1. (a) Neither the sponsor nor any affiliate shall enter into any farm-out or other agreement with the oil program where in consideration for services to be rendered, an interest in production is payable to such sponsor or affiliate.
2. (b) During the existence of a program and before it has ceased operations neither the sponsor nor any affiliate (excluding another program where the interest of the sponsor is identical to or less than his interest in the first program) shall acquire, retain, or drill for its own account any oil and gas interest on any prospect upon which such program possesses an interest, except for sales or lease transactions which comply with Subdivision (D) of Section 260.140.127.1(a)(1) of these rules. In the event the program abandons its interest in the prospect, this restriction shall continue until one year following the abandonment. If the geological limits of a prospect are enlarged to encompass any interest held by such sponsor or affiliate, such interest shall be sold to such program in accordance with the provisions of Subdivision (C) of Section 260.140.127.1(a)(1) of these rules and any net income previously received by the sponsor or affiliate shall be paid over to such program. If within this period, the sponsor acquires additional acreage or interest in a prospect of the program, he must sell such to the program and is prohibited from retaining any such interest, except as may be permitted by Section 260.140.127.1(a) of these rules.

3. (c) The sponsor shall not take any action with respect to the assets or property of the program which does not benefit exclusively the program, including among other things:

   1. (1) the utilization of funds of the program as compensating balances for his own benefit, and
   2. (2) future commitments of production.
4. (d) All benefits from marketing arrangements or other relationships affecting property of the sponsor and the program shall be fairly and equitably apportioned according to the respective interests of each.
5. (e) Any agreements or arrangements which bind the program must be fully disclosed in the prospectus.
6. (f) Anything to the contrary notwithstanding, a sponsor may never profit by drilling in contravention of his fiduciary obligation to the participants.

7. (g) Neither the sponsor nor any affiliate shall render to the program any oil field, equipage or drilling services nor sell or lease to the program any equipment or related supplies unless:

   1. (1) such person is engaged, independently of the program and as an ordinary and ongoing business, in the business of rendering such services or selling or leasing such equipment and supplies predominantly to other persons in the oil and gas industry in addition to programs in which he has an interest, and
   2. (2) the compensation, price or rental therefore is competitive with the compensation, price or rental of other persons engaged in the business of rendering comparable services or selling or leasing comparable equipment and supplies which could reasonably be made available to the program, provided that, if such person is not engaged in a business within the meaning of Subdivision (1), then such compensation, price or rental shall be the cost of such services, equipment or supplies to such person or the competitive rate whichever is less.

8. (h) With the exception of compensation authorized by Section 260.140.125.1 of these rules, all services for which the sponsor and any affiliated person is to receive compensation shall be embodied in a written contract which:

   1. (1) Precisely describes the services to be rendered and all compensation to be paid.
   2. (2) Provides, in substance, that any material change in the terms of such contract must be approved by the vote of the holders of a majority of the units of the program.
9. (i) No loans may be made by the program to the sponsor.
10. (j) On loans made available to the program by the sponsor, the sponsor may not receive interest in excess of the amounts which would be charged the program (without reference to the sponsor's financial abilities or guaranties) by unrelated banks on comparable loans for the same purpose and the sponsor shall not receive points or other financing charges or fees regardless of the amount.

Note: Authority cited: Section 25610, Corporations Code. Reference: Section 25140, Corporations Code.

History

1. Editorial correction adding Note filed 11-8-82 (Register 82, No. 46).