oohSTATE OF OF THE MONEY GENERAL LAWRENCE G. WAWEH December 10. 2010 Key Trust Company of Ohio Attention: Eilli Ailen 127 Public Square Cleveland, Ohio 441 14 Re: Notice of Breaches and Demand for Care of Breaches Dear Mr. Allen: I am counsel to the State of Idaho, Of?ce of the Treasurer (ldaho Treasurer). The ldaho Treasurer has asked that i contact you oonoerning the Securities Lending Agreement bemoan Key Trust Company of Ohio (Key) and the idaho Treasurer dated as? of: January 26, 2000 (Agreement). Notice of Breaches With this tattoo I notify you of the following breaches of the Agreement. The Agreement provides: that Keirr is authorized to invest collateral arising from securities lending under the Agreement only in approved investments. Approved investments are de?ned as investments conforming to ldaho law and within the standards set todh on Exhibit A to the Agreement. ldaho Gods,- 67?1210 and 1210A de?ne the permitted investrnents for the Idaho Treasurer. Exhibit A to the Agreement specifies the maturity requirements, which in no case exceed three years finai maturity or potable to issuer. The Agreement further provides for a specific method of catsuiating the agent's fee. The agent's fee is assessed as a percentage of the net realized income derived from approved investments plus any seourities loan fee paid by the borrower minus any rebate paid by Key to the borroWer. Records obtained by the idaho Treasurer show that Key has invested in investments that are not approved investments. The investments are either not permitted by ldaho Code or have a ?nal maturity in excess of three (3) years and are not putable to issuer, or are both. not permitted by ldaho Code and exceed the maturity requirements. Cb?tt?lc? E-Admlr?sira tivs Law Divisitm H0. ans WED. Boise. idaho 33720-0913 Telephone: tans} sad-2am. Fax: reds} 8WD Located at 954 W. Je?etson, and Floor Kev Trust Company of Ohio Attention: Bill Allen December to. 2010 Page 2 The ldaho Treasurer has also determined that Key has failed to correcij invoice the agent fee. Key has been assessing fees based upon gross Income and failing to realize losses as required to establish a not realized Income ?gure. Demand for Cure The Idaho Treasurer makes the following demands. The Treasurer demands that Key immediately and at no cost or loss to the state of Idaho cause the Idaho Treasurer's account to contain only approved investments. In addition, the Idaho Treasurer demands that Key make the Idaho Treasurer whote for all tosses arising from investments during the term of the Agreement that are or were not approved investments. Accordingly, the Idaho Treasurer also demands that Key audit Its records for the tarm of the Agreement and provide a full accounting and refund to the Idaho Treasurer of fees that exceeded those allowed by the Agreement The Idaho Treasurer requires that Key cure these breach of the Agreement within ten (10) days of the date of this letter. Written proof and con?rmation that Key has cured these probterns should be sent to me at the address indicated in this letter within the ten {10) day period. Sincerelny IE K. WEAVER Deputy Attorney General Contracts and Administrative Law Division c: Ron GraneI Idaho State Treasurer STATE OF IDAHO OFFICE oF THE ATTORNEY GENERAL LAWRENCE G. WASDEN December 10. 2010 Key Trust Company of Ohio Attention: Bill Allen 127 Public Square Cleveland, Ohio 44114 Re: Notice of Breaches and Demand for Cure of Breaches Dear Mr. Allen: I am counsel to the State of Idaho. Of?ce of the Treasurer (Idaho Treasurer). The Idaho Treasurer has asked that I contact you concerning the Securities Lending Agreement between Key Trust Company of Ohio (Key) and the Idaho Treasurer dated as of January 26, 2000 (Agreement). Notice of Breaches With this letter, notify you of the following breaches of the Agreement. The Agreement provides that Key is authorized to invest collateral arising from securities lending under the Agreement only in approved investments. Approved investments are de?ned as investments conforming to idaho law and within the standards set forth on Exhibit A to the Agreement. Idaho Code 67-1210 and 1210A de?ne the permitted investments for the Idaho Treasurer. Exhibit A to the Agreement speci?es the maturity requirements, which in no case exceed three (3) years ?nal maturity or putable to issuer. The Agreement further provides for a speci?c method of calculating the agent?s fee. The agent?s fee is assessed as a percentage of the net realized income derived from approved investments plus any securities loan fee paid by the borrower minus any rebate paid by Key to the borrower. Records obtained by the Idaho Treasurer show that Key has invested in investments that are not approved investments. The investments are either not permitted by Idaho Code or have a ?nal maturity in excess of three (3) years and are not putable to issuer, or are both not permitted by Idaho Code and exceed the maturity requirements. Contracts 8? Administrative Law Division FED. Box 53720. Boise. Idaho 331'20-001 0 Telephone: (203} 334?2400, FAX: (205) 354-30?0 Located at 954 W. Jefferson. 2nd Floor Key Trust Company of Ohio Attention: Bill Allen December 10, 2010 Page 2 The Idaho Treasurer has also determined that Key has failed to correctly invoice the agent fee. Key has been assessing fees based upon gross income and failing to realize losses as required to establish a net realized income ?gure. Demand for Cure The Idaho Treasurer makes the following demands. The Treasurer demands that Key immediately and at no cost or loss to the state of Idaho cause the Idaho Treasurer's account to contain only approved investments. In addition, the Idaho Treasurer demands that Key make the Idaho Treasurer whole for ail losses arising from investments during the term of the Agreement that are or were not approved investments. Accordingly, the Idaho Treasurer also demands that Key audit its records for the term of the Agreement and provide a full accounting and refund to the Idaho Treasurer of fees that exceeded those allowed by the Agreement. The Idaho Treasurer requires that Key cure these breach of the Agreement within ten (10) days of the date of this letter. Written proof and con?rmation that Key has cured these problems should be sent to me at the address indicated in this letter within the ten (10) day period. ?rw IE K. WEAVER Deputy Attorney General Contracts and Administrative Law Division KWi'sb L: Ron Crane, Idaho State Treasurer HECEWED William R. Allen DEC 2 1 imp} Senior Managing Director 69 SeCuritiea Lending .3, Capital Management 12? Public Square Cleveland, Ohio 44114-1306 December 16, 2010 State of Idaho Of?ce of the Attorney General PO Box 83720 Boise, ID 83720 Attention: Julie K. Weaver Dear Ms. Weaver: We received your letter yesterday, December 15. We have had a preliminary discussion of' your concerns, and I have forwarded your letter to our Legal Department. I expect that they will reply to you in a timely manner. Sincerely, Me: as, cc C. Ohmacht Tel: 215-689-434d 0 Fax: 216-689-43?3 E-maH' RECEIVED Ottica oi the Niamey Garteral Contracts and Administrative Law KoyBanlt National Association Mailcode; 12? Public Square r22 01 :2 0 Cleveiand.OH 44114-1306 VIA FIRST CLASS MAIL and FAX To (203) 854-8070 Julie K. Weaver Deputy Attorney General Contracts and Administrative Law Division PO. Box 63720 954 W. Jefferson - 2nd Flr. Boise. ldaho 8320-0010 He: Letter to Key Trust Company dated December 10, 2010 (the 'Letter") Dear Ms. Weaver: i am in-house counsel to KeyBank National Association, successor by merger to Key Trust Company of Ohio We have received and reviewed the allegations and demands set iorth in your Letter. Key denies that it has breached any contracts or other agreements with the State of Idaho. or that it has otherwise acted inappropriately in any manner, and thus respectfully declines your "Demand for cure" set forth in the Letter. Further we note that all relevant investments were a roved the ldaho Treasurer?s Office. Key will continue to manage the securities lending program according to Idaho's wishes, and will continue to tollow its instructions in that regard. We are also willing to sit down and discuss this matter further with you and your client. To summarize, Key does not believe that there is any basis to support the allegations or demands in the Letter. Key furthermore reserves all of its rights with respect to this matter. Please contact me should you have any questions. Very truiy yours Gregory J. Edgehouse Senior Vice President Managing Counsel [00266374 vl INTERNAL