[Federal Register Volume 65, Number 199 (Friday, October 13, 2000)]
[Notices]
[Pages 61005-61010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26380]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24680; 812-12094]


Vanguard Index Funds, et al.; Notice of Application

October 6, 2000.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for exemption 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 
exemption from sections 17(a)(1) and (a)(2) of the Act.

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    Summary of Application: Applicants request an order that would 
permit each of certain registered open-end management investment 
companies whose portfolios consist of the component securities of 
certain indices to issue a new class of shares with limited 
redeemability. The requested order would permit transactions in the 
shares of the new classes at negotiated prices in the secondary market 
and would allow dealers to sell the shares to secondary market 
purchasers unaccompanied by a prospectus, when prospectus delivery is 
not required by the Securities Act of 1933. The requested order also 
would permit certain affiliated persons of the investment companies to 
deposit securities into, and receive securities from, the investment 
companies in connection with the purchase and redemption of 
aggregations of shares of the new classes.

[[Page 61006]]

    Applicants: Vanguard Index Funds (``Index Trust''), The Vanguard 
Group, Inc. (``VGI''), and Vanguard Marketing Corporation (``VMC'').
    Filing Dates: The application was filed on May 12, 2000 and was 
amended on July 12, 2000.
    Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 31, 2000 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 Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, P.O. Box 2600, 
Valley Forge, PA 19482.

FOR FURTHER INFORMATION CONTACT: Rachel H. Graham, Senior Counsel, or 
Michael W. Mundt, 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 at the 
Commission's Public Reference Branch, 450 Fifth Street, NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Index Trust is an open-end management investment company 
registered under the Act and organized as a Delaware business trust. 
Index Trust offers nine investment portfolios (each a ``Fund'' and, 
collectively, the ``Funds''). Currently, eight of the Funds offer 
separate classes of shares for retail and institutional investors, and 
the remaining Fund offers retail shares only (shares of the retail and 
institutional classes of the Funds collectively are referred to as 
``Conventional Shares'').
    2. VGI is a Pennsylvania corporation that is wholly and jointly 
owned by the Vanguard family of mutual funds (``Vanguard Fund 
Complex''). VGI is registered as an investment adviser under the 
Investment Advisers Act of 1940 and as a transfer agent under the 
Securities Exchange Act of 1934 (``Exchange Act''). VGI provides each 
Vanguard fund (including the Funds) with corporate management, 
administrative, and transfer agency services at cost. VGI also provides 
advisory services at cost to certain Vanguard funds, including each 
Fund. VMC is a wholly owned subsidiary of VGI and is registered as a 
broker-dealer under the Exchange Act. VMC provides all distribution and 
marketing services at cost to the Vanguard funds including each Fund.
    3. Each Fund seeks to tract, as closely as possible, the 
performance of a specified domestic securities index (each an ``Index'' 
and, collectively, the ``Indices'').\1\ A Fund will utilize as an 
investment approach either a replication strategy or a representative 
sampling strategy. A Fund using a replication strategy will hold each 
of the component securities in its Index in about the same proportion 
as represented in the Index itself. A Fund using a representative 
sampling strategy will hold a representative sample of the component 
securities of its Index that resembles the entire Index in terms of 
industry weightings, market capitalization, price/earnings ratio, 
dividend yield, and other characteristics. Applicants state that the 
difference between the performance of a Fund and that of its Index 
generally has been significantly less than one percentage point. 
Applicants expect that the Funds will continue to track the Indices 
with the same degree of precision in the future.
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    \1\ The Indices are the Standard & Poor's (``S&P'') 500 
Composite Stock Price Index, S&P MidCap 400 Index, S&P 500/BARRA 
Growth Index, S&P 500/BARRA Value Index, S&P Small Cap 600/BARRA 
Growth Index, S&P Small Cap 600/BARRA Value Index, Wilshire 5000 
Total Market Index, Wilshire 4500 Completion Index, and Russell 200 
Index. No entity that creates, complies, sponsors, or maintains an 
Index is an affiliated person, as defined in section 2(a)(3) of the 
Act, or an affiliated person of an affiliated person, of the Funds, 
VGI, or VMC.
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    4. Applicants state that some investors trade in and out of the 
Funds' Conventional Shares frequently, often as part of a market timing 
strategy, to the detriment of the Funds' long-term shareholders. 
Applicants state that the purchase and redemption requests of market 
timers increase a Fund's realization of capital gains, increase Fund 
expenses, and hinder a Fund's ability to achieve its investment 
objective of tracking its Index as closely as possible. According to 
applicants, Index Trust has adopted policies designed to deter short-
term investors, but these efforts have proven insufficient.
    5. Each Fund proposes to create a class of shares (Vanguard Index 
Participation Equity Receipts, or ``VIPER Shares'') that would be 
listed on a national securities exchange (``Exchange'') and would trade 
in the secondary market at negotiated prices. Applicants state that, by 
creating exchange-traded classes of shares, the Funds hope to provide 
short-term investors with an attractive means of purchasing Fund shares 
that can be bought and sold continuously throughout the day at market 
prices.\2\ Applicants further assert that the new classes of VIPER 
Shares would benefit holders of Conventional Shares by reducing the 
portfolio disruption and transaction costs caused by market timing 
activity.
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    \2\ Transactions in each Fund's Conventional Shares would 
continue to be priced at that day's net asset value (``NAV''), which 
is calculated once per day at the close of trading on the New York 
Stock Exchange.
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    6. Except in connection with the Exchange Option (defined below), 
the Funds will sell VIPER Shares in aggregations of a specified number 
ranging from 20,000 to 200,000 shares (``Creation Units''), depending 
on the Fund. The price of a Creation Unit will range from about 
$2,000,000 to $6,000,000.\3\ Creation Units may be purchased only by or 
through (i) a participant in the Continuous Net Settlement System of 
the National Securities Clearing Corporation (``NSCC'') or (ii) a 
Depository Trust Company (``DTC'') participant. In either case, the 
participant must enter into a participant agreement with VMC. Creation 
Units will be issued in exchange for an in-kind deposit of securities 
and cash. An investor wishing to purchase a Creation Unit from a Fund 
will have to transfer to the Fund a ``Portfolio Deposit'' consisting of 
(i) a basket of securities selected by VGI from among the securities 
contained in the Fund's portfolio (``Deposit Securities''),\4\ and (ii) 
a cash payment to equalize any difference between (a) the total 
aggregate market value of the Deposit Securities and (b) the NAV per 
Creation Unit of the Fund (``Balancing Amount'').\5\ An investor 
purchasing a

[[Page 61007]]

Creation Unit from a Fund will be charged a fee (``Transaction Fee'') 
to prevent the dilution of the interests of the remaining shareholders 
resulting from the Fund incurring costs in connection with the purchase 
of the Creation Units.\6\ Each purchaser of a Creation Unit will 
reveive a prospectus for the VIPER Shares (``VIPER Shares Prospectus'') 
that contains complete disclosure about the Transaction Fee. A Fund's 
Conventional Shares will be covered by a separate prospectus 
(``Conventional Shares Prospectus'').
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    \3\ A Fund may require that an investor purchase a minimum 
number of Creation Units.
    \4\ Applicants state that, for Funds holding fewer than 
approximately one thousand portfolio securities, the Deposit 
Securities typically will be identical to the Fund's portfolio. For 
Funds holding more than that number of portfolio securities, VGI 
will select a subset of the Fund's portfolio using a representative 
sampling strategy.
    \5\ On each business day, VGI will make available through the 
NSCC, prior to the opening of trading on the Exchange, the list of 
the names and the required number of shares of each Deposit Security 
for each Fund. In addition, each Fund reserves the right to permit 
or require the substitution of an amount of cash to be added to the 
Balancing Amount, or of a different security, to replace any Deposit 
Security in certain circumstances.
    \6\ In situations where a Fund permits a purchaser to substitute 
cash for one or more Deposit Securities, the purchaser will be 
assessed a higher Transaction Fee to offset the increased cost to 
the Fund of buying those particular Deposit Securities.
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    7. Orders to purchase Creation Units will be placed with VMC, which 
will be responsible for transmitting the orders to the applicable Fund. 
VMC will maintain a record of Creation Unit purchasers and will send 
out a VIPER Shares Prospectus and confirmation to purchasers whose 
orders have been accepted by the Fund.
    8. Purchasers of Creation Units may separate a Creation Unit into 
individual VIPER Shares.\7\ VIPER Shares will be listed on an Exchange 
and traded in the secondary market in the same manner as other equity 
securities. One or more Exchange specialists will be assigned to make a 
market in VIPER Shares. The price of VIPER Shares traded on an Exchange 
will be based on a current bid/offer market, and each VIPER Share is 
expected to have a market value of between $10 and $150. Transactions 
involving the sale of VIPER Shares in the secondary market will be 
subject to customary brokerage commissions and charges.
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    \7\ Applicants state that persons purchasing Creation Units will 
be cautioned in the VIPER Shares Prospectus that some activities on 
their part may, depending on the circumstances, result in their 
being deemed statutory underwriters and subject them to the 
prospectus delivery and liability provisions of the Securities Act 
of 1933 (``Securities Act''). For example, a broker-dealer firm may 
be deemed a statutory underwriter if it purchases Creation Units 
from a Fund, breaks them down into the constituent VIPER Shares, and 
sells VIPER Shares directly to its customers; or if it chooses to 
couple the purchase of a supply of new VIPER Shares with an active 
selling effort involving solicitation of secondary market demand for 
VIPER Shares. The VIPER Shares Prospectus will state that whether a 
person is an underwriter depends upon all the facts and 
circumstances pertaining to that person's activities. The VIPER 
Shares Prospectus also will state that broker-dealer firms should 
note that dealers who are not ``underwriters'' but are participating 
in a distribution (as contrasted to ordinary secondary trading 
transactions), and thus dealing with VIPER Shares that are part of 
an ``unsold allotment'' within the meaning of section 4(3)(C) of the 
Securities Act, would be unable to take advantage of the prospectus 
delivery exemption provided by section 4(3) of the Securities Act.
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    9. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs. An Exchange specialist, in 
providing for a fair and orderly secondary market for VIPER Shares, 
also may purchase Creation Units for use in its market-making 
activities on the Exchange. Applicants expect that secondary market 
purchasers of VIPER Shares will include both institutional and retail 
investors.\8\ Applicants believe that arbitrageurs will purchase or 
redeem Creation Units to take advantage of discrepancies between the 
VIPER Shares' market price and the VIPER Shares' underlying NAV. 
Applicants expect that this arbitrage activity will provide a market 
``discipline'' that will result in a close correspondence between the 
price at which the VIPER Shares trade and their NAV. In other words, 
applicants do not expect the VIPER Shares to trade at a significant 
premium or discount to their NAV.\9\
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    \8\ VIPER Shares will be registered in book-entry form only. DTC 
or its nominee will be the registered owner of all outstanding VIPER 
Shares. Records reflecting the beneficial owners of VIPER Shares 
will be maintained by DTC or its participants.
    \9\ Every fifteen seconds throughout the trading day, the 
Exchange will disseminate (i) via the facilities of the Consolidated 
Tape Association, the market value of a VIPER Share; and (ii) 
separately from the consolidated tape, a calculation of the 
estimated NAV of a VIPER Share, which estimate is expected to be 
accurate to within a few basis points. Applicants state that an 
investor comparing the two figures will be able to determine 
whether, and to what extent, VIPER Shares are selling at a premium 
or discount to NAV.
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    10. Applicants will make available a VIPER Shares product 
description (``Product Description'') for distribution in accordance 
with an Exchange rule requiring Exchange members and member 
organizations effecting transactions in a Fund's VIPER Shares to 
deliver a Product Description to investors purchasing VIPER Shares. 
Applicants state that any other Exchange that applies for unlisted 
trading privileges in VIPER Shares will have to adopt a similar rule. 
The Product Description will provide a plain English overview of a 
Fund, including its investment objective and investment strategies and 
the material risks and potential rewards of investing in the Fund. The 
Product Description also will provide a brief, plain English 
description of the salient aspects of the Fund's VIPER Shares. The 
Product Description will advise investors that a VIPER Shares 
Prospectus and the Fund's Statement of Additional Information (``SAI'') 
may be obtained, without charge, from the investor's broker or from 
VMC. The Product Description also will provide a website address (in 
most cases to a website maintained by the sponsor of the relevant 
Index) where investors can obtain information about the composition and 
compilation methodology of the Index. Applicants expect that the number 
of purchases of VIPER Shares in which an investor will not receive a 
Product Description will not constitute a significant portion of the 
market activity in VIPER Shares.
    11. Except in connection with the liquidation of a Fund or a Fund's 
VIPER Share class, VIPER Shares will not be individually redeemable. 
VIPER Shares will only be redeemable in Creation Unit aggregations 
through each Fund.\10\ To redeem, an investor will have to accumulate 
enough VIPER Shares to constitute a Creation Unit. An investor 
redeeming a Creation Unit generally will receive (i) a basket of 
securities (``Redemption Securities'') that in most cases will be the 
same as the Deposit Securities required of investors purchasing 
Creation Units on the same day, and (ii) a cash payment that generally 
will be the same as that day's Balancing Amount. An investor also may 
receive the cash equivalent of a Redemption Security if the Fund 
determines that such alternative is warranted, such as a case in which 
the investor is not permitted to own a particular Redemption Security 
by regulation or policy. A redeeming investor will pay a Transaction 
Fee to cover the Fund's transaction costs.
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    \10\ Creation Units may be redeemed through either NSCC or DTC. 
Investors who redeem through DTC will pay a higher Transaction Fee.
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    12. A Fund may offer holders of its Conventional Shares (except 
those holding Conventional Shares through a 401(k) or other 
participant-directed employer-sponsored retirement plan) the 
opportunity to exchange some or all of those shares for the Fund's 
VIPER Shares (``Exchange Option'').\11\ Applicants state that the 
Exchange Option would facilitate the movement of investors currently 
holding Conventional Shares, but desiring intraday trading flexibility, 
out of the Conventional Shares and into VIPER Shares in an expeditious 
and tax

[[Page 61008]]

efficient manner.\12\ Around the time that the Fund's VIPER Shares 
begin trading, VGI will send to existing holders of the Fund's 
Conventional Shares a notice describing the Exchange Option and 
explaining the process by which an investor may exchange his or her 
Conventional Shares for VIPER Shares. The notice will comply with 
section 10(b) of the Securities Act and rule 482 under the Securities 
Act, and will highlight the key differences between the Fund's VIPER 
Shares and Conventional Shares. Comparable information about a Fund's 
Exchange Option also would be contained in a separate section of the 
Conventional Shares Prospectus. To effect an exchange through the 
Exchange Option, the investor must have a brokerage account and must 
contact his or her broker to initiate the exchange. The investor will 
receive a VIPER Shares Prospectus in connection with the exchange 
transaction, as required by the Securities Act. Subsequent to the 
exchange, the investor would have to contact his or her broker for 
account information relating to his or her VIPER Share holdings or to 
sell the VIPER Shares.
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    \11\ The terms of an exchange made pursuant to the Exchange 
Option will comply with section 11(a) of the Act and rule 11a-3 
under the Act. The Exchange Option would offer a ``one way'' 
exchange only. Therefore, a holder of a Fund's VIPER Shares who 
wishes to shift his or her investment to the Fund's Conventional 
Shares would have to sell the VIPER Shares in the secondary market 
and use the sale proceeds (less brokerage commissions) to purchase 
Conventional Shares from the Fund. The sale of the VIPER Shares 
would be a taxable event.
    \12\ An exchange of Conventional Shares for VIPER Shares of the 
same Fund generally is not a taxable transaction. Applicants note 
that because DTC's systems currently are unable to handle fractional 
shares, exchange requests will be rounded down to the nearest whole 
VIPER Share. If an investor wishes to exchange all of his or her 
Conventional Shares for VIPER Shares, however, any fractional VIPER 
Share that results from the exchange would be liquidated and the 
cash sent to the investor's broker for the benefit of the investor.
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Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for 
exemption from sections 2(a)(32), 18(f)(1), 18(i), 22(d), and 224(d) of 
the Act and rule 22c-1 under the Act; and under sections 6(c) and 17(b) 
of the Act for exemption from sections 17(a)(1) and (a)(2) of the Act.
    2. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction, or any class of persons, 
securities, 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.

Section 2(a)(32) of the Act

    3. Section 2(a)(32) of the Act defines a ``redeemable security'' as 
any security, other than short-term paper, under the terms of which the 
holder, upon its presentation to the issuer, is entitled to receive 
approximately his proportionate share of the issuer's current net 
assets, or the cash equivalent. Applicants request an order under 
section 6(c) of the Act to permit VIPER Shares to be redeemed in 
Creation Unit aggregations only. Applicants note that because of the 
arbitrage possibilities created by the redeemability of Creation Units, 
it is expected that the market price of a VIPER Share will not vary 
much from its NAV.

Sections 18(f)(1) and 18(i) of the Act

    4. Section 18(f)(1) of the Act, in relevant part, prohibits a 
registered open-end company from issuing any class of ``senior 
security,'' which is defined in section 18(g) of the Act to include any 
stock of a class having a priority over any other class as to the 
distribution of assets or payment of dividends. Section 18(i) of the 
Act requires that every share of stock issued by a registered 
management company be voting stock, with the same voting rights as 
every other outstanding voting stock. Rule 18f-3 under the Act permits 
an open-end fund to issue multiple classes of shares representing 
interests in the same portfolio without seeking exemptive relief from 
sections 18(f)(1) and 18(i), provided that the fund complies with 
certain requirements. Applicants state that they will comply in all 
respects with rule 18f-3, except the requirements that (i) other than 
the differences allowed by the rule, each class must have the same 
rights and obligations as each other class, and (ii) if a class has a 
different distribution arrangement, the class must pay all of the 
expenses of that arrangement. Because they may not rely on rule 18f-3, 
applicants request an exemption under section 6(c) from sections 
18(f)(1) and 18(i).
    5. Applicants state that there are three ways in which the 
Conventional Shares and VIPER Shares of each Fund will have different 
rights: (i) Conventional Shares will be individually redeemable from 
the Fund, while VIPER Shares will be redeemable only in Creation Unit 
aggregations; (ii) VIPER Shares will be traded on an Exchange, while 
Conventional Shares will not; and (iii) Conventional Shares may be 
exchanged for VIPER Shares, but VIPER Shares may not be exchanged for 
Conventional Shares. Applicants assert that these different rights are 
necessary if their proposal is to have the desired benefits. Applicants 
note that a Fund's VIPER Shares will be tradable on an Exchange and 
redeemable only in large aggregations, and that its Conventional Shares 
will be exchangeable for VIPER Shares, in order to encourage short-term 
investors to conduct their trading activities in a vehicle that will 
not disrupt management of the Fund. Applicants assert that there is no 
reason to make Conventional Shares tradable and that it would be 
counterproductive to facilitate the ability of market timers to disrupt 
a Fund by making VIPER Shares individually redeemable or exchangeable 
for Conventional Shares.
    6. Applicants assert that the different rights do not implicate the 
concerns underlying section 18 of the Act, including conflicts of 
interest and investor confusion. With respect to the potential for 
investor confusion, applicants will take a variety of steps to ensure 
that investors understand the key differences between a Fund's classes 
of VIPER Shares and Conventional Shares. Applicants state that the 
VIPER Shares will not be marketed as a mutual fund investment. 
Marketing materials may refer to VIPER Shares as an interest in an 
investment company or fund, but will not make reference to an ``open-
end fund'' or ``mutual fund'' except to compare or contrast the VIPER 
Shares with the shares of a conventional open-end management investment 
company. Any marketing or advertising materials addressed primarily to 
prospective investors will emphasize that (i) VIPER Shares are not 
redeemable from a Fund other than in Creation Unit aggregations; (ii) 
VIPER Shares, other than in Creation Unit aggregations, may be sold 
only through a broker, and the shareholder may have to pay brokerage 
commissions in connection with the sale; and (iii) the shareholder may 
receive less than NAV in connection with the sale of VIPER Shares. The 
same type of disclosure will be provided in the Conventional Shares 
Prospectus, VIPER Shares Prospectus, Product Description, SAI, and 
reports to shareholders. Applicants also note that (i) all references 
to a Fund's exchange-traded class of shares will use a form of the name 
``VIPERS'' rather than the Fund name; (ii) the cover and summary page 
of the VIPER Shares Prospectus will state that the VIPER Shares are 
listed on an Exchange and are not individually redeemable; (iii) VMC 
will not market Conventional Shares and VIPER Shares in the same 
advertisement or marketing material; and (iv) applicants will prepare 
educational materials describing the VIPER Shares.
    7. Applicants currently allocate distribution expenses among all 
funds in the Vanguard Fund Complex according to a cost-sharing formula 
approved by the Commission in 1981 as part of an order allowing the 
Vanguard Fund Complex to internalize its

[[Page 61009]]

distribution services (``1981 Order'').\13\ For those funds in the 
Vanguard Fund Complex offering multiple classes of shares (including 
eight of the Funds), applicants apply the formula in the 1981 Order by 
treating each class as a separate fund (``Multi-Class Distribution 
Formula''). Applicants state that the Multi-Class Distribution Formula 
currently is applied in a manner that is consistent with rule 18f-3 
because each class currently has the same distribution arrangement and, 
accordingly, the rule does not require that each class pay its actual 
distribution expenses.
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    \13\ Investment Company Act Rel. No. 11645 (Feb. 25, 1981) 
(Opinion of the Commission and Final Order). Under the formula, each 
fund's contribution is based 50% on the fund's average month-end net 
assets during the preceding quarter relative to the average month-
end net assets of the other Vanguard funds, and 50% on the fund's 
sales of new shares relative to the sales of new shares of the other 
Vanguard funds during the preceding 24 months. So that a new fund is 
not unduly burdened, the formula caps each fund's contribution at 
125% of the average expenses of the Vanguard funds collectively, 
with any amounts above the cap redistributed among the other 
Vanguard funds. In addition, no fund may pay more than 0.2% of its 
average month-end net assets for distribution.
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    8. Applicants propose to apply the Multi-Class Distribution Formula 
to each Fund's class of VIPER Shares. Applicants acknowledge that, 
because VIPER Shares may have a distribution arrangement that differs 
from that for Conventional Shares, the proposed allocation method may 
be inconsistent with the rule. Applicants contend, however, that the 
Multi-Class Distribution Formula is a fundamental feature of Vanguard's 
unique internally managed structure, and that the proposed allocation 
method is consistent with the method approved by the Commission in the 
1981 Order. Applicants represent that prior to the application of the 
Multi-Class Distribution Formula to a class of VIPER Shares, the board 
of trustees of Index Trust (``Board''), including a majority of 
trustees who are not interested persons of Index Trust, as defined in 
section 2(a)(19) of the Act, will determine for each Fund that the 
proposed allocation is in the best interests of each class and of the 
Fund as a whole. As a condition to the order, the Board would be 
required to make a similar finding for each Fund on an annual basis.

Section 22(d) of the Act and Rule 22c-1 Under the Act

    9. Section 22(d) of the Act, among other things, prohibits a dealer 
from selling a redeemable security that is currently being offered to 
the public by or through an underwriter, except at a current public 
offering price described in the prospectus. Rule 22c-1 under the Act 
generally requires that a dealer selling, redeeming, or repurchasing a 
redeemable security do so only at a price based on its NAV. Applicants 
state that secondary market trading in VIPER Shares will take place at 
negotiated prices, not at a current offering price described in the 
VIPER Shares Prospectus, and not at a price based on NAV. Thus, 
purchases and sales of VIPER Shares in the secondary market will not 
comply with section 22(d) and rule 22c-1. Applicants accordingly 
request an exemption under section 6(c) of the Act from these 
provisions.
    10. Applicants assert that the sale of VIPER Shares at negotiated 
prices does not present the opportunity for any of the abuses that 
section 22(d) and rule 22c-1 were designed to prevent. Applicants 
maintain that while there is little legislative history regarding 
section 22(d), its provisions, as well as those of rule 22c-1, appear 
to have been designed to (i) prevent dilution caused by certain 
riskless-trading schemes by principal underwriters and contract 
dealers; (ii) prevent unjust discrimination or preferential treatment 
among buyers resulting from sales at different prices; and (iii) assure 
an orderly distribution of investment company shares by eliminating 
price competition from dealers offering shares at less than the 
published sales price and repurchasing shares at more than the 
published redemption price. Applicants state that secondary market 
trading in VIPER Shares would not cause dilution for existing Fund 
shareholders because such transactions would not directly or indirectly 
affect the Fund's assets. Applicants further state that secondary 
market trading in VIPER Shares would not lead to discrimination or 
preferential treatment among purchases because, to the extent different 
prices exist during a given trading day or from day to day, these 
variances will occur as a result of market forces. Finally, applicants 
contend that the proposed distribution system will be orderly because 
arbitrage activity will ensure that the difference between the market 
price of VIPER Shares and their NAV remains narrow.

Section 24(d) of the Act

    11. Section 24(d) of the Act provides, in relevant part, that the 
prospectus delivery exemption provided to dealer transactions by 
section 4(3) of the Securities Act does not apply to any transaction in 
a redeemable security issued by an open-end investment company. 
Applicants request an exemption under section 6(c) of the Act from 
section 24(d) to permit dealers selling VIPER Shares to rely on the 
prospectus delivery exemption provided by section 4(3) of the 
Securities Act.\14\
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    \14\ Applicants do not seek relief from the prospectus delivery 
requirement for non-secondary market transactions, including 
purchases of Creation Units or those involving an underwriter and 
transactions pursuant to the Exchange Option.
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    12. Applicants state that VIPER Shares will be listed on an 
Exchange and will be traded in a manner similar to other equity 
securities, including the shares of closed-end investment companies. 
Applicants note that dealers selling shares of closed-end investment 
companies in the secondary market generally are not required to deliver 
a prospectus to the purchaser.
    13. Applicants contend that VIPER Shares, as a listed security, 
merit a reduction in the compliance costs and regulatory burdens 
resulting from the imposition of prospectus delivery obligations in the 
secondary market. Because VIPER Shares will be exchange-listed, 
prospective investors will have access to several types of market 
information about the VIPER Shares. Applicants state that information 
regarding market price and volume will be continually available on a 
real-time basis throughout the day on brokers' computer screens and 
other electronic services. The previous day's price and volume 
information also will be published daily in the financial section of 
newspapers.
    14. Investors also will receive a Product Description describing 
the Fund and its VIPER Shares. Applicants state that, while not 
intended as a substitute for a prospectus, the Product Description will 
contain information about VIPER Shares that is tailored to meet the 
needs of investors purchasing VIPER Shares in the secondary market.

Sections 17(a)(1) and (a)(2) of the Act

    15. Sections 17(a)(1) and (a)(2) of the Act generally prohibit an 
affiliated person of a registered investment company, or an affiliated 
person of such person, from selling any security to or purchasing any 
security from the company. Section 2(a)(3)(A) of the Act defines 
``affiliated person'' as any person owning five percent or more of an 
issuer's outstanding voting securities. Applicants state that large 
institutional investors may be affiliated persons of a Fund under 
section 2(a)(3)(A) and, because purchases and redemptions of Creation 
Units would be ``in-kind'' transactions, those investors would be 
precluded by sections 17(a)(1) and (a)(2) from purchasing or redeeming 
Creation Units from the Fund. Applicants accordingly request an 
exemption under sections 6(c) and 17(b) of the Act to permit these 
affiliated persons to

[[Page 61010]]

purchase and redeem Creation Units from the Fund.
    16. Section 17(b) authorizes the Commission to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the transaction, including the consideration to be paid or received, 
are reasonable and fair and do not involve overreaching, and the 
proposed transaction is consistent with the policies of the registered 
investment company and the general provisions of the Act. Applicants 
contend that no useful purpose would be served by prohibiting persons 
affiliated with a Fund, as described above, from purchasing or 
redeeming Creation Units from the Fund. Applicants represent that Fund 
affiliates making in-kind purchases and redemptions would be treated no 
differently from non-affiliates making the same types of transactions. 
Applicants state that all purchases and redemptions of Creation Units 
would be at the Fund's next calculated NAV. Applicants also state that, 
in all cases, Deposit Securities and Redemption Securities will be 
valued in the same manner, using the same standards, as those 
securities are valued for purposes of calculating the Fund's NAV. 
Applicants assert that, for these reasons, the requested relief meets 
the standards of sections 6(c) and 17(b).

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. No portfolio of Index Trust other than the Funds will issue a 
class of VIPER Shares unless applicants have requested and received 
with respect to such portfolio either exemptive relief from the 
Commission or a no-action letter from the Division of Investment 
Management of the Commission.
    2. The VIPER Shares Prospectus and the Product Description for each 
Fund will clearly disclose that, for purposes of the Act, VIPER Shares 
are issued by the Fund and that the acquisition of VIPER Shares by 
investment companies is subject to the restrictions of section 12(d)(1) 
of the Act.
    3. As long as a Fund operates in reliance on the requested order, 
the VIPER Shares will be listed on an Exchange.
    4. The VIPER Shares of a Fund will not be advertised or marketed as 
shares of an open-end investment company or mutual fund. The VIPER 
Shares Prospectus of each Fund will prominently disclose that VIPER 
Shares are not individually redeemable and will disclose that holders 
of VIPER Shares may acquire those shares from the Fund and tender those 
shares for redemption to the Fund in Creation Unit aggregations only. 
Any advertised material that describes the purchase or sale of Creation 
Units or refers to redeemability will prominently disclose that VIPER 
Shares are not individually redeemable and that holders of VIPER Shares 
may acquire those shares from the Fund and tender those shares for 
redemption to the Fund in Creation Unit aggregations only.
    5. Before a Fund may rely on the order, the Commission will have 
approved, pursuant to rule 19b-4 under the Securities Exchange Act of 
1934, an Exchange rule requiring Exchange members and member 
organizations effecting transactions in VIPER Shares to deliver a 
Product Description to purchasers of VIPER Shares.
    6. On an annual basis, the Board, including a majority of trustees 
who are not interested persons of Index Trust, must determine, for each 
Fund, that the allocation of distribution expenses among the classes of 
Conventional Shares and VIPER Shares in accordance with the Multi-Class 
Distribution Formula is in the best interests of each class and of the 
Fund as a whole. Index Trust will preserve for a period of not less 
than six years from the date of a Board determination, the first two 
years in an easily accessible place, a record of the determination and 
the basis and information upon which the determination was made. This 
record will be subject to examination by the Commission and its staff.
    7. For six years following the issuance of a Fund's VIPER Shares, 
the Fund will (i) record and preserve any investor complaints or 
reports of confusion concerning the Exchange Option that are 
communicated to the Fund, VGI, and/or VMC; and (ii) record data 
tracking the number of investors that, after VIPER Shares are offered, 
purchase the Fund's Conventional Shares and, within 90 days, exchange 
those shares for VIPER Shares. The Fund will preserve this information 
in an easily accessible place, and the information will be subject to 
examination by the Commission and its staff.
    8. Applicant's website, which is and will be publicly accessible at 
no charge, will contain the following information, on a per VIPER Share 
Basis, for each Fund: (i) The prior business day's NAV and the closing 
market price, and a calculation of the premium or discount of the 
closing market price in relation to the NAV; and (ii) data for a period 
covering at least the four previous calendar quarters (or the life of a 
Fund, if shorter) indicating how frequently each Fund's VIPER Shares 
traded at a premium or discount to NAV based on daily closing market 
price, and the magnitude of such premiums and discounts. In addition, 
the Product Description for each Fund will state that applicants' 
website has information about the premiums and discounts at which the 
Fund's VIPER Shares have traded.
    9. The VIPER Shares Prospectus and annual report will include, for 
each Fund: (i) the information listed in condition 8(ii), (a) in the 
case of the VIPER Shares Prospectus, for the most recently completed 
calendar year (and the most recently completed quarter or quarters, as 
applicable), and (b) in the case of the annual report, for no less than 
the immediately preceding five fiscal years (or the life of the Fund, 
if shorter); and (ii) the cumulative total return and the average 
annual total return for one, five, and ten year periods (or the life of 
the Fund, if shorter) of (a) a VIPER Share based on NAV and market 
price, and (b) the Fund's Index.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-26380 Filed 10-12-00; 8:45 am]
BILLING CODE 8010-01-M