Document:

Exhibit 10.2

 

	
  ATTORNEY
  GENERAL OF THE STATE OF NEW YORK

  	
   

  
	
  BUREAU OF
  INVESTMENT PROTECTION

  	
   

  
	
   

  	
  X

  	
   

  
	
   

  	
   

  
	
  In the Matter of

  	
   

  
	
   

  	
   

  
	
  WADDELL & REED, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
  X

  	
   

  

 

ASSURANCE OF DISCONTINUANCE

PURSUANT TO EXECUTIVE LAW § 63 (15)

 

WHEREAS,
pursuant to the provisions of the Martin Act (Article 23-A of the General
Business Law), Eliot Spitzer, Attorney General of the State of New York
(hereinafter, the “Attorney General”), commenced an investigation in 2003 into
the practices, procedures and conduct of Waddell & Reed, Inc., Waddell
& Reed Investment Management Company, and Waddell & Reed Services Company
(“Waddell”) during the period 1998 through September 2003 respecting market
timing of mutual funds advised by Waddell;(1)

 

WHEREAS, the
Investigation was conducted in cooperation with a parallel investigation of
Waddell by the U.S. Securities and Exchange Commission (“SEC”); in connection
with which the SEC is issuing an Order Instituting Administrative and Cease and
Desist Proceedings against Waddell (the “SEC Order”);

 

(1)“Market timing” refers to the practice of
short-term investing in mutual fund shares and/or the exploitation of pricing
inefficiencies in mutual fund share pricing.

 

1

 

WHEREAS, Waddell serves as the investment
advisor to the mutual funds listed in Schedule A hereto (the “Funds”);

 

WHEREAS, in
the course of the Investigation, numerous witnesses were interviewed and/or
deposed and extensive documentary evidence was reviewed;

 

WHEREAS,
Waddell has cooperated in the Investigation by producing documentary evidence
and witnesses and identifying evidence relevant to the Investigation;

 

WHEREAS, as
set forth in the findings of fact set forth below, the Investigation revealed
that certain practices by Waddell have violated the Martin Act, § 349 of the
General Business Law, and Executive Law § 63 (12);

 

WHEREAS,
Waddell has advised the Attorney General of its desire to resolve the
Investigation;

 

WHEREAS,
Waddell has agreed to reduce the management fees it charges to certain Funds
distributed to retail investors in the United States, to implement certain
changes with respect to the corporate governance of the Funds, to maintain a
certain compliance and ethics corporate structure, and to make certain
payments; and

 

WHEREAS, the
Attorney General finds the following sanctions appropriate and in the public
interest and Waddell, without admitting or denying the Attorney General’s
Findings made below, agrees to the sanctions provided herein;

 

NOW THEREFORE,
the Attorney General, based upon the Investigation, makes the following
Findings:

 

2

 

FINDINGS

 

1.                                       Waddell
is and was a corporation with its principal place of business located at 6300
Lamar Avenue, Overland Park, Kansas. At all relevant times, Waddell was an
investment adviser which had registered with the SEC pursuant to Section 203(c)
of the Advisers Act and filed with the State of New York. As an investment
adviser to the Funds, Waddell owed fiduciary duties to the Funds and their
investors. 

 

2.                                       The
findings of fact contained in paragraphs 1 through 43 of the SEC Order (the “Findings”)
are incorporated by reference herein.

 

3.                                       The
Attorney General has jurisdiction over this matter pursuant to the Martin Act
(Article 23-A of the General Business Law) and Executive Law § 63.

 

4.                                       The
acts and practices of Waddell described in the Findings violated the Martin
Act, Article 23-A of the General Business Law, § 349 of the General Business
Law, and § 63 (12) of the Executive Law.

 

AGREEMENT

 

IT NOW
APPEARING THAT Waddell desires to settle and resolve the Investigation without
admitting or denying the Attorney General’s Findings, which Findings are not
binding on any other person or entity in this or any other proceeding, or on
Waddell in any other proceeding to which the Attorney General is not a party, the
Attorney General and Waddell hereby enter into this Assurance of
Discontinuance, pursuant to Executive Law § 63 (15), and agree as follows:

 

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I.                                         Affirmative
Relief

 

A.                                    Disgorgement
and/or Restitution and Civil Penalty

 

1.                                       Pursuant
to paragraph IV.H.1 of the SEC Order, Waddell shall pay $25,000,000 in
disgorgement and/or restitution and $25,000,000 in penalties, exclusive of the
value of the management fee reductions provided for in Section I.C. hereof. The
$50,000,000 payment shall be remitted to and administered by the SEC in
accordance with the SEC Order.

 

2.                                       Waddell
agrees that it shall not seek or accept, directly or indirectly, reimbursement
or indemnification, including, but not limited to, payment made pursuant to any
insurance policy, with regard to any or all of the amounts payable pursuant to
Paragraph I.A.1 of this Assurance of Discontinuance. Nothing in this Assurance
of Discontinuance shall: (i) prevent Waddell from bringing claims (including
claims for indemnity and/or contribution) against persons or entities for
injuries sustained as a result of market timing; or (ii) limit or impair the
rights of persons other than Waddell under any applicable insurance policy.

 

3.                                       Except
as specified in Section I.E., no payments made or costs incurred by Waddell
pursuant to or in connection with this Assurance of Discontinuance shall be
borne directly or indirectly by any Fund or the shareholders thereof. Waddell
agrees and undertakes that neither it nor any of its affiliates shall directly
or indirectly assess any fee or charge to any Fund, or the shareholders
thereof, to defray, recoup or reimburse any such payments or costs, including,
but not limited to, the reduction in management fees provided for in Section
I.C.

 

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below. Within 15 days after the end of Waddell’s fiscal years 2006
through 2011, the president or chief executive officer of Waddell shall certify
in writing to the Attorney General, or his successor, that Waddell has complied
in all material respects with the provisions of this Paragraph.

 

B.                                    General Relief

 

1.                                       Waddell
admits the jurisdiction of the Attorney General over Waddell in connection with
the subject matter of this Investigation. Waddell will cease and desist from
engaging in any acts in violation of the Martin Act, General Business Law § 349
and/or Executive Law § 63 (12) and will comply with the Martin Act, General
Business Law § 349 and Executive Law § 63 (12).

 

2.                                       A
violation of any provision of this Assurance of Discontinuance by Waddell shall
constitute prima facie proof of violation of the Martin Act, General Business
Law § 349 and Executive Law § 63(12) in any civil action or proceeding
hereafter commenced by the Attorney General.

 

C.                                    Reduction
of Management Fee Rates For Five Years

 

1.                                       Effective
no later than October 1, 2006, Waddell and its Successors (as hereinafter
defined in Section II.D.8) will establish reduced Net Management Fee Rates for
certain of the Funds identified in Schedule A to this Assurance of
Discontinuance (the “Affected Funds”). “Net Management Fee Rates” means the
percentage fee rates specified in the relevant agreements between Waddell or
its affiliates and the Affected Funds, less waivers and reimbursements by
Waddell and its affiliates, in effect as of May 31, 2006, which rates are set
forth on Schedule A.

 

5

 

The reduced Net Management Fee Rates shall result in a reduction of
$5 million a year from the amount that would have been paid by the Affected
Funds based on the Net Management Fee Rates and assets under management of the
Affected Funds as of May 31, 2006, for a total projected reduction over five
years of $25 million from the amount of fees that would have been paid by
the Affected Funds based on the Net Management Fee Rates and assets under
management of the Affected Funds as of May 31, 2006. Waddell agrees that the
reduced Net Management Fee Rates established pursuant to this Paragraph shall
not be increased through September 30, 2011.

 

2.                                       Waddell
represents and warrants that Schedule A accurately and completely states:  (a) assets under management by the Affected
Funds as of May 31, 2006; (b) the Net Management Fee Rates for the Affected
Funds as of May 31, 2006; and (c) the reduced Net Management Fee Rates and the
resulting Net Management Fee reduction of $5 million as provided in Paragraph
I.C.1 above.

 

D.                                    Corporate
Governance of Mutual Funds

 

1.                                       On
or after October 1, 2006, Waddell shall not manage or provide investment
advisory services to any Fund that has not agreed to and implemented the
provisions of Section I. of this Assurance of Discontinuance insofar as they
concern acts by the Fund. In the event that any Fund to which Waddell provides
management or investment advisory services ceases to continue to act in
accordance with such provisions, Waddell shall promptly terminate its
management of, and/or provision of advisory services to, such Fund. Any such
termination will be made in accordance with the terms of Waddell’s investment
advisory agreement with such

 

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Fund, in accordance with the provisions of the Investment Company Act
of 1940 (15 U.S.C. 80a-1, et seq.)
and the Investment Advisers Act of 1940 (15 U.S.C. 80b-1, et seq.)(collectively, the “40 Acts”), and
within 180 days, unless this period is extended by agreement of the parties to
this Assurance of Discontinuance. For purposes of this Subsection D, “Fund”
includes any mutual fund into which any Fund is merged or its assets are
transferred, or any reorganized mutual fund into which the assets of any Fund
are transferred.

 

Chairman of the
Board

 

2.                                       Waddell
may manage or advise a Fund on or after October 1, 2006 only if the Chairman of
the Board of Directors (the “Chairman”) is in all respects independent of
Waddell and its affiliates and has had no prior relationship (other than a
purely social relationship), at any time, with Waddell, its then present or
former affiliates, directors, officers, employees, or agents acting in their
capacity as such agents, or with such Fund (other than to have been a Board
member or Chairman of the Board of a Waddell or Waddell affiliated mutual fund
or closed-end fund) (hereinafter referred to as an “Impermissible Relationship”).
An Impermissible Relationship includes, but is not limited to, any of the
following types of relationships: (a) substantial commercial, banking or
financial relationship, other than as an owner of shares of a Waddell or
Waddell-affiliated mutual fund or closed-end fund on customary terms; or (b)
any attorney-client, accounting, consulting, advisory, familial, charitable,
employee, director, trustee or officer relationship; provided, however, a
charitable relationship shall not be deemed an Impermissible Relationship if
the charitable relationship is disclosed to the Board of Directors. During the
period when acting as Chairman, the Chairman and any firm with which he or she
is

 

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affiliated shall have no such Impermissible Relationship. For a period of two years following
conclusion of the Chairman’s services as such, Waddell and its affiliates shall
not enter into any substantial commercial, banking or financial relationship or
any attorney-client, accounting, consulting, or advisory relationship with the
Chairman or with any firm with which the Chairman was affiliated while
Chairman; provided that nothing herein shall prevent Waddell and its affiliates
from advising a mutual fund or a closed-end fund of which the Chairman serves
as a member of the Board or of which the Chairman owns shares on customary
terms. An interested person of Waddell or of a Fund shall not be deemed “independent.”  For purposes of this Assurance of Discontinuance, “interested person” has
the same meaning as defined in the Investment Company Act of 1940 and “familial”
means all individuals within three degrees of consanguinity or affinity.

 

3.                                       In
the event that Waddell desires input from the Attorney General as to whether a
proposed Chairman of the Board of Directors, Senior Officer, Independent
Compliance Consultant or Independent Fee Consultant, (as defined below) has a
relationship that is an Impermissible Relationship, Waddell may make full
disclosure of the facts and circumstances and seek the prior guidance of the
Attorney General; provided, however, that nothing contained herein shall be
construed to excuse a breach of this Assurance of Discontinuance if a Chairman,
Senior Officer, Independent Compliance Consultant or Independent Fee Consultant
has already assumed office before the input of the Attorney General was sought
by Waddell.

 

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Board of Directors

 

4.                                       Waddell
may manage or advise a Fund on or after October 1, 2006 only if at least
seventy-five percent of the members of a Fund’s Board of Directors:  (a) are not interested persons, as defined by
the Investment Company Act, of Waddell or any of its affiliates; and (b) have
not been directors, officers or employees of Waddell at any point during the
preceding 10 years (“Independent Members”). In the event that a Fund’s Board of
Directors fails to meet this requirement at any time due to the death,
resignation, retirement or removal of any Independent Member, Waddell shall
terminate its management of, and provision of advisory services to such Fund
unless the Independent Members bring a Fund’s Board of Directors into
compliance within a reasonable period of time as provided under the provisions
of the ‘40 Acts, not to exceed 120 days (or 180 days if a shareholder vote is
necessary), unless extended by written agreement of the parties to this
Assurance of Discontinuance.

 

Senior Officer

 

5.                                       Within
30 days after the Effective Date of this Assurance of Discontinuance, Waddell
shall recommend in writing to the Board of Directors of each Fund that the Fund
either:

 

(a)                                  appoint
a full-time senior officer (“Senior Officer”) with the title of at least Vice President
who shall have no Impermissible Relationship during the period he or she is
acting as Senior Officer, provided, however, that a Fund’s Senior Officer may
be technically employed and paid by Waddell or an affiliate of Waddell and may
be the same person the Fund designates as the Chief Compliance Officer of the Fund
pursuant to Rule 38a-1(a)(4) of the Investment Company Act, 17 C.F.R.
270.38a-1(a)(4), so long as the Senior Officer is not the person employed by
Waddell or an affiliate of Waddell pursuant to Rule 206(4)-7 of the 

 

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Investment Advisers Act, 17 C.F.R. 275.206(4)-7, and has no duties or
responsibilities other than as Chief Compliance Officer of the Fund pursuant to
Rule 38a-1(a)(4) and Senior Officer of the Fund pursuant to this Assurance of
Discontinuance. The Senior Officer may serve as Senior Officer to more than one
Fund. For a period of two years following conclusion of the Senior Officer’s
services as such, Waddell and its affiliates shall not enter into any
substantial commercial, banking or financial relationship or any
attorney-client, accounting, consulting, or advisory relationship with the
Senior Officer or with any firm with which the Senior Officer was affiliated
while Senior Officer; or,

 

(b)                                 engage
an independent compliance consultant (the “Independent Compliance Consultant”) who
shall have no Impermissible Relationship during the period he or she is acting
as Independent Compliance Consultant and who has the duties and responsibilities
set forth in Paragraph I.D.8, below. The Independent Compliance Consultant
shall be a named individual who is either self-employed or a principal,
partner, member or officer of an entity. The Independent Compliance Consultant
may not be employed by Waddell pursuant to Rule 206(4)-7 of the Investment
Advisers Act, 17 C.F.R. 275.206(4)-7, but the Independent Compliance Consultant
may be the same person who serves as the Independent Compliance Consultant
pursuant to Paragraph 48 of the SEC Order, so long as the Independent
Compliance Consultant has no duties or responsibilities to Waddell, Waddell’s
affiliates, or any of their officers, directors or agents. For a period of two
years following conclusion of the Independent Compliance Consultant’s services
as such, Waddell and its affiliates shall not enter into any substantial
commercial, banking or financial relationship or any attorney-client,
accounting,

 

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consulting, or advisory relationship with the Independent Compliance
Consultant or with any firm with which the Independent Compliance Consultant
was affiliated while Independent Compliance Consultant;

 

6.                                       Waddell
may manage or advise a Fund after October 1, 2006 only if the Senior Officer or
Independent Compliance Consultant of the Fund acknowledges that he or she owes
a fiduciary duty to the Board of Directors of the Fund and to the shareholders
of the Fund, and only if he or she reports directly to the Board of Directors
of the Fund and such reporting is as often as may be appropriate, but no less
than quarterly.

 

7.                                       Waddell
may manage or advise a Fund after October 1, 2006 only if, subject to approval
by the Independent Members of the Fund’s Board of Directors, the Senior Officer
or the Independent Compliance Consultant has the authority to retain or consult
consultants, experts or staff as may be reasonably necessary to assist the
Senior Officer or the Independent Compliance Consultant in the performance of
his or her duties. The Senior Officer or the Independent Compliance Consultant,
and such consultants, experts or staff shall be compensated at their reasonable
and customary rates as determined by the Independent Members of the Board of
Directors of the Fund. The Senior Officer or the Independent Compliance
Consultant of a Fund may be terminated only with the approval of a majority of
the Independent Members of the Fund’s Board of Directors.

 

8.                                       Waddell
may manage or advise a Fund after October 1, 2006 only if the duties and
responsibilities of the Senior Officer or Independent Compliance Consultant of
the Fund include at least monitoring compliance by the Fund and its investment
advisor(s)  (insofar as the advisors act
in connection

 

11

 

with the Fund), with: (i) applicable federal and state securities laws;
(ii) applicable state laws respecting potential or actual conflicts of
interests; (iii) their respective fiduciary duties; and (iv) applicable codes
of ethics and/or compliance manuals.

 

9.                                       Waddell
may manage or advise a Fund after October 1, 2006 only if the Independent
Members of a Fund’s Board of Directors either; (a) assign to the Senior Officer
the duties set forth in the following sentence; or (b) retain an independent fee consultant
(the “Independent Fee Consultant”) who shall acknowledge that he or she owes a
fiduciary duty to the Board of Directors of the Fund and to the shareholders of
the Fund to perform such duties. The duties and responsibilities of the Senior
Officer or Independent Fee Consultant, as the case may be, shall include
managing the process by which proposed management fees (including, but not
limited to, advisory fees) to be charged the Fund are negotiated so that they
are negotiated in a manner which is at arms’ length and reasonable and
consistent with this Assurance of Discontinuance. Proposed management fees
include, but are not limited to, renewal of existing management fee agreements
or continuation of such existing fee agreements for more than a year after
approval by the Board of Directors of a Fund. If an Independent Fee Consultant
is retained, he or she shall be a named individual who is either self-employed
or a principal, partner, member or officer of an entity. The Independent Fee
Consultant shall have no duties or responsibilities to Waddell, Waddell’s
affiliates, or any of their officers, directors or agents and shall have no
Impermissible Relationship (except that the Independent Fee Consultant may have
previously served as a Fee Consultant to the Fund) during the period he or she
is acting as Independent Fee Consultant. For a period of two years following
conclusion of the Independent Fee Consultant’s services as such, 

 

12

 

Waddell and its affiliates shall not enter into any substantial
commercial, banking, or financial relationship or any attorney-client,
accounting, consulting, or advisory relationship with the Independent Fee
Consultant or with any firm with which the Independent Fee Consultant was
affiliated while Independent Fee Consultant;

 

10.                                 Waddell
may manage or advise a Fund after October 1, 2006 only if the reasonableness of
the proposed management fees is determined by the Board of Directors of the Fund
using an annual independent written evaluation prepared by or under the
direction of the Senior Officer or the Independent Fee Consultant that
considers at least the following: (i) management fees (including any components
thereof) charged to institutional and other clients of Waddell for like
services; (ii) management fees (including any components thereof) charged by
other mutual fund companies for like services; (iii) costs to Waddell and its
affiliates of supplying services pursuant to the management fee agreements,
excluding any intra-corporate profit; (iv) profit margins of Waddell and its
affiliates from supplying such services; (v) possible economies of scale as the
Fund grows larger; and (vi) the nature and quality of Waddell’s services,
including Fund performance.

 

11.                                 Waddell
may manage or advise a Fund after October 1, 2006 only if the Fund’s Senior
Officer or the Independent Fee Consultant keeps the Fund’s Board of Directors
fully and promptly informed of the fee evaluation process.

 

12.                                 Waddell
may manage or advise a Fund after October 1, 2006 only if it cooperates fully
and promptly with the Fund’s Senior Officer, Independent Compliance Consultant
or Independent Fee Consultant and provides any information (including
preparation of summaries or other

 

13

 

compilations of data) and documents in the possession, custody or
control of Waddell that the Senior Officer, Independent Compliance Consultant
or Independent Fee Consultant requests and that relate to or concern any of the
matters referenced in this Section. Waddell shall promptly provide the Senior
Officer, Independent Compliance Consultant or Independent Fee Consultant with
access to any director, officer or employee of Waddell and use its best efforts
to cause such persons to answer any and all inquiries put to them by the Senior
Officer, Independent Compliance Consultant or the Independent Fee Consultant
that relate to or concern any such matters.

 

13.                                 After
October 1, 2006, Waddell may manage or advise a Fund only if the Fund has hired
and continues to employ or retain the Fund’s Senior Officer and/or Independent
Compliance Consultant and/or Independent Fee Consultant. On or before thirty
(30) days after the Effective Date of this Assurance of Discontinuance, Waddell
shall provide a written schedule to the Attorney General that identifies the
name of the Fund’s Senior Officer and/or Independent Compliance Consultant
and/or the Independent Fee Consultant and describes his or her background and
compensation. Waddell shall keep the information on the schedule current and
provide an updated schedule to the Attorney General within 10 days of any
change in such information.

 

14.                                 No
later than 15 days after the Board of Directors of a Fund has completed its
review of the written fee evaluation provided for in Section I.D.10 and
approved a new advisory agreement or continuation of a presently existing
advisory agreement, Waddell shall disclose to the shareholders of the funds
affected by such fee evaluation a summary of such evaluation and

 

14

 

any opinions or conclusions arising from or included in the evaluation
(hereinafter referred to as the “Fee Summary”). The Fee Summary shall discuss
the factors referenced in Section I.D.10 and sufficient specifics so that an
investor in a Fund can evaluate the reasonableness of the fees; provided,
however, that the Fee Summary shall not be required to include or reveal
confidential, competitively sensitive data, such as (but not limited to)
institutional fee rates, internal costs and profit margins. Public disclosure
shall include, at least: (a) continuous, prominent posting (in downloadable
format) on the Fund’s website of Fee Summaries of at least the two most recent
fee evaluations as part of the Fund description; (b) delivery or incorporation
of the Fee Summary of the most
recent fee evaluation with, or in,  the
annual and semi-annual reports furnished to shareholders; and (c) prominent
notice, in any periodic account statements furnished by the Fund to individual
direct investors, of the fact that the Fee Summaries are available as provided
in (a) and (b) of this Paragraph I.D.14.

 

E.                                      Disclosure to Investors

 

1.                                       Waddell
shall:

 

(a)                                  maintain,
commencing no later than 120 days after the Effective Date of this Assurance of
Discontinuance, continuous, prominent posting on Waddell’s website of a
calculator that will enable an investor to calculate: (I) the fees and costs,
in actual dollars on a fund-by-fund basis, charged to each investor based upon
the investor’s most recent quarterly closing balance; (ii) the fees and costs,
in actual dollars that would be charged a hypothetical investment of $10,000
held for the next 10 years and the impact of such fees and costs on fund
returns for each year and cumulatively, assuming a 5% return for each year and
continuation of 

 

15

 

the reduced Net Management Fee Rates provided in Section I.C. above for
disclosures made during the period through October 31, 2011, and assuming for
disclosures made after October 31, 2011, a 5% return for each year and the then
current Net Management Fee Rates;

 

(b)                                 include
with each periodic account statement a Fund sends to each shareholder,
beginning with the statement for the period ending December 31, 2006, or as
soon as practicable thereafter (but in no event later than March 31, 2007): (i)
the fees and costs, in actual dollars on a fund-by-fund basis, charged to each
shareholder based upon the shareholder’s most recent quarterly closing balance;
(ii) the fees and costs, in actual dollars that would be charged a hypothetical
investment of $10,000 held for the next 10 years and the impact of such fees
and costs on fund returns for each year and cumulatively, assuming a 5% return
for each year and continuation of the reduced Net Management Fee Rates provided
in Section I.C. above for disclosures made during the period through October 31,
2011, and assuming for disclosures made after October 31, 2011, a 5% return for
each year and the then current Net Management Fee Rates;

 

(c)                                  Subject
to SEC approval, disclose in the applicable prospectus or amendment thereto a
summary showing the fees and costs, in actual dollars, that would be borne by a
hypothetical investment of $10,000 held for the next 10 years and the impact of
such fees and costs on fund returns for each year and cumulatively, assuming a
5% return for each year and continuation of the reduced Net Management Fee
Rates provided in Section I.C. above for disclosures made during the period
through October 31, 2011, and assuming for disclosures made after October 31,
2011, a 5% return for each year and the then current Net Management Fee Rates;
and

 

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2.                                       Waddell
shall bear the costs for developing procedures to implement the measures set
forth above in Paragraph I.E.1 in an easy to understand format.

 

II.                                     Other
Provisions

 

A.                                    Scope
Of This Assurance of Discontinuance

 

1.                                       This
Assurance of Discontinuance concludes the Investigation brought by the Attorney
General and any action the Attorney General could commence against Waddell or
any of its current affiliates, or any of the current or former officers,
directors, or employees of Waddell or any of its current affiliates, or any Fund
arising from or relating to the subject matter of the Investigation; provided
however, that nothing contained in this Assurance of Discontinuance shall be
construed to cover claims of any type by any other state agency or any claims
that may be brought by the Attorney General to enforce Waddell’s obligations
arising from or relating to the provisions contained in this Assurance of
Discontinuance. This Assurance of Discontinuance shall not prejudice, waive or
affect any claims, rights or remedies of the Attorney General with respect to
any person, other than Waddell or any of its current affiliates, or any of the
current or former officers, directors, or employees of Waddell or any of its
current affiliates,  and the Funds, all
of which claims, rights, and remedies are expressly reserved.

 

2.                                       If
Waddell does not make the payments as provided in Section I.A. of this
Assurance of Discontinuance (i.e.,
pursuant to the SEC Order) or the Net Management Fee reductions as provided in
Section I.C. of this Assurance of Discontinuance, or Waddell commits a breach
of any of its obligations under this Assurance of Discontinuance, the Attorney
General may terminate this Assurance of Discontinuance, at his sole discretion,
upon written notice to

 

17

 

Waddell, followed by Waddell’s failure to cure such breach within a
reasonable time, and Waddell agrees that any statute of limitations or other
time-related defenses applicable to the subject of the Investigation and any
claims arising from or relating thereto are tolled from and after December 31,
2004. In the event of such termination, Waddell expressly agrees and
acknowledges that this Assurance of Discontinuance shall in no way bar or
otherwise preclude the Attorney General from commencing, conducting or prosecuting
any investigation, action or proceeding, however denominated, related to the
Investigation, against Waddell or from using in any way any statements,
documents or other materials produced or provided by Waddell after commencement
of the Investigation, including, without limitation, any statements, documents
or other materials provided for purposes of settlement negotiations.

 

3.                                       For
any person or entity not a party hereto, this Assurance of Discontinuance does
not prohibit, limit, or create any rights, remedies, or liabilities. It also
does not limit or prohibit any defenses of Waddell, its current or former
affiliates, or their respective heirs, successors, executors, administrators,
and assigns to claims asserted by any person or entity not a party hereto.

 

4.                                       This
Assurance of Discontinuance is not intended by the Attorney General to subject
Waddell or any of its affiliates to any disqualifications under any federal
securities laws, rules or regulations, including the Investment Advisers Act,
the Investment Company Act, or the laws, rules or regulations of any state, the
District of Columbia, Puerto Rico or territory (collectively “State”),
including, without limitation, any disqualifications from relying upon the
State registration exemptions or State safe harbor provisions.

 

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5.                                       The
SEC Order, this Assurance of Discontinuance, and the order of any other State
in related proceedings against Waddell or its affiliates (collectively, the “Settlement
Documents”) shall not disqualify Waddell or its affiliates from any business
that they otherwise are qualified, licensed or permitted to perform under the
applicable law of the State of New York, and any disqualifications from relying
upon this state’s registration exemptions or safe harbor provisions that arise
from the Settlement Documents are hereby waived.

 

B.                                    Cooperation

 

1.                                       Waddell,
its current affiliates, and its successors, assigns, and/or purchasers of all
or substantially all its assets (“Waddell Entities”) agree to cooperate fully
and promptly with the Attorney General with regard to any investigation,
litigation or other proceeding initiated
by the Attorney General or to
which the Attorney General is a party, whether pending or subsequently initiated,
relating to market timing or other sales or trading practices. Waddell Entities
shall use their best efforts to ensure that all current and former officers,
directors, trustees, agents and employees of Waddell Entities also fully and
promptly cooperate with the Attorney General.

 

2.                                       Cooperation
shall include, without limitation:

 

(a)                                  production,
voluntarily and without service of subpoena, of all documents or other tangible
evidence requested by the Attorney General and any compilations or summaries of
information or data that the Attorney General requests be prepared, with the
exception of any information or documents with respect to which the Waddell
Entities have a statutory or contractual obligation of confidentiality to
persons or entities who are not parties to this

 

19

 

Assurance of Discontinuance (“Confidential Information”) and
information or documents protected by the attorney-client and/or work product
privileges (“Privileged Information”);

 

(b)                                 without
the necessity of a subpoena, having the then-current officers, directors, and
employees of Waddell Entities attend any proceedings in New York State or
elsewhere at which the presence of any such persons is requested by the
Attorney General and having such
then-current officers, directors,
and employees answer any and all inquiries that may be put by the Attorney
General to any of them at any proceedings or otherwise (“proceedings” include,
but are not limited to, any meetings, interviews, depositions, hearings, trials
or other proceedings), except to the extent to which such inquiries call for
the disclosure of Confidential Information or Privileged Information;

 

(c)                                  Waddell
Entities using their best efforts to cause then-current and former trustees and
agents, as well as former officers, directors, and employees of Waddell
Entities, upon reasonable notice, to attend any proceedings in New York State
or elsewhere at which the presence of any such persons is requested by the
Attorney General and to answer any and all inquiries that may be put by the
Attorney General to any of them at any proceedings or otherwise, except to the
extent to which such inquiries call for the disclosure of Confidential
Information or Privileged Information;

 

(d)                                 fully,
fairly and truthfully disclosing all information and producing all records and
other evidence in its possession relevant to all inquiries made by the Attorney
General, except to the extent to which such inquiries call for the disclosure
of Confidential Information or Privileged Information;

 

20

 

(e)                                  making
Waddell’s outside counsel reasonably available to provide comprehensive
presentations concerning any internal investigation relating to all matters in
this Assurance of Discontinuance and to answer questions, except to the extent
to which such presentations or questions call for the disclosure of
Confidential Information or Privileged Information.

 

3.                                       All
communications relating to cooperation pursuant to this Assurance of
Discontinuance may be made to Waddell Entities’ attorneys as follows:

 

Orrin L.
Harrison III

Akin Gump
Strauss Hauer & Feld LLP

1700 Pacific
Avenue

Suite 4100

Dallas,
TX  75201-4675

 

4.                                       In
the event Waddell Entities fail to comply with this section of the Assurance of
Discontinuance, the Attorney General, after written notice and a 15-day
opportunity to cure,  shall be entitled,
in addition to any other remedies in the Assurance of Discontinuance or otherwise,
to:  (a) liquidated damages of $100,000
for each day that Waddell Entities are in non-compliance; and (b) specific
performance.

 

C.                                    No
Indemnification

 

1.                                       Except
as otherwise required by applicable law, or by presently existing written
agreement, including, but not limited to, presently existing articles of
incorporation and presently existing bylaws of Waddell and/or its affiliates,
Waddell shall not make any payments of indemnification or allowances of
expenses respecting “market timing” transactions to any person, including,
without limitation, current or former directors, officers, employees or agents.

 

21

 

However, any such payments by Waddell required by applicable law or by
such presently existing written agreements (as described in this Paragraph
II.C.1), shall be payable at the time and in the manner of Waddell’s choosing.

 

2.                                       Nothing
in this Assurance of Discontinuance shall prevent or limit Waddell from
indemnifying the Funds or their successors in connection with any business
combination, merger or otherwise.

 

D.                                    Miscellaneous
Provisions

 

1.                                       This
Assurance of Discontinuance and any dispute related thereto shall be governed
by the laws of the State of New York without regard to any conflicts of laws
principles.

 

2.                                       No
failure or delay by the Attorney General in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
provided herein shall be cumulative.

 

3.                                       Waddell
consents to the jurisdiction of the Attorney General in any proceeding or
action to enforce this Assurance of Discontinuance.

 

4.                                       Waddell
enters into this Assurance of Discontinuance voluntarily and represents that no
threats, offers, promises or inducements of any kind have been made by the
Attorney General or any member, officer, employee, agent or representative of
the Attorney General to induce Waddell to enter into this Assurance of
Discontinuance.

 

5.                                       Waddell
agrees not to take any action or to make or permit to be made any public
statement denying, directly or indirectly, any finding in this Assurance of
Discontinuance or

 

22

 

creating the impression that this Assurance of Discontinuance is
without factual basis. Nothing in this Paragraph affects Waddell’s: (a)
testimonial obligations; or (b) right to take legal or factual positions in any
legal or administrative proceeding in which the Attorney General is not a
party.

 

6.                                       This
Assurance of Discontinuance may be changed, amended or modified only by a
writing signed by all parties hereto.

 

7.                                       This
Assurance of Discontinuance, together with the attached schedules, constitutes
the entire agreement between the Attorney General and Waddell and supersedes
any prior communication, understanding or agreement, whether written or oral,
concerning the subject matter of this Assurance of Discontinuance.

 

8.                                       This
Assurance of Discontinuance shall be binding upon Waddell and its successors,
assigns, and/or purchasers of all or substantially all its assets (“Successors”)
for as long as Waddell or any Successor continues to provide investment
advisory services to the Funds or any successors thereof (including any funds
with which a Fund is merged or its assets are transferred, or any reorganized
mutual fund into which the assets of any Fund are transferred) provided,
however, that any Successor to Waddell may petition the Attorney General and obtain
relief from such undertakings.

 

23

 

9.                                       This
Assurance of Discontinuance shall be effective and binding only when this
Assurance of Discontinuance is signed by all parties and the SEC Order is
approved and issued by the Commission (referred to herein as the “Effective
Date”). This Assurance of Discontinuance may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one instrument.

 

24

 

WHEREFORE, the
following signatures are affixed hereto on the dates set forth below.

 

Dated:  July 19, 2006

 

	
   

  	
  Waddell
  & Reed, Inc.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Daniel
  C. Schulte

  	
   

  
	
   

  	
   

  	
     Daniel
  C. Schulte

  	
   

  
	
   

  	
   

  	
     Senior
  Vice-President and General Counsel

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Dated: July
       , 2006

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  ELIOT SPITZER,

  	
   

  
	
   

  	
  Attorney
  General of the State of New York

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Roger L.
  Waldman

  	
   

  
	
   

  	
   

  	
  Senior
  Enforcement Counsel

  	
   

  
	
   

  	
   

  	
  Investment
  Protection Bureau

  	
   

  

 

25

 

ACKNOWLEDGMENT

 

STATE OF Kansas      )

                                             :ss.

COUNTY OF Johnson)

 

On this 19th day of July, 2006
before me personally came Daniel C. Schulte known to me, who, being duly sworn
by me, did depose and say that he or she is Senior Vice President & General
Counsel of Waddell & Reed, Inc., the entity described in the foregoing
Assurance of Discontinuance, is duly authorized by Waddell & Reed, Inc., to
execute the same, and that he or she signed his name in my presence by like
authorization.

 

 

	
  /s/ Vicki K.
  McCune

  	
   

  
	
  Notary Public

  
	
  My commission expires: 6/12/2009

  
	
   

  
	
  Dated: July 19, 2006

  

 

 

26

 

Schedule A

 

	
   

  	
   

  	
  AUM as
  of

  	
   

  	
  Contractual
  Fee Rates

  	
   

  	
  Contractual
  Fee Rates

  	
   

  	
  Fee

  	
   

  
	
   

  	
   

  	
  As of
  5/31/06

  	
   

  	
  as of
  5/31/06

  	
   

  	
  as of
  10/01/06

  	
   

  	
  Reduction

  	
   

  
	
  Waddell & Reed Advisor Funds

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Advisors
  Science & Technology Fund

  	
   

  	
  2,430,628,883

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.830

  	
  %

  	
  $

  	
  (200,000

  	
  )

  
	
  Advisors New
  Concepts Fund

  	
   

  	
  1,346,981,415

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.830

  	
  %

  	
  $

  	
  (200,000

  	
  )

  
	
  Advisors Small
  Cap Fund

  	
   

  	
  986,885,548

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.830

  	
  %

  	
  $

  	
  (197,377

  	
  )

  
	
  Advisors
  International Growth Fund

  	
   

  	
  780,389,423

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.820

  	
  %

  	
  $

  	
  (234,117

  	
  )

  
	
  Advisors Core
  Investment Fund

  	
   

  	
  4,129,212,845

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.650

  	
  %

  	
  $

  	
  (500,000

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
  Second 1.0 billion

  	
  0.650

  	
  %

  	
  Second 1.0 billion

  	
  0.640

  	
  %

  	
  $

  	
  (100,000

  	
  )

  
	
  Advisors
  Accumulative Fund

  	
   

  	
  1,967,885,471

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.660

  	
  %

  	
  $

  	
  (400,000

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
  Second 1.0 billion

  	
  0.650

  	
  %

  	
  Second 1.0 billion

  	
  0.640

  	
  %

  	
  $

  	
  (96,789

  	
  )

  
	
  Advisors Vanguard
  Fund

  	
   

  	
  1,810,743,814

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.670

  	
  %

  	
  $

  	
  (300,000

  	
  )

  
	
  Advisors
  Retirement Shares Fund

  	
   

  	
  615,429,111

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.650

  	
  %

  	
  $

  	
  (307,715

  	
  )

  
	
  Advisors Asset
  Strategy Fund

  	
   

  	
  1,562,050,307

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.690

  	
  %

  	
  $

  	
  (100,000

  	
  )

  
	
  Advisors Value
  Fund Fund

  	
   

  	
  538,275,624

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.690

  	
  %

  	
  $

  	
  (53,828

  	
  )

  
	
  Advisors
  Continental Income Fund

  	
   

  	
  488,896,151

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Advisors Dividend
  Income Fund

  	
   

  	
  407,072,613

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Advisors
  Tax-Managed Equity Fund

  	
   

  	
  71,726,419

  	
   

  	
  First 1.0 billion

  	
  0.650

  	
  %

  	
  First 1.0 billion

  	
  0.650

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Advisors High
  Income Fund

  	
   

  	
  899,685,105

  	
   

  	
  First .5 billion

  	
  0.625

  	
  %

  	
  First .5 billion

  	
  0.575

  	
  %

  	
  $

  	
  (250,000

  	
  )

  
	
  Advisors Global
  Bond Fund

  	
   

  	
  278,861,775

  	
   

  	
  First .5 billion

  	
  0.625

  	
  %

  	
  First .5 billion

  	
  0.590

  	
  %

  	
  $

  	
  (97,602

  	
  )

  
	
  Advisors Bond
  Fund

  	
   

  	
  639,212,440

  	
   

  	
  First .5 billion

  	
  0.525

  	
  %

  	
  First .5 billion

  	
  0.485

  	
  %

  	
  $

  	
  (200,000

  	
  )

  
	
  Advisors Municipal
  Bond Fund

  	
   

  	
  553,197,583

  	
   

  	
  First .5 billion

  	
  0.525

  	
  %

  	
  First .5 billion

  	
  0.485

  	
  %

  	
  $

  	
  (200,000

  	
  )

  
	
  Advisors
  Municipal High Fund

  	
   

  	
  459,763,691

  	
   

  	
  First .5 billion

  	
  0.525

  	
  %

  	
  First .5 billion

  	
  0.485

  	
  %

  	
  $

  	
  (183,905

  	
  )

  
	
  Advisors
  Government Securities Fund

  	
   

  	
  224,070,635

  	
   

  	
  First .5 billion

  	
  0.500

  	
  %

  	
  First .5 billion

  	
  0.460

  	
  %

  	
  $

  	
  (89,628

  	
  )

  
	
  Advisors
  Limited-Term Bond Fund

  	
   

  	
  144,827,857

  	
   

  	
  First .5 billion

  	
  0.500

  	
  %

  	
  First .5 billion

  	
  0.455

  	
  %

  	
  $

  	
  (65,173

  	
  )

  
	
  Advisors Cash
  Magement Fund

  	
   

  	
  699,564,122

  	
   

  	
   

  	
  0.400

  	
  %

  	
   

  	
  0.400

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Advisors Energy
  Fund

  	
   

  	
  110,306,642

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  $

  	
  0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  W&R Target Funds, Inc.

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Target Global
  Natural Resources Fund

  	
   

  	
  62,472,623

  	
   

  	
  First .5 billion

  	
  1.000

  	
  %

  	
  First .5 billion

  	
  1.000

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Mid Cap
  Growth Fund

  	
   

  	
  23,090,618

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.830

  	
  %

  	
  $

  	
  0

  	
   note a

  
	
  Target
  International Value Fund

  	
   

  	
  499,627,434

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Micro Cap
  Growth Fund

  	
   

  	
  60,127,189

  	
   

  	
  First 1.0 billion

  	
  0.950

  	
  %

  	
  First 1.0 billion

  	
  0.950

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Small Cap
  Value Fund

  	
   

  	
  179,805,278

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Value Fund

  	
   

  	
  339,552,202

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.690

  	
  %

  	
  $

  	
  (33,955

  	
  )

  
	
  Target
  Science & Technology Fund

  	
   

  	
  351,181,432

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.830

  	
  %

  	
  $

  	
  (70,236

  	
  )

  
	
  Target Asset
  Strategy Fund

  	
   

  	
  525,608,597

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.690

  	
  %

  	
  $

  	
  (52,561

  	
  )

  
	
  Target Money
  Market Fund

  	
   

  	
  54,880,063

  	
   

  	
   

  	
  0.400

  	
  %

  	
   

  	
  0.400

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Bond Fund

  	
   

  	
  205,444,365

  	
   

  	
  First .5 billion

  	
  0.525

  	
  %

  	
  First .5 billion

  	
  0.485

  	
  %

  	
  $

  	
  (82,178

  	
  )

  
	
  Target High
  Income Fund

  	
   

  	
  188,914,214

  	
   

  	
  First .5 billion

  	
  0.625

  	
  %

  	
  First .5 billion

  	
  0.575

  	
  %

  	
  $

  	
  (94,457

  	
  )

  
	
  Target Growth
  Fund

  	
   

  	
  1,186,443,449

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.670

  	
  %

  	
  $

  	
  (300,000

  	
  )

  
	
  Target Core
  Equity Fund

  	
   

  	
  751,083,846

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.650

  	
  %

  	
  $

  	
  (375,542

  	
  )

  
	
  Target
  International Growth Fund

  	
   

  	
  222,249,633

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.820

  	
  %

  	
  $

  	
  (66,675

  	
  )

  
	
  Target Small Cap
  Fund

  	
   

  	
  597,226,096

  	
   

  	
  First 1.0 billion

  	
  0.850

  	
  %

  	
  First 1.0 billion

  	
  0.830

  	
  %

  	
  $

  	
  (119,445

  	
  )

  
	
  Target Balanced
  Fund

  	
   

  	
  566,714,765

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Limited-Term
  Bond Fund

  	
   

  	
  71,856,006

  	
   

  	
  First .5 billion

  	
  0.500

  	
  %

  	
  First .5 billion

  	
  0.455

  	
  %

  	
  $

  	
  (32,335

  	
  )

  
	
  Target Dividend
  Fund

  	
   

  	
  56,195,576

  	
   

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  First 1.0 billion

  	
  0.700

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Mortgage
  Securities Fund

  	
   

  	
  27,078,233

  	
   

  	
  First .5 billion

  	
  0.500

  	
  %

  	
  First .5 billion

  	
  0.500

  	
  %

  	
  $

  	
  0

  	
   

  
	
  Target Real
  Estate Fund

  	
   

  	
  38,286,271

  	
   

  	
  First 1.0 billion

  	
  0.900

  	
  %

  	
  First 1.0 billion

  	
  0.900

  	
  %

  	
  $

  	
  0

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total
  AUM

  	
   

  	
  27,153,505,364

  	
   

  	
   

  	
   

  	
   

  	
  Total Fee Reduction

  	
   

  	
  $

  	
  (5,003,517

  	
  )

  

 

note a - the Target Mid Cap Growth contractual management fee rate for
the first breakpoint is reduced by 2 basis points. However, it does not impact
fees until the fund assets are at least $25 million due to the voluntary waiver
of fees when assets are below $25 million.Exhibit 10.3

 

BEFORE THE SECURITIES COMMISSIONER

OF THE STATE OF KANSAS

 

	
  In the Matter of:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WADDELL & REED, INC.,

  	
   

  	
  Docket No. 2004E020

  
	
  WADDELL & REED INVESTMENT

  	
   

  	
  KSC Case No. 2004-4821

  
	
  MANAGEMENT COMPANY, AND

  	
   

  	
   

  
	
  WADDELL & REED SERVICES

  	
   

  	
   

  
	
  COMPANY,

  	
   

  	
   

  

 

Respondents.

	
   

  	
  /

  

(A proceeding pursuant to K.S.A. 17-1266a)

 

STIPULATION
FOR CONSENT ORDER

 

This proceeding follows an investigation conducted by the Office of the
Securities Commissioner of Kansas. As a result of this investigation, staff for
the Securities Commissioner allege as follows:

 

ALLEGATIONS
OF FACT

 

a. Respondents

 

1.               Respondent Waddell & Reed, Inc.
(W&R), CRD #866, has been registered as a broker-dealer under the Kansas
Securities Act since 1961. Its principal business address is 6300 Lamar Avenue,
Overland Park, KS  66202. It is the
principal underwriter and distributor for the Waddell & Reed Advisors family
of mutual funds, which includes the Waddell & Reed Advisors International
Growth Fund, Inc. (“International Growth Fund”). Respondent W&R is a
Kansas-based broker-dealer with 171 registered representatives who reside in
Kansas. The registered representatives operate out of offices in 40 different
cities throughout the state.

 

 

2.               Respondent Waddell & Reed Investment
Management Company (“WRIMCO”), CRD #106343, has been registered with the United
States Securities and Exchange Commission since 1992. Pursuant to K.S.A.
17-1254(e), it has made notice filings as a federal covered adviser with the
Office of the Kansas Securities Commissioner since 2001. Its principal business
address is the same as respondent W&R. It is the investment adviser and
manager for the Advisors Funds, including the International Growth Fund.

 

3.               Respondent Waddell & Reed Services
Company (“WRSCO”) provides transfer agent and accounting services to the
Waddell & Reed mutual funds, including the International Growth Fund. Its
principal business address is the same as respondent W&R.

 

b. Background – Description of Market Timing
in General

 

4.               Mutual
funds are generally priced once a day after the close of the markets. The share
price is the net asset value or “NAV.” 
The NAV reflects the closing price of the securities that comprise the
fund’s portfolio, plus the value of any cash that the fund manager maintains
for the fund, less the fund’s liabilities, and it is stated on a per share
basis. A mutual fund may trade shares during the day but, unlike stock, the
price of a mutual fund does not change during the course of the day. Orders
placed prior to 4:00 p.m. EST are entered at that day’s NAV while orders placed
after 4:00 p.m. EST are given the next day’s NAV.

 

5.               Mutual fund market timing involves the
rapid trading of mutual fund shares. The rapid trading strategy may be employed
to take advantage of the inefficiencies in mutual fund pricing. For example,
the NAV of a mutual fund containing international stocks may reflect stale
prices because the NAV does not immediately take into account events impacting
the overseas markets. As a result, a timer can anticipate a short-term upswing
in an international fund because of market conditions that are not yet reflected
in the stale NAV of the fund, and

 

2

 

the timer can purchase shares at the undervalued NAV. Then, when the
NAV moves upward to reflect the new market conditions, the timer can sell its
shares in the short term at a profit.

 

6.               Short-term trading may harm long-term
investors in a mutual fund. The short-term trading can disrupt the management
of the fund’s investment portfolio because the portfolio manager may be forced
to liquidate securities in order to redeem the shares of market timers. This
causes an increase in transactional costs and commissions, as well as the
realization of taxable gains or losses on the trades that were necessitated by
timer redemptions. In addition, the portfolio manager may have to buy stock as
it is going up in price or sell into a falling market in order to accommodate
the inflows and outflows of timer funds.

 

7.               To prevent the disruption to the fund,
fund managers may maintain large enough cash balances to accommodate timer
trades without having to buy or sell securities at inopportune times. However,
this strategy can reduce the overall performance of the fund by requiring the
fund managers to keep a significant percentage of the fund assets in cash and
depriving investors of the advantages of being fully invested in a rising
market.

 

8.               Market timing may dilute the value of a
mutual fund by allowing the timer to siphon short-term profits from a long-term
investment vehicle. For example, a timer may invest an amount equal to 10
percent of the fund in anticipation of a short-term upswing in the NAV. If the
NAV rises as anticipated, the timer can immediately redeem its shares and take
10 percent of the profits from the upswing. This leaves the long-term
shareholders with 10 percent less than the profits they would have otherwise
received from the rise in the NAV. In effect, the timer clipped 10 percent of
the profits from the long-term shareholders, even 

 

3

 

though the fund manager may not have actually invested the timer’s
money in the securities which generated the profits because the timer funds
were left as cash balances.(1)

 

c. Market Timing at Waddell & Reed

 

9.               In a prospectus and Statement of
Additional Information for the International Growth Fund dated October 15,
2002, the company described the investment philosophy of the International
Growth Fund as follows:

 

•                  Who May Want to
Invest:  International Growth Fund is
designed for investors seeking long-term appreciation of capital by investing
primarily in securities issued by foreign companies.

 

•                  The primary goal
of International Growth Fund is long-term capital appreciation, with current
income as a secondary goal.

 

10.         Prior to October 2001, the Statement of
Additional Information for the International Growth Fund did not refer to
market timing. In October 2001, the Statement of Additional Information was
amended to say “[t]he Fund may limit activity deemed to be market timing by
restricting the amount of exchanges permitted by shareholders.”

 

11.         From 1995 through 2003, the respondents
allowed certain clients to engage in market timing in Advisors Funds,
particularly the International Growth Fund. Beginning in December 1998, respondents
W&R and WRSCO entered into written agreements with at least three investors
which allowed the investors to engage in short-term trading, subject to certain
limitations on the number, amount and frequency of trades, in return for a fee based
on a

 

(1)           In some
circumstances, market timing can benefit a fund.  For example, in the example provided in
paragraph 8, if the fund declined in
value by 10 percent after the timer’s investment, then the timer’s investment
would be accretive to the fund.  This is
because while the fund’s equity assets decreased in value, the timer’s
investment remained in cash and suffered no diminution in value (and likely
earned interest).  Thus, the timer pays
10 percent of the decline in the value of the fund (although its investment
remained the same or increased in value), and the long-term shareholders avoid
paying that portion of the loss paid by the timer.

 

4

 

percentage of the investor’s assets under management. Between 1998 and
2003, approximately $3.6 million was paid by the three investors to WRSCO.

 

12.         As a registered broker-dealer, respondent
W&R processed the transactions on behalf of the market timers.

 

13.         The respondents entered into written
agreements with known market timers, subject to certain limitations on the
number, amount and frequency of trades, despite the respondents’ having
received notice that mutual fund timing could have a harmful effect on the
funds and their long-term investors. The timing agreements and their possible effects
on the funds were not disclosed to the long-term investors. In addition, the
conflicts of interest created by the timers’ payment of special fees were not
disclosed to the shareholders in the funds.

 

d. Respondents’ Efforts to Control Other
Market Timers

 

14.         Initially, WRIMCO personnel handled any
monitoring of timing in the Waddell & Reed funds. Beginning in late 2000 or
early 2001, however, WRSCO undertook most of the fund complex’s limited efforts
to monitor timing activity. Although WRSCO initially did not have any
systematic means to detect timing or frequent exchanges, WRSCO personnel
sometimes noticed unusual activity and followed up to determine whether the
accountholders were timing the funds. When timers were discovered, the timers
were usually asked to enter into written agreements that, among other things,
contained certain limitations on the number, amount and frequency of trades. At
that time, WRSCO 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.

 

5

 

15.         Beginning in mid-2001, WRSCO 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 monthly schedules that counted each timer’s
round trips.

 

16.         WRIMCO, and later WRSCO, 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 time far in excess
of the 12 round trip limit until they finally obtained written timing agreements
from them in March 2002.

 

17.         In an effort to limit timing in the Waddell
& Reed funds, beginning at least as early as 2002, WRSCO 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. However, at the same
time it was policing market timing and frequent trading by certain accounts, WRSCO
allowed certain known market timers, including the fee paying timers, to time
the funds.

 

18.         In May 2003, in an effort to discourage
timing, the respondents 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.

 

6

 

Allegations of Law

 

1.               Respondents W&R and WRSCO engaged in
an act, practice or course of business which operated as a fraud or deceit upon
the long-term shareholders of Waddell & Reed mutual funds, in violation of
K.S.A. 17-1253(a).

 

2.               Respondent WRIMCO engaged in an act,
practice or course of business which operated as a fraud or deceit upon the long-term
shareholders of Waddell & Reed mutual funds, in violation of K.S.A.
17-1253(b).

 

3.               Respondent W&R engaged in dishonest
and unethical business practices, in violation of K.A.R. 81-3-1(i)(1) and
K.S.A. 17-1254(m)(7).

 

4.               Respondent WRIMCO engaged in unethical
business practices, in violation of K.A.R. 81-14-5(a) and K.S.A. 17-1253(b)(5).

 

The respondents, wishing to obtain a disposition of this matter without
formal litigation, have determined not to contest the issuance of the attached Consent
Order.

 

IT IS, THEREFORE, STIPULATED AND AGREED, by and between staff for the
Securities Commissioner of Kansas and respondents Waddell & Reed, Inc., Waddell
& Reed Investment Management Company, and Waddell & Reed Services
Company, that:

 

1.               The respondents
acknowledge that the Securities Commissioner for the State of Kansas has
jurisdiction over the respondents and the subject matter of this action.

 

2.               The respondents
waive their rights to any hearing to contest the allegations set forth above,
consent to the issuance of the attached Consent Order, and waive their
rights to seek judicial review of this proceeding.

 

3.               The respondents neither admit nor deny
the allegations of the Commissioner’s staff as set forth above. Any findings,
statements of fact, or other provisions of this Stipulation and the

 

7

 

attached Consent Order are not binding on any other person or
entity in this or any other proceeding, or on the respondents in any other
proceeding to which the Commissioner is not a party.

 

4.               The respondents, jointly and severally,
agree to pay a fine of $2,000,000 to the Office of the Securities Commissioner
within 30 days after the effective date of the attached Consent Order. It is
the intention of the parties, but not binding upon the State, that such funds shall
be used for the education of consumers in matters concerning securities
regulation and investments.

 

5.               Staff for the
Commissioner recognize the following mitigating factors:

 

a.               The respondents
have cooperated fully with the staff in the course of its investigation and
this proceeding.

 

b.              In a related case
involving the same conduct alleged above, the respondents have agreed to pay a
total of $50,000,000 to the United States Securities and Exchange Commission. Those
funds will be utilized to pay restitution to harmed investors, including Kansas
investors.

 

c.               In their settlement
with the SEC, the respondents agreed to implement changes to their management
and supervisory structures to prevent similar violations in the future.

 

d.              In a related case
involving the same conduct alleged above, the respondents have agreed to reduce
fees by a total of $25,000,000 over a 5 year period pursuant to an agreement
with the Office of the New York Attorney General.

 

6.               Staff shall
recommend to the Commissioner that, for good cause shown, nothing in this Stipulation
for Consent Order or in the Consent Order should constitute grounds
for disqualifying the respondents from the use of the Uniform Limited Offering
Exemption,

 

8

 

K.A.R. 81-5-6(a)(2), or any other exemption
with the same or substantially similar disqualifications (commonly known as “bad
boy” provisions), in any future securities transaction otherwise effected in
full compliance with applicable securities laws and regulations.

 

7.               This Stipulation
for Consent Order and Consent Order conclude the Investigation brought by the
Kansas Securities Commissioner and any action the Kansas Securities
Commissioner could commence against Waddell or any of its current affiliates,
or any of the current or former officers, directors, or employees of Waddell or
any of its current affiliates, or any Fund arising from or relating to the
subject matter of the Investigation; provided however, that nothing contained
in this Stipulation for Consent Order or Consent Order shall be construed to
cover claims of any type by any other state agency or any claims that may be
brought by the Kansas Securities Commissioner to enforce Waddell’s obligations
arising from or relating to the provisions contained in this Stipulation for
Consent Order or Consent Order. The Stipulation for Consent Order and Consent
Order shall not prejudice, waive or affect any claims, rights or remedies of
the Kansas Securities Commissioner with respect to any person, other than
Waddell or any of its current affiliates, or any of the current or former
officers, directors, or employees of Waddell or any of its current affiliates,
and the Funds, all of which claims, rights, and remedies are expressly
reserved.

 

8.               On June 10, 2005,
respondent Waddell & Reed, Inc. entered into a settlement with the Kansas
Insurance Department, Docket No. 3468-CO, as part of a “global settlement” with
the NASD and other states for alleged violations involving the exchanging of
variable annuities. In the settlement, Waddell & Reed, Inc. agreed to pay
the Kansas Insurance Department a civil monetary penalty of $145,291.70. The
Office of the Securities Commissioner was not a

 

9

 

party to the settlement and did not consent
to its terms; however, the respondent entered into the settlement in good faith
with an agency of the State of Kansas, so the Office of the Securities
Commissioner agrees not to take enforcement action with respect to the
allegations contained in the settlement agreement.

 

9.               This Stipulation
for Consent Order and the Consent Order shall be effective and binding only
when they are signed by all parties and the SEC order is approved and issued by
the U.S. Securities and Exchange Commission (referred to herein as the “effective
date”). This Stipulation may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together shall constitute
one instrument.

///

 

///

 

///

 

///

 

///

 

///

 

///

 

10

 

APPROVED BY:

 

 

	
  /s/ Daniel C. Schulte

  	
   

  	
  7/10/06

  	
   

  
	
  Daniel C. Schulte

  	
   

  	
  Date

  
	
  Senior Vice President and General Counsel

  	
   

  	
   

  
	
  Waddell & Reed, Inc.

  	
   

  	
   

  
	
  Waddell & Reed Services Company,

  	
   

  	
   

  
	
  Waddell & Reed Investment Management Co.

  	
   

  	
   

  

 

	
  State of 

  	
  KANSAS

  	
  )

  
	
   

  	
  ) ss.

  
	
  County of

  	
  JOHNSON

  	
  )

  
				

 

This instrument was signed before me on this, the 10th day of July, 2006,
by Daniel C. Schulte as the Senior Vice President and General Counsel of Waddell
& Reed, Inc., Waddell & Reed Services Company, and Waddell & Reed
Investment Management Co.

 

 

	
   

  	
   

  	
  /s/ Vicki K.
  McCune

  	
   

  
	
  (seal)

  	
   

  	
  Notary Public

  
	
   

  
	
  My appointment expires: 

  	
  6/12/09

  	
   

  
						

 

 

 

APPROVED BY:

 

 

 

	
  /s/  Rick A. Fleming

  	
   

  	
  7/13/06

  	
   

  
	
  Rick A. Fleming, #17127

  	
   

  	
  Date

  
	
  General Counsel

  	
   

  	
   

  
	
  Office of the Securities Commissioner

  	
   

  	
   

  

 

 

 

	
  /s/  Gail E. Bright

  	
   

  	
  7/14/06

  	
   

  
	
  Gail E. Bright, #14572

  	
   

  	
  Date

  
	
  Associate General Counsel

  	
   

  	
   

  
	
  Office of the Securities Commissioner

  	
   

  	
   

  

 

11

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