Exhibit
10.1


 


UNITED STATES OF AMERICA


Before the


SECURITIES AND EXCHANGE
COMMISSION


 


 


ADMINISTRATIVE
PROCEEDING


File No.


 


 


	
  In the Matter of

  Waddell & Reed, Inc., Waddell & Reed Investment Management Company,
  and Waddell & Reed Services Company,

  	
  OFFER OF SETTLEMENT OF WADDELL & REED, INC., WADDELL
  & REED INVESTEMENT MANAGEMENT COMPANY and WADDELL & REED SERVICES
  COMPANY

  
	
   

  	
   

  
	
  Respondents.

  	
   

  



 


I.


 


Waddell & Reed, Inc. (“W&R”), Waddell &
Reed Investment Management Company (“W&R Investment Management”), and Waddell
& Reed Services Company (“W&R Services”) (collectively “Respondents”),
pursuant to Rule 240(a) of the Rules of Practice of the Securities and Exchange
Commission (“Commission”) [17 C.F.R. § 201.240(a)] submit this Offer of
Settlement (“Offer”) in anticipation of public administrative and
cease-and-desist proceedings to be instituted against them by the Commission,
pursuant to Sections 15(b) and 17A(c) of the Securities Exchange Act of 1934 (“Exchange
Act”), Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers
Act”), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Investment
Company Act”).


 


II.


 


This
Offer is submitted solely for the purpose of settling these proceedings, with
the express understanding that it will not be used in any way in these or any
other proceedings, unless the Offer is accepted by the Commission. If the Offer
is not accepted by the Commission, the Offer is withdrawn without prejudice to
Respondents and shall not become a part of the record in these or any other
proceedings, except for the waiver expressed in Section V. with respect to Rule
240(c)(5) of the Commission’s Rules of Practice [17 C.F.R. § 201.240(c)(5)].


 

















 


III.


 


On the
basis of the foregoing, the Respondents hereby:


 


A.            Admit
the jurisdiction of the Commission over them and over the matters set forth in
the Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant
to Sections 15(b) and 17A(c) of the Securities Exchange Act of 1934, Sections
203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and
9(f) of the Investment Company Act of 1940, Making Findings, and Imposing
Remedial Sanctions and a Cease-and-Desist Order (“Order”).


 


B.            Solely
for the purpose of these proceedings and any other proceedings brought by or on
behalf of the Commission or in which the Commission is a party, and without
admitting or denying the findings contained in the Order, except as to the
Commission’s jurisdiction over them and the subject matter of these
proceedings, which are admitted, consent to the entry of an Order by the
Commission containing the following findings and remedial sanctions set forth
below:


 


OVERVIEW


 


1.             Pursuant to
written agreements, the Respondents permitted a number of individuals and
entities (the “Market Timers” or “Timers”) to market time certain funds in the
Waddell & Reed mutual fund complex (“Waddell & Reed funds”), subject to
certain limitations on the number, amount and frequency of trades, from at
least as early as 1995 through 2003 (“Timing Agreements”). Beginning in
December 1998 and continuing through the fall of 2003, W&R Services and/or
W&R collected a total of $3.6 million in asset-based fees from three of
these Timers (the “Fee Paying Timers”) pursuant to Timing Agreements with those
entities. During the relevant period, Respondents had internal procedures
designed to prevent or limit market timing, and the Waddell & Reed funds
had prospectus disclosures that fostered the
impression that the funds discouraged timing. Nevertheless, Respondents
permitted the Fee Paying Timers to time certain Waddell & Reed funds, and
they permitted
Timers, including the Fee Paying Timers, to time in the Waddell & Reed
Advisors International Growth Fund (the “International Fund”), even though they
knew that the Timers were harming that fund by diluting other investors’
returns.


 


2.             Market
timing includes (a) frequent buying and selling of shares of the same mutual
fund or (b) buying or selling mutual fund shares in order to exploit
inefficiencies in mutual fund pricing. Market timing, while not illegal per se,
can harm other mutual fund shareholders, because it can dilute the value of
their shares if the market timer is exploiting pricing inefficiencies. Market
timing can also disrupt the management of the mutual fund’s investment
portfolio, and frequent buying and selling of shares by market timers can cause
the targeted mutual fund to incur costs it would not incur in the absence of
the market timing.


 


3.             The Timing
Agreements benefited the Respondents financially. In addition to   asset-based advisory fees that W&R
Investment Management earned, W&R and/or W&R


 


2

















 


Services
also received asset-based fees from the Fee Paying Timers under the Timing
Agreements. Because the timing that the Respondents permitted in return for
those financial benefits potentially could (and at times did) harm the funds,
W&R Investment Management had a conflict of interest. It failed to disclose
adequately the facts underlying that conflict to the board of directors of the
mutual funds or the shareholders of the mutual funds, thereby breaching its
fiduciary duty to the mutual funds.


 


RESPONDENTS


 


4.             W&R, a Delaware corporation headquartered in Overland
Park, Kansas, is a subsidiary of Waddell & Reed Financial, Inc. W&R has
been dually registered with the Commission as a broker-dealer and investment
adviser since 1982. During the pertinent period, W&R acted primarily as the
national distributor and underwriter for shares of Waddell & Reed funds. Currently,
W&R distributes the Waddell & Reed Advisors Funds, a group of the
Waddell & Reed funds.


 


5.             W&R
Investment Management, a Kansas corporation headquartered in Overland Park,
Kansas, has been registered with the
Commission as an investment adviser since January 1992. During the pertinent
period, W&R Investment Management, which is a subsidiary of W&R,
provided investment management and advisory services to the Waddell & Reed
funds, and currently it provides such services to the Waddell & Reed
Advisors funds.


 


6.             W&R Services, a Missouri corporation headquartered in
Overland Park, Kansas, has been registered with the Commission as a transfer
agent since August 1992. W&R Services, which is a subsidiary of W&R,
provides transfer agent and other services to affiliated Waddell & Reed
funds.


 


FACTS


 


Market
Timing Agreements


 


7.             From
as early as 1995, Respondents were aware that shareholders were timing the
Waddell & Reed funds, and they entered into Timing Agreements
with a number of Timers. Beginning in early 2001, the Timing Agreements were
executed and administered by W&R Services (and in one instance by W&R).


 


8.             The
Timing Agreements initially allowed the Timers 24 “round trip” exchanges
(exchanges in and out of a fund) per fund, per year. In 1998, W&R
Investment Management reduced the permitted number of round trip exchanges to
12 per fund, per year.(1)


 


9.             W&R Investment Management also had a
policy limiting aggregate assets invested in the funds by Timers to no more
than 1% of the fund complex’s equity assets, and no


 






(1)           One Timer was allowed
30 round trips per fund, per year.


 


3

















 


more than 2% of the assets in any one fund.
Frequently, however, Timer assets exceeded 2% of the assets in one or more
funds.


 


10.           Under the Timing Agreements, Respondents permitted
market timing in funds that had assets in excess of $300 million. One of the
most frequently and successfully timed funds was the International Fund, which
was the fund complex’s largest international fund.


 


11.           Collectively, the timing activity by the Market
Timers diluted returns to other investors in the affected Waddell & Reed
funds, particularly the International Fund.


 


Respondents’ Efforts to Control
Timing Activity


 


12.           Initially, W&R Investment Management personnel
handled any monitoring of timing in the Waddell & Reed funds. Beginning in
late 2000 or early 2001, however, W&R Services undertook most of the fund
complex’s limited efforts to monitor timing activity. Although W&R Services
initially did not have any systematic means to detect timing or frequent
exchanges, W&R Services personnel sometimes noticed unusual activity and
followed up to determine whether the accounts were timing the funds.(2)


 


13.           Beginning in mid-2001, W&R Services personnel
systematically tracked known Timer accounts with monthly, and later daily,
schedules reflecting Timer assets, timing capacity in individual funds, and
timing capacity in the complex as a whole, and with monthly schedules that
counted each Timer’s round trips.


 


14.           W&R Investment Management, and later W&R
Services, generally enforced the round trip limits in the written Timing
Agreements once the agreements were executed. In some instances, however, the
Respondents failed to obtain written agreements from known Timers for extended
periods. For example, in March 2000, the Respondents identified eleven Market
Timer accounts that had not executed Timing Agreements, and they allowed six of
the accounts to exceed the 12 round trip limit until they finally obtained
written Timing Agreements from them in March 2002.


 


15.           In an
effort to eliminate or further limit timing in the Waddell & Reed funds,
beginning at least as early as 2002, W&R Services regularly monitored and
policed market timing and frequent trading in the funds through third-party
platforms, and took steps to stop such trading when it was identified,
including barring shareholders from the funds. At the same time it was policing
market timing and frequent trading by certain accounts, W&R Services
allowed certain known Market Timers, including the Fee Paying Timers, to time
the funds.


 






(2)           W&R Services and
W&R defined Market Timers as shareholders who frequently moved all, or
substantially all of their investments between money market funds and non-money
market funds, and who typically executed a round trip at least once a month.


 


4

















 


16.           In May 2003, Respondents, in an effort to discourage
timing, sought and obtained approval from the board of directors for all of the
W&R complex international funds to assess a 2% redemption fee for
redemptions or exchanges within 30 days of purchase.


 


Three Timers Paid Fees to W&R
Services and W&R


 


17.           Beginning in December 1998 and continuing through
2003, three Timers paid a total of $3.6
million in fees to W&R Services and/or W&R pursuant to Timing
Agreements with those entities. The Timing Agreements required the Fee Paying
Timers to pay W&R or W&R Services a fee ranging from 25 to 100 basis
points on the timing assets, purportedly as payment for services.(3) None of
the fees were paid to the timed funds. In aggregate, the Fee Paying Timers
netted $8.2 million in profits from their trading in Waddell & Reed funds
under the Timing Agreements.


 


The Largest Fee Paying Timer


 


18.           The largest Fee Paying Timer (“Timer 1”), which was an investment
adviser, had a Timing Agreement relating to the Waddell & Reed funds from
at least as early as 1995. In the fall of 1998, W&R Investment Management
notified Timers with which it had Timing Agreements that round trips would be
limited to 12 per fund, per year, and that this limitation also applied to the
money market fund. Timer 1 proposed an alternative arrangement, which allowed
unlimited round trips in the money market fund and 12 round trips per fund, per
year in the other funds, and offered to pay a 1% fee based on the assets
its clients held at the Waddell & Reed fund family “to defray possible fund
expenses.”


 


19.           Subsequently,
Timer 1 entered into a “Supplemental Services Agreement” with W&R Services,
in which it agreed that its clients would pay W&R Services a 1% annual fee,
and W&R Services agreed to fax confirmations to Timer 1; assign a
non-exclusive, designated individual to process Timer 1’s transactions; and
provide Timer 1 with an annual consolidated report showing the holdings and
value of its clients’ accounts. Concurrently, W&R Investment Management
agreed to allow Timer 1’s clients 12 round trips per year, per fund, and
excluded the money market fund from this limit.


 


20.           Between December 1998 and September 2003, the aggregate value of
investments in the Waddell & Reed fund complex by clients of the
Timer 1 ranged from $51.5 million to $85 million. During that period, clients
of Timer 1 netted $12.5 million in timing profits. Timer 1 timed 13 funds at
various times, trading profitably in five funds, including the International
Fund.


 


21.           Pursuant
to the Supplemental Services Agreement, clients of Timer 1 paid approximately
$3.46 million in fees in total to W&R Services from 1999 through 2003.


 






(3)           Respondents, however,
provided few services to the Fee Paying Timers that they did not provide to
other shareholders, and the cost of the minimal additional services was far
less than the amount of fees the Fee Paying Timers paid.


 


5

















 


The Second Fee Paying Timer


 


22.           In February 2001 and November 2002, W&R Services entered into
Timing Agreements with a second investment adviser (“Timer 2”) that allowed the
Timer to make up to 30 round trips per fund, per year in its client accounts.


 


23.           Timer 2 approached the fund complex, asked
for timing capacity, and agreed to pay W&R Services an annual fee of 25 basis points on its assets at Waddell
& Reed funds. Timer 2 paid a total of $139,000 in fees pursuant to
its Timing Agreements.


 


24.           At
times during 2001 and 2002, the aggregate amount of assets being timed by Timer
2’s clients pursuant to the Timing Agreements rose as high as $35 million in
five Waddell & Reed funds, and Timer 2’s clients timed approximately $3
million in the International Fund in 2002 and 2003.


 


25.           Timer
2’s clients experienced net losses of $6.36 million from timing in the Waddell
& Reed funds overall. In the International Fund, however, clients of Timer
2 made approximately $700,000 in net profits.


 


The Broker-Dealer Fee Paying
Timer


 


26.           In
May 2002, W&R entered into a “selling agreement” with a broker-dealer (“Timer
3”), under the terms of which the broker-dealer paid a 25 basis point fee on
assets invested in the fund complex. Under the “selling agreement,” W&R
allowed Timer 3’s customers 12 round trips per year in the International Fund
and a money market fund.(4)  In contrast,
during this period, W&R Services policed frequent trading in the Waddell
& Reed funds through other broker-dealers and took steps to stop investors
from timing through broker-dealers other than Timer 3.


 


27.           During
June through November 2002, Timer 3’s customers timed approximately $20-$22
million in the International Fund, until W&R notified Timer 3 in late 2002
that it could no longer time the International Fund.


 


28.           During
February through April 2003, W&R and W&R Services allowed Timer 3 to
time four other Waddell & Reed Advisors funds, until its customers withdrew
their assets from the Waddell & Reed fund complex in April 2003.


 


29.           Timer
3’s customers made approximately $2.03 million in profits from their timing
trades in Waddell & Reed Advisors funds, $1.5 million of which resulted
from trades in the International Fund.


 






(4)           During negotiations
leading up to the agreement, Timer 3 asked for additional round trips and
offered W&R incentives, including sticky assets (i.e., long-term
investments) and separate managed accounts, but Respondents declined.


 


6

















 


30.           Timer
3 paid W&R Services $35,000 in fees in total under the “selling agreement.”


 


Timers  Harmed the International Fund


 


31.           In 2001, a
W&R Services employee began watching for large exchanges between the
International Fund and a money market fund because, among other things, he was
concerned that large, frequent exchanges in the fund harmed it through
dilution.


 


32.           The employee
monitored large exchange activity in the fund. In late June 2001, he prepared a
schedule showing that, from April 2001 through mid-June 2001, certain known
Timers had made almost $600,000 from trading in the International Fund, while
the fund’s net asset value (“NAV”) fluctuated, but ultimately experienced a net
decline of $0.24 per share. Through October 2001, the employee continued to
monitor large exchange activity in the fund, and he shared with his superiors
his analyses, which showed millions in profits for the Timers while the fund’s
NAV per share continued to decline.


 


33.           Despite the employee’s warnings, Respondents allowed
known Timers, including Fee Paying Timers, to time in the International Fund
through the fall of 2002. Respondents allowed three Timers, who were identified as such by March
2000, to make over 40 round trips in the International Fund in 2001.(5)


 


34.           After learning that Timers were profiting in the
International Fund, W&R and W&R Services entered into additional Timing
Agreements. In fact, in May 2002, W&R entered into an agreement allowing
customers of Timer 3 to time between the International Fund and a money market
fund.


 


35.           In early October 2002, when Timers, including Timer
3, had approximately $40 million in the International Fund and briefly raised
Timer assets to over 5% of the fund’s assets, Respondents decided to prohibit
timing activity in the complex’s international funds. Thereafter, the
International Fund was closed to Timers, other than Timer 2, which was allowed
to continue timing in the fund through September 2003.


 


36.           From March
2001 through September 2003, known Timers, including Fee Paying Timers, netted
approximately $11.7 million from timing in the International Fund.


 


Respondents Failed to Disclose
Fees Paid by Timers


or Harmful Timing in the
International Fund


to the Fund Board or Shareholders


 


37.           Before
October 2001, the registration statements and prospectuses for the Waddell
& Reed funds did not contain any disclosures relating to market timing. Beginning
in October 2001, the SAI for the Waddell & Reed funds, which is
incorporated in the fund prospectuses and


 






(5)           W&R Investment
Management testified that they believed that timing could be accretive or
dilutive to the funds and that the timing parameters it put into place would
limit disruption to fund portfolio managers.


 


7

















 


included in the registration statements, disclosed that “[t]he Fund may limit activity deemed to be
market timing by restricting the amount of exchanges permitted by a
shareholder.”


 


38.           During the
pertinent period, W&R marketed the Waddell & Reed Advisors Funds almost
exclusively through the W&R sales force, although it was seeking to
increase distribution of other Waddell & Reed funds through third party
platforms. Marketing materials for the Waddell & Reed funds, available on
the company website, identify one of the firm’s basic concepts as looking for
investment results with a long-term perspective. The International Fund
prospectus specifically states that the fund is “designed for investors seeking
long-term appreciation of capital” through investment in securities issued by
foreign companies.


 


39.           None of the Waddell & Reed fund
registration statements or fund prospectuses disclosed that Respondents allowed
three Fee
Paying Timers access to the funds in return for fees paid to W&R and
W&R Services, or that Respondents allowed the Fee
Paying Timers, as well as other known Timers, to time the International Fund
even though the adviser and its affiliates had been notified that Timers were harming the fund through dilution.


 


40.           Respondents
did not fully disclose to the fund board of directors the facts and
circumstances of the Timing Agreements with Timer 1, and did not disclose to
the board the other two arrangements with Fee Paying Timers.


 


41.           During
two board meetings in late 1998 and 1999, Respondents mentioned that W&R
Services might receive, or was receiving, fees under an arrangement with Timer
1. The Respondents failed to disclose fully, however, the underlying facts and
circumstances of the arrangement, including that the arrangement benefited
Respondents but could harm other fund shareholders, and that the Timing
Agreement with Timer 1 specifically permitted more than 12 round trips in the
money market fund, while Timing Agreements with other, non-fee paying Timers did
not include such a provision. In subsequent board meetings, Respondents
completely failed to disclose the other two fee paying arrangements. Thus,
Respondents failed to disclose adequately fee paying arrangements that created
conflicts of interest. W&R Investment Management therefore breached its
fiduciary duty to the fund boards of directors and the funds that the Fee
paying Timers timed, and defrauded shareholders of those funds.


 


42.           Respondents
did not disclose to the International Fund’s board of directors that they
allowed the Fee Paying Timers, as well as other known Timers, to time the fund
even though they had been notified
that Timers were harming the fund through dilution of other investors’ returns.
W&R Investment Management therefore breached its fiduciary duty to the
International Fund board of directors and shareholders, and defrauded
shareholders of that fund.


 


43.           During
a May 2003 board meeting, at which the Waddell & Reed funds boards adopted
a redemption fee for the Waddell & Reed international funds, Respondents
described the negative impact of Market Timers on the international funds,
principally through dilution, and told the board that all redemption fees would
be paid to the funds, not to Respondents. The


 


8

















 


Respondents failed to disclose, however, that, from mid-2001 through
October 2002, they had
allowed known Timers, including the Fee Paying Timers, to time the
International Fund even though they had been notified that the Timers
were harming the fund through dilution. The Respondents also failed to disclose
to the fund board that W&R Services and W&R already were receiving fees
from three Fee Paying Timers, two of whom were timing the International Fund. They
also failed to disclose that they would continue to allow Timer 2 to time the
International Fund.


 


VIOLATIONS


 


44.           As a result
of the conduct described in Section III. above, W&R Investment Management
willfully violated Sections 206(1) and 206(2) of the Advisers Act in that,
while acting as an investment adviser, it employed devices, schemes, or
artifices to defraud clients or prospective clients, and engaged in
transactions, practices, or courses of business which operated or would operate
as a fraud or deceit upon clients or prospective clients. Specifically, W&R
Investment Management allowed Fee Paying Timers to time certain Waddell &
Reed funds in a manner that it knew or had reason to believe would be harmful
to shareholders in exchange for fees paid to W&R Services and W&R, and
it allowed the Fee Paying Timers to time the International Fund despite having
been notified that Timers were harming the fund through dilution. These actions
created a conflict of interest that W&R Investment Management knowingly or
recklessly failed to disclose to the board of directors and shareholders of the
funds.


 


45.           As a result
of the conduct described in Section III. above, W&R and W&R Services
willfully aided and abetted and caused W&R Investment Management’s
violations of Sections 206(1) and 206(2). W&R and W&R Services
knowingly and substantially assisted W&R Investment Management’s violations
by negotiating Timing Agreements, from which they financially benefited, that
caused W&R Investment Management to breach its fiduciary duty to the funds’
board and defraud the funds’ shareholders.


 


46.           As a result
of the conduct described above, Respondents, each an affiliated person of the
timed Waddell & Reed funds, willfully violated Section 17(d) of the
Investment Company Act and Rule 17d-1 thereunder, in that, while acting as a
principal, each of them participated in and effected transactions in connection
with joint arrangements in which the funds were participants, without filing an
application with the Commission and obtaining a Commission order approving the
transactions. Specifically, W&R and W&R Services received fees from
three Timers in return for timing capacity in the Waddell & Reed funds, and
W&R Investment Management permitted the timing which financially benefited
its affiliates.


 


UNDERTAKINGS


 


47.           Compliance
and Ethics Oversight Structure. Each Respondent has undertaken to maintain
its own compliance and ethics oversight infrastructure having the following
characteristics:


 


9

















 


a.             Each
Respondent shall maintain a Code of Ethics Oversight Committee having
responsibility for all matters relating to issues arising under that Respondent’s
Code of Ethics. The Code of Ethics Oversight Committee shall be comprised of
senior executives of the Respondent’s operating businesses. Each Respondent
shall hold at least quarterly meetings of the Code of Ethics Oversight
Committee to review violations of the Code of Ethics, as well as to consider
policy matters relating to the Code of Ethics. Each Respondent shall report on
issues arising under the Code of Ethics, including all violations thereof, to
the Audit Committee of the Directors of the Waddell & Reed funds with such
frequency as the Audit Committee may instruct, and in any event at least
quarterly, provided however that any material violation shall be reported
promptly.


 


b.             Each
Respondent shall establish an Internal Compliance Controls Committee to be
chaired by that Respondent’s Chief Compliance Officer,(6)  which Committee shall have as its members
senior executives of that Respondent’s operating businesses. Notice of all
meetings of the Internal Compliance Controls Committee shall be given to the
independent compliance officer of the Waddell & Reed funds, who shall be
invited to attend and participate in such meetings. The Internal Compliance
Controls Committee shall review compliance issues throughout the business of
the Respondent, endeavor to develop solutions to those issues as they may arise
from time to time, and oversee implementation of those solutions. The Internal
Compliance Controls Committee shall provide reports on internal compliance
matters to the Audit Committee of the directors of the Waddell & Reed funds
with such frequency as the independent directors of such funds may instruct,
and in any event at least quarterly. Each Respondent shall also provide to its
respective Audit Committee (or the board of directors if that Respondent’s
board does not have an Audit Committee) the same reports of the Code of Ethics
Oversight Committee and the Internal Compliance Controls Committee that it
provides to the Audit Committee of the Waddell & Reed funds.


 


c.             Each
Respondent shall require that its Chief Compliance Officer or a member of his
or her staff shall review compliance with the policies and procedures
established to address compliance issues under the Securities Act, Exchange
Act, Investment Advisers Act and Investment Company Act and that any violations
be reported to the Internal Compliance Controls Committee.


 






(6)           Insofar as the Order
refers to the Chief Compliance Officer, if the relevant entity does not have
such an officer, the ethics officer for the entity, as described in paragraph
47(e) below, may fulfill the responsibilities of the Chief Compliance Officer
specified in paragraph 47 of this Order.


 


10

















 


d.             Each
Respondent shall require its Chief Compliance Officer to report to the
independent directors of the Waddell & Reed funds any breach of fiduciary
duty and/or the federal securities laws of which he or she becomes aware in the
course of carrying out his or her duties, with such frequency as the
independent directors may instruct, and in any event at least quarterly,
provided however that any material breach (i.e., any breach that would be important,
qualitatively or quantitatively, to a reasonable director) shall be reported
promptly.


 


e.             Each
Respondent shall establish an ethics officer to whom the Respondent’s employees
may convey concerns about the Respondent’s business matters that they believe
implicate matters of ethics, conflicts of interest or questionable practices. Each
Respondent shall establish procedures to investigate matters brought to the
attention of the ethics officer, and these procedures shall be presented for
review and approval by the independent directors of the Waddell & Reed
funds. Each Respondent shall also review matters brought to the attention of
its ethics officer, along with any resolution of such matters, with the
independent directors of the Waddell & Reed funds with such frequency as
the independent directors of such funds may instruct.


 


48.           Independent
Compliance Consultants.


 


a.             Respondent
W&R Investment Management shall retain, within 30 days of the date of entry
of the Order, the services of an Independent Compliance Consultant (“the
Adviser Consultant”) not unacceptable to the staff of the Commission and a
majority of the independent directors of the Waddell & Reed Advisors funds.
The Adviser Consultant’s compensation and expenses shall be borne exclusively
by W&R Investment Management or its affiliates. W&R Investment
Management shall require that the Adviser Consultant shall conduct a
comprehensive review of W&R Investment Management’s supervisory,
compliance, and other policies and procedures designed to prevent and detect
breaches of fiduciary duty, breaches of the Code of Ethics and federal
securities law violations by W&R Investment Management and its employees. This
review shall include, but shall not be limited to, a review of W&R
Investment Management’s market timing controls across all areas of its
business, a review of the pricing practices of the Waddell & Reed funds
that may make those funds vulnerable to market timing, a review of the Waddell
& Reed funds’ utilization of short term trading fees and other controls for
deterring excessive short term trading, and a review of W&R Investment
Management’s policies and procedures concerning conflicts of interest,
including conflicts arising from advisory services to multiple clients. W&R
Investment Management


 


11

















 


shall cooperate fully
with the Adviser Consultant and shall provide the Adviser Consultant with
access to its files, books, records, and personnel as reasonably requested for
the review.


 


b.             Respondent
W&R shall retain, within 30 days of the date of entry of the Order, the
services of an Independent Compliance Consultant (“the Distributor Consultant”)
not unacceptable to the staff of the Commission and a majority of the
independent directors of the Waddell & Reed Advisors Funds. The Distributor
Consultant’s compensation and expenses shall be borne exclusively by W&R or
its affiliates. W&R shall require that the Distributor Consultant shall
conduct a comprehensive review of W&R’s mutual fund sales practices,
supervisory, compliance, and other policies and procedures designed to prevent
and detect breaches of fiduciary duty, breaches of the Code of Ethics and
federal securities law violations by W&R and its employees. W&R shall
cooperate fully with the Distributor Consultant and shall provide the
Distributor Consultant with access to its files, books, records, and personnel
as reasonably requested for the review.


 


c.             Respondent
W&R Services shall retain, within 30 days of the date of entry of the
Order, the services of an Independent Compliance Consultant (“the Transfer
Agent Consultant”) not unacceptable to the staff of the Commission and a
majority of the independent directors of the funds serviced by W&R Services.
The Transfer Agent Consultant’s compensation and expenses shall be borne
exclusively by W&R Services or its affiliates. W&R Services shall
require that the Transfer Agent Consultant shall conduct a comprehensive review
of W&R Services’ supervisory, compliance, and other policies and procedures
designed to prevent and detect breaches of fiduciary duty, breaches of the Code
of Ethics and federal securities law violations by W&R Services and its
employees. W&R Services shall cooperate fully with the Transfer Agent
Consultant and shall provide the Transfer Agent Consultant with access to its
files, books, records, and personnel as reasonably requested for the review.


 


d.             Respondents shall require that, at
the conclusion of the review by the Adviser Consultant, the Distributor
Consultant, and the Transfer Agent Consultant (collectively referred to as the
Independent Compliance Consultants), which in no event shall be more than 120
days after the date of entry of the Order, the Independent Compliance
Consultants shall submit a Report to the Respondents, the directors of the
Waddell & Reed funds, and the staff of the Commission. Respondents shall
require that the Adviser Consultant’s Report address the issues described in
subparagraph


 


12

















 


48a.
of these undertakings, the Distributor Consultant’s Report address the issues
described in subparagraph 48b. of these undertakings, and the Transfer Agent
Consultant’s Report address the issues described in subparagraph 48c. of these
undertakings. Respondents shall require that each report include a description
of the review performed, the conclusions reached, the respective Independent
Compliance Consultant’s recommendations for changes in or improvements to
policies and procedures of Respondents and the pertinent Waddell & Reed
funds, and a procedure for implementing the recommended changes in or
improvements to Respondents’ policies and procedures.


 


e.             Respondents shall adopt all
recommendations with respect to Respondents contained in the Report of the
Independent Compliance Consultants; provided, however, that within 150 days
after the date of entry of the Order, Respondents shall in writing advise the
Independent Compliance Consultants, the directors of the Waddell & Reed
funds and the staff of the Commission of any recommendations that it considers
to be unnecessary or inappropriate. With respect to any recommendation that
Respondents consider unnecessary or inappropriate, Respondents need not adopt
that recommendation at that time but shall propose in writing an alternative
policy, procedure or system designed to achieve the same objective or purpose.


 


f.              As
to any recommendation with respect to Respondents’ policies and procedures on
which Respondents and the Independent Compliance Consultants do not agree, such
parties shall attempt in good faith to reach an agreement within 180 days of
the date of entry of the Order. In the event Respondents and the Independent
Compliance Consultants are unable to agree on an alternative proposal,
Respondents will abide by the determinations of the Independent Compliance
Consultants.


 


g.             Respondents (i) shall not have the
authority to terminate the Independent Compliance Consultants, without the
prior written approval of the majority of independent directors and the staff
of the Commission; (ii) shall compensate the Independent Compliance
Consultants, and persons engaged to assist the Independent Compliance
Consultants, for services rendered pursuant to the Order at their reasonable
and customary rates; and, (iii) shall not be in and shall not have an
attorney-client relationship with the Independent Compliance Consultants and
shall not seek to invoke the attorney-client or any other doctrine or privilege
to prevent the Independent Compliance Consultants from transmitting any information,
reports, or documents to the directors or the Commission.


 


13

















 


h.             Respondents shall require that the
Independent Compliance Consultants, for the period of the engagement and for a
period of two years from completion of the engagement, shall not enter into any
employment, consultant, attorney-client, auditing or other professional
relationship with Respondents, or any of their present or former affiliates,
directors, officers, employees, or agents acting in their capacity as such. Respondents
shall require that any firm with which the Independent Compliance Consultants
are affiliated in performance of their duties under the Order shall not,
without prior written consent of the independent directors and the staff of the
Commission, enter into any employment, consultant, attorney-client, auditing or
other professional relationship with Respondents, or any of their present or
former affiliates, directors, officers, employees, or agents acting in their
capacity as such for the period of the engagement and for a period of two years
after the engagement. Notwithstanding the statements above in this
subparagraph, the Independent Compliance Consultant may enter into simultaneous
agreements with the three Respondents to fulfill the responsibilities described
in the undertakings in paragraphs 48 and 49.


 


49.           Compliance
Review. Within two years, but in no event earlier than one year, after the
completion of the Independent Compliance Consultant process referenced in paragraph
48 of these undertakings, Respondents shall undergo a compliance review by a
third party, who is not an interested person, as defined in the Investment
Company Act, of Respondents. At the conclusion of the review, Respondents shall
require that the third party issue a report of its findings and recommendations
concerning Respondents’ supervisory, compliance, and other policies and
procedures designed to prevent and detect breaches of fiduciary duty, breaches
of the Code of Ethics and federal securities law violations by Respondents and
their employees in connection with their duties and activities on behalf of and
related to the Waddell & Reed funds. Each such report shall be promptly
delivered to Respondents’ Internal Compliance Controls Committee and to the
Audit Committee of the board of directors of each Waddell & Reed fund.


 


50.           Independent
Distribution Consultant. Respondents shall retain, within 30 days of the
date of entry of the Order, the services of an Independent Distribution
Consultant not unacceptable to the staff of the Commission and the independent
directors of the Waddell & Reed funds. The Independent Distribution Consultant’s compensation and expenses
shall be borne exclusively by Respondents. Respondents shall cooperate
fully with the Independent Distribution Consultant and shall provide the
Independent Distribution Consultant with access to its files, books, records,
and personnel as reasonably requested for the review. Respondents shall require
that the Independent Distribution Consultant develop a Distribution Plan for
the distribution of all of the disgorgement and penalty ordered in Paragraph
IV.H.1. of the Order, and any interest or earnings thereon, according to a
methodology developed in consultation with Respondents and acceptable to the
staff of the Commission and the independent directors of the Waddell & Reed
funds. The Distribution Plan shall provide for investors to receive, from the monies
available for distribution pursuant to Paragraph IV.H.1 of the Order, in
order of priority,


 


14

















 


(i) their proportionate share of losses suffered by the fund due to
market timing by the Fee Paying Timers, and (ii) a proportionate share of
advisory fees paid by funds that suffered such losses during the period of such
market timing.


 


a.             Respondents shall require that the
Independent Distribution Consultant submit a Distribution Plan to Respondents
and the staff of the Commission no more than 100 days after the date of entry
of the Order.


 


b.             The Distribution Plan developed by
the Independent Distribution Consultant shall be binding unless, within 130
days after the date of entry of the Order, Respondents or the staff of the
Commission advises, in writing, the Independent Distribution Consultant of any
determination or calculation from the Distribution Plan that it considers to be
inappropriate and states in writing the reasons for considering such
determination or calculation inappropriate.


 


c.             With respect to any determination or
calculation with which Respondents or the staff of the Commission do not agree,
such parties shall attempt in good faith to reach an agreement within 160 days
of the date of entry of the Order. In the event that Respondents and the staff
of the Commission are unable to agree on an alternative determination or
calculation, the determinations and calculations of the Independent
Distribution Consultant shall be binding.


 


d.             Within 175 days of the date of entry
of the Order, Respondents shall require that the Independent Distribution
Consultant submit the Distribution Plan for the administration and distribution
of disgorgement and penalty funds pursuant to Rule 1101 [17 C.F.R. § 201.1101]
of the Commission’s Rules Regarding Fair Fund and Disgorgement Plans. Following
a Commission order approving a final plan of disgorgement, as provided in Rule
1104 [17 C.F.R. § 201.1104] of the Commission’s Rules Regarding Fair Fund and
Disgorgement Plans, Respondents shall require that the Independent Distribution
Consultant, with Respondents, take all necessary and appropriate steps to
administer the final plan for distribution of disgorgement and penalty funds.


 


e.             Respondents shall require that the
Independent Distribution Consultant, for the period of the engagement and for a
period of two years from completion of the engagement, not enter into any
employment, consultant, attorney-client, auditing or other professional
relationship with Respondents, or any of their present or former affiliates,
directors, officers, employees, or agents acting in their capacity as such.
Respondents shall require that any firm with which the Independent Distribution
Consultant


 


15

















 


is
affiliated in performance of his or her duties under the Order not, without
prior written consent of a majority of the independent directors and the staff
of the Commission, enter into any employment, consultant, attorney-client,
auditing or other professional relationship with Respondents, or any of their
present or former affiliates, directors, officers, employees, or agents acting
in their capacity as such for the period of the engagement and for a period of
two years after the engagement.


 


51.           Certification.
No later than twenty-four months after the date of entry of the Order, the
chief executive officer of each of the Respondents shall certify to the
Commission in writing that the respective Respondent has fully adopted and
complied in all material respects with the undertakings set forth in paragraphs
47 through 52 and with the recommendations of the Independent Compliance
Consultants or, in the event of material non-adoption or non-compliance, shall
describe such material non-adoption and non-compliance.


 


52.           Recordkeeping.
Respondents shall preserve for a period not less than six years from the end of
the fiscal year last used, the first two years in an easily accessible place,
any record of Respondents’ compliance with the undertakings set forth in
paragraphs 47 through 52.


 


53.           Deadlines.
For good cause shown, the Commission’s staff may extend any of the procedural
dates set forth above.


 


IV.


 


On the
basis of the foregoing, Respondents hereby consent to the entry of an Order by
the Commission imposing the following remedial sanctions:


 


A.            Pursuant
to Section 203(e) of the Advisers Act, W&R Investment Management is hereby
censured.


 


B.            Pursuant
to Section 15(b)(4) of the Exchange Act, W&R is hereby censured.


 


C.            Pursuant
to Section 17A(c)(3) of the Exchange Act, W&R Services is hereby censured.


 


D.            Pursuant
to Section 203(k) of the Advisers Act and Section 9(f) of the Investment
Company Act, W&R Investment Management shall cease and desist from
committing or causing any violations and any future violations of Sections
206(1) and 206(2) of the Advisers Act and Section 17(d) of the Investment
Company Act and Rule 17d-1 thereunder.


 


E.             Pursuant
to Section 203(k) of the Advisers Act and Section 9(f) of the Investment
Company Act, W&R shall cease and desist from committing or causing any
violations and any


 


16

















 


future violations of Sections 206(1) and 206(2) of the Advisers Act and
Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder.


 


F.             Pursuant
to Section 203(k) of the Advisers Act and Section 9(f) of the Investment
Company Act, W&R Services shall cease and desist from committing or causing
any violations and any future violations of Section 17(d) of the Investment
Company Act and Rule 17d-1 thereunder and from causing any violations and any
future violations of Sections 206(1) and 206(2) of the Advisers Act.


 


G.            Respondents
shall comply with the undertakings set forth in Paragraphs 47 through 52 above.


 


H.            Disgorgement
and Civil Money Penalties


 


1.             Respondents
shall pay, within 20 days of the entry of this Order, on a joint and several
basis, $40 million in disgorgement plus a civil money penalty of $10 million,
for a total payment of $50 million.


 


a.             Such
payment shall be:  (a) made by wire
transfer, United States postal money order, certified check, bank cashier’s check
or bank money order; (b) made payable to the Securities and Exchange
Commission; (c) wired, hand-delivered, or mailed to the Office of Financial
Management, Securities and Exchange Commission, Operations Center, 6432 General
Green Way, Stop 0-3, Alexandria, VA 
22131; and (d) submitted under cover letter that identifies W&R
Investment Management, W&R, and W&R Services as Respondents in these
proceedings, a copy of which cover letter, wire transfer instruction, money
order or check shall be sent to Rose Romero, District Administrator, Securities
and Exchange Commission, Fort Worth District Office, 801 Cherry Street, 19th
Floor, Fort Worth, Texas  76102.


 


b.             There
shall be, pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair
Fund established for the funds described in Section IV.H.1. Regardless of
whether any such Fair Fund distribution is made, amounts ordered to be paid as
civil money penalties pursuant to this Order shall be treated as penalties paid
to the government for all purposes, including all tax purposes. To preserve the
deterrent effect of the civil penalty, Respondents agree that they shall not,
after offset or reduction in any Related Investor Action based on Respondents’
payment of disgorgement in this action, further benefit by offset or reduction
of any part of Respondents’ payment of a civil penalty in this action (“Penalty
Offset”). If the court in any Related Investor Action grants such a


 


17

















 


Penalty
Offset, Respondents agree that they shall, within 30 days after entry of a
final order granting the Penalty Offset, notify the Commission’s counsel in
this action and pay the amount of the Penalty Offset to the United States
Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not
be deemed an additional civil penalty and shall not be deemed to change the
amount of the civil penalty imposed in this proceeding. For purposes of this
paragraph, a “Related Investor Action” means a private damages action brought
against Respondents by or on behalf of one or more investors based on
substantially the same facts as alleged in the Order instituted by the
Commission in this proceeding.


 


I.              Other Obligations and Requirements.
Nothing in this Order shall relieve Respondents or any Waddell & Reed fund
of any other applicable legal obligation or requirement, including any rule
adopted by the Commission subsequent to this Order.


 


V.


 


By
submitting this Offer, Respondents hereby acknowledge their waiver of those
rights specified in Rules 240(c)(4) and (5) [17 C.F.R. §201.240(c)(4) and (5)]
of the Commission’s Rules of Practice. Respondents also hereby waive service of
the Order.


 


VI.


 


Respondents
understand and agree to comply with the Commission’s policy “not to permit a
defendant or Respondent to consent to a judgment or order that imposes a
sanction while denying the allegations in the complaint or order for
proceedings” (17 C.F.R. §202.5(e)). In compliance with this policy, Respondents
agree: (i) not to take any action or to make or permit to be made any public
statement denying, directly or indirectly, any finding in the Order or creating
the impression that the Order is without factual basis; and (ii) that upon the
filing of this Offer of Settlement, Respondents hereby withdraw any papers
previously filed in this proceeding to the extent that they deny, directly or
indirectly, any finding in the Order. If Respondents breach this agreement, the
Division of Enforcement may petition the Commission to vacate the Order and
restore this proceeding to its active docket. Nothing in this provision affects
Respondents: (i) testimonial obligations; or (ii) right to take legal or
factual positions in litigation or other legal proceedings in which the
Commission is not a party.


 


18

















 


VII.


 


Consistent
with the provisions of 17 C.F.R. § 202.5(f), Respondents waive any claim of
Double Jeopardy based upon the settlement of this proceeding, including the
imposition of any remedy or civil penalty herein.


 


VIII.


 


Respondents hereby waive
any rights under the Equal Access to Justice Act, the Small Business Regulatory
Enforcement Fairness Act of 1996, or any other provision of law to seek from
the United States, or any agency, or any official of the United States acting
in his or her official capacity, directly or indirectly, reimbursement of
attorney’s fees or other fees, expenses, or costs expended by Respondents to
defend against this action. For these purposes, Respondents agree that Respondents
are not the prevailing parties in this action since the parties have reached a
good faith settlement.


 


IX.


 


Respondents agree that
they shall not seek or accept, directly or indirectly, reimbursement or
indemnification from any source including, but not limited to, payment made
pursuant to any insurance policy, with regard to any penalty amounts that Respondents
shall pay pursuant to this Order, regardless of whether such penalty amounts or
any part thereof are added to a distribution fund or otherwise used for the
benefit of investors. Respondents further agree that they shall not claim,
assert, or apply for a tax deduction or tax credit with regard to any federal,
state or local tax for any penalty amounts that Respondents shall pay pursuant
to this Order, regardless of whether such penalty amounts or any part thereof
are added to a distribution fund or otherwise used for the benefit of
investors.


 


19

















 


X.


 


Respondents
state that they have read and understand the foregoing Offer, that this Offer
is made voluntarily, and that no promises, offers, threats, or inducements of
any kind or nature whatsoever have been made by the Commission or any member,
officer, employee, agent, or representative of the Commission in consideration
of this Offer or otherwise to induce them to submit to this Offer.


 


 


	
  July 10, 2006.

  	
   

  	
  By:

  	
  /s/ Daniel C.
  Schulte

  	
   

  
	
   

  	
   

  	
  Daniel C.
  Schulte, General Counsel

  
	
   

  	
   

  	
  Waddell &
  Reed Investment Management Company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Daniel C.
  Schulte

  	
   

  
	
   

  	
   

  	
  Daniel C.
  Schulte, General Counsel

  
	
   

  	
   

  	
  W&R, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Daniel C.
  Schulte

  	
   

  
	
   

  	
   

  	
  Daniel C.
  Schulte, General Counsel

  
	
   

  	
   

  	
  Waddell &
  Reed Services Company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  STATE
  OF KANSAS

  	
  }

  	
   

  
	
   

  	
  }

  	
  SS:

  
	
  COUNTY
  OF JOHNSON

  	
  }

  	
   

  



 


The
foregoing instrument was acknowledged before me this July 10, 2006, by Daniel
C. Schulte, who is personally known to me.


 


 


	
  /s/ Vicky K.
  McCune

  	
   

  	
   

  
	
  Notary Public

  	
   

  	
   

  
	
  State of Kansas

  	
   

  	
   

  
	
  Commission
  Number

  	
  :

  	
   

  
	
  Commission
  Expiration

  	
  : June
  12, 2009

  	
   

  
				



 


20