[Federal Register Volume 60, Number 218 (Monday, November 13, 1995)]
[Notices]
[Pages 57046-57049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27885]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 21470; 812-9532]
The Vanguard Group, Inc., et al.; Notice of Application
November 3, 1995.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for an Order under the Investment Company
Act of 1940 (the ``Act'').
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APPLICANTS: The Vanguard Group, Inc. (``TVGI''); and Vanguard Balanced
Index Fund, Inc., Vanguard Index Trust, Vanguard International Equity
Index Fund, Inc., Vanguard Bond Index Fund, Inc., Vanguard
Institutional Index Fund, Vanguard Institutional Portfolios, Inc.,
Vanguard California Tax-Free Fund, Vanguard New York Insured Tax-Free
Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Fixed Income
Securities Fund, Inc., Vanguard Preferred Stock Fund, Vanguard Asset
Allocation Fund, Inc., Vanguard/Trustees' Equity Fund, Vanguard/Windsor
Funds, Inc., Vanguard Tax-Managed Fund, Inc., Vanguard Florida Insured
Tax-Free Fund, Inc., Vanguard/Primecap Fund, Inc., Vanguard/Morgan
Growth Fund, Inc., Vanguard Variable Insurance Fund, Vanguard Money
Market Reserves, Inc., Vanguard Municipal Bond Fund, Inc., Vanguard New
Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard/Wellesley
Income Fund, Inc., Vanguard Convertible Securities Fund, Inc.,
Vanguard/Wellington Fund, Inc., Vanguard Equity Income Fund, Inc.,
Vanguard Quantitative Portfolios, Inc., Vanguard World Fund, Inc.,
Vanguard Explorer Fund, Inc., Vanguard Specialized Portfolios, Inc.,
Vanguard Admiral Funds, Inc., Gemini II, Inc. and any future registered
open-end management investment company, or portfolio thereof, in which
a Fund of Index Funds (as defined below) invests that (a) is part of a
group of investment companies which holds itself out to investors as
related companies for purposes of investment and investor services, and
(b) obtains corporate management, administrative, and distribution
services from TVGI.
RELEVANT ACT SECTIONS: Order of exemption requested pursuant to section
6(c) of the Act from section 12(d)(1) of the Act, pursuant to sections
6(c) and 17(b) of the Act from section 17(a) of the Act, and pursuant
to rule 17d-1 under the Act permitting certain joint transactions in
accordance with section 17(d) of the Act and rule 17d-1 thereunder.
SUMMARY OF APPLICATION: The requested order would permit applicants to
create a ``fund of index funds'' that would invest according to
specified ratios or weightings in shares of two or more Vanguard index
funds without regard to the percentage limitations of section 12(d)(1)
(``Fund of Index Funds''). The requested order also would permit the
boards of trustees/directors of the funds constituting the Vanguard
Group of Investment Companies to modify the funds' service agreement to
provide that a Fund of Index Funds may become a member of The Vanguard
Group of Investment Companies without bearing duplicative capital
contribution or expense allocation costs.
FILING DATE: The application was filed on March 16, 1995, and amended
on November 1, 1995.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be
[[Page 57047]]
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 28, 1995, 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 may request notification of
a hearing by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549.
Applicants, c/o The Vanguard Group, Inc., P.O. Box 2600, Valley Forge,
Pennsylvania 19482.
FOR FURTHER INFORMATION CONTACT:
Sarah A. Buescher, Staff Attorney, at (202) 942-0573, or C. David
Messman, Branch Chief, at (202) 942-0564 (Division of Investment
Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch.
Applicants' Representations
1. The Vanguard Funds are 32 registered management investment
companies that currently offer shares in 86 portfolios (the
``Portfolios''). The Vanguard Funds organized and operate TVGI,
pursuant to the terms of a Second Amended and Restated Funds' Service
Agreement dated May 15, 1993 (the ``Funds' Service Agreement'') in
order to provide the Funds with services on an ``internalized,'' at-
cost, no-load basis.\1\ Each Fund is organized as a business trust
under Pennsylvania law, or as a Maryland corporation. Each Fund is
registered as an open-end management investment company, except for
Gemini II, Inc., which is registered as a closed-end company. Each Fund
has a board of directors/trustees (the ``Board of Directors'') that
consists of the same ten persons, eight of whom are not ``interested
persons'' of the Fund under section 2(a)(19) of the Act. Nine of the
directors compose the board of directors of TVGI. The Funds that are
party to the Funds' Service Agreement constitute The Vanguard Group of
Investment Companies (``The Vanguard Group''). Vanguard Institutional
Index Fund is a registered management investment company that receives
services from the Vanguard Group, Inc., but is not a member of The
Vanguard Group.
\1\ The Funds operate TVGI pursuant to a number of exemptive
orders. The Vanguard Group, Inc., Investment Company Act Release
Nos. 19011 (Oct. 9, 1992) (notice) and 19184 (Dec. 29, 1992)
(order); Wellington Fund, Inc., Investment Company Act Release Nos.
15788 (June 9, 1987) (notice) and 15846 (July 2, 1987) (order);
Wellington Fund, Inc., Investment Company Act Release Nos. 13566
(Oct. 5, 1983) (notice) and 13613 (Nov. 3, 1983) (order); The
Vanguard Group, Inc., Investment Company Act Release Nos. 11718
(Apr. 6, 1981) (notice) and 11761 (May 4, 1981) (order); The
Vanguard Group, Inc., Investment Company Act Release Nos. 9850 (July
15, 1977) (notice), and 9927 (Sept. 13, 1977) (temporary order) and
11645 (Feb. 25, 1981) (order); Wellington Fund, Inc., Investment
Company Act Release Nos. 8644 (Jan. 17, 1975) and 8676 (Feb. 18,
1975) (order).
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2. Within the Vanguard Funds are the following index funds:
Vanguard Balanced Index Fund, Inc., Vanguard Index Trust, Vanguard
International Equity Index Fund, Inc., Vanguard Bond Index Fund, Inc.
(collectively, with the Vanguard Institutional Index Fund, the ``Index
Funds''). The Index Funds currently offer shares in 15 separate
portfolios (``Index Portfolios''). Except for Vanguard Balanced Index
Fund, each Index Portfolio seeks to provide investment results that
correspond to the results of a particular securities index (or
benchmark) by investing its assets in the same proportion as the
securities represented in the index (or a representative sampling
thereof). Vanguard Balanced Index Fund seeks to provide investment
results that correspond to the results of a 60%/40% weighting of two
indices, the Wilshire 5000 Index and the Lehman Brothers Aggregate Bond
Index.
3. As a matter of fundamental policy, the Index Portfolios invest
all of their investable assets in securities selected to replicate the
composition of a specified securities index or benchmark. In addition,
the Index Portfolios invest solely in liquid, readily marketable
securities. Several Index Portfolios impose purchase charges that are
designed to allocate transaction costs associated with new purchases to
investors making the purchases. The Emerging Markets Portfolio is the
only Index Portfolio that charges a redemption fee.
4. Vanguard seeks to create a Fund of Index Funds. The initial
portfolio of the Fund of Index Funds would be an ``International Index
Portfolio,'' which would replicate the Morgan Stanley Capital
International Europe, Australia and Far East Index (``EAFE''). Vanguard
intends to create this International Index Portfolio by combining two
existing Index Portfolios, the European Portfolio and the Pacific
Portfolio, rather than creating a separate investment company or
portfolio to invest in securities directly. By combining existing Index
Portfolios, Vanguard seeks to avoid higher start-up and ongoing costs,
and tracking errors.
5. Applicants request that the relief sought herein apply to any
future Fund of Index Funds, whether organized as an open-end investment
company or as a portfolio thereof, which operates in all material
respects in accordance with the representations contained in the
application, complies with the conditions to the requested order, and
is a Vanguard Fund or is operated by TVGI.
6. TVGI, a registered investment adviser under the Investment
Advisers Act of 1940, is a wholly and jointly owned and capitalized
subsidiary of the Vanguard Funds. TVGI provides to the Vanguard Funds
on an at-cost basis almost all of their necessary corporate management,
administrative, and shareholder accounting services, distribution
services, and, for certain Portfolios, advisory services. TVGI also
provides specified services to two funds, Vanguard STAR Fund and
Vanguard Institutional Index Fund, that do not contribute to the
capital of TVGI.
7. Under current provisions of the Funds' Service Agreement, a Fund
of Index Funds, if structured as a separate investment company, could
not become a member of The Vanguard Group without making a capital
investment in TVGI, and being allocated a portion of TVGI's corporate
management and distribution expenses, even though Fund of Index Funds
shareholders would bear a portion of these expenses through the fees
they pay with respect to the Index Portfolios. The Boards of Directors
of the Funds propose to amend the Funds' Service Agreement to permit a
Fund of Index Funds, whether structured as a separate investment
company or as a portfolio of a Vanguard Fund, to become a member of The
Vanguard Group.
8. The amendment to the Funds' Service Agreement would provide, in
substance, that: (a) The obligation of a Fund of Index Funds to make
capital contributions to TVGI would be reduced or eliminated to the
extent that its assets consist of shares of an Index Portfolio that is
already contributing to the capital of TVGI; (b) a Fund of Index Funds
would not be allocated any portion of the corporate management and
administrative expenses, or the distribution expenses, that are
allocated under the Funds' Service Agreement; and (c) a Fund of Index
Funds would be obligated to pay for services rendered by outside
parties and certain other direct Fund of Index Funds expenses
customarily borne by each Fund pursuant to the Funds' Service
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Agreement, subject to the partial or complete elimination of these
charges by the savings which would accrue to the benefit of the Index
Portfolios.
Applicants' Legal Analysis
A. Section 12(d)(1)
1. Section 12(d)(1)(A) provides that no registered investment
company may acquire securities of another investment company if such
securities represent more than 3% of the acquired company's outstanding
voting stock, more than 5% of the acquiring company's total assets, or
if such securities, together with the securities of any other acquired
investment companies, represent more than 10% of the acquiring
company's total assets. Section 12(d)(1)(B) provides that no registered
open-end investment company may sell its securities to another
investment company if the sale will cause the acquiring company to own
more than 3% of the acquired company's voting stock, or if the sale
will cause more than 10% of the acquired company's voting stock to be
owned by investment companies.
2. Section 6(c) provides that the SEC may exempt persons or
transactions if, and to the extent that, such exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provisions of the Act. Applicants request an order under section 6(c)
exempting them from section 12(d)(1) to permit any Fund of Index Funds
to invest in the Index Portfolios in excess of the percentage
limitations of section 12(d)(1).
3. Section 12(d)(1) was intended to mitigate or eliminate actual or
potential abuses that might arise when one investment company acquires
shares of another investment company. These abuses include the
acquiring fund imposing undue influence over the management of the
acquired funds through the threat of large-scale redemptions, the
acquisition by the acquiring company of voting control of the acquired
company, the layering of sales charges, advisory fees, and
administrative costs, and the creation of a complex pyramidal structure
that may be confusing to investors.
4. Applicants believe that none of these potential abuses would be
present in the structure of a Fund of Index Funds. A Fund of Index
Funds would not exercise any influence over the management of the
acquired Index Portfolios by the threat of redemptions. A Fund of Index
Funds would invest its assets solely to establish and maintain
specified ratios or weightings of Index Portfolios. Unless a Fund of
Index Funds would cease using one Index Portfolio and begin using
another, the Fund of Index Funds would have no investment management
authority to select which Index Portfolios to purchase or redeem, and
would not hold itself out as doing so. Redemptions from the acquired
Index Portfolios would result solely in the ordinary course of business
as a result of a Fund of Index Fund's receipt of net redemption
requests from its shareholders. The acquired Index Portfolios, as a
matter of policy and practice, are at all times fully invested in
liquid, publicly traded securities. Thus, they would have no reason to
hold a cash position to protect their other shareholders against
potential redemptions by a Fund of Index Funds.
5. The structure of a Fund of Index Funds would contain no improper
layering of sales charges or advisory fees. Neither a Fund of Index
Funds nor the Index Portfolios currently intend to impose any sales
charges or fees pursuant to rule 12b-1. Applicants currently do not
intend to charge an advisory fee at the Fund of Index Funds level with
respect to assets invested in the Index Portfolios. Similarly,
virtually all administrative fees would be imposed at the Index
Portfolio level, and shareholders of a Fund of Index Funds would bear a
portion of these fees only in proportion to their holdings of the Index
Portfolios.
6. A Fund of Index Funds would not have a complex structure that
would make it difficult for a shareholder to determine the true value
of his or her interest in the Fund of Index Funds. The Fund of Index
Funds would seek to replicate specified indices by investing in shares
of Index Portfolios that hold securities replicating the indices,
rather than by direct investments in these securities.
7. In addition to not containing the actual and potential abuses
which led to the enactment of section 12(d)(1), applicants believe that
the structure of a Fund of Index Funds would provide a number of
benefits to a Fund of Index Funds and its shareholders, including: (a)
The opportunity to obtain through a single investment account a
diversified investment program suitable for retirement or long-term
savings; (b) a simpler method for an investor to allocate his or her
assets on a continuous basis without, at a minimum, the inconvenience
of initiating the steps periodically to ``rebalance'' his or her
portfolio; (c) a modest reduction in the investor's account maintenance
costs, because an investor would not need to maintain two or more
accounts to attain a desired allocation; and (d) the lower expense
ratios and increased diversification which result from a new Fund of
Index Fund's ability to take advantage of the existing asset base
created by the acquired Index Portfolios.
8. The acquired Index Portfolios benefit from the existence of a
Fund of Index Funds in three major respects: (a) The likely addition of
assets from a Fund of Index Funds would reduce the expense ratios of
the Index Portfolios; (b) to the extent many shareholders of a Fund of
Index Funds would otherwise open accounts with each of the Index
Portfolios, the number of accounts maintained by the Index Portfolios
in the aggregate, and the resulting transfer agency fees, would be
reduced; and (c) the costs of printing and mailing prospectuses, sales
material, and periodic reports would be reduced because The Vanguard
Group can combine information concerning two or more funds in a single
document. All of the Vanguard Funds are also likely to benefit from the
existence of a Fund of Index Funds since increased distribution and the
resulting addition of assets to The Vanguard Group produces cost
savings and other benefits for all Funds even if they are not the
acquired Funds.
B. Section 17(a)
1. Section 17(a) makes it unlawful for an affiliated person of a
registered investment company to sell securities to, or purchase
securities from, the company. A Fund of Index Funds and the acquired
Index Portfolios may be considered affiliated persons because they
share common officers and/or directors/trustees. An acquired Index
Portfolio's issuance of its shares to a Fund of Index Funds may be
considered a sale prohibited by section 17(a).
2. Section 17(b) provides that the SEC shall exempt a proposed
transaction from section 17(a) if evidence establishes that: (a) The
terms of the proposed transaction are reasonable and fair and do not
involve overreaching; (b) the proposed transaction is consistent with
the policies of the registered investment company involved; and (c) the
proposed transaction is consistent with the general provisions of the
Act. Applicants request an exemption under sections 6(c) and 17(b) to
permit the Index Portfolios to sell their shares to a Fund of Index
Funds.\2\
\2\ Section 17(b) applies to specific proposed transactions and
not to an ongoing series of future transactions. See Keystone
Custodian Funds, 21 S.E.C. 295, 298-299 (1945). Section 6(c) can be
used to grant relief from section 17(a) for an ongoing series of
future transactions.
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3. Applicants believe that the proposed transactions meet the
standards of sections 6(c) and 17(b). All purchases and redemptions of
shares of an Index Portfolio would be effected at current net asset
value. A Fund of Index Fund's purchase and sale of shares of the Index
Portfolios is consistent with the Fund of Index Funds' policy, as set
forth in its registration statement. Applicants also believe that the
proposed transactions are consistent with the general purposes of the
Act.
C. Section 17(d) and Rule 17d-1
1. Section 17(d) prohibits an affiliated person of a registered
investment company, or an affiliated person of such person, acting as
principal, from effecting any transaction in which such investment
company is a joint, or joint and several, participant with such person
in contravention of SEC rules and regulations. Rule 17d-1 provides that
an affiliated person of a registered investment company or an
affiliated person of such person, acting as principal, shall not
participate in, or effect any transaction in connection with, any joint
enterprise or other joint arrangement in which the registered
investment company is a participant unless the SEC has issued an order
approving the arrangement. The Vanguard Funds and TVGI are engaged in a
joint enterprise within the meaning of section 17(d).
2. Applicants request an order under section 17(d) and rule 17d-1
to permit the Boards of Directors of the Vanguard Funds to modify the
Funds' Service Agreement. Applicants believe that, for the reasons
discussed above, the proposed amendments to the Funds' Service
Agreement are consistent with the standards of rule 17d-1. Requiring a
Fund of Index Funds to make an asset-related capital contribution to
TVGI, when the assets of the Fund of Index Funds will already be
bearing a capital assessment indirectly at the Index Portfolio level,
would unfairly impose duplicative expenses upon the shareholders of the
Fund of Index Funds, and confer an unjustified benefit on the acquired
Index Portfolios, as well as the other Vanguard Funds, which will be
deriving other benefits from the Fund of Index Funds' participation in
TVGI.
Applicants' Conditions
Applicants agree that the order granting the requested relief shall
be subject to the following conditions:
1. The Fund of Index Funds and each underlying Index Portfolio will
be part of a group of investment companies which holds itself out to
investors as related companies for purposes of investment and investor
services, and which obtains corporate management, administrative, and
distribution services from TVGI.
2. No underlying Index Portfolio shall acquire securities of any
other investment company in excess of the limits contained in section
12(d)(1)(A) of the Act.
3. A majority of the directors of the Fund of Index Funds will not
be ``interested persons,'' as defined in section 2(a)(19) of the Act.
4. Before approving any advisory contract under section 15 of the
Act, the board of directors of the Fund of Index Funds, including a
majority of the directors who are not ``interested persons,'' as
defined in section 2(a)(19), shall find that advisory fees charged
under such contract are based on services provided that are in addition
to, rather than duplicative of, services provided pursuant to any
underlying Index Portfolio's advisory contract. Such finding, and the
basis upon which the finding was made, will be recorded fully in the
minute books of the Fund of Index Funds.
5. Any sales charges or service fees charged with respect to
securities of the Fund of Index Funds, when aggregated with any sales
charges or service fees paid by the Fund of Index Funds with respect to
shares of the underlying Index Portfolios, shall not exceed the limits
set forth in Article III, section 26, of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc.
6. The applicants agree to provide the following information, in
electronic format, to the Chief Financial Analyst of the SEC's Division
of Investment Management: monthly average total assets for each Fund of
Index Funds portfolio and each of its underlying Index Portfolios;
monthly purchases and redemptions (other than by exchange) for each
Fund of Index Funds portfolio and each of its underlying Index
Portfolios; monthly exchanges into and out of each Fund of Index Funds
Portfolio and each of its underlying Index Portfolios; month-end
allocations of each Fund of Index Funds portfolio's assets among its
underlying Index Portfolios; annual expense ratios for each Fund of
Index Funds portfolio and each of its underlying Index Portfolios; and
a description of any vote taken by the shareholders of any underlying
Index Portfolio, including a statement of the percentage of votes cast
for and against the proposal by the Fund of Index Funds and by the
other shareholders of the underlying Index Portfolios. Such information
will be provided as soon as reasonably practicable following each
fiscal year-end of the Fund of Index Funds (unless the Chief Financial
Analyst shall notify applicants in writing that such information need
no longer be submitted).
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27885 Filed 11-9-95; 8:45 am]
BILLING CODE 8010-01-M
