00-32208. INVESTMENT COMPANY ACT OF 1940; Vanguard Index Funds et al.

In the Matter of; Vanguard Index Funds, The Vanguard Group, Inc., Vanguard Marketing Corporation, P.O. Box 2600, Valley Forge, PA 19482, (812-12094), Order under section 6(c) of the Investment Company Act of 1940 granting exemptions from sections 2(a)(32), 18(f)(1), 18(i), 22(d) and 24(d) of the Act and Rule 22c-1 under the Act and under sections 6(c) and 17(b) of the Act granting exemptions from sections 17(a)(1) and (2) of the Act and denying a request for hearing.

Vanguard Index Funds, The Vanguard Group, Inc. and Vanguard Marketing Corporation (collectively, “Vanguard”) filed an application on May 12, 2000, and amended the application on July 12, 2000. Applicants requested an order under section 6(c) of the Investment Company Act of 1940 (“Act”) for exemptions from sections 2(a)(32), 18(f)(1), 18(i), 22(d), and 24(d) of the Act and rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the Act for exemptions from sections 17(a)(1) and (2) of the Act. The requested order would permit: (a) certain open-end management investment companies (“Funds”) to issue a new class of shares with limited redeemability (“VIPERS”); (b) secondary market transactions in VIPERs at negotiated prices on a national securities exchange; (c) dealers to sell VIPERs to secondary market purchasers unaccompanied by a prospectus, when prospectus delivery is not required by the Securities Act of 1933 (“Securities Act”); and (d) certain affiliated persons of the Funds to deposit securities into, and receive securities from, the Funds in connection with the purchase and redemption of aggregations of VIPERs.

On October 6, 2000, a notice of the filing of the application was issued (Investment Company Act Release No. 24680). The notice gave interested persons an opportunity to request a hearing and stated that an order disposing of the application would be issued unless a hearing was ordered. On October 30, 2000, Standard & Poor's (“S&P”), a division of McGraw-Hill Companies, Inc. (“McGraw-Hill”), submitted a hearing request on the application (“Hearing Request”).

Rule 0-5(c) states that the Commission will order a hearing on a matter, upon the request of an “interested person” or upon its own motion, if it appears that a hearing is “necessary or appropriate in the public interest or for the protection of investors.” The Commission has reviewed each of the issues raised in the Hearing Request and finds that none of the issues warrants ordering a hearing on the application. Set forth below is a summary of each of the arguments made by S&P in support of a hearing and the Commission's findings.

First, S&P states that McGraw-Hill has filed suit against Vanguard concerning the use of S&P indices and trademarks in connection with the issuance of VIPERs (“Litigation”). S&P states that it is not in the public interest for the Commission to grant the requested exemptions when Vanguard's right to issue VIPERs is being challenged in the Litigation. S&P asserts that a potentially chaotic situation could develop if S&P prevails in the Litigation after the Commission allows the issuance of VIPERs.

The Commission has determined that the Litigation is not relevant to the issues the Act requires the Commission to consider in deciding whether to grant or deny the application. The Litigation does not relate to or challenge any of the specific exemptions requested by Vanguard, nor does the Litigation assert any claims under the Act. With respect to any potential detriment that shareholders might suffer if S&P prevails in the Litigation after the issuance of VIPERs, any conclusions that the Commission might reach, even if a hearing were held, would require the Commission to speculate on the outcome of the Litigation and on the possible remedies that would be imposed.

Second, S&P states that it is not in the interests of investors for Vanguard to issue VIPERs when Vanguard appears unable to meet its obligations as set forth in the notice. Specifically, S&P asserts that Vanguard's representatives in the Litigation suggest that VIPERs are simply shares of an additional class of an existing Fund, while the representations in the application indicate that Vanguard will highlight the differences between VIPERs and traditional mutual fund investments. S&P indicates that these contradictory public positions could lead to investor confusion.

The Commission thoroughly considered the issue of potential investor confusion during the review of the application. In the application, Vanguard agrees to a variety of specific measures designed to address this issue. The Commission has determined that S&P has not raised any issue that, if substantiated, would indicate that Vanguard would not meet the obligations set forth in the application. If Vanguard were unable to meet its obligations, the Commission would take appropriate action.

Third, S&P states that it is not in the interests of investors for the Commission to facilitate an unconventional investment that may never achieve its stated purpose of encouraging short-term traders not to trade in shares of the conventional classes of the Funds. Specifically, S&P states that because Vanguard may charge an administrative fee when shareholders in a conventional class of a Fund exchange shares for VIPERs, the Vanguard proposal may not succeed in drawing short-term traders from conventional classes to exchange-traded classes. S&P also states that a hearing would be appropriate to explore why Vanguard's current and previous prospectuses do not discuss the problems that the application attributes to short-term traders.

The Commission finds that the specific issues raised by S&P are not relevant to the relief requested by Vanguard in the application. In the application, Vanguard represents that any administrative fee assessed on exchanges will comply with rule 11a-3 under the Act, which governs this type of fee. Vanguard has not requested any relief relating to the imposition of this fee. Any disclosure issues in current and prior prospectuses have been addressed previously as necessary during the disclosure review process and are not the subject of the application.

Finally, S&P questions whether the Commission should grant the requested relief from section 24(d) of the Act, which would allow dealers to sell VIPERs to secondary market purchasers unaccompanied by a prospectus, when the Securities Act does not require prospectus delivery. S&P argues that because of the risks of the Litigation and the possible effect of the Litigation on the Funds, the Commission should require Vanguard to deliver prospectuses disclosing information about the Litigation to all VIPERs investors.

The Commission fully considered issues relating to prospectus delivery relief during its review of the application. A condition to the prospectus delivery relief is that the national securities exchange that lists VIPERs will require the delivery of a product description to secondary market purchasers. As stated in the application, the product description must provide, among other things, a plain English overview of the material risks of owning the Fund's shares. The product description also must disclose the actions that would be taken if the Fund's license with S&P were terminated. In addition, the Commission understands that Vanguard intends to include a description of the Litigation in the product description that will be similar to the disclosure contained in the Fund's prospectus.

On the basis of the foregoing, the Commission finds that S&P has not articulated any material issue of fact or law that is relevant to the Commission's decision whether to grant the requested relief or that has not been considered previously.^[1] It therefore appears that a hearing is not necessary or appropriate in the public interest or for the protection of investors.

Accordingly,

It Is Ordered that the request for a hearing is denied.

The matter having been considered, it is found, on the basis of the information set forth in the application, as amended, that granting the requested exemptions is 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.

It is further found that the terms of the proposed transactions are fair and reasonable and do not involve overreaching on the part of any person concerned, and that the proposed transactions are consistent with the policy of each registered investment company concerned and the general purposes of the Act.

Accordingly,

It Is Further Ordered, that the requested exemptions under section 6(c) of the Act from sections 2(a)(32), 18(f)(1), 18(i), 22(d), and 24(d) of the Act and rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the Act from sections 17(a)(1) and (2), are granted, effective immediately, subject to the conditions contained in the application, as amended.

The exemption from section 24(d) of the Act does not affect a purchaser's rights under the civil liability and anti-fraud provisions of the Securities Act. Thus, rights under section 11 and section 12(a)(2) of the Securities Act extend to all purchasers who can trace their securities to a registration statement filed with the Commission, regardless of whether they were delivered a prospectus in connection with their purchase.

By the Commission.

Jonathan G. Katz,

Secretary.

Footnotes

1.  The Commission does not deem it necessary to make a formal determination with respect to the status of S&P as an “interested person” within the meaning of section 40(a) of the Act and rule 0-5(c) under the Act inasmuch as the Commission has determined that the assertions made and the issues raised in connection with the application do not warrant a hearing.