[Federal Register Volume 65, Number 244 (Tuesday, December 19, 2000)]
[Notices]
[Pages 79439-79441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32208]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 24789/December 12, 2000]
INVESTMENT COMPANY ACT OF 1940; Vanguard Index Funds et al.
In the Matter of; Vanguard Index Funds, The Vanguard Group,
Inc., Vanguard Marketing Corporation, P.O. Box 2600, Valley Forge,
PA 19482, (812-12094), Order under section 6(c) of the Investment
Company Act of 1940 granting exemptions 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 granting exemptions
from sections 17(a)(1) and (2) of the Act and denying a request for
hearing.
Vanguard Index Funds, The Vanguard Group, Inc. and Vanguard
Marketing Corporation (collectively, ``Vanguard'') filed an application
on May 12, 2000, and amended the application on July 12, 2000.
Applicants requested an order under section 6(c) of the Investment
Company Act of 1940 (``Act'') for exemptions 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 exemptions from
sections 17(a)(1) and (2) of the Act. The requested order would permit:
(a) certain open-end management investment companies (``Funds'') to
issue a new class of shares with limited redeemability (``VIPERS'');
(b) secondary market transactions in VIPERs at negotiated prices on a
national securities exchange; (c) dealers to sell VIPERs to secondary
market purchasers unaccompanied by a prospectus, when prospectus
delivery is not required by the Securities Act of 1933 (``Securities
Act''); and (d) certain affiliated persons of the Funds to deposit
securities into, and receive securities from, the Funds in connection
with the purchase and redemption of aggregations of VIPERs.
On October 6, 2000, a notice of the filing of the application was
issued (Investment Company Act Release No. 24680). The notice gave
interested persons an opportunity to request a hearing and stated that
an order disposing of the application would be issued unless a hearing
was ordered. On October 30, 2000, Standard & Poor's (``S&P''), a
division of McGraw-Hill Companies, Inc. (``McGraw-Hill''), submitted a
hearing request on the application (``Hearing Request'').
Rule 0-5(c) states that the Commission will order a hearing on a
matter, upon the request of an ``interested person'' or upon its own
motion, if it appears that a hearing is ``necessary or appropriate in
the public interest or for the protection of
[[Page 79440]]
investors.'' The Commission has reviewed each of the issues raised in
the Hearing Request and finds that none of the issues warrants ordering
a hearing on the application. Set forth below is a summary of each of
the arguments made by S&P in support of a hearing and the Commission's
findings.
First, S&P states that McGraw-Hill has filed suit against Vanguard
concerning the use of S&P indices and trademarks in connection with the
issuance of VIPERs (``Litigation''). S&P states that it is not in the
public interest for the Commission to grant the requested exemptions
when Vanguard's right to issue VIPERs is being challenged in the
Litigation. S&P asserts that a potentially chaotic situation could
develop if S&P prevails in the Litigation after the Commission allows
the issuance of VIPERs.
The Commission has determined that the Litigation is not relevant
to the issues the Act requires the Commission to consider in deciding
whether to grant or deny the application. The Litigation does not
relate to or challenge any of the specific exemptions requested by
Vanguard, nor does the Litigation assert any claims under the Act. With
respect to any potential detriment that shareholders might suffer if
S&P prevails in the Litigation after the issuance of VIPERs, any
conclusions that the Commission might reach, even if a hearing were
held, would require the Commission to speculate on the outcome of the
Litigation and on the possible remedies that would be imposed.
Second, S&P states that it is not in the interests of investors for
Vanguard to issue VIPERs when Vanguard appears unable to meet its
obligations as set forth in the notice. Specifically, S&P asserts that
Vanguard's representatives in the Litigation suggest that VIPERs are
simply shares of an additional class of an existing Fund, while the
representations in the application indicate that Vanguard will
highlight the differences between VIPERs and traditional mutual fund
investments. S&P indicates that these contradictory public positions
could lead to investor confusion.
The Commission thoroughly considered the issue of potential
investor confusion during the review of the application. In the
application, Vanguard agrees to a variety of specific measures designed
to address this issue. The Commission has determined that S&P has not
raised any issue that, if substantiated, would indicate that Vanguard
would not meet the obligations set forth in the application. If
Vanguard were unable to meet its obligations, the Commission would take
appropriate action.
Third, S&P states that it is not in the interests of investors for
the Commission to facilitate an unconventional investment that may
never achieve its stated purpose of encouraging short-term traders not
to trade in shares of the conventional classes of the Funds.
Specifically, S&P states that because Vanguard may charge an
administrative fee when shareholders in a conventional class of a Fund
exchange shares for VIPERs, the Vanguard proposal may not succeed in
drawing short-term traders from conventional classes to exchange-traded
classes. S&P also states that a hearing would be appropriate to explore
why Vanguard's current and previous prospectuses do not discuss the
problems that the application attributes to short-term traders.
The Commission finds that the specific issues raised by S&P are not
relevant to the relief requested by Vanguard in the application. In the
application, Vanguard represents that any administrative fee assessed
on exchanges will comply with rule 11a-3 under the Act, which governs
this type of fee. Vanguard has not requested any relief relating to the
imposition of this fee. Any disclosure issues in current and prior
prospectuses have been addressed previously as necessary during the
disclosure review process and are not the subject of the application.
Finally, S&P questions whether the Commission should grant the
requested relief from section 24(d) of the Act, which would allow
dealers to sell VIPERs to secondary market purchasers unaccompanied by
a prospectus, when the Securities Act does not require prospectus
delivery. S&P argues that because of the risks of the Litigation and
the possible effect of the Litigation on the Funds, the Commission
should require Vanguard to deliver prospectuses disclosing information
about the Litigation to all VIPERs investors.
The Commission fully considered issues relating to prospectus
delivery relief during its review of the application. A condition to
the prospectus delivery relief is that the national securities exchange
that lists VIPERs will require the delivery of a product description to
secondary market purchasers. As stated in the application, the product
description must provide, among other things, a plain English overview
of the material risks of owning the Fund's shares. The product
description also must disclose the actions that would be taken if the
Fund's license with S&P were terminated. In addition, the Commission
understands that Vanguard intends to include a description of the
Litigation in the product description that will be similar to the
disclosure contained in the Fund's prospectus.
On the basis of the foregoing, the Commission finds that S&P has
not articulated any material issue of fact or law that is relevant to
the Commission's decision whether to grant the requested relief or that
has not been considered previously.\1\ It therefore appears that a
hearing is not necessary or appropriate in the public interest or for
the protection of investors.
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\1\ The Commission does not deem it necessary to make a formal
determination with respect to the status of S&P as an ``interested
person'' within the meaning of section 40(a) of the Act and rule 0-
5(c) under the Act inasmuch as the Commission has determined that
the assertions made and the issues raised in connection with the
application do not warrant a hearing.
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Accordingly,
It Is Ordered that the request for a hearing is denied.
The matter having been considered, it is found, on the basis of the
information set forth in the application, as amended, that granting the
requested exemptions is 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.
It is further found that the terms of the proposed transactions are
fair and reasonable and do not involve overreaching on the part of any
person concerned, and that the proposed transactions are consistent
with the policy of each registered investment company concerned and the
general purposes of the Act.
Accordingly,
It Is Further Ordered, that the requested 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), are granted,
effective immediately, subject to the conditions contained in the
application, as amended.
The exemption from section 24(d) of the Act does not affect a
purchaser's rights under the civil liability and anti-fraud provisions
of the Securities Act. Thus, rights under section 11 and section
12(a)(2) of the Securities Act extend to all purchasers who can trace
their securities to a registration statement filed with the Commission,
regardless of whether they were delivered a prospectus in connection
with their purchase.
[[Page 79441]]
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-32208 Filed 12-18-00; 8:45 am]
BILLING CODE 8010-01-M