[Federal Register Volume 68, Number 235 (Monday, December 8, 2003)]
[Notices]
[Pages 68430-68432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30351]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26282; 812-12912]


The Vanguard Group, Inc., et al.; Notice of Application

 December 2, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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    Summary of Application: Applicants request an order to amend the 
Original VIPERs Order. The requested order would permit additional 
registered investment companies, and their series, to rely on the 
Original VIPERs Order, and modify certain terms and conditions of the 
Original VIPERs Order.
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    \1\ Vanguard Index Funds, et al., Investment Company Act Rel. 
Nos. 24680 (Oct. 6, 2000) (notice) and 24789 (Dec. 12, 2000) (order) 
(``Original VIPERs Order'').
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    Applicants: The Vanguard Group, Inc. (``VGI''), Vanguard Index 
Funds (``Index Trust''), Vanguard Specialized Funds (``Specialized 
Trust''), Vanguard World Fund (``World Trust''), and Vanguard Marketing 
Corporation (``VMC'').
    Filing Dates: The application was filed on December 13, 2002, and 
amended on October 30, 2003. Applicants have agreed to file an 
amendment during the notice period, the substance of which is reflected 
in this notice.
    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 December 29, 2003, and should be accompanied by proof of 
service on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609. Applicants, 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. Index Trust, VGI and VMC (together, ``Original Applicants'') 
obtained the Original VIPERs Order to permit the nine series of Index 
Trust (``Original Applicant Funds'') to offer an exchange-traded class 
of shares (``VIPER Shares''). The Original VIPERs Order granted 
exemptions under section 6(c) of the Act from sections 2(a)(32), 
18(f)(1), 18(i), 22(d) and 24(d) of the Act and rule 22c-1 under the 
Act and under sections 6(c) and 17(b) of the Act from sections 17(a)(1) 
and (2) of the Act. The Original Applicants, Specialized Trust, and 
World Trust (together,

[[Page 68431]]

``Applicants'') seek to amend the Original VIPERs Order to permit 
additional entities to rely on the relief and to modify certain terms 
and conditions of the Original VIPERs Order.
    2. Index Trust is a Delaware statutory trust registered under the 
Act as an open-end management investment company, which currently 
consists of nine series. Specialized Trust is a Delaware statutory 
trust registered under the Act as an open-end management investment 
company, which currently consists of five series. World Trust is a 
Delaware statutory trust registered under the Act as an open-end 
management investment company, which currently consists of three 
series.
    3. Applicants seek to permit an additional series of Index 
Trust,\2\ a series of Specialized Trust,\3\ certain series of World 
Trust \4\ (together with the Original Applicant Funds, ``Current 
Funds''), and other registered open-end management investment 
companies, and their series, that are advised by VGI or an entity 
controlled by or under common control with VGI (``Future Funds,'' and 
together with the Current Funds, ``Funds'') to rely on the Original 
VIPERs Order, as amended by the requested order. All Funds will comply 
with the terms and conditions of the Original VIPERs Order, as amended 
by the requested order. Because the amended order would extend relief 
to Future Funds, Applicants seek to amend condition 1 of the Original 
VIPERs Order as stated below.
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    \2\ The new series of Index Trust will track the MSCI U.S. Prime 
Market 750 Index.
    \3\ Only one of the five existing series of Specialized Trust, 
which tracks the Morgan Stanley REIT Index, may offer a class of 
VIPER Shares.
    \4\ Only one of the three existing series of World Trust, which 
tracks the Calvert Social Index, currently intends to offer a class 
of VIPER Shares. Applicants state that future series of World Trust 
that will offer a class of VIPER Shares will track the following 
Target Indices: MSCI U.S. Investable Market Consumer Discretionary 
Index; MSCI U.S. Investable Market Consumer Staples Index; MSCI U.S. 
Investable Market Energy Index; MSCI U.S. Investable Market 
Financials Index; MSCI U.S. Investable Market Health Care Index; 
MSCI U.S. Investable Market Industrials Index; MSCI U.S. Investable 
Market Information Technology Index; MSCI U.S. Investable Market 
Materials Index; MSCI U.S. Investable Market Telecommunication 
Services Index; MSCI U.S. Investable Market Utilities Index.
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    4. Each Fund tracks, or will track, a domestic equity securities 
index (``Target Index''). The application for the Original VIPERs Order 
(``Original VIPERs Application'') specified the nine Target Indices 
tracked by the Original Applicant Funds. Applicants note that the 
Target Indices for six of the Original Applicant Funds have since been 
replaced.\5\ None of those six Original Applicant Funds currently 
offers a class of VIPER Shares. Consistent with the relief requested 
for Future Funds, Applicants seek relief to permit any Fund to change 
its Target Index in a manner that is consistent with the Fund's 
policies and complies with the terms and conditions of the Original 
VIPERs Order, as amended by the requested order, including condition 1 
below. Any new Target Index would track the same market or market 
segment as the Fund's existing Target Index. No entity that creates, 
compiles, sponsors or maintains a Target Index is, or 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 Fund, VGI, VMC, or 
any promoter or subadviser of the Fund.
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    \5\ Specifically, Applicants replaced the S&P MidCap 400 Index, 
Russell 2000 Index, S&P 500/BARRA Value Index, S&P Small Cap 600/
BARRA Value Index, S&P 500/BARRA Growth Index and S&P Small Cap 600/
BARRA Growth Index with, respectively, the MSCI U.S. Mid Cap 450 
Index, MSCI U.S. Small Cap 1750 Index, MSCI U.S. Prime Market Value 
Index, MSCI U.S. Small Cap Value Index, MSCI U.S. Prime Market 
Growth Index and MSCI U.S. Small Cap Growth Index.
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    5. Conditions 8 and 9 of the Original VIPERs Order require the 
Original Applicants to include on their website and in the Original 
Applicant Funds' prospectuses and annual reports, among other things, a 
comparison of the previous day's net asset value (``NAV'') and closing 
market price of its VIPER Shares. Applicants state that because the 
Funds' NAV is calculated at 4 p.m., which is the close of trading on 
the New York Stock Exchange, and the market for VIPER Shares does not 
close until 4 p.m., the closing market price of a Fund's VIPER Shares 
is not measured at the same time as its NAV is calculated. Applicants 
state that the difference in timing could lead to discrepancies between 
a Fund's NAV and the closing market price of its VIPER Shares, thereby 
giving investors an inaccurate picture of the correlation between the 
two figures. Applicants assert that comparing a Fund's NAV to the 
midpoint of the bid-asked price of its VIPER Shares at the time NAV is 
calculated (``Bid-Asked Price'') would be more appropriate. Applicants 
accordingly seek to amend conditions 8 and 9 as stated below.
    6. In the Original VIPERs Application, the Original Applicants 
represented that VMC would not market a Fund's VIPER Shares and its 
retail and institutional shares (``Conventional Shares'') in the same 
advertisement or marketing material. Applicants contend that publishing 
materials that describe a Fund's VIPER Shares and its Conventional 
Shares may help investors to determine which class of shares is best 
for them, so long as the materials clearly outline the differences 
between the share classes. Accordingly, Applicants propose to modify 
the representation made in the Original VIPERs Application to permit 
VMC to market a Fund's VIPER Shares and Conventional Shares in the same 
advertisement or marketing material with appropriate disclosures 
explaining the relevant features of each class of shares and 
highlighting the differences between the classes.
    7. Under the Original VIPERs Order, the Original Applicants were 
granted relief under sections 6(c) and 17(b) from sections 17(a)(1) and 
(2) to permit persons that are affiliated persons of a Fund, as defined 
in section 2(a)(3)(A) of the Act, by virtue of owning 5% or more of a 
Fund's outstanding voting securities (``5% Affiliates''), to purchase 
and redeem VIPER Shares in large blocks of shares (``Creation Units'') 
through in-kind transactions. Applicants seek an expansion of that 
relief to permit persons that are affiliated persons, as defined by 
section 2(a)(3)(C) of the Act, by virtue of owning more than 25% of a 
Fund's voting securities (``25% Affiliates''), to purchase and redeem 
Creation Units in-kind with the Funds. The requested relief would also 
allow affiliated persons of 5% and 25% Affiliates (that are not 
otherwise affiliated persons of a Fund) to purchase and redeem Creation 
Units in-kind with the Funds. Applicants state that securities tendered 
by investors through in-kind transactions with a Fund will be valued in 
the same manner as they are valued for purposes of calculating the 
Fund's NAV.
    8. Applicants also propose to modify certain other terms of the 
Original VIPERs Order that they believe to be non-material. First, 
Applicants indicate that each of the Funds may offer up to three 
classes of Conventional Shares even though the Original VIPERs 
Application stated that the Original Applicant Funds only offered one 
or two classes of Conventional Shares. Second, whereas the Original 
VIPERs Application specified that each Original Applicant Fund would 
use a replication indexing method to track its Target Index, Applicants 
propose to give the Funds the flexibility to track their Target Indices 
by using a replication or representative sampling strategy.\6\

[[Page 68432]]

Third, Applicants seek the flexibility to list each Fund's VIPER Shares 
on any ``national securities exchange,'' as defined in section 2(a)(26) 
of the Act (``Exchange''), and not exclusively on the American Stock 
Exchange, as stated in the Original VIPERs Application. Finally, 
Applicants seek to clarify two statements in the Original VIPERs 
Application in which the Original Applicants stated that (a) the 
product description for the Original Applicant Funds' VIPER Shares 
(``Product Description'') would not contain information that was not 
also in the Fund's prospectus for VIPER Shares (``VIPER Shares 
Prospectus'') and (b) the Product Description would include a website 
address where investors could obtain information on the composition and 
compilation methodology of the Fund's Target Index. Applicants state 
that because Form N-1A does not require them to include information 
about a Target Index's website, the Funds' VIPER Shares Prospectuses do 
not include such information. Applicants state that such information 
is, however, included in the Funds' Product Descriptions. Applicants 
state, as a clarification, that other than information about a Target 
Index's website, a Fund's Product Description does not contain 
information that is not also in its VIPER Shares Prospectus.
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    \6\ Applicants state that each Fund will invest at least 90% of 
its assets in the component securities of its Target Index and have 
a tracking error with respect to its Target Index of five percentage 
points or less.
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    9. For the reasons set forth above and for the reasons set forth in 
the Original VIPERs Application, Applicants contend that the standards 
of sections 6(c) and 17(b) are satisfied.
    Applicants' Conditions:
    Applicants agree that any order granting the requested relief will 
be subject to the conditions of the Original VIPERs Order, except that 
conditions 1, 8 and 9 will be amended as follows:
    1. Applicants will not register the VIPER Shares of a Future Fund 
by means of filing a post-effective amendment to a Future Fund's 
registration statement or by any other means, unless (a) Applicants 
have requested and received with respect to such VIPER Shares either 
exemptive relief from the Commission or a no-action letter from the 
Division of Investment Management of the Commission, or (b) such VIPER 
Shares will be listed on an Exchange without the need for filing 
pursuant to rule 19b-4 under the Securities Exchange Act of 1934.
    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 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' 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: (a) The information listed in condition 8(b), (i) 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 (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 life of the 
Fund, if shorter) of (i) a VIPER Share based on NAV and the 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. 03-30351 Filed 12-5-03; 8:45 am]
BILLING CODE 8010-01-P