EXHIBIT 23P(2)
CODE OF ETHICS
FAIRHOLME CAPITAL MANAGEMENT, LLC
18.1 INTRODUCTION
Fairholme Capital Management, L.L.C. ("FCM") believes in the principle
that our clients' interests come first and that high ethical standards
are integral to success in our business. Further, FCM has a fiduciary
duty to its clients which requires individuals associated with our
firm to ensure that any perceived or actual conflicts of interest are
resolved in a fair and equitable manner for our clients.
FCM recognizes its fiduciary obligations to its clients. Personal
trading activities of individuals associated with investment advisory
firms may create conflicts of interests with clients of these firms.
In order to maintain high ethical standards, FCM has adopted this Code
of Ethics. It contains provisions designed to prevent improper
personal trading, identify conflicts of interest and provide a means
to resolve any actual or potential conflict in a fair and equitable
manner for our clients.
Furthermore, the nature of our business means that employees may
occasionally be exposed to information that constitutes "inside
information" or material, non-public information. Federal securities
laws prohibit the use of such information for financial benefit.
Accordingly, FCM has also adopted policies that prohibit the use of
material non-public information. Section 19 of this Code of Ethics
discusses and sets forth our policies regarding Insider Trading.
While our business consists of providing investment advisory services
to
(i) client accounts unrelated to employees of FCM,
(ii) client accounts related to employees of FCM, and
(iii) client accounts as to which employees may have a beneficial
interest,
we are committed to the principle that all clients will be treated
fairly and equitably and that employees and principals of FCM will not
benefit in any way at the expense of any client.
Clients of FCM receive investment advice which, while comporting with
the firms overall views, is tailored to the financial situation of
each customer as determined by periodic consultations with that
customer. Each client account managed by FCM has a portfolio manager
who makes investment decisions and recommendations based on the
specific investment objectives of the client. All portfolio managers
of FCM must ensure that neither conflict of interests nor appearances
of impropriety exist due to a relationship to any particular client.
Further, the portfolio managers must ensure that any personal trading
and investment activities do not create a conflict or the appearance
of a conflict with client accounts.
Adherence to the Code of Ethics and the related restrictions on
personal investing are basic conditions of employment by FCM. If you
have any doubt as to the propriety of any activity, you should consult
with the Compliance Officer before executing any questionable
transaction.
18.2 DEFINITIONS
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18.2.1 BENEFICIAL OWNERSHIP includes ownership by any person who,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares a direct or
indirect financial interest other than the receipt of a fee.
18.2.2 COVERED PERSON means any director, officer, or employee of FCM,
as outlined in Rules Under The Investment Advisers Act of 1940 Rule
204-2(a)(12) "advisory representative" and any person who resides in
the same household or is supported by any owners or officers of FCM.
18.2.3 PERSONAL ACCOUNT means any account in which a Covered Person
has 25% or greater Beneficial Ownership
18.2.4 CLIENT ACCOUNT means any account managed by a portfolio manager
of FCM which is not an account of a Covered Person.
18.2.5 CLIENT RESTRICTED ACCOUNT means any account managed by a
portfolio manager of FCM wherein a client has restricted account
activity for any reason.
18.2.6 CLIENT DIRECTED ORDER means any purchase or sale whose
implementation will be effected based on instructions received from a
client.
18.2.7 SHORT SALE means the sale of security that the seller does not
own.
18.2.8 SECURITY shall include any warrant for, option in, or security
immediately convertible into that Security except that it shall not
include
i) Direct obligations of the Government of the United States,
ii) High quality short-term debt instruments, including but not
limited to bankers' acceptances, bank certificates of
deposit, commercial paper and repurchase agreements; and
iii) Shares of registered open-end investment companies.
18.2.9 A SECURITY HELD OR TO BE ACQUIRED means any security which,
within the most recent 15 calendar days, (i) is or has been held by
Client Accounts; or (ii) is being or has been considered by FCM for
purchase by any Client Accounts including but not limited to the
Fairholme Fund.
18.2.10 A SECURITY IS BEING CONSIDERED FOR PURCHASE OR SALE from the
time an order is given by or on behalf of FCM to the order room of the
executing broker until all orders with respect to that security are
completed or withdrawn.
18.2.11 COVERED SECURITY means all stock, debt obligations and other
instruments comprising the investments of FCM's Client Accounts
including but not limited to the Fairholme Fund.
18.3 APPLICABILITY OF CODE OF ETHICS
18.3.1 COVERED PERSONS accounts also include any account maintained by
or for:
1) A covered Person's spouse (other than a legally separated or
divorced spouse of the covered Person) and minor children;
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2) Any person who lives in the Covered Person's household and,
any accounts whose purchases, sales, or other trading
activities the Covered Person exercises control or
investment discretion;
3) Any person to or for whom the Covered Person
a) provides primary financial support and
b) either
i) whose financial affairs the Covered Person controls or
ii) the Covered Person provides discretionary advisory
services.
4) Any trust or other arrangement which names the Covered
Person as a beneficiary or remainderman; and
5) Any partnership, corporation, or other entity of which the
Covered Person is a director, officer or partner or in which
the Covered Person has a 25% or greater beneficial
ownership.
A comprehensive list of all Covered Persons and Personal Accounts will be
maintained by our Compliance Officer.
18.3.2 PERSONAL ACCOUNTS OF OTHER COVERED PERSONS. A Personal Account
of a Covered Person that is managed by another Covered Person is
considered to be a Personal Account only of the covered Person who has
a beneficial ownership in the Personal Account.
18.4 RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES
18.4.1 GENERAL. It is the responsibility of each Covered Person to
ensure that a particular securities transaction being considered for
his or her Personal Account is not subject to a restriction contained
in this Code of Ethics or otherwise prohibited by any applicable laws.
Personal Account securities transactions may be effected only in
accordance with the provisions of this Section.
18.4.2 TRADING ON THE SAME DAY AS CLIENTS. In the event that any
employee of FCM trades a security for his own account that is being
traded on the same day for a Client Account pursuant to FCM's
discretionary authority, all such trades shall be aggregated with any
trades in such security for Client Account(s).
All such aggregated trades, including those for the accounts of clients
and employees shall receive an average price. A client that has
restricted or directed his activity by the client agreement or by any
other means in a manner that precludes his trade from being aggregated
may or may not receive the average price.
18.4.3 SHORT SALES. A Covered Person shall not engage in any short
sale of a security if, at the time of the transaction, any Client
Account managed by the Covered Person has a long position in such
security.
1) The sale of any warrant or equity option shall not be
considered a Short Sale and is not subject to the
restriction stated above.
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2) The sale of a security as a leg of an arbitrage shall not be
considered a Short Sale and is not subject to the
restriction stated above.
18.4.4 PRECLEARANCE A Covered Person may not effect a Personal Account
transaction in a security held by or to be acquired for Client
Accounts unless these transactions have been "precleared" by FCM's
Compliance Officer, or are effected as outlined above in 18.4.2.
Factors Considered in Clearance of Personal Transactions
1) Whether the amount of shares or nature of the transaction,
is likely to affect the price or market for the Security.
2) Whether the Covered Person making the proposed purchase or
sale is likely to benefit from purchases or sales in the
same or similar security being made or being considered for
FCM clients
18.4.4 EXEMPT TRANSACTIONS Neither the prohibitions nor the reporting
requirements of this Code of Ethics apply to:
1) Purchases, sales or other acquisitions or dispositions of
Securities for an account over which the person has no
direct influence or control and does not exercise indirect
influence or control;
2) Purchases which are part of an automatic dividend
reinvestment plan;
3) Purchases or other acquisitions or dispositions resulting
from the exercise of rights acquired from an issuer as part
of a pro rata distribution to all holders of a class of
securities of such issuer and the sale of such rights;
4) TRANSACTIONS OF FAIRHOLME PARTNERS LP AND FOOTHOLD PARTNERS
LP. FCM serves as General Partner of Fairholme Partners LP
and act as the investment advisor to Foothold Fund LP. It is
the responsibility of FCM to ensure that the Short Sales and
Short-Term positions, and/or arbitrage activity including
derivatives such as, warrants for, or option to buy or sell
any Security that is held by Fairholme Capital Management's
Client Accounts, including but not limited to the Fairholme
Fund, are conducted in a manner that is least likely to
affect the price or market for the Security. To meet this
responsibility FCM's Compliance Officer will regularly
review all Fairholme Partners and Foothold Partners
transactions.
18.5 PROHIBITED TRANSACTIONS
18.5.1 BLACKOUT PERIODS A Covered Person may not effect a personal
securities transaction in a security held or to be acquired by FCM on
behalf of Advisory Clients, including but not limited to the Fairholme
Fund unless such person:
1) executes such transactions on the Same Day as Clients as outlined
under paragraph 18.4.2 of this document
2) obtains preclearance from the FCM Compliance officer as outlined
under paragraph 18.4.4 of this document.
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FCM retains the right to require the cancellation of any transaction
violating the above policies. Such violations constitute grounds for
sanctions as outlined under paragraph 18.8.3 of this document.
18.5.2 INITIAL PUBLIC OFFERINGS A Covered Person may not acquire any
security in an initial public offering without the written clearance
of such transaction by the FCM Compliance Officer.
18.5.3 PRIVATE PLACEMENTS A Covered Person may not acquire any
security in a private placement, without the written clearance of such
transaction by the FCM Compliance Officer.
18.5.4.GIFTS A Covered Person may not receive any gift or other thing
of more than de minimus value( $150.00) from any person or entity that
does business with or on behalf of FCM.
18.5.3 SERVICE ON BOARDS. A Covered Person shall not serve on any
board of directors of any publicly traded company without prior
written authorization from the Managing Member of FCM. Authorization
will be based upon a determination that the board service would not be
inconsistent with the interest of any client. This restriction does
not apply to service on the board of any not-for-profit corporation or
organization.
18.6 REPORTING
18.6.1 DUPLICATE COPIES OF BROKER'S CONFIRMATIONS AND ACCOUNT
STATEMENTS. All Covered Persons are required to direct their brokers
or custodians or any persons managing the Covered Person'spersonal
account to supply the Compliance Officer with (i) duplicate copies of
trade confirmations ("Broker's Confirmations") within five days after
the Covered Person's transaction and (ii) the Covered Person's monthly
and quarterly brokerage statements. A Covered Person shall not be
required to submit Broker's Confirmations or periodic statements for
any transaction in a Personal Account over which the Covered Person
has no direct or indirect influence or control. The transactions
reported on the Broker's Confirmations will be reviewed and compared
against client transactions and pre-clearances. The brokerage records
allow FCM to ensure the effectiveness of its compliance efforts. Each
Covered Person has an affirmative obligation to notify the Compliance
Officer promptly if the Covered Person opens any new account with a
broker or custodian or moves an existing account to a different broker
or custodian.
18.6.2 DISCLOSURE OF SECURITIES HOLDINGS AND BUSINESS ACTIVITIES. All
Covered Persons shall, upon commencement of employment with FCM,
submit a statement to the Compliance Officer listing all of the (i)
securities in which the Covered Person has any beneficial ownership,
(ii) business activities in which the Covered Person has a significant
role and (iii) the names of any brokerage firms where the Covered
Person maintains a personal account.
18.7 RECORDKEEPING
18.7.1.QUARTERLY TRANSACTION REPORTS Not later than ten (10) days
after the end of each calendar quarter, the Compliance Officer must be
in possession of the following information
A-With respect to any personal transaction during the previous
calendar quarter in a Covered Security in which each Covered Person
had any direct or indirect Beneficial Ownership:
1. The date of the transaction, the title, the number of shares
and the Principal amount of each covered security involved
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2. The nature of the transaction (I.e., purchase, sale or any
other type of acquisition or disposition);
3. The price of the Covered Security at which the transaction
was effected
4. The name of the broker, through which the transaction was
effected; and
B-With respect to any account established by the Covered Person in
which any securities were held during the previous quarter for the
direct or indirect benefit of the Covered Person:
1. The name of the broker, through which the transaction was
effected;
2. The date the account was established;
3. The date that the report is submitted by the Covered Person
18.7.2 ANNUAL HOLDING REPORTS
The Compliance Officer shall keep in an easily accessible place for at
least five years The following information(which must be current as of
a date no more than 30 days before the report is submitted):
1. The title, number of shares and principal amount of each
Covered Security in which the Covered Person had any direct
or indirect beneficial ownership;
2 The name of any broker with whom the Covered Person
maintains an account in which any securities are held for
the direct or indirect benefit of the Covered Person;
3 The date that the report is submitted by the Covered Person.
18.8. OVERSIGHT OF CODE OF ETHICS
18.8.1 ACKNOWLEDGMENT. All Covered Persons are required to sign and
acknowledge annually their familiarity with the provisions of this
Code of Ethics by signing the form of acknowledgment. See Section
19.4. In addition, any situation which may involve a conflict of
interest or other possible violation of this Code of Ethics must be
promptly reported to the Compliance Officer who must report to the
Managing Member of FCM.
18.8.2 REVIEW OF TRANSACTIONS. Each Covered Person's transactions in
his/her Personal Account will be reviewed on a regular basis and
compared to transactions entered into by FCM for clients. Any
transactions that are believed to be a violation of this Code of
Ethics will be reported promptly to the Compliance Officer who must
report to Managing Member of FCM.
18.8.3 SANCTIONS. The Compliance officer, and Managing Member of FCM,
with advice of legal counsel, at their discretion, shall consider
reports made to him and upon determining that a violation of this Code
of Ethics has occurred, may impose such sanctions or remedial action
as he deems appropriate or to the extent required by law. These
sanctions may include, among other things, disgorgement of profits,
suspension or termination of employment with FCM, or criminal or civil
penalties.
18.8.4 AUTHORITY TO EXEMPT TRANSACTIONS. The Compliance Officer shall
prepare and file a written memorandum of any exemption granted,
describing the circumstances and reasons for the exemption.
18.9 CONFIDENTIALITY
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All reports of securities transactions and any other information filed
pursuant to this Code of Ethics shall be treated as confidential to
the extent permitted by law.
SECTION 19
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INSIDER TRADING
19.1 POLICY STATEMENT
19.1.1 Introduction
Fairholme Capital Management, L.L.C. seeks to foster a reputation for
integrity and professionalism. That reputation is a vital business
asset. The confidence and trust placed in us by investors in accounts
managed by Fairholme Capital Management, L.L.C. is something we should
value and endeavor to protect. To further that goal, this Policy
Statement implements procedures to deter the misuse of material,
nonpublic information in securities transactions. FCM is required to
have these procedures in writing as mandated by Sec 204A of The
Advisers Act.
Trading securities while in possession of material, nonpublic
information or improperly communicating that information to others may
expose you to stringent penalties. Criminal sanctions may include a
fine of up to $3,000,000 and/or ten years imprisonment. The Securities
and Exchange Commission can recover the profits gained or losses
avoided through the violative trading, impose a penalty of up to three
times the illicit windfall and issue an order permanently barring you
from the securities industry. Finally, you may be sued by investors
seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, Fairholme Capital
Management, L.L.C. views seriously any violation of this Policy
Statement. Such violations constitute grounds for disciplinary
sanctions, including dismissal.
19.1.2 Scope of the Policy Statement
This Policy Statement is drafted broadly; it will be applied and
interpreted in a similar manner. This Policy Statement applies to
securities trading and information handling by directors, officers and
employees of Fairholme Capital Management, L.L.C. including family
members, and extends to activities within and outside their duties at
Fairholme Capital Management, L.L.C.
The law of insider trading is unsettled; any individual legitimately
may be uncertain about the application of the Policy Statement in a
particular circumstance. Often, a single question can forestall
disciplinary action or complex legal problems. You should direct any
questions relating to the Policy Statement to the Compliance Officer.
You also must notify the Compliance Officer immediately if you have
any reason to believe that a violation of the Policy Statement has
occurred or is about to occur.
19.1.3 Policy Statement on Insider Trading
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Fairholme Capital Management, L.L.C. forbids any officer, director or
employee from trading, either personally or on behalf of others,
including accounts managed by Fairholme Capital Management, L.L.C., on
material nonpublic information or communicating material nonpublic
information to others in violation of the law. This conduct is
frequently referred to as "insider trading." Every officer, director
and employee must read and retain this policy statement. Any questions
regarding Fairholme Capital Management, L.L.C.'s policy and procedures
should be referred to the Compliance Officer.
The term "insider trading" is not defined in the federal securities
laws, but generally is used to refer to the use of material nonpublic
information to trade in securities (whether or not one is an
"insider") or to communications of material nonpublic information to
others.
While the law concerning insider trading is not static, it is
generally understood that the law prohibits:
a) trading by an insider, while in possession of material
nonpublic information, or
b) trading by a non-insider, while in possession of material
nonpublic information, where the information either was
disclosed to the non-insider in violation of an insider's
duty to keep it confidential or was misappropriated, or
c) communicating material nonpublic information to others.
The elements of insider trading and the penalties for such unlawful
conduct are discussed below. If, after reviewing this policy
statement, you have any questions you should consult the Compliance
Officer.
1. Who is an Insider?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary
insider" if he or she enters into a special confidential relationship
in the conduct of a company's affairs and as a result is given access
to information solely for the company's purposes. A temporary insider
can include, among others, a company's attorneys, accountants,
consultants, bank lending officers, and the employees of such
organizations. In addition, Fairholme Capital Management, L.L.C. may
become a temporary insider of a company it advises or for which it
performs other services. According to the Supreme Court, the company
must expect the outsider to keep the disclosed nonpublic information
confidential and the relationship must at least imply such a duty
before the outsider will be considered an insider.
2. What is Material Information?
Trading on insider information is not a basis for liability unless the
information is material. Information is "material" when there is a
substantial likelihood that a reasonable investor would consider it
important in making his or her investment decisions, or if it is
reasonably certain to have a substantial effect on the price of a
company's securities. Information that officers, directors and
employees should consider material includes, but is not limited to:
dividend changes, earnings estimates, changes in
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previously released earnings estimates, significant merger or
acquisition proposals or agreements, major litigation, liquidation
problems, and extraordinary management developments.
Material information does not have to relate to a company's business,
but may also relate to the market for a company's securities. For
example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court
considered as material certain information about the contents of a
forthcoming newspaper column that was expected to affect the market
price of a security. In that case a Wall Street Journal reporter was
found criminally liable for disclosing to others the dates that
reports on various companies would appear in the Journal and whether
those reports would be favorable or not.
No simple "bright line" test exists to determine when information is
material; assessments of materiality involve a highly fact-specific
inquiry. For this reason, you should direct any questions about
whether information is material to the Compliance Officer.
3. Contacts with Public Companies.
For Fairholme Capital Management, L.L.C., contacts with public
companies represent an important part of our research efforts.
Fairholme Capital Management, L.L.C. may make investment decisions on
the basis of the firm's conclusions formed through such contacts and
analysis of publicly-available information. Difficult legal issues
arise, however, when, in the course of these contacts, a Fairholme
Capital Management, L.L.C. employee or other person subject to this
Policy Statement becomes aware of material, nonpublic information.
This could happen, for example, if a company's Chief Financial Officer
prematurely discloses quarterly results to an analyst or an investor
relations representative makes a selective disclosure of adverse news
to a handful of investors. In such situation, Fairholme Capital
Management, L.L.C. must make a judgment as to its further conduct. To
protect yourself, our clients and the firm, you should contact the
Compliance Officer immediately if you believe that you may have
received material, nonpublic information.
4. Tender Offers.
Tender offers represent a particular concern in the law of insider
trading for two reasons. First, tender offer activity often produces
extraordinary gyrations in the price of the target company's
securities. Trading during this time period is more likely to attract
regulatory attention (and produces a disproportionate percentage of
insider trading cases). Second, the SEC has adopted a rule which
expressly forbids trading and "tipping" while in possession of
material, nonpublic information regarding a tender offer received from
the tender offer, the target company or anyone acting on behalf of
either. Fairholme Capital Management, L.L.C. employees and others
subject to this Policy Statement should exercise particular caution
any time they become aware of nonpublic information relating to a
tender offer.
5. What is Nonpublic Information?
Information is nonpublic until it has been effectively communicated to
the market place. One must be able to point to some fact to show that
the information is generally public. For example, information found in
a report filed with the SEC, or appearing in Dow Jones, Reuters
Economic Services, The Wall Street Journal or other publications of
general circulation would be considered public.
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6. Bases for Liability
i) Fiduciary Duty Theory
In 1980, the Supreme Court found that there is no general duty to
disclose before trading on material nonpublic information, but that
such a duty arises only where there is a fiduciary relationship. That
is, there must be a relationship between the parties to the
transaction such that one party has a right to expect that the other
party will disclose any material nonpublic information or refrain from
trading. Chiarella v. U.S., 445 U.S. 22 (1980).
In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated
alternate theories under which non-insiders can acquire the fiduciary
duties of insiders: they can enter into a confidential relationship
with the company through which they gain information (e.g., attorneys,
accountants), or they can acquire a fiduciary duty to the company's
shareholders as "tippees" if they are aware or should have been aware
that they have been given confidential information by an insider who
has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if
the insider personally benefits, directly or indirectly, from the
disclosure. The benefit does not have to be pecuniary, but can be a
gift, a reputational benefit that will translate into futures
earnings, or even evidence of a relationship that suggests a quid pro
quo.
ii) Misappropriation Theory
Another basis for insider trading liability is the "misappropriation"
theory, where liability is established when trading occurs on material
nonpublic information that was stolen or misappropriated from any
other person. In U.S. v. Carpenter, supra, the Court found, in 1987, a
columnist defrauded The Wall Street Journal when he stole information
from the Journal and used it for trading in the securities markets. It
should be noted that the misappropriation theory can be used to reach
a variety of individuals not previously thought to be encompassed
under the fiduciary duty theory.
7. Penalties for Insider Trading
Penalties for trading on or communicating material nonpublic
information are severe, both for individuals involved in such unlawful
conduct and their employers. A person can be subject to some or all of
the penalties below even if he or she does not personally benefit from
the violation. Penalties include:
o civil injunctions
o treble damages
o disgorgement of profits
o jail sentences
o fines for the person who committed the violation of up to three
times the profit gains or loss avoided, whether or not the person
actually benefitted, and
o fines for the employer or other controlling person of up to the
greater of $1,000,000 or three times the amount of the profit
gains or loss avoided.
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In addition, any violation of this policy statement can be expected to
result in serious sanctions by Fairholme Capital Management, L.L.C.,
including dismissal of the persons involved.
19.2 PROCEDURES TO IMPLEMENT FAIRHOLME CAPITAL MANAGEMENT, L.L.C.'S POLICY
AGAINST INSIDER TRADING
The following procedures have been established to aid the officers,
directors and employees of Fairholme Capital Management, L.L.C. in
avoiding insider trading, and to aid Fairholme Capital Management,
L.L.C. in preventing, detecting and imposing sanctions against insider
trading. Every officer, director and employee of Fairholme Capital
Management, L.L.C. must follow these procedures or risk serious
sanctions, including dismissal, substantial personal liability and
criminal penalties. If you have any questions about these procedures
you should consult the Compliance Officer.
19.2.1 Identifying Insider Information
Before trading for yourself or others, including accounts managed by
Fairholme Capital Management, L.L.C., in the securities of a company
about which you may have potential inside information, ask yourself
the following questions:
i. Is the information material? Is this information that an
investor would consider important in making his or her
investment decisions? Is this information that would
substantially effect the market price of the securities if
generally disclosed?
ii. Is the information nonpublic? To whom has this information
been provided? Has the information been effectively
communicated to the marketplace via CNN, Bloomberg, Reuters,
The Wall Street Journal or other public information media
provider?
If, after consideration of the above, you believe that the information
is material and nonpublic, or if you have questions as to whether the
information is material and nonpublic, you should take the following
steps:
i. Report the matter immediately to the Compliance Officer ,
and if he is unavailable to the Managing Member.
ii. Do not purchase or sell the securities on behalf of yourself
or others, including accounts managed by Fairholme Capital
Management, L.L.C.
iii. Do not communicate the information inside or outside
Fairholme Capital Management, L.L.C., other than to the
Compliance Officer or Managing Member.
iv. After the Compliance Officer has reviewed the issue, you
will be instructed to continue the prohibitions against
trading and communication, or you will be allowed to trade
and communicate the information.
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19.3 SUPERVISORY PROCEDURES
The role of Fairholme's Compliance Officer is critical to the
implementation and maintenance of Fairholme's policy and procedures
against insider trading. Supervisory Procedures can be divided into
two classifications--prevention of insider trading and detection of
insider trading.
19.3.1 Prevention of Insider Trading
To prevent insider trading, Fairholme will:
i. distribute and review Fairholme's Insider Trading policy and
procedures and Code of Ethics with new employees and
annually recertify each FCM director, officer and employee.
ii. answer questions regarding Fairholme's policy and procedures
iii. resolve issues of whether information received by an
officer, director or employee of Fairholme is material and
nonpublic
iv. review on a regular basis, at least annually, and update as
necessary Fairholme's policy and procedures
v. when it has been determined that an officer, director or
employee of Fairholme has material nonpublic information
1. implement measures to prevent dissemination of such
information, and
2. restrict officers, directors and employees from trading
the securities for anyone.
19.3.2 Detection of Insider Trading
To detect insider trading, Fairholme will:
i. monitor trading activities of Fairholme employees through
review of duplicates of confirmations and customer
statements provided by any NASD Member broker-dealer with
whom the employee has an account.
ii. coordinate the review of such reports with other appropriate
officers, directors or employees of Fairholme.
iii. promptly investigate all reports of any possible violations
of Fairholme's Policy and Procedures to Detect and Prevent
Insider Trading.
iv. Investigate any circumstances about possible receipt,
trading or other use of inside information.
19.3.3 Special Reports
Promptly, upon learning of a potential violation of Fairholme's Policy
and Procedures to Detect and Prevent Insider Trading, the Compliance
Officer will prepare a written report providing full details and
recommendations for further action which will include any or all of
the following:
i. the name of particular securities involved, if any,
ii. the date(s) the Compliance Officer learned of the potential
violation and began investigating,
iii. the accounts and individuals involved,
iv. actions taken as a result of the investigation, if any, and
v. recommendations for further action.
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19.3.4 Annual Reports
On an annual basis, Fairholme will meet to re-evaluate the current
policies and procedures in place and obtain an annual employee
certification as to each employee's compliance.
19.4 CODE OF ETHICS AND INSIDER TRADING POLICY & PROCEDURES ACKNOWLEDGMENT
I hereby acknowledge receipt of both Fairholme Capital Management's
Code of Ethics and Insider Trading Policy. I certify that I have read,
understand and agree to abide by both policies. I hereby represent
that all my personal securities transactions will be effected in
compliance with the firm's policies.
I also confirm that I have instructed all brokerage firms where I
maintain an account to supply duplicate copies of my trade
confirmations and monthly and quarterly brokerage account statements
to the Compliance Officer at Fairholme Capital Management.
I hereby certify that I have never been found civilly liable for nor
criminally guilty of insider trading and that no legal proceedings
alleging that I have violated the law on insider trading are now
pending or, to my knowledge, threatened by any person or authority.
Date:
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(Signature)
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(Print Name)
SECTION 20
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TRADE ALLOCATION POLICY
20.1 GENERAL STATEMENT OF POLICY
An investment adviser has a duty to act in the best interests of its
clients, to treat all clients fairly, and to not advantage one client
over another. Fairholme Capital Management, L.L.C. considers these
fiduciary duties when deciding which client accounts will participate
in an order. This trade allocation policy applies to aggregated
orders. The overall goal of this policy is to treat each account
fairly, consistent with fiduciary principles, while complying with
applicable portfolio/account and regulatory restrictions. If an order
subject to this policy is executed over the course of more than one
trading day, the policy shall apply as if the order were entered anew
at the beginning of each trading day.
20.2 ALLOCATION OF AGGREGATED ORDERS
The following policy and procedures apply when orders for the same
security are aggregated.
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20.2.1 Procedures
a) Allocation of securities among clients will be done either
beforehand or promptly after the transaction, to insure equal
treatment of all participants. Each participating client would
receive the aggregated average share price for the transactions
in that security on any given day.
b) All partial fills will be allocated by the Pro Rata method unless
the order ticket indicates a different method from one of the
pre-approved allocation methods listed below. Any other method
must be approved by the firm's compliance officer, in writing,
prior to implementation of the trade.
c) Allocations will be communicated to the executing broker before
the close of business on Trade date.
Pre-Approved Partial Fill Allocation Methods
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a) PRO RATA - All securities purchased or sold are allocated to all
of the accounts included in the order pro rata based upon the
amount of securities that each account had intended to purchase
or sell rounded to the nearest "round" lot.
b) HIGH CASH - All securities purchased or sold are allocated to
those accounts with the highest amounts of cash available for
investment, as a percentage of the account's assets (or greatest
position as a percentage of assets, if a sale). The account with
the highest percentage of cash will receive a full position, and
then the account with the next highest percentage of cash will
receive a full position, and so on, until the entire order has
been allocated.
c) ROTATION - All accounts of a similar type are placed on a list,
and a partially filled order is allocated starting from the top
of the list. On the next order for a different security, the
order is filled beginning with the first account that did not
receive a full position of the first security. This method may be
most appropriate for municipal securities and other types of debt
securities.
d) RANDOM/FULL POSITION - The securities are randomly allocated to
certain accounts so that as many accounts as possible will
receive a full allocation. This may be accomplished either by a
computer program that randomly selects which accounts to fill, or
by a decision to start at a certain location in the list of
accounts, and to begin filling at that point. If this method of
partial fill allocation is used, the trade ticket must indicate
on which part of the list (identified by page number, part,
section, etc.) the allocation will begin, or whether the computer
will be randomly selecting the accounts. (Additionally, to add to
the randomness of this allocation method, the location of where
to begin filling orders should change with each order.)
e) PREDETERMINED VARIABLE FACTORS - In some cases, it may be
appropriate for certain variable factors to be considered when
determining which accounts will be allocated securities in a
partial fill. (For example, in municipal securities, the order
may be
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state-specific accounts, high cash balances, average duration,
etc.) A listing of the factors that will be considered and the
order in which they will be considered should be written on the
trade ticket prior to the trade. (Any such instructions must be
pre-approved by the Compliance Officer.) The actual partial
allocation must conform to these factors and be approved by the
Compliance Officer.
20.2.2 Exceptions
Aggregated orders generally may not be allocated on a basis other than
the original allocation. In unusual situations, exceptions may be
granted, but only if the following conditions are satisfied:
i. Before the start of the next trading day, the Portfolio Manager who placed
an order:
o Submits a statement showing the alternative formula for allocating the
orders and explains the reasons for the re-allocation1, and
o Obtains written approval of the statement by the compliance officer.2
20.2.3 Pricing
o Orders that are aggregated shall be assigned utilizing the average
price obtained.
20.2.4 Books and Records
o The books and records of Fairholme Capital Management, L.L.C. must
separately reflect, for each client account the orders of which are
aggregated, the securities held by, and bought and sold for, the
account.
o All written allocation formulas and written explanations of deviations
from the formulas must be maintained for not less than five years, the
first two years on the premises.
20.3 SPECIAL CIRCUMSTANCES
20.3.1 Aggregating Client-Directed Brokerage Orders
o Fairholme has a duty to obtain best execution for each client in an
aggregated order. Orders that are not client-directed or
client-restricted may be aggregated with client-directed orders only
if all participating clients receive best execution. If aggregating
orders, the Portfolio Manager should be able to demonstrate that he or
she has not disadvantaged one client in order to fund a rebate for
another.
20.3.2 Aggregating Unaffiliated Orders With Advisory Personnel Orders
o As a general rule, if Mr. Berkowitz or any employee of Fairholme
trades a security for his own account that is being traded on the same
day for the account of a client of the applicant, such trades shall be
aggregated with any trades in such security for client account(s)
unless the client has restricted or directed his activity by the
client agreement, or by any other means on that day, with all trades
obtaining an average price for the aggregated order(s).
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1 For example, a partially filled order may not be allocated on a pro rata
basis if the position size is too small for a large account, or in order to
maintain round lots of debt securities.
2 Note that compliance officer approval must be received prior to the
beginning of the next trading day.
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20.3.3 Trading Procedures for Options and leaps
o All employee option and leap orders can only be entered after customer
stock orders on the same security have been filled on any given day.
SECTION 21
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TRADING ERRORS
21 Correcting Trading Errors
In the course of managing accounts, it is almost unavoidable that from time
to time trading errors will occur. In an attempt to define what constitutes
the most likely trading errors, Fairholme has identified the following
situations:
o Purchasing securities not legally permitted for an account, or not
within an account's investment guidelines
o Purchasing or selling the wrong securities for an account
o Purchasing or selling securities for the wrong account
o Failing to purchase or sell securities as intended for a particular
Account
Fairholme is aware of its responsibility in managing customer accounts and
if, or when, errors occur as indicated above Fairholme will compensate the
account if a loss has occurred. Fairholme will instruct the applicable
custodian to reverse the error and place the trade in Fairholme's Errors
and Omissions account.
