[Federal Register Volume 68, Number 216 (Friday, November 7, 2003)]
[Notices]
[Pages 63135-63141]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28070]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26246; 812-12860]


Vanguard International Equity Index Funds, et al.; Notice of 
Application

November 3, 2003.
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 (the ``Act'') for exemptions from 
sections 2(a)(32), 18(f)(1), 18(i), 22(d), 22(e) 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.

-----------------------------------------------------------------------

Summary of Application: Applicants request an order that would permit 
the following: (a) An open-end management investment company, the 
series of which consist of the component securities of certain foreign 
equity securities indices, to issue a class of shares (``VIPER 
Shares'') that can be purchased from the investment company and 
redeemed only in large aggregations (``Creation Units''); (b) secondary 
market transactions in VIPER Shares to occur at negotiated prices on a 
national securities exchange, as defined in section 2(a)(26) of the Act 
(``Exchange''); (c) dealers to sell VIPER Shares to purchasers in the 
secondary market unaccompanied by a prospectus when prospectus delivery 
is not required by the Securities Act of 1933 (``Securities Act''); (d) 
certain affiliated persons of the series to deposit securities into, 
and receive securities from, the series in connection with the purchase 
and redemption of Creation Units; and, (e) the series to pay redemption 
proceeds, under certain circumstances, more than seven days after the 
tender of a Creation Unit of VIPER Shares for redemption.

Applicants: Vanguard International Equity Index Funds (``Trust''), The 
Vanguard Group, Inc. (``VGI''), and Vanguard Marketing Corporation 
(``VMC'').

Filing Dates: The application was filed on July 25, 2002, and amended 
on October 7, 2003.

Hearing or Notification of Hearing: An order granting the application 
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 November 28, 2003, and

[[Page 63136]]

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 
Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, c/o Barry A. Mendelson, The Vanguard Group, 
Inc., P.O. Box 2600, Valley Forge, PA 19482.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, 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 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549-0102 (telephone 202-942-8090).

Applicants' Representations

    1. The Trust is an open-end management investment company 
registered under the Act and organized as a Delaware statutory trust. 
The Trust currently has three series (``Existing Funds''). Each 
Existing Fund currently offers separate classes of shares for retail 
and institutional investors (such classes of shares collectively, 
``Conventional Shares''). In the future, the Trust or another 
registered open-end management investment company may offer other 
series (``Future Funds,'' and together with Existing Funds, ``Funds''). 
Any Future Fund will (a) be advised by VGI or an entity controlled by 
or under common control with VGI and (b) comply with the terms and 
conditions of any order granted pursuant to the application.
    2. VGI is a Pennsylvania corporation that is wholly and jointly 
owned by 35 investment companies, and the series thereof (each, a 
``Vanguard Fund'' and collectively, the ``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, with 
corporate management, administrative, and transfer agency services at 
cost. VGI also provides advisory services at cost to certain Vanguard 
Funds, including each of the Existing Funds. VMC, a wholly owned 
subsidiary of VGI, is registered as a broker-dealer under the Exchange 
Act. VMC provides all distribution and marketing services to the 
Vanguard Funds, including each of the Existing Funds.
    3. Each Existing Fund seeks to track as closely as possible the 
performance of an international equity securities index (each, a 
``Target Index'').\1\ In seeking to track their Target Indexes, the 
Existing Funds use a replication strategy, pursuant to which each 
Existing Fund holds each of the component securities in the Target 
Index in about the same proportion as represented in the Target Index 
itself. Future Funds may use the replication strategy or a 
representative sampling strategy, pursuant to which they would hold a 
representative sample of the component securities in the relevant 
Target Index that resembles the full Target Index in terms of industry 
weightings, market capitalization, price/earnings ratio, dividend yield 
and other characteristics.\2\ Applicants state that, measured over 
virtually any period, the difference between the performance of an 
Existing Fund and the performance of its Target Index rarely exceeds 
one percentage point per annum and in almost all cases is significantly 
less. Applicants expect that, in the future, the Funds will track the 
relevant Target Indexes with a similar degree of precision, and have a 
tracking error of less than 5% per annum. No entity that creates, 
compiles, sponsors or maintains a Target Index will be an affiliated 
person, as defined in section 2(a)(3) of the Act, or an affiliated 
person of an affiliated person, of the Trust, VGI, VMC, or any promoter 
of the Trust.
---------------------------------------------------------------------------

    \1\ The Target Indexes are the Select Emerging Markets Free 
Index, Morgan Stanley Capital International Europe Index, and the 
Morgan Stanley Capital International Pacific Index. Each Fund 
reserves the right to substitute a different index for the Target 
Index that it currently tracks. Any substitute index will measure 
the same general market as the current Target Index. Investors will 
receive notification of any such substitution.
    \2\ Each Fund will invest at least 90% of its assets in the 
component securities of its Target Index but may invest up to 10% of 
its assets in convertible securities, stock and index futures, 
options on stock and index futures, swap agreements, cash 
investments, forward foreign currency investments, foreign currency 
exchange contracts, and other instruments not inconsistent with the 
investment policies described in its registration statement, which 
VGI believes will help the Fund to track its Target Index.
---------------------------------------------------------------------------

    4. Applicants state that a small percentage of investors frequently 
trade in and out of the Existing Funds, often as part of a market 
timing strategy, and that to meet these investors' redemption requests, 
a Fund must buy and sell portfolio securities. Applicants state that 
such purchases and sales of portfolio securities are detrimental in 
that they can increase a Fund's realization of capital gains, increase 
expenses, and hinder a Fund's ability to achieve its investment 
objective of tracking the relevant Target Index as closely as possible. 
Applicants further state that the Existing Funds have adopted policies 
designed to deter these investors but that such policies have been 
insufficient.
    5. Each Fund proposes to create VIPER (Vanguard Index Participation 
Equity Receipts) Shares, a class of shares that would be listed on an 
Exchange and trade in the secondary market at negotiated prices. 
Applicants state that, by creating an exchange-traded class of shares, 
the Funds will offer short-term investors an attractive means of 
investing in the Funds.\3\ Applicants further assert that offering 
VIPER Shares will benefit holders of Conventional Shares by reducing 
the portfolio disruption and transaction costs caused by market timing 
activity.
---------------------------------------------------------------------------

    \3\ Applicants expect VIPER Shares to appeal to short-term 
investors because they can be bought and sold continuously 
throughout the day at market price rather than at net asset value 
(``NAV''), which is calculated only once per day at the close of 
trading on the New York Stock Exchange (``NYSE''). Transactions in 
Conventional Shares will continue to be priced at NAV.
---------------------------------------------------------------------------

    6. Except in connection with the Conversion Privilege (as defined 
below) or the liquidation of a Fund (or of the VIPER Share class of a 
Fund), the Funds will issue VIPER Shares only in Creation Units, 
aggregations of a specified number of shares ranging from 20,000 to 
250,000 shares. The price of a Creation Unit will range from $500,000 
to $30,000,000.\4\ Orders to purchase Creation Units must be placed 
with VMC by or through an ``Authorized Participant,'' which is a 
Depository Trust Company (``DTC'') participant that has executed a 
participant agreement with VMC. Creation Units will be issued in 
exchange for an in-kind deposit of securities and cash (``Creation 
Deposit''). The Creation Deposit will consist of a basket of securities 
selected by VGI from among the securities contained in the Fund's 
portfolio (``Deposit Securities''),\5\ and a cash

[[Page 63137]]

payment to equalize any difference between the total aggregate market 
value of the Deposit Securities and the NAV per Creation Unit of the 
Fund (``Balancing Amount'').\6\ An investor purchasing a Creation Unit 
from a Fund will be charged a fee (``Transaction Fee'') to prevent any 
dilution of the interests of remaining shareholders due to the Fund 
incurring costs in connection with the investor's purchase of the 
Creation Unit(s).\7\ Each purchaser of a Creation Unit will receive a 
prospectus for the VIPER Shares (the ``VIPER Prospectus'') that 
discloses the maximum Transaction Fee, and the method of calculating 
Transaction Fees will be disclosed in the Fund's statement of 
additional information (``SAI''). A Fund's Conventional Shares will be 
covered by a separate prospectus (the ``Conventional Prospectus'').
---------------------------------------------------------------------------

    \4\ A Fund may require investors to purchase a minimum number of 
Creation Units.
    \5\ 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, similar to that discussed above. American 
Depositary Receipts (``ADRs'') will not be component securities of a 
Target Index and Authorized Participants will not be able, on their 
own initiative, to substitute the ADR of a Deposit Security in place 
of the actual Deposit Security. However, Applicants may include one 
or more ADRs in a list of Deposit Securities when the security 
underlying the ADR is difficult or costly for Authorized 
Participants to obtain or designating the ADR as a Deposit Security 
will otherwise enhance pricing and liquidity.
    \6\ On each business day, prior to the opening of trading on the 
Exchange, VGI will make available through DTC or VMC the list of the 
names and the required number of shares of each Deposit Security to 
be included in the Creation Deposit for each Fund. Each Fund 
reserves the right to permit or require the purchaser of a Creation 
Unit to substitute cash or a different security to replace a Deposit 
Security under certain circumstances.
    \7\ When a Fund permits an investor to substitute cash for a 
Deposit Security, the investor may be assessed a higher Transaction 
Fee to offset the increased cost to the Fund of buying the necessary 
Deposit Security for its portfolio.
---------------------------------------------------------------------------

    7. All orders to purchase Creation Units must be received by VMC no 
later than the closing time of the NYSE on the date the order is placed 
in order to receive NAV as determined that day. VMC will transmit all 
purchase orders to the Funds, maintain a record of each Creation Unit 
purchaser, and send out a VIPER Prospectus and confirmation to such 
purchasers.
    8. The purchaser of a Creation Unit will be able to separate the 
Creation Unit into individual VIPER Shares.\8\ VIPER Shares will be 
listed on an Exchange and traded in the secondary market in the same 
manner as shares of other exchange-traded funds. One or more Exchange 
specialists (``Specialists'') will be assigned to make a market in the 
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 an initial 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.
---------------------------------------------------------------------------

    \8\ Applicants state that persons purchasing Creation Units will 
be cautioned in the VIPER Prospectus that some activities on their 
part may, depending on the circumstances, result in their being 
deemed a statutory underwriter and subject them to the prospectus 
delivery and liability provisions of the Securities Act. For 
example, a broker-dealer firm and/or its client 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 Prospectus will state that whether a person is an 
underwriter depends on all the facts and circumstances pertaining to 
that person's activities. The VIPER 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 an ordinary secondary trading transaction), 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.
---------------------------------------------------------------------------

    9. Applicants expect that purchasers of Creation Units will include 
institutional investors and arbitrageurs. A 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.\9\ 
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' 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. Applicants do not expect VIPER Shares to trade at 
a significant premium or discount to their NAV.\10\
---------------------------------------------------------------------------

    \9\ 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.
    \10\ Every 15 seconds throughout the trading day, the Exchange 
will disseminate via the facilities of the Consolidated Tape 
Association the market value of a VIPER Share and, separate from the 
consolidated tape, a calculation of the estimated NAV of a VIPER 
Share. 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.
---------------------------------------------------------------------------

    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 VIPER Shares to deliver a 
Product Description to investors purchasing VIPER Shares, whether on or 
away from the Exchange. Applicants state that any other Exchange that 
applies for unlisted trading privileges in VIPER Shares will have to 
adopt a similar rule, requiring delivery of the Product Description. 
The Product Description will provide a plain English overview of a 
Fund, including its investment objective and investment strategies, the 
identity of VGI, the material risks of investing in the Fund, and the 
composition and frequency of distributions. The Product Description 
also will provide a brief, plain English description of the salient 
features of VIPER Shares. The Product Description will advise investors 
that a VIPER Prospectus and SAI may be obtained, without charge, from 
the investor's broker or from VMC. The Product Description also will 
identify a Web site address where investors can obtain information 
about the composition and compilation methodology of the Target 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 of a 
Fund's VIPER Share class), VIPER Shares will only be redeemable in 
Creation Unit aggregations through each Fund. An investor redeeming a 
Creation Unit generally will receive (a) a basket of securities 
(``Redemption Securities''), which in most cases will be the same as 
the Deposit Securities required of investors purchasing Creation Units 
on the same day, and (b) a cash amount equal to the difference in the 
value of the Redemption Securities and the NAV of a Creation Unit, 
which in most cases will be the same as the Balancing Amount paid (or 
received) by investors purchasing Creation Units on the same day. A 
Fund may make redemptions partly or wholly in cash in lieu of 
transferring one or more Redemption Securities to a redeeming investor, 
if the Fund determines that such alternative is warranted. The Fund may 
make such a determination if, for example, a foreign country's 
regulations restrict or prohibit a redeeming investor from holding a 
particular issuer's securities. In order to cover the Fund's 
transaction costs, redeeming investors will pay a Transaction Fee.\11\
---------------------------------------------------------------------------

    \11\ Investors who redeem for cash, rather than in kind, may pay 
a higher Transaction Fee.
---------------------------------------------------------------------------

    12. The Funds intend to offer holders of 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

[[Page 63138]]

Shares (``Conversion Privilege'').\12\ A Fund would not offer holders 
of VIPER Shares the opportunity to exchange some or all of their shares 
for Conventional Shares.\13\ Applicants state that the Conversion 
Privilege would facilitate the movement of investors, who currently 
hold Conventional Shares but desire intraday trading flexibility, out 
of Conventional Shares and into VIPER Shares in an expeditious and tax 
efficient manner.\14\ Around the time that a Fund's VIPER Shares begin 
trading, VGI may send to existing holders of the Fund's Conventional 
Shares a notice describing the Conversion Privilege 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. Comparable 
information about a Fund's Conversion Privilege also will be contained 
in a separate section of the Conventional Prospectus. To effect an 
exchange through the Conversion Privilege, the investor must have a 
brokerage account and must contact his or her broker to initiate the 
exchange. The investor will receive a VIPER Prospectus in connection 
with the exchange transaction, as required by the Securities Act. 
Subsequent to the exchange, the investor will have to contact his or 
her broker for account information relating to the VIPER Share 
holdings.
---------------------------------------------------------------------------

    \12\ Investors who own Conventional Shares through an employer-
sponsored retirement plan can sell those shares and use the proceeds 
to buy VIPER Shares without tax consequences. It is therefore 
unnecessary to offer such investors the Conversion Privilege.
    \13\ The terms of an exchange made pursuant to the Conversion 
Privilege will comply with section 11(a) of the Act and rule 11a-3 
under the Act. The Conversion Privilege would offer a ``one way'' 
exchange only. Therefore, a holder of a Fund's VIPER Shares who 
wishes to shift to the Fund's Conventional Shares would have to sell 
the VIPER Shares in the secondary market and use the sale proceeds 
(less any brokerage commission) to purchase Conventional Shares from 
the Fund. The sale of VIPER Shares would be a taxable transaction.
    \14\ Applicants note that an exchange of Conventional Shares for 
VIPER Shares of the same Fund generally would not be a taxable 
transaction. Applicants note that because DTC's systems 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, however, any fractional VIPER 
Share that results from the exchange will be liquidated and the cash 
will be sent to the investor's broker for the benefit of the 
investor.
---------------------------------------------------------------------------

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for 
exemptions from sections 2(a)(32), 18(f)(1), 18(i), 22(d), 22(e) 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.
    2. 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 or provisions 
of the Act, or any rule or regulation thereunder, 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 ``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) to permit VIPER Shares to be redeemed in Creation Units 
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.
Section 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) 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 permits an open-end fund to issue multiple 
classes of shares representing interests in the same portfolio without 
seeking exemptive relief from section 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 (a) each class have the same rights and obligations as each other 
class (other than the differences allowed by the rule), and (b) if a 
class has a different distribution arrangement, the class must pay all 
of the expenses of the arrangement. Because applicants, therefore, may 
not rely on rule 18f-3, they 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: (a) Conventional Shares will be individually redeemable, while 
VIPER Shares will be redeemable in Creation Units only; (b) VIPER 
Shares will be traded on an Exchange, while Conventional Shares will 
not; and (c) Conventional Shares may be exchanged for VIPER Shares 
through the Conversion Privilege, while 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 
way that does not disrupt the management of the Fund's portfolio. 
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 Conventional 
Shares and VIPER 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 (a) VIPER Shares are not redeemable from a Fund other 
than in Creation Units, (b) VIPER Shares, other than in Creation Units, 
may be sold only through a broker, and the shareholder may have to pay 
brokerage commissions in connection with the sale, and (c) a selling 
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 Prospectus, VIPER Prospectus, Product

[[Page 63139]]

Description, SAI and reports to shareholders. Applicants also note that 
(a) all references to a Fund's exchange-traded class of shares will use 
a form of the name ``VIPERS'' rather than the Fund name, (b) the cover 
and summary page of the VIPER Prospectus will state that the VIPER 
Shares are listed on an Exchange and are not individually redeemable, 
(c) VMC will only market Conventional Shares and VIPER Shares in the 
same advertisement or marketing material when the advertisement or 
marketing material contains appropriate disclosure explaining the 
relevant features of each class of shares and highlighting the 
differences between the share classes, and (d) applicants have prepared 
educational materials describing the VIPER Shares.
    7. Applicants currently allocate distribution expenses among 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 distribution services (``1981 
Order'').\15\ For those funds in the Vanguard Fund Complex offering 
multiple classes of shares, applicants apply the formula in the 1981 
Order by treating each class as a separate fund (``Multi-Class 
Distribution Formula'').
---------------------------------------------------------------------------

    \15\ Investment Company Act Release No. 11645 (Feb. 25, 1981) 
(Opinion of the Commission and Final Order). Under the formula, each 
Vanguard Fund's contribution is based 50% on its 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 its 
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 Vanguard 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.
---------------------------------------------------------------------------

    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 is 
inconsistent with rule 18f-3. 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. The Multi-Class Distribution Formula has been approved by 
the board of trustees (``Board'') of each Fund, and the Board of each 
Fund, including a majority of the trustees who are not interested 
persons, as defined in section 2(a)(19) of the Act (``Disinterested 
Trustees''), will review the application of the Multi-Class 
Distribution Formula on an annual basis and determine that the proposed 
allocation is in the best interests of each class of shareholders and 
of the Fund as a whole.
Section 22(d) of the Act and Rule 22c-1 under the Act
    9. Section 22(d), 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 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 
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. Accordingly, applicants request exemptions from 
these provisions under section 6(c) of the Act.
    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 (a) prevent dilution caused by certain 
riskless trading schemes by principal underwriters and contract 
dealers, (b) prevent unjust discrimination or preferential treatment 
among buyers resulting from sales at different prices, and (c) ensure 
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 purchasers because, to the extent that 
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, among other things, arbitrage activity will ensure 
that the difference between the market price of VIPER Shares and their 
NAV remains narrow.
Section 22(e) of the Act
    11. Section 22(e) generally prohibits a registered investment 
company from suspending the right of redemption or postponing the date 
of payment of redemption proceeds for more than seven days after the 
tender of a security for redemption. The principal reason for the 
requested exemption is that settlement of redemptions for the Funds is 
contingent not only on the settlement cycle of the United States 
market, but also on currently practicable delivery cycles in local 
markets for underlying foreign securities held by the Funds. Applicants 
state that local market delivery cycles for transferring certain 
foreign securities to investors redeeming Creation Units of VIPER 
Shares, together with local market holiday schedules, will under 
certain circumstances require a delivery process in excess of seven 
calendar days for the Funds. Applicants request relief under section 
6(c) of the Act from section 22(e) to allow the Funds to pay redemption 
proceeds up to 12 calendar days after the tender of VIPER Shares for 
redemption. At all other times and except as disclosed in the relevant 
SAI, applicants expect that each Fund will be able to deliver 
redemption proceeds within seven days.\16\ With respect to Future 
Funds, applicants seek the same relief from section 22(e) only to the 
extent that circumstances similar to those described in the application 
exist.
---------------------------------------------------------------------------

    \16\ Rule 15c6-1 under the Exchange Act requires that most 
securities transactions be settled within three business days of the 
trade. Applicants acknowledge that no relief obtained from the 
requirements of section 22(e) will affect any obligations applicants 
may have under rule 15c6-1.
---------------------------------------------------------------------------

    12. Applicants state that section 22(e) was designed to prevent 
unreasonable, undisclosed and unforeseen delays in the payment of 
redemption proceeds. Applicants assert that their requested relief will 
not lead to the problems that section 22(e) was designed to prevent. 
Applicants state that the SAI for each Fund will disclose those local 
holidays (over the period of at least one year following the date of 
the SAI), if any, that are expected to prevent the delivery of 
redemption proceeds in seven calendar days, and the maximum number of 
days needed to deliver the proceeds for the Fund.

[[Page 63140]]

Section 24(d) of the Act
    13. Section 24(d) 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 transactions 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.\17\
    14. 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. Applicants contend that VIPER Shares, as 
a listed security, merit similar treatment, reducing compliance costs 
and regulatory burdens that result from the imposition of a prospectus 
delivery requirement on secondary market transactions. Applicants state 
that 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.
---------------------------------------------------------------------------

    \17\ 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 Conversion Privilege.
---------------------------------------------------------------------------

    15. Applicants further state that investors that purchase VIPER 
Shares in the secondary market 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 (2) of the Act
    16. Sections 17(a)(1) and (2) generally prohibit an affiliated 
person of a registered investment company, or an affiliated person of 
an affiliated person, acting as principal, from selling any security 
to, or purchasing any security from, the company. Sections 2(a)(3)(A) 
and (C) of the Act define ``affiliated person,'' respectively, as any 
person who owns 5% or more of an issuer's outstanding voting securities 
and any person who controls the fund. Section 2(a)(9) of the Act 
provides that a control relationship will be presumed where one person 
owns 25% or more of another person's voting securities. Applicants 
state that a large institutional investor or the Specialist could own 
5% or more, or more than 25%, of a Fund's outstanding voting securities 
and, as a result, be deemed to be an affiliated person of the Fund 
under section 2(a)(3)(A) or (C). Applicants further state that, because 
purchases and redemptions of Creation Units would be in-kind, rather 
than for cash, those investors would be precluded by sections 17(a)(1) 
and (2) from purchasing or redeeming Creation Units from the Fund. 
Accordingly, applicants request an exemption under sections 6(c) and 
17(b) of the Act to permit these affiliated persons, and affiliated 
persons of such affiliated persons who are not otherwise affiliated 
with the Fund, to purchase and redeem Creation Units through in-kind 
transactions.
    17. Section 17(b) of the Act 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 involved and the general purposes 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 and 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 Future Fund will issue a class of VIPER Shares unless (a) 
applicants have requested and received with respect to such Future Fund 
either exemptive relief from the Commission or a no-action letter from 
the Division of Investment Management of the Commission, or (b) the 
Future Fund's VIPER Shares will be listed on an Exchange without the 
need for a filing pursuant to rule 19b-4 under the Exchange Act.
    2. The VIPER 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 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 
Prospectus of each Fund will prominently disclose that VIPER Shares are 
not individually redeemable and will disclose that holders of VIPER 
Shares may acquire the shares from the Fund and tender the shares for 
redemption to the Fund in Creation Units only. Any advertising 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 
the shares from the Fund and tender the shares for redemption to the 
Fund in Creation Units only.
    5. Before a Fund may rely on the order, the Commission will have 
approved pursuant to rule 19b-4 under the Exchange Act, 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 of each Fund, including a majority 
of Disinterested Trustees, 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. Each Fund will preserve for a period of not less than six years 
from

[[Page 63141]]

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 (a) record and preserve any investor complaints or 
reports of confusion concerning the Conversion Privilege that are 
communicated to the Fund, VGI and/or VMC and (b) record data tracking 
the number of investors that, after VIPER Shares are offered, purchase 
the Fund's Conventional Shares and, within 90 days, convert those 
shares into 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. Applicants' Web site, which is and will be publicly accessible 
at no charge, will contain the following information, on a per VIPER 
Share basis, for each Fund: (a) The prior business day's closing NAV 
and the midpoint of the bid-asked spread at the time the Fund's NAV is 
calculated (``Bid-Asked Price'') and a calculation of the premium or 
discount of the Bid-Asked Price in relation to the closing NAV; and (b) 
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 the 
Bid-Asked Price and closing NAV, and the magnitude of such premiums and 
discounts. In addition, the Product Description for each Fund will 
state that applicants' Web site has information about the premiums and 
discounts at which the Fund's VIPER Shares have traded.
    9. The VIPER Prospectus and annual report will include, for each 
Fund: (a) The information listed in condition 8(b), (i) in the case of 
the VIPER Prospectus, for the most recently completed calendar year 
(and the most recently completed quarter or quarters, as applicable), 
and (ii) 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 (b) 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 (i) a VIPER Share based on NAV and Bid-Asked Price 
and (ii) the Fund's Target Index.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28070 Filed 11-6-03; 8:45 am]
BILLING CODE 8010-01-P