[Federal Register Volume 68, Number 107 (Wednesday, June 4, 2003)]
[Notices]
[Pages 33538-33540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14046]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26062; 812-12380]


Vanguard Convertible Securities Fund, et al.; Notice of 
Application

May 29, 2003.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
15(a) of the Act and rule 18f-2 under the Act, as well as from certain 
disclosure requirements.

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Summary of the Application: Applicants request an order to permit them 
to enter into and amend sub-advisory agreements without shareholder 
approval and to grant relief from certain disclosure requirements. The 
order would supersede a prior order (``Prior Order'').\1\
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    \1\ The Vanguard Group, Inc., et al., Investment Company Act 
Release Nos. 19411 (April 16, 1993) (notice) and 19471 (May 12, 
1993) (order).

Applicants: Vanguard Convertible Securities Fund; Vanguard Explorer 
Fund; Vanguard Fenway Funds; Vanguard Fixed Income Securities Funds; 
Vanguard Horizon Funds; Vanguard Malvern Funds; Vanguard Morgan Growth 
Fund; Vanguard PRIMECAP Fund; Vanguard Quantitative Funds; Vanguard 
Specialized Funds; Vanguard Trustees' Equity Fund; Vanguard Variable 
Insurance Fund; Vanguard Wellesley Income Fund; Vanguard Wellington 
Fund; Vanguard Whitehall Funds; Vanguard Windsor Funds; Vanguard World 
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Fund (each, a ``Trust''); and The Vanguard Group, Inc. (``VGI'').

Filing Dates: The application was filed on December 15, 2000 and 
amended on May 8, 2003.

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 
applicant with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on June 23, 2003, 
and should be accompanied by proof of service on applicant, 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 5th Street, NW., Washington, DC 20549-
0609. Applicants, c/o Sarah A. Buescher, Senior Counsel, The Vanguard 
Group, Inc., P.O. Box 2600, Mail Stop V26, Valley Forge, Pennsylvania 
19482.

FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel, at 
(202) 942-0611 or Michael W. Mundt, Senior Special Counsel, 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 
SEC's Public Reference Branch, 450 5th Street, NW., Washington, DC 
20549-0102 (telephone (202) 942-8090).

[[Page 33539]]

Applicants' Representations

    1. Each Trust is registered under the Act as an open-end management 
investment company and is organized as a Delaware statutory trust. Each 
Trust is a member of The Vanguard Group (``The Vanguard Group''), a 
group of 33 investment companies with more than 100 series (each, a 
``Fund'' and together, the ``Funds''), each of which has its own 
investment objectives, policies, and restrictions.\2\
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    \2\ Applicants also request relief with respect to any other 
registered open-end management investment company or series thereof 
that (a) is organized or advised currently or in the future by VGI 
or any entity controlling, controlled by, or under common control 
(within the meaning of section 2(a)(9) of the Act) with VGI; (b) 
operates in substantially the same manner described in the 
application; and (c) complies with the terms and conditions in the 
application (``Future Funds,'' and together with the Funds, the 
``Funds''). Any Fund that currently intends to rely on the requested 
order is named as an applicant. If the name of a Fund contains the 
name of a Selected Adviser, the name of the Selected Adviser will be 
preceded by the word ``Vanguard.''
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    2. VGI is a Pennsylvania corporation that is wholly and jointly 
owned by the members of The Vanguard Group. VGI is a registered 
investment adviser under the Investment Advisers Act of 1940 
(``Advisers Act'') and a registered transfer agent under the Securities 
Exchange Act of 1934 (``Exchange Act''). VGI provides each Trust, at 
cost, with corporate management, administrative, transfer agency and 
distribution services. VGI also provides certain Funds with investment 
advisory services at cost.
    3. VGI's Portfolio Review Group evaluates, selects and recommends 
investment advisers (``Selected Advisers'') to the relevant boards of 
trustees of each Trust (each, a ``Board''). Each Selected Adviser is an 
investment adviser as defined in section 2(a)(20) of the Act and is 
registered under the Advisers Act or exempt from registration. Selected 
Advisers are not ``affiliated persons'' of the applicants, as defined 
in section 2(a)(3) of the Act other than by virtue of serving as 
investment advisers to one or more Funds. Each Selected Adviser 
operates pursuant to a written advisory contract (``Selected Advisory 
Agreement'') approved by the relevant Board, including a majority of 
the Board's trustees who are not ``interested persons'' of the Trust, 
as defined in section 2(a)(19) of the Act (``Independent Trustees''). 
The Portfolio Review Group monitors the compliance of each Selected 
Adviser with the respective Fund's investment objectives and other 
policies, reviews each Adviser's performance, and recommends to the 
relevant Boards the allocation and reallocation of a Fund's assets 
among the Selected Advisers and/or VGI.
    4. The Prior Order exempted applicants from section 15(a) of the 
Act and rule 18f-2 under the Act to permit the Funds to hire Selected 
Advisers and revise Selected Advisory Agreements without obtaining a 
shareholder vote, subject to the approval by the relevant Board and 
certain other conditions.\3\ Applicants state that recent orders 
providing similar relief have conditions that would permit the Board to 
serve shareholders more efficiently. Applicants seek to update the 
conditions in the Prior Order to make them similar to conditions in the 
recent orders. Applicants therefore request an order to supersede the 
Prior Order to permit VGI, subject to Board approval, to enter into and 
amend Selected Advisory Agreements without Fund shareholder 
approval.\4\ The requested relief will not extend to an investment 
adviser that is an affiliated person, as defined in section 2(a)(3) of 
the Act, of the Funds or VGI, other than by reason of serving as 
investment adviser to one or more of the Funds (an ``Affiliated 
Adviser''). Applicants also request an exemption from the various 
disclosure provisions described below that may require the Funds to 
disclose the fees paid to each Selected Adviser. An exemption is 
requested to permit the Funds to disclose (as both a dollar amount and 
as a percentage of a Fund's net assets): (a) Aggregate fees paid by the 
Fund to VGI and Affiliated Advisers; (b) aggregate fees paid by the 
Fund to Selected Advisers, and (c) the fees paid by the Fund to each 
Affiliated Adviser (collectively, the ``Aggregate Fee Disclosure'').
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    \3\ The term ``shareholder'' includes variable life insurance 
policy and variable annuity contract owners that are unitholders of 
any separate account for which the Fund serves as a funding medium.
    \4\ As described in the application, the requested order would 
revise the conditions in the Prior Order to make them more 
consistent with conditions in recent similar orders granted by the 
Commission and would also make certain other modifications to the 
conditions related to disclosure relief based upon the applicants' 
unique management structure. For Funds that were relying on the 
Prior Order, applicants will provide a notification to shareholders 
that describes the principal differences between the Prior Order and 
the requested order.
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Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that it is 
unlawful for any person to act as an investment adviser to a registered 
investment company except pursuant to a written contract that has been 
approved by a vote of the company's outstanding voting securities. Rule 
18f-2 under the Act provides, in relevant part, that each series or 
class of stock in a series company affected by a matter must approve 
the matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end 
investment companies. Item 15(a)(3) of Form N-1A requires disclosure of 
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect 
to an investment company to comply with Schedule 14A under the Exchange 
Act. Items 22(c)(1)(ii), 22(c)(1)(iii), 22(c)(8), and 22(c)(9) of 
Schedule 14A, taken together, require a proxy statement for a 
shareholder meeting at which the advisory contract will be voted upon 
to include the ``rate of compensation of the investment adviser,'' the 
``aggregate amount of the investment adviser's fees,'' a description of 
``the terms of the contract to be acted upon,'' and, if a change in the 
advisory fee is proposed, the existing and proposed fees and the 
difference between the two fees.
    4. Form N-SAR is the semi-annual report filed with the Commission 
by registered investment companies. Item 48 of Form N-SAR requires 
investment companies to disclose the rate schedule for fees paid to 
their investment advisers, including the Selected Advisers.
    5. Regulation S-X sets forth the requirements for financial 
statements that must be included in investment company registration 
statements and shareholder reports filed with the Commission. Sections 
6-07(2)(a), (b), and (c) of Regulation S-X require that investment 
companies include in their financial statements information about 
investment advisory fees.
    6. Section 6(c) of the Act provides that the Commission may exempt 
any person, security, or transaction or any class or classes of 
persons, securities, or transactions from any provision of the Act, or 
from any rule thereunder, if such exemption is necessary or appropriate 
in the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policies and provisions of the 
Act. Applicants believe that their requested relief meets this standard 
for the reasons discussed below.
    7. Applicants assert that shareholders are relying on VGI's 
experience to select and monitor the Selected Advisers best suited to 
achieve a Fund's investment objectives. Applicants contend that from 
the perspective of the investor, the role of the Selected Advisers is 
comparable to that of individual portfolio managers

[[Page 33540]]

employed by investment advisory firms. Applicants state that requiring 
shareholder approval of the Selected Advisory Agreements would impose 
unnecessary costs and delays on the Funds, and may preclude the Board 
from acting in a prompt manner. Applicants note that investment 
advisory agreements with Affiliated Advisers would remain subject to 
section 15(a) of the Act and rule 18f-2 thereunder.
    8. Applicants assert that many Selected Advisers charge their 
customers for advisory services according to a ``posted'' fee schedule. 
Applicants state that while Selected Advisers are willing to negotiate 
fees lower than those posted in the schedule, particularly with large 
institutional clients, they are reluctant to do so when the fees are 
disclosed to other prospective and existing customers. Applicants 
submit that the relief will encourage Selected Advisers to accept lower 
advisory fees from the Funds, resulting in a direct benefit to Fund 
shareholders.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. Unless a Fund's shareholders have previously approved the Fund's 
use of a multi-manager arrangement pursuant to the Prior Order, before 
a Fund may rely on the requested order, the operation of the Fund in 
the manner described in the application will be approved by a majority 
of the Fund's outstanding voting securities (or, if the Fund serves as 
a funding medium for any sub-account of a registered separate account, 
pursuant to voting instructions provided by the unitholders of the sub-
account), as defined in the Act, or in the case of a Fund whose public 
shareholders (or, if the Fund serves as a funding medium for any sub-
account of a registered separate account, the unitholders of the sub-
account) purchase shares on the basis of a prospectus containing the 
disclosure contemplated by condition 3 below, by the initial 
shareholders(s) (or, if the Fund serves as a funding medium for any 
sub-account of a registered separate account, by the initial unitholder 
of the sub-account) before the shares of the Fund are offered to the 
public.
    2. Each Fund will operate as a member of The Vanguard Group of 
Investment Companies with ``internalized'' corporate management and 
distribution services provided on an ``at cost'' basis.
    3. Each Fund will disclose in its prospectus the existence, 
substance, and effect of any order granted pursuant to the application. 
In addition, each Fund will hold itself out to the public as employing 
the management structure described in the application. Each Fund's 
prospectus will prominently disclose that VGI has the ultimate 
responsibility (subject to oversight by the Board) to oversee the 
Selected Advisers and recommend their hiring, termination, and 
replacement.
    4. Within 90 days of the hiring of any new Selected Adviser for any 
fund, VGI will furnish to the applicable Fund's shareholders (or if the 
Fund serves as a funding medium for any sub-account of a registered 
separate account, the unitholders of the sub-account) all information 
about the new Selected Adviser that would be included in a proxy 
statement, except as modified by the order to permit Aggregate Fee 
Disclosure. This information will include Aggregate Fee Disclosure and 
any change in such disclosure caused by the addition of a new Selected 
Adviser. To meet this obligation, VGI will provide shareholders (or if 
the Fund serves as a funding medium for any sub-account of a registered 
separate account, the unitholders of the sub-account) of the applicable 
Fund an information statement meeting the requirements of Regulation 
14C, Schedule 14C, and Item 22 of Schedule 14A under the Exchange Act, 
except as modified by the order to permit Aggregate Fee Disclosure.
    5. A Fund will not enter into an advisory agreement with any 
Affiliated Adviser without that agreement, including the compensation 
to be paid thereunder, being approved by the Fund's shareholders (or if 
the Fund serves as a funding medium for any sub-account of a registered 
separate account, pursuant to voting instructions provided by the 
unitholders of the sub-account).
    6. At all times, a majority each Fund's Board will be Independent 
Trustees, subject to the suspension of this requirement for the death, 
disqualification or bona fide resignation of trustees as provided in 
rule 10e-1 under the Act, and the nomination of new or additional 
Independent Trustees will be at the discretion of the then-existing 
Independent Trustees.
    7. When a change in a Selected Adviser is proposed for a Fund with 
an Affiliated Adviser, the Fund's Board, including a majority of the 
Board's Independent Trustees, will make a separate finding, reflected 
in the affected Fund's Board minutes, that the change is in the best 
interests of the Fund and its shareholders (or if the Fund serves as a 
funding medium for any sub-account of a registered separate account, 
the best interests of the Fund and unitholders of any such sub-
account), and does not involve a conflict of interest from which VGI or 
the Affiliated Adviser derives an inappropriate advantage.
    8. VGI will provide general management services to the Funds, 
including overall supervisory responsibility for the general management 
and investment of each Fund, and, subject to review and approval by 
each Board, will: (a) Set the Funds' overall investment strategies; (b) 
evaluate, select and recommend Selected Advisers to manage all or part 
of a Fund's assets; (c) monitor and evaluate the performance of 
Selected Advisers; (d) implement procedures reasonably designed to 
ensure that the Selected Advisers comply with the Funds' investment 
objectives, policies and restriction; and (e) allocate and, when 
appropriate, reallocate a Fund's assets among Selected Advisers.
    9. No trustee or officer of a Trust, or director or officer of VGI 
will own directly or indirectly (other than through a pooled investment 
vehicle that is not controlled by that trustee, director, or officer), 
any interest in a Selected Adviser or Affiliated Adviser, except for: 
(a) Ownership of interests in VGI or any entity that controls, is 
controlled by, or is under common control with VGI; or (b) ownership of 
less than 1% of the outstanding securities of any class of equity or 
debt of a publicly-traded company that is either a Selected Adviser or 
Affiliated Adviser or an entity that controls, is controlled by, or is 
under common control with a Selected Adviser or Affiliated Adviser.
    10. Each Fund will disclose in its registration statement the 
Aggregate Fee Disclosure.
    11. Any person who acts as legal counsel for the Board's 
Independent Trustees must be independent legal counsel as defined in 
rule 0-1(a)(6) under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14046 Filed 6-3-03; 8:45 am]
BILLING CODE 8010-01-M