Vanguard Emerging Markets Stock Index Fund, Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund: No-action Letter dated March 9, 2005

Kathleen H. Moriarty, Esq.
Carter, Ledyard & Milburn
2 Wall Street
New York, NY 10005-2072

In your letter dated March 9, 2005,¹ as supplemented by conversations with the staff of the Division of Market Regulation ("Staff"), the International Index Trust on behalf of itself, the Amex and any other Market on which the VIPER Shares may subsequently trade, and persons or entities engaging in transactions in the VIPER Shares, requests exemptive, interpretive, or no-action advice regarding Section 11(d)(1) of the Exchange Act and Rules 10a-1, 10b-10, 10b-17, 11d1-2, 14e-5, 15c1-5 and 15c1-6 thereunder, Rules 101 and 102 of Regulation M, and Rule 200(g) of Regulation SHO under the Exchange Act, in connection with secondary market transactions in the VIPER Shares on the Amex or any other Market on which the VIPER Shares may subsequently trade, and the creation and redemption of Creation Units of the Funds.

The International Index Trust was originally organized in 1989 as a Maryland corporation and was reorganized as a Delaware statutory trust in 1998. The International Index Trust is registered with the Securities and Exchange Commission as an open-end management investment company and consists currently of three separate investment portfolios. Each Fund's VIPER Shares is listed for trading on the Amex. Each Fund is an index fund that seeks to track, as closely as possible, the performance of a different international equity Target Index.² The Vanguard Emerging Markets Stock Index Fund seeks to track the performance of the Select Emerging Markets Free Index, the Vanguard European Stock Index Fund seeks to track the performance of the MSCI Europe Index, and the Vanguard Pacific Stock Index Fund seeks to track the performance of the MSCI Pacific Index. The Amex's proposed rule changes regarding the listing and trading of the Funds' VIPER Shares were approved by the Commission pursuant to Section 19(b) of the Exchange Act on August 12, 2004.³

Rule 10a-1

Rule 200 of Regulation SHO defines "short sale" and Rule 10a-1 under the Exchange Act governs short sales generally. Paragraph (a) of Rule 10a-1 covers transactions in any security registered on a national securities exchange, if trades in such security are reported in the consolidated transaction reporting system, and prohibits short sales with respect to these securities unless such sales occur on a "plus tick," (that is, a price above the price at which the immediately preceding sale was effected), or "zero-plus tick," (that is, at the last sale price if it was higher than the last different price). Rule 10a-1 is designed to prevent the market price of a stock or other "reported security," as defined in Rule 11Aa3-1(a)(4) under the Exchange Act, from being manipulated downward by unrestricted short selling.

On the basis of your representations and the facts presented, in particular the composite and derivative nature of the VIPER Shares, it would not appear that trading in the VIPER Shares would be susceptible to the practices that Rule 10a-1 is designed to prevent. In particular, the International Index Trust anticipates that the market value of the VIPER Shares will rise or fall based on changes in the net asset value of the Component Securities of the Index and supply and demand. Moreover, the short sale rule does not apply to analogous derivative products such as index options and index futures contracts. Accordingly, the Commission hereby grants an exemption from Rule 10a-1 to permit sales of the VIPER Shares without regard to the "tick" requirements of Rule 10a-1.

We note that the exemption from Rule 10a-1 would not apply to secondary market portfolio sales of Component Securities made in connection with the redemption of the VIPER Shares. In addition, this exemption is contingent upon the Funds maintaining at least 20 Component Securities.

Rule 200(g) of Regulation SHO

Rule 200(g) of Regulation SHO provides that a broker-dealer must mark all sell orders of any equity security as "long," "short," or "short exempt." Rule 200(g)(2) requires that a short sale order must be marked "short exempt" if the seller is relying on an exception from the tick test of Rule 10a-1 of the Exchange Act or any short sale price test of any exchange or national securities association.

Accordingly, in conjunction with the exemption granted above to permit sales of VIPER Shares without regard to the "tick" requirements of Rule 10a-1, on the basis of your representations and the facts presented, and without necessarily concurring in your analysis, the Staff will not recommend to the Commission enforcement action under Rule 200(g) of Regulation SHO if a broker-dealer marks "short," rather than "short exempt," a short sale that is effected in the VIPER Shares, subject to the following conditions:

Regulation M

Redeemable securities issued by an open-end management investment company are excepted from the provisions of Rule 101 and 102 of Regulation M. The Commission granted relief to the International Index Trust and its co-applicants from the application of certain provisions of the Investment Company Act of 1940 and certain rules thereunder.⁴

Rule 101 of Regulation M

Generally, Rule 101 of Regulation M is an anti-manipulation regulation that, subject to certain exemptions, prohibits any "distribution participant" and its "affiliated purchasers" from bidding for, purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of a distribution until after the applicable restricted period except as specifically permitted in the Regulation.⁵ The provisions of Rule 101 of Regulation M apply to underwriters, prospective underwriters, brokers, dealers, or other persons who have agreed to participate or are participating in a distribution of securities.

On the basis of your representations and the facts presented, particularly that the International Index Trust is a registered open-end management investment company that will continuously redeem at net asset value Creation Unit size aggregations of the VIPER Shares; and the secondary market price of the VIPER Shares should not vary substantially from the net asset value of such VIPER Shares, which is based on the value of the Component Securities in the underlying Index and will be computed on a daily basis, the Staff hereby confirms that the International Index Trust is excepted under paragraph (c)(4) of Rule 101 of Regulation M, thus permitting persons who may be deemed to be participating in a distribution of the VIPER Shares to bid for or purchase the VIPER Shares during their participation in such distribution.⁶

The Staff also confirms the interpretation of Rule 101 of Regulation M that a redemption of Creation Unit size aggregations of the VIPER Shares and the receipt of Component Securities in exchange therefor by a participant in a distribution of the VIPER Shares would not constitute an "attempt to induce any person to bid for or purchase a covered security, during the applicable restricted period" within the meaning of Regulation M, and therefore would not violate Regulation M.

Rule 102 of Regulation M

Rule 102 of Regulation M prohibits issuers, selling security holders, or any affiliated purchaser of such person from bidding for, purchasing, or attempting to induce any person to bid for or purchase a covered security during the applicable restricted period in connection with a distribution of securities effected by or on behalf of an issuer or selling security holder. Rule 100 of Regulation M defines "distribution" to mean any offering of securities that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods.

On the basis of your representations and the facts presented, particularly that the International Index Trust is a registered open-end management investment company that will redeem at net asset value Creation Units of the VIPER Shares, the Staff hereby confirms that the International Index Trust is excepted under paragraph (d)(4) of Rule 102 of Regulation M, thus permitting each Fund to redeem the VIPER Shares during the continuous offering of the VIPER Shares.

Rule 14e-5

Rule 14e-5 under the Exchange Act, among other things, prohibits a person making a tender offer or exchange offer for any equity security from directly or indirectly, purchasing or arranging to purchase any subject or related securities except as part of the offer, from the time the offer is publicly announced until its expiration.

Rule 14e-5 explicitly includes dealer-managers within the rule's definition of "covered person." Accordingly, while acting as dealer-manager of a tender offer for a Component Security, a dealer-manager is prohibited from purchasing or arranging to purchase that Component Security until the expiration of the offer.

On the basis of your representations and the facts presented, particularly that purchases or redemptions of the VIPER Shares would not appear to result in the abuses at which Rule 14e-5 is directed, and that any bids or purchases by dealer-managers would not be effected for the purpose of facilitating a tender offer, the Commission hereby grants an exemption from Rule 14e-5 to permit any person acting as dealer-manager of a tender offer for a Component Security to: (1) redeem the VIPER Shares in Creation Unit size aggregations to the International Index Trust for Component Securities that may include a security subject to the tender offer; and (2) purchase the VIPER Shares during such offer.⁷

Rule 10b-17

Rule 10b-17, with certain exceptions, requires an issuer of a class of publicly traded securities to give notice of certain specified actions (for example, a dividend distribution, stock split, or rights offering) relating to such class of securities in accordance with Rule 10b-17(b).

On the basis of your representations and the facts presented, particularly that the Commission has determined to grant an exemption from the Investment Company Act of 1940 to register the International Index Trust as an open-end management investment company notwithstanding the fact that it issues VIPER Shares with limited redeemability, the Commission hereby grants an exemption from the requirements of Rule 10b-17 to the International Index Trust with respect to transactions in the VIPER Shares.⁸

Rule 10b-10

Rule 10b-10 under the Exchange Act requires a broker-dealer that effects a securities transaction with or for the account of a customer to provide, at or before the completion of the transaction, a written confirmation statement to the customer disclosing the information specified in paragraph (a) of Rule 10b-10. The required information includes the identity, price, and number of shares or units (or principal amount) of the security purchased or sold by the customer.

On the basis of your representations and the facts presented, and particularly the expected institutional nature of the market for VIPER Shares in Creation Unit size aggregations and the public availability of information regarding the composition of the Component Securities to be tendered or received by customers in the Funds' creation and redemption transactions, the Commission hereby grants an exemption from Rule 10b-10 under the Exchange Act in order to permit broker-dealers that create or redeem VIPER Shares on behalf of their customers to confirm such creation or redemption transactions without providing a statement of the identity, price, or number of shares of each individual Component Securities tendered to or delivered by the International Index Trust pursuant to the creation or redemption transaction. This exemption does not apply to purchases and sales of VIPER Shares in the secondary market. This exemption is subject to the following conditions:

Section 11(d)(1); Rule 11d1-2

On the basis of your representations and the facts presented, the Staff will not recommend enforcement action to the Commission under Section 11(d)(1) of the Exchange Act if broker-dealers treat VIPER Shares, for the purposes of Rule 11d1-2 under the Exchange Act, as "securities issued by a registered ... open-end investment company as defined in the Investment Company Act of 1940" and thereby extend or maintain or arrange for the extension or maintenance of credit on VIPER Shares that have been owned by the persons to whom credit is provided for more than 30 days, in reliance on the exemption contained in the rule. The exemption provided in Rule 11d1-2 will not be available, however, with respect to any VIPER Shares owned for 30 days or less by the person to whom credit is provided.

In addition, on the basis of your representations and the facts presented, the Staff will not recommend enforcement action to the Commission under Section 11(d)(1) of the Exchange Act if broker-dealers that do not create VIPER Shares, but engage in customer transactions in VIPER Shares exclusively in the secondary market, extend or maintain or arrange for the extension or maintenance of credit on VIPER Shares, in connection with such secondary market transactions.

Rule 15c1-5 and 15c1-6

Rule 15c1-5 under the Exchange Act requires a broker-dealer controlled by, controlling, or under common control with the issuer of any security, before entering into any contract with or for a customer for the purchase or sale of such security, to disclose that relationship and to provide written disclosure to the customer of such control relationship at or before the completion of the transaction.

Rule 15c1-6 under the Exchange Act generally requires a broker-dealer that effects a transaction with a customer in any security in a primary or secondary distribution in which the broker-dealer is participating or is otherwise financially interested to provide written notification to the customer of the existence of such participation or interest at or before the completion of each transaction.

In light of the composite nature of the VIPER Shares and the relatively small proportionate share of any Component Security, transactions in VIPER Shares do not appear to result in any of the harms that Rules 15c1-5 and 15c1-6 are designed to prevent. Therefore, on the basis of your representations and the facts presented, the Staff will not recommend that the Commission take enforcement action under Rule 15c1-5 if a broker-dealer executes transactions in VIPER Shares without disclosing any control relationship with an issuer of a Component Security. Moreover, on the basis of your representations and the facts presented, the Staff will not recommend that the Commission take enforcement action under Rule 15c1-6 if a broker-dealer executes transactions in VIPER Shares without disclosing its participation or interest in a primary or secondary distribution of a Component Security.

The foregoing exemptions from Rules 10a-1, 10b-10, 10b-17, 14e-5, interpretations of Rules 101 and 102 of Regulation M, and no-action positions taken under Section 11(d)(1) and Rules 11d1-2, 15c1-5, and 15c1-6 and Regulation SHO under the Exchange Act are based solely on your representations and the facts presented to Staff, and are strictly limited to the application of those rules to transactions involving the VIPER Shares under the circumstances described above and in your letter. Such transactions should be discontinued, pending presentation of the facts for our consideration, in the event that any material change occurs with respect to any of those facts or representations. Moreover, the foregoing exemptions from Rules 10a-1, 10b-10, 10b-17, and 14e-5, interpretations Rules 101 and 102 of Regulation M and no-action positions taken under Section 11(d)(1) and Rules 11d1-2, 15c1-5, and 15c1-6 and Regulation SHO under the Exchange Act are subject to the condition that such transactions in VIPER Shares, any Component Security, or any related securities are not made for the purpose of creating actual, or apparent, active trading in or raising or otherwise affecting the price of such securities.

These exemptions, interpretations, and no-action positions are subject to modification or revocation if at any time the Commission or Staff determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition, persons relying on these exemptions, interpretations, and no-action positions are directed to the anti-fraud and anti-manipulation provisions of the Exchange Act, particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder. Responsibility for compliance with these and other provisions of the federal or state securities laws must rest with persons relying on these exemptions, interpretations, and no-action positions. The Staff expresses no view with respect to other questions that the proposed transactions may raise, including, but not limited to, the adequacy of disclosure concerning, and the applicability of other federal and state laws to, the proposed transactions.

For the Commission,
by the Division of Market Regulation,
pursuant to delegated authority,

James A. Brigagliano
Assistant Director

Endnotes

¹ We have enclosed a photocopy of your letter. Each defined term in this letter has the same meaning as defined in your letter, unless we note otherwise.

² Whenever practicable, each Fund will replicate its Target Index, meaning that it will hold the same component securities ("Component Securities") as those in its Target Index and in approximately the same proportions.

⁴ In the Matter of Vanguard International Equity Index Funds, et al., Investment Company Act Relase Nos. 26246, November 3, 2003 (notice) and 26281, December 1, 2003 (order).

⁶ We note that Regulation M does not prohibit a distribution participant and its affiliated purchasers from bidding for and purchasing Component Securities in accordance with the exceptions contained in paragraphs (b)(6) and (c)(1) of Rule 101. Rule 101(b)(6)(i) excepts basket transactions in which bids or purchases are made in the ordinary course of business in connection with a basket of 20 or more securities in which a covered security does not comprise more that 5% of the value of the basket purchased. Rule 101(b)(6)(ii) excepts adjustments to such a basket made in the ordinary course of business as a result of a change in the composition of a standardized index. Also, Rule 101 (c)(1) excepts transactions in actively-traded securities, that is, securities that have an average daily trading volume value of at least $ 1 million and are issued by an issuer whose common equity securities have a public float value of at least $150 million; provided however, that such securities are not issued by the distribution participant or an affiliate of the distribution participant.

⁷ The Staff also confirms its no-action position under Rule 14e-5 when a broker-dealer (including a member or member organization of the Amex or other national securities exchange), acting as a dealer-manager of a tender offer for a Component Security, purchases such Component Security in the secondary market for the purpose of tendering them to purchase a Creation Unit size aggregation of VIPER Shares, if such transactions are effected as adjustments to such a basket in the ordinary course of business as a result of a change in the composition of the relevant index.

⁸ We also note that compliance with Rule 10b-17 would be impractical in light of the nature of the Funds. This is because it is not possible for the International Index Trust to accurately project ten days in advance what dividend, if any, would be paid on a particular record date.