[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]



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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'').

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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).
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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

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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.

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    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