[Federal Register: June 4, 2003 (Volume 68, Number 107)]
[Notices]
[Page 33538-33540]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04jn03-130]
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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