[Federal Register Volume 61, Number 203 (Friday, October 18, 1996)]
[Notices]
[Pages 54470-54472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26712]
[[Page 54470]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC--22275; 812-10246]
Vanguard Money Market Reserves, Inc., et al.; Notice of
Application
October 10, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption Under the Investment
Company Act of 1940 (the ``Act'').
-----------------------------------------------------------------------
APPLICANTS: Vanguard Money Market Reserves, Inc., Vanguard Balanced
Index Fund, Inc., Vanguard Municipal Bond Fund, Inc., Vanguard
California Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund,
Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free
Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund,
Vanguard Bond Index Fund, Inc., Vanguard Fixed Income Securities Fund,
Inc., Vanguard/Wellesley Income Fund, Inc., Vanguard Asset Allocation
Fund, Inc., Vanguard Convertible Securities Fund, Inc., Vanguard/
Windsor Funds, Inc., Vanguard/Wellington Fund, Inc., Vanguard/Trustees'
Equity Fund, Vanguard Equity Income Fund, Inc., Vanguard Index Trust,
Vanguard Institutional Index Fund, Vanguard International Equity Index
Fund, Inc., Vanguard Quantitative Portfolios, Inc., Vanguard Preferred
Stock Fund, Vanguard/PRIMECAP Fund, Inc., Vanguard World Fund, Inc.,
Vanguard/Morgan Growth Fund, Inc., Vanguard Explorer Fund, Inc.,
Vanguard Specialized Portfolios, Inc., Vanguard Variable Insurance
Fund, Vanguard Admiral Funds, Inc., Vanguard Tax-Managed Fund, Inc.,
Vanguard Whitehall Funds, Inc., Vanguard STAR Fund, and Gemini II,
Inc., (collectively, the ``Funds'') and The Vanguard Group, Inc. (the
``Vanguard Group'' or ``Vanguard'').
RELEVANT ACT SECTION: Order requested under section 17(d) of the Act
and rule 17d-1 thereunder.
SUMMARY OF APPLICATION: Applicants seek to amend an existing order (the
``Existing Order'') that permitted applicants to operate a joint
account that invests solely in repurchase agreements of seven days or
less.\1\ The amended order would permit applicants to deposit
uninvested cash into one or more joint accounts authorized to invest in
repurchase agreements with maturities of up to 60 days as well as other
short-term investments.
\1\ Wellington Fund, Inc., et al., Investment Company Act
Release Nos. 15605 (March 5, 1987) (notice) and 15653 (March 31,
1987) (order).
---------------------------------------------------------------------------
FILING DATES: The application was filed on July 11, 1996, and amended
on September 27, 1996. Applicants agree to file an amendment, the
substance of which is incorporated herein, during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicants with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 4,
1996, and should be accompanied by proof of service on applicants in
the form of an affidavit or, for lawyers, a certificate of service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons who wish to
be notified of a hearing may request notification by writing to the
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 5th Street, N.W., Washington, D.C.
20549. Applicants: Vanguard Financial Center, Valley Forge,
Pennsylvania 19482.
FOR FURTHER INFORMATION CONTACT: Sarah A. Buescher, Staff Attorney, at
(202) 942-0573, or Alison E. Baur, Branch Chief, (202) 942-0564 (Office
of Investment Company Regulation, Division of Investment Management).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. The Funds, except for Vanguard STAR Fund and Vanguard
Institutional Index Fund, are members of the Vanguard Group of
Investment Companies, a group of over 30 registered management
investment companies that currently offer shares in over 90 portfolios.
Each Fund is registered as an open-end management investment company,
except for Gemini II, Inc., which is registered as a closed-end
investment company. Applicants request that any relief granted pursuant
to the application also apply to any other investment companies or
portfolios thereof which are or may become members of the Vanguard
Group of Investment Companies or for which Vanguard provides advisory
or distribution services.
2. The Vanguard Group, a wholly and jointly owned subsidiary of its
member Funds, and a registered investment adviser and transfer agent,
provides corporate management, administrative, transfer agent, and
distribution services to the Funds on a at-cost basis pursuant to an
agreement approved by shareholders of each of its member Funds.
Vanguard also provides investment advisory services to certain member
Funds on an at-cost basis. Vanguard Institutional Index Fund is not a
member of the Vanguard Group, but receives services from Vanguard on an
at-cost basis pursuant to an individual service agreement. Vanguard
STAR Fund, which invests exclusively in other Vanguard Funds, is also
not a member of the Vanguard Group. The boards of directors of the
Funds and of Vanguard are presently the same. Eight of the ten
directors have no affiliation with the Funds or Vanguard other than as
directors.
3. The Existing Order permits the Funds to invest through a joint
account (``Joint Account'') in repurchase agreements with a maturity of
seven days or less. Applicants propose to continue to operate the Joint
Account in the same manner as permitted by the Existing Order, subject
to the proposed modifications discussed below.
4. Applicants propose to amend the Existing Order to permit the
Funds to pool their daily uninvested cash balances into one or more
Joint Accounts authorized to (a) invest in (i) tax-exempt variable rate
demand notes (``VRDNs'') with demand features providing for maturities
of up to 30 days or one month and (ii) securities (other than VRDNs)
exempt from federal and/or state income tax with remaining maturities
of up to 60 days (collectively, ``Tax-Exempt Securities''), (b) invest
in commercial paper, certificates of deposit, other non-government
money market securities, and U.S. Government Securities (i.e.,
obligations issued or guaranteed as to principal or interest by the
U.S. Government and by any of its agencies or instrumentalities, and
satisfying the uniform standards set by the Funds for such investments)
that have remaining maturities of up to 60 days (collectively, ``Short-
Term Money Market Securities'') and (c) invest in repurchase agreements
with maturities of up to 60 days.
5. If a tax-exempt money market fund contributes cash to a Joint
Account, the cash only will be invested in securities that qualify for
purchase by a tax-exempt money market fund under rule 2a-7 under the
Act, as it may be amended from time to time.
6. The VRDNs include short-term tax-exempt demand obligations that
have a variable or floating interest rate and an unconditional right to
demand payment of the unpaid principal and accrued interest within 30
days or one month. The variable or floating rate features of the VRDNs
provide for the readjustment of the interest rate to a rate then
[[Page 54471]]
prevailing for similar instruments so that such securities reasonably
can be expected to maintain a market value that approximates the par
value of the notes.
7. Vanguard's investment management staff is responsible for
negotiating the terms of the repurchase agreements. In connection with
the use of repurchase transactions collateralized by U.S. Government
Securities, each of the Funds has established the same systems and
standards. These include quality standards for issuers of repurchase
agreements and for collateral, and requirements that the repurchase
agreements will be collateralized fully, as defined in rule 2a-7 under
the Act. Any joint repurchase agreement transaction will be effected in
accordance with Investment Company Act Release No. 13005 (Feb. 2, 1983)
and with any other existing and future positions taken by the SEC in
any release proposing, reproposing, or adopting any new rule or any
amendments to any existing rule.
8. Each Fund will automatically transfer its uninvested cash
remaining after the conclusion of its daily trading activity into the
Joint Account. The officers and employees of Vanguard, or the
investment adviser of each Fund will determine whether to invest a
Fund's assets in repurchase agreements, Tax-Exempt Securities, or
Short-Term Money Market Securities (collectively, ``Short-Term
Investments''). Each Fund will be able to invest in Short-Term
Investments through a Joint Account if such investment is consistent
with the Fund's investment objectives and policies. The transactions
entered into on behalf of a Joint Account will be recorded and
monitored following the same procedures set forth in the Existing
Order. Each portfolio manager would have the discretion whether to
invest a Fund's cash in the securities purchased by the Joint Account
or to separately invest cash on an individual Fund basis in appropriate
short-term investments given a Fund's investment limitations.
Applicants' Legal Analysis
1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit an
affiliated person of a registered investment company from participating
in any joint enterprise or arrangement in which such investment company
is a participant, without an SEC order.
2. Each Fund, by participating in the proposed Joint Accounts, as
proposed to be modified, and Vanguard, by managing the proposed Joint
Accounts, could be deemed to be ``joint participants'' in a transaction
within the meaning of section 17(d). In addition, a proposed Joint
Account could be deemed to be a ``joint enterprise or other joint
arrangement'' within the meaning of rule 17d-1.
3. Applicants believe that the proposed amendments to the method of
operating the Joint Account will not result in any conflicts of
interest between any of the Funds or between the Funds and Vanguard or
a Fund's adviser. Although an adviser will realize some benefits
through administrative convenience and some possible reduction in
clerical costs, the Funds will be the primary beneficiaries because the
Joint Accounts may result in higher returns and would be a more
efficient means of administering daily cash investments. Applicants
believe that the operation of the Joint Account will be free of any
inherent bias favoring one Fund over another.
4. Applicants also believe that the future participation in the
Joint Account by one or more Funds that do not presently exist would be
desirable without the necessity of applying for an amendment of the
requested order. Applicants represent that additional Funds will only
be permitted to participate in the Joint Account on the same terms and
conditions as the existing Funds.
Applicants' Conditions
Applicants will comply with the following as conditions to any
order granted by the SEC:
1. The Joint Account will not be distinguishable from any other
accounts maintained by a Fund with its custodian bank or a designated
sub-custodian bank except that monies from the Fund will be deposited
in it on a commingled basis. The Joint Account will not have any
separate existence which will have indicia of a separate legal entity.
The sole function of the Joint Account will be to provide a convenient
way of aggregating what otherwise will be one or more individual daily
transactions for each Fund necessary to manage the daily uninvested
cash balances of each Fund.
2. Cash contributed by a Fund to the Joint Account will be invested
in one or more of the following, as directed by the Fund: (a)(1) Tax-
exempt variable rate demand notes (``VRDNs'') with demand features
providing for maturities of up to 30 days or one month and (2)
securities (other than VRNDs) exempt from federal and/or state income
tax with remaining maturities of up to 60 days, (b) commercial paper,
certificates of deposit, other non-government money market securities,
and U.S Government Securities that constitute ``Eligible Securities''
within the meaning of rule 2a-7 under the Act which have remaining
maturities of up to 60 days, and (c) repurchase agreements with
maturities of up to 60 days ``collateralized fully,'' as defined in
rule 2a-7 under the Act, by U.S. Government Securities.
3. Any investment made by a Fund or Funds through the Joint Account
will satisfy the investment criteria of all Funds participating in that
investment.
4. All investments held by a Fund or Funds through the Joint
Account would be valued on the basis of amortized cost to the extent
permitted by applicable SEC release, rule or order.
5. Each Fund valuing its net assets in reliance upon rule 2a-7
under the Act will use the average maturity of the instrument(s) in the
Joint Account in which such Fund has an interest (determined on a
dollar weighted basis) for the purpose of computing the Fund's average
portfolio maturity with respect to the portion of its assets held in
the Joint Account on that day.
6. In order to assure that there will be no opportunity for one
Fund to use any part of a balance of the Joint Account credited to
another Fund, no one Fund will be allowed to create a negative balance
in the Joint Account for any reason. A Fund's decision to invest in the
Joint Account will be solely at the Fund's option. A Fund will not be
obligated to invest in the Joint Account nor to maintain any minimum
balance. A Fund will be permitted to withdraw all, or a portion, of its
investment in the Joint Account at any time. In addition, a Fund will
retain the sole rights of ownership of any of its assets, including any
interest payable on such assets invested in the Joint Account.
7. Each Fund and the custodian for each Fund will maintain records
(in conformity with section 31 of the Act and the rules and regulations
thereunder) documenting, for any given day, each Fund's aggregate
investment in the Joint Account and each Fund's pro rata share of each
Short-Term Investment made through the Joint Account.
8. Not every Fund participating in the Joint Account will
necessarily have its cash invested in every Short-Term Investment held
in the Joint Account. However, to the extent a Fund's cash is applied
to particular Short-Term Investments made through the Joint Account,
the Fund will participate in and own a proportionate share of such
investment, and the income earned or accrued thereon, based upon the
percentage of such investment purchased with monies contributed by the
Fund.
[[Page 54472]]
9. Vanguard will administer the investment of cash balances in and
operation of the Joint Account without payment of any additional fee or
compensation. The investment adviser of each Fund will collect its fees
based upon the assets of the Fund, which include the value of any
assets the Fund has invested in the Joint Account.
10. The Board of Directors (Trustees) of each Fund will adopt
procedures pursuant to which the Joint Account will operate, which will
be reasonably designed to provide that the requirements of the
application will be met. Each Board will make and approve such changes
as it deems necessary to ensure that such procedures are followed. In
addition, the Boards will determine, no less frequently than annually,
that the Joint Account has been operated in accordance with such
procedures and will only permit a Fund to continue to participate in a
Joint Account if it determines that there is a reasonable likelihood
that the Fund and its shareholders will benefit from the Fund's
continued participation.
11. The administration of the Joint Account will be within the
fidelity bond coverage required by section 17(g) of the Act and rule
17g-1 thereunder.
12. Short-Term Investments held through the Joint Account generally
will not be sold prior to maturity except: (a) If the officers or
employees of Vanguard believe the security no longer presents minimal
credit risk; (b) in the case of taxable and tax-exempt securities, if
as a result of a credit downgrading or otherwise, the security no
longer satisfies the investment criteria of all Funds participating in
that investment; or (c) in the case of a repurchase agreement, if the
counterparty defaults. A Fund may, however, sell its fractional portion
of a Short-Term Investment prior to the maturity of the investment if
the cost of such transaction will be borne solely by the selling Fund
and the transaction would not adversely affect the other Funds
participating in the Short-Term Investment. In no case would an early
termination by less than all participating Funds be permitted if it
would reduce the principal amount or yield received by other funds
participating in a particular Short-Term Investment or otherwise
adversely affect the other participating Funds. Each Fund participating
in the Short-Term Investment will be deemed to have consented to such
sale and partition of the Short-Term Investment.
13. Any Short-Term Investment held through the Joint Account with a
remaining maturity of more than seven days will be considered illiquid
and, for any Fund that is an open-end management investment company
registered under the Act, subject to the restriction that the Fund may
not invest more than 15% (or such other percentages as set forth by the
SEC from time to time) of its net assets in illiquid securities, if the
Fund cannot sell its fractional interest in the Short-Term Investment
pursuant to the requirements described in the preceding condition.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26712 Filed 10-17-96; 8:45 am]
BILLING CODE 8010-01-M
