Introduced Accounts
shall be paid within fifteen (15) days of their origin date, and
it shall be the responsibility of the Introducing Firm to collect
such payments from its customers and transmit them to the Clearing
Firm within such fifteen (15) day period. If any debit balances
remain outstanding for a period of more than fifteen (15) days
after their origin date, the Clearing Firm is authorized to apply
as payment of such debit balances commission fees owed to the
Introducing Firm in connection with transactions pursuant to this
Agreement.
G. Transfers of securities relating to Introduced Accounts shall be
frozen ten (10) business days prior to the Conversion Date.
H. The Clearing Firm shall limit its services pursuant to the terms
of this Agreement to that of clearing functions and the related
services expressly set forth herein and the Introducing Firm shall
not hold itself out as an agent of the Clearing Firm or any of the
subsidiaries or companies controlled directly or indirectly by or
affiliated with the Clearing Firm. Should the Introducing Firm in
any way attempt to hold itself out as, advertise or in any way
represent that it is the agent of the Clearing Firm, the Clearing
Firm shall have the power, at its option, to terminate this
-24-
Agreement and the Introducing Firm shall be liable for any loss,
liability, damage, cost or expense (including but not otherwise
limited to fees and expenses of legal counsel) sustained or
incurred by the Clearing Firm as a result of such a representation
of agency or apparent authority to act as an agent of the Clearing
Firm or agency by estoppel.
I. This Agreement supersedes any previous agreement and may be
modified only by a writing signed by both parties to this
Agreement. Such modification shall not be deemed as a cancellation
of this Agreement.
J. This Agreement shall be submitted to and/or approved by any
National Securities Exchange, or other regulatory and
self-regulatory bodies vested with the authority to review and/or
approve this Agreement or any amendment or modifications hereto.
The parties hereto agree to work diligently and in good faith to
have this Agreement be reviewed and approved expeditiously. In the
event of any such disapproval, the parties hereto agree to bargain
in good faith to achieve the requisite approval. The date as of
which all applicable regulatory authorities shall have approved
the Clearing Agreement shall hereinafter be called the "Clearing
Agreement Approval Date."
K.
(i) The first period of the arrangement contemplated by this
Agreement (the "First Term Year") shall commence on the date first
written above and shall end on the last day of the twelfth
consecutive calendar month which follows the first (1st) day of
the first (1st) calendar month after the Clearing Agreement
Approval Date. The term of this Agreement shall commence on the
date first above written and shall end of the tenth anniversary of
the end of the First Term Year (the "Term"). Each of the First
Term Year and each succeeding period of twelve consecutive
calendar months shall hereinafter be called a "Term Year." After
the expiration of the Term, either party may terminate this
Agreement by giving ninety (90) days' advance written notice to
the other party.
(ii) In the event that (a) the Introducing Firm desires to
terminate this Agreement and cancel the relationship contemplated
hereby prior to the expiration of the Term, or (b) the Clearing
Firm elects to terminate this Agreement during the Term upon an
Event of Default with respect to the Introducing Firm, the
Introducing Firm shall, upon such termination, pay to the Clearing
Firm the following early termination fees:
---------------------------------- -------------------------------
Termination in Term Year Early Termination Fee
---------------------------------- -------------------------------
1 $2,000,000
---------------------------------- -------------------------------
2 $1,600,000
---------------------------------- -------------------------------
3 $1,200,000
---------------------------------- -------------------------------
4 $800,000
---------------------------------- -------------------------------
5 $400,000
---------------------------------- -------------------------------
Notwithstanding the foregoing, if the loan evidenced by the
Promissory Note is paid in full in accordance with its terms and
there is then no Event of Default under this Agreement, the
Clearing Firm shall waive its right to receive any early
-25-
termination fees under this Agreement which are payable after the
date such loan is so paid.
(iii) In the event of a change in the "control" of the Clearing
Firm which (a) occurs prior to the expiration of the second (2nd)
Term Year and (b) necessitates the conversion of the Introduced
Accounts of Introducing Firm, and all positions in such accounts,
from the Clearing Firm to another clearing firm (a "Change in
Control Conversion"), then Introducing Firm shall have the right
to elect either to (1) continue this Agreement as if no change in
control had occurred or (2) terminate this Agreement. If the
Introducing Firm elects to terminate this Agreement pursuant to
this paragraph (iii) of Section K, the Introducing Firm shall have
no obligation to pay any early termination fees under this
Agreement which are payable after the date it terminates this
Agreement and the Clearing Firm shall pay the Introducing Firm
whichever of the following fees is then applicable (the "Change in
Control Fee") as compensation for subjecting the Introducing Firm
to a Change in Control Conversion:
------------------------------------ -----------------------------
Change in Control in Term Year Change in Control Fee
------------------------------------ -----------------------------
1 $2,000,000
------------------------------------ -----------------------------
2 $1,600,000
------------------------------------ -----------------------------
For purposes of this paragraph (iii) of Section K, the occurrence
of any one or more of the following without the prior written
consent of the Introducing Firm shall be deemed to be a change in
the "control" of the Clearing Firm: (a) the sale of all or
substantially all of the business or assets of the Clearing Firm
at any time during the Term, (b) the acquisition of more than
fifty percent (50%) of the outstanding stock or voting power of
the Clearing Firm by any other entity; or (c) the merger or
consolidation of the Clearing Firm into another entity.
(iv) Notwithstanding any other provision of this Agreement and without
limitation upon the rights and obligations under paragraphs (ii)
and (iii) of this Section K, this Agreement may be terminated and
the relationship contemplated hereby cancelled by the Clearing
Firm at any time for any reason, and without liability therefor,
upon ninety (90) days prior written notice to the Introducing
Firm.
L.
ANY DISPUTE OR CONTROVERSY BETWEEN THE INTRODUCING FIRM AND THE
CLEARING FIRM RELATING TO OR ARISING OUT OF THIS AGREEMENT SHALL
BE SETTLED BY ARBITRATION BEFORE AND UNDER THE ARBITRATION RULES
OF THE NYSE.
M The Clearing Firm shall not be bound to make any investigation
into the facts surrounding any transaction that it may have with
the Introducing Firm on a principal or agency basis or that the
Introducing Firm may have with its customers or other persons, nor
shall the Clearing Firm be under any responsibility for compliance
by the Introducing Firm with any Laws or Regulations which may be
applicable to the Introducing Firm.
-26-
N. To facilitate the keeping of records by the Clearing Firm, the
Introducing Firm shall turn over promptly to the Clearing Firm any
and all payments and securities which the Introducing Firm
receives from its customers. Concurrently with the delivery of
such payments or securities to the Introducing Firm, it shall
furnish the Clearing Firm with such information as may be relevant
or necessary to enable the Clearing Firm to record promptly and
properly such payments and securities in the respective Introduced
Account.
O. This Agreement shall be binding upon all successors, assigns or
transfers of both parties hereto, irrespective of any change with
regard to the name of or the personnel of the Introducing Firm or
the Clearing Firm. Any assignment of this Agreement shall be
subject to the requisite review and/or approval of any regulatory
or self-regulatory agency or body whose review and/or approval
must be obtained prior to the effectiveness and validity of such
assignment. No assignment of this Agreement by the Introducing
Firm shall be valid unless the Clearing Firm consents to such an
assignment in writing. Any assignment by the Clearing Firm to any
subsidiary that it may create or to a company affiliated with or
controlled directly or indirectly by it shall be deemed valid and
enforceable in the absence of any consent from the Introducing
Firm. Neither this Agreement nor any operation under this
Agreement is intended to be, shall not be deemed to be, and shall
not be treated as a general or limited partnership, association or
joint venture or agency relationship between the Introducing Firm
and the Clearing Firm.
P. Notwithstanding the provisions of Section L of Article XVII that
any dispute or controversy between the parties relating to or
arising out of this Agreement shall be referred to and settled by
arbitration, in connection with any breach by the Introducing Firm
of Section H of Article XVII or by the Clearing firm of the second
sentence of Section B(v) of Article XIV, the Clearing Firm or the
Introducing Firm, as applicable, may, at any time prior to the
initial arbitration hearing pertaining to such dispute or
controversy, by application to the United States District Court
for the Eastern District of Virginia or the Circuit Court of the
Commonwealth of Virginia or the City of Richmond seek any such
temporary or provisional relief or remedy ("provisional remedy")
provided by the laws of the United States or the laws of the
Commonwealth of Virginia would be available in an action based
upon such dispute or controversy in the absence of an agreement to
arbitrate. The parties acknowledge and agree that it is their
intention to have any such application for a provisional remedy
decided by the court to which it is made and that such application
shall not be referred to or settled by arbitration. No such
application to either said court for a provisional remedy, nor any
act or conduct by either party in furtherance of or in opposition
to such application, shall constitute a relinquishment or waiver
of any right to have the underlying dispute or controversy with
respect to which such application is made settled by arbitration
in accordance with Section L above.
Q. Neither the Introducing Firm nor the Clearing Firm shall, without
having obtained the prior written approval of the other firm,
agree to place or place any advertisement in any newspaper,
publication, periodical or any other media or communicate with any
customer or the public in any manner whatsoever if such
-27-
advertisement or communication in any manner makes reference to
the other firm, to any person or entity that directly, or
indirectly through one or more intermediaries, controls or is
controlled by, or is under common control, with the other firm and
to the clearing arrangements and/or any of the services embodied
in this Agreement.
R. The Laws and Regulations require that the Clearing Firm must have
proper documentation to support any account opened on its books,
including Introduced Accounts. If, after reasonable request
therefor, the necessary documents so as to enable the Clearing
Firm to comply with such account documentation requirements of the
Laws and Regulations have not been received by the Clearing Firm,
the Introducing Firm shall receive notification that no further
orders shall be accepted for the Introduced Accounts involved.
Should it happen that inadvertent orders are placed for such
account after this notice is received, no commission credit shall
be granted from such orders. On receipt of the necessary
documents, this restriction shall be lifted on future commissions,
but any commissions withheld shall not be credited or paid. This
Agreement is not in any way intended to limit the responsibility
of the Clearing Firm under the Laws and Regulations with respect
to Introduced Accounts.
S. The construction and effect of every provision of this Agreement,
the rights of the parties under this Agreement and any questions
arising out of the Agreement, shall be governed by, construed
under and subject to the statutory and common law of the
Commonwealth of Virginia.
T. The headings preceding the text, articles and sections hereof have
been inserted for convenience and reference only and shall not be
construed to affect the meaning, construction or effect of this
Agreement.
U. This Agreement shall cover only the types of services set forth
herein and is in no way intended nor shall it be construed to
bestow upon the Introducing Firm any special treatment regarding
any other arrangements, agreements or understanding which
presently exist between the Introducing Firm and the Clearing Firm
or which may hereafter exist. The Introducing Firm shall be under
no obligation whatsoever to deal with the Clearing Firm or any of
its subsidiaries or any companies controlled directly or
indirectly by or affiliated with the Clearing Firm, in any
capacity other than as set forth in this Agreement. Likewise, the
Clearing Firm shall be under no obligation whatsoever to deal with
the Introducing Firm or any of its affiliates in any capacity
other than as set forth in this Agreement.
V. If any provision or condition of this Agreement shall be held to
be invalid or unenforceable by any court, or regulatory or
self-regulatory agency or body, such invalidity or
unenforceability shall attach only to such provision or condition.
The validity of the remaining provisions and conditions shall not
be affected thereby and this Agreement shall be carried out as if
any such invalid or unenforceable provision or condition were not
contained herein.
-28-
W. Unless otherwise expressly provided in this Agreement, all
notices, consents, directions, approvals, restrictions, requests
and other communications required or permitted to be delivered
under this Agreement shall be in writing and shall be deemed duly
given if delivered personally or by express delivery service (such
as UPS Next Day Air), or if sent by registered or certified United
States mail, return receipt requested, first class, postage
prepaid, to the following addresses (or to such other address of a
party which that party elects to designate in writing to all other
addressees listed below). The date such notice is deemed given
shall be the date it is received, if it is delivered in person
(including by express delivery service), or two days after its
postmark date, if it is sent by registered or certified mail.
If to the Clearing Firm: First Clearing Corporation,
901 E. Byrd Street
P.O. Box 1357, Richmond, VA 23211-1357
Attn: President
If to the Introducing Firm: National Securities Corporation
1001 Fourth Avenue, Suite 2200
Seattle, WA 98154
Attn: President
X. The Clearing Firm shall not be liable for any loss caused,
directly or indirectly, by government restrictions, exchange or
market ruling, suspension of trading, war, strikes or other
conditions beyond the control of the Clearing Firm. In the event
that any communications network or computer system used by the
Clearing Firm, whether or not owned by the Clearing Firm, is
rendered inoperable, the Clearing Firm shall not be liable to the
Introducing Firm for any loss, liability, claim, damage or expense
resulting, either directly or indirectly, therefrom.
Y. The Clearing Firm shall have the right to investigate, or arrange
for an appropriate party to investigate, the Introducing Firm's
credit; provided, however, that the Introducing Firm may make a
written request for disclosure of the nature of such investigation
within a reasonable time. Nothing in this Section Z shall be
construed to relieve the Introducing Firm of its obligation to
over see its financial integrity.
Z. During the Term of this Agreement (including any extensions or
renewals thereof), neither the Introducing Firm nor the Clearing
Firm or any of its affiliates shall hire or suffer the employment
of a registered representative ("Representative") of the other
without the prior express written approval of a senior executive
officer of the party (the "Losing Firm") which is losing the
Representative.
1. In the event that a party (the "Hiring Firm") hereto hires
or suffers the employment of a Representative of the Losing
Firm without having obtained the prior written permission
required above pursuant to this Section Z, the Hiring Firm
shall pay to the Losing Firm an amount equal to fifty
-29-
percent (50%) of the trailing twelve (12) month production
of each Representative so hired. Payment shall be made by
the Hiring Firm to the Losing Firm within thirty (30) days
of the making of a written demand by the Losing Firm. In
the event that payment is not made when due, the Losing
Firm may offset such unpaid amount(s) against any sums
which may be due by it to the Hiring Firm.
2. Notwithstanding anything contained in this Agreement
(including without limitation, this Article XVIII, Section
Z), in addition to the right to receive fifty percent (50%)
of the trailing twelve (12) month production of each
Representative so hired without its permission, the Losing
Firm shall be entitled to exercise any and all other
remedies or claims it may have under contract, law, equity
or arbitration, cumulatively, against either or both the
Representative and/or the Hiring Firm.
3. For the purposes of this Section Z, the term
"Representative" shall have the same meaning given to it in
Part III of Schedule C of the By-Laws of the NASD, PROVIDED
HOWEVER, that for purposes of this Section Z,
"Representative" shall also include individuals who are
registered with, or licensed by any other securities
self-regulatory organization, national securities exchange
or state securities administrator.
AA. Payment of commissions due the Introducing Firm shall be made by
the Clearing Firm to the Introducing Firm twice each calendar
month subject to and after the deduction of the following from
such commissions:
1. All clearing and other charges, costs and expenses due and
payable to the Clearing Firm under this Agreement.
2. All amounts due and payable under this Agreement by the
Introducing Firm to the Clearing Firm on account of losses,
liabilities, damages and any rights the Clearing Firm may
have against the Introducing Firm under this Agreement.
BB. To facilitate execution, this Agreement may be executed in as many
counterparts as may be required. It shall not be necessary that
the signature of, or on behalf of, each party, or that the
signatures of all persons required to bind any party, appear on
each counterpart. It shall be sufficient that the signature of, or
on behalf of, each party, or that the signatures of the persons
required to bind any party, appear on one or more such
counterparts. All counterparts shall together constitute a single
agreement.
XVIII. Introducing Firm Deposit Account
A. In order to further assure compliance with its representations,
agreements and indemnifications herein, the Introducing Firm
agrees to establish an Introducing Firm Deposit Account ("the
Deposit Account") in the name of the Introducing Firm with the
Clearing Firm.
-30-
The Introducing Firm shall deposit good and free funds in the
amount of One Million Dollars ($1,000,000) into the Deposit
Account on the day that the First Advance (as defined in the
Promissory Note) is made under the Promissory Note. Thereafter,
the Introducing Firm shall at all times maintain on deposit in the
Deposit Account not less than One Million Dollars ($1,000,000) in
good and free funds. The Clearing Firm shall pay interest on cash
deposited in the Deposit Account in accordance with its then
accepted Free Credit Balance Interest Rates.
B. The establishment of the Deposit Account and deposit of funds
therein shall be for the purposes described in this section and
shall not constitute an ownership interest in the Clearing Firm by
the Introducing Firm.
C. Return of Required Clearing Deposit. Upon termination of this
Agreement in accordance with the provisions hereof, and subject to
(a) the Clearing Firm's receipt of payment in full of any and all
amounts owing to the Clearing Firm under this Agreement
(collectively, the "Clearing Agreement Amounts") and (b) the
Introducing Firm's satisfaction of each and every of the
Introducing Firm's outstanding obligations to the Clearing Firm
under this Agreement, including without limitation obligations
arising under indemnities in this Agreement and the obligation to
pay the Clearing Agreement Amounts (collectively, the "Clearing
Agreement Obligations"), the Clearing Firm shall return the
required clearing deposit to the Introducing Firm within thirty
(30) calendar days of the date on which all of said payments have
been received, and obligations satisfied. The Clearing Agreement
Obligations include, but are not limited to, any open and
unsettled litigation matters between the Clearing Firm and either
the Introducing Firm or its customer, any unresolved, unsecured
Introduced Account debit balances, any open fails as a result of
trades executed on behalf of Introduced Accounts, and any failures
to transfer to another broker any Introduced Accounts introduced
by the Introducing Firm. The Clearing Agreement Amounts and the
Clearing Agreement Obligations shall collectively be referred to
as the "Clearing Agreement Liabilities."
XIX. Liens and Security Interests
The Introducing Firm hereby grants to the Clearing Firm a security interest in
and lien on all of the Introducing Firm's right, title and interest, whether now
existing or hereafter arising, in, to and under (i) all commission, proprietary
and other accounts of the Introducing Firm maintained with the Clearing Firm,
including without limitation the Deposit Account, (ii) all securities, financial
assets, contracts, commercial paper, monies, general intangibles, investment
property (as each such term is defined in the Uniform Commercial Code as shall
be in effect in the Commonwealth of Virginia on July 1, 2001), and all other
similar property of every nature, type or description held in any commission,
proprietary or other account of the Introducing Firm maintained with the
Clearing Firm, including without limitation the Deposit Account, and (iii) all
proceeds thereof. The foregoing security interest and lien shall secure the
payment and performance of all of the Introducing Firm's debts, liabilities and
obligations to the Clearing Firm under this Agreement, whether now existing or
hereafter arising and howsoever incurred, including without limitation the
Clearing Agreement Liabilities. Without limiting any of the Clearing Firm's
other rights and remedies under this Agreement, the Introducing Firm hereby
-31-
agrees that the Clearing Firm may, without demand or notice of any kind, debit
any cash balance in any account of the Introducing Firm maintained with the
Clearing Firm and/or liquidate any securities or other property of any type held
in any account of the Introducing Firm maintained with the Clearing Firm and
credit the proceeds to the obligations secured hereby in such order of
application as the Clearing Firm elects in its sole discretion. The Introducing
Firm shall, from time to time, at its sole expense, promptly execute, deliver,
file and/or record (as appropriate) all such instruments and documents, and take
all such further action as the Clearing Firm may deem necessary or prudent in
order to perfect, continue and protect the security interests and liens granted
hereunder or to enable the Clearing Firm to exercise and enforce its rights and
remedies with respect to any of the property in which the Clearing Firm has a
security interest or lien. The Introducing Firm and the Clearing Firm hereby
expressly agree that any and all property contained in any of the foregoing
accounts is to be treated as a "financial asset" as that term is defined in
Title 8A of the Uniform Commercial Code as adopted in the Commonwealth of
Virginia on the date hereof.
[SIGNATURES ON THE NEXT PAGE]
-32-
Made and executed at Richmond, Virginia on the date first hereinabove set forth.
NATIONAL SECURITIES CORPORATIOIN
By:
------------------------------------
Name:
---------------------------------
Title:
---------------------------------
FIRST CLEARING CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
----------------------------------
-33-