Federal Register / Vol. 65, No. 199 / Friday, October 13, 2000 / Notices 61005

22Scottish Power has given commitments to

regulators in the U.K. regarding the reorganization

of SPUK and its subsidiaries, including the

incorporation of divisions of SPUK’s business.

23Applicants state that Scottish Power’s status as

a foreign company makes it commercially

impossible for it to comply fully with some of the

technical requirements of rule 53. In particular,

since Scottish Power has pre-existing foreign utility

operations, Applicants states that it would be

unreasonable to require that Scottish Power

maintain the books and records of its FUCOs in

accordance with U.S. GAAP, although it will

provide reconciliation as required in Form 20–F.

24As of March 31, 2000, the Scottish Power

System had an aggregate investment of $3,239

million in EWGs and FUCOs.

25All affiliate transactions among Scottish Power,

PacifiCorp, and the PacifiCorp Subsidiaries are

subject to review by all of the state utility

commissions that regulate PacifiCorp, including the

Idaho Public Utilities Commission, the Public

Service Commission of Utah, the Washington

Utilities and Transportation Commission, the

Public Service Commission of Wyoming, the

Oregon Public Utility Commission, and the

California Public Utilities Commission.

26 In the event that the market rate for these

service transactions is less than the cost of these

services, neither PacifiCorp nor the PacifiCorp

Subsidiaries will provide these services.

27Scottish Power estimates that the total charges

by SPUK to PacifiCorp for the provision of

anticipated services will be approximately $12

million annually.

proposed external financing limits

applicable to the immediate parent of

that Financing Entity. However,

Applicants request that the underlying

intrasystem mirror debt and parent

guaranty not be included in that

limitation or the separate Scottish

Power Guarantee Limitation.

X. Proposed Corporate Restructuring

Scottish Power proposes to engage in

corporate restructuring or reorganization

of the SPUK Group without prior

Commission approval.22 Scottish Power

further states that, as it continues to

review the combined operations of the

Scottish Power System, it may prove

prudent to reorganize its nonutility

companies to merge current FUCO

investments held in the PacifiCorp

Group with those of SPUK. Scottish

Power also requests authorization to

consolidate or otherwise reorganize a

nonutility subsidiary if the acquisition

of the securities of that nonutility

subsidiary is exempt from prior

Commission approval. Scottish Power

requests that the Commission reserve

jurisdiction, pending completion of the

record, over any other consolidation or

reorganization of its direct or indirect

ownership interests in any nonutility

company.

XI. EWG/FUCO-related Financings

As a general matter, Scottish Power

intends to fund its FUCO activities at

the level of its first-tier subsidiary,

SPUK, or at the level of the Intermediate

Companies. However, it may be

desirable from time to time for Scottish

Power to provide some investment

capital or credit support for FUCO

acquisitions or operations. To that end,

Scottish Power is seeking authority to

finance EWG and FUCO investments

and operations up to an amount equal

to 154% of its consolidated retained

earnings (‘‘CRE’’) at any one time

outstanding during the Authorization

Period.23 Applicants state that, as of

March 31, 2000, Scottish Power’s CRE

on a U.S. GAAP basis was $3,116

million. Applicants further state that, as

of March 31, 2000, the Scottish Power

System had an existing ‘‘aggregate

investment,’’ as that term is defined in

rule 53 under the Act, in EWGs and

FUCOs of an amount equal to 104% of

Scottish Power’s CRE, subject to an

adjustment based on the sale of

PacifiCorp’s Australian FUCO assets.24

Therefore, Scottish Power’s request for

an additional investment authorization

would result in an aggregate investment

of approximately 154% of Scottish

Power’s CRE, or approximately $4,797

million.

XII. Affiliate Transactions

A. Existing Intrasystem Arrangements

PacifiCorp has been providing

administrative, management, technical,

legal and other support services to its

subsidiaries for many years.25 In

addition, there have been occasions

when subsidiaries of PacifiCorp have

provided services to PacifiCorp or to

other PacifiCorp Subsidiaries.

Accordingly, PacifiCorp now proposes

to continue these arrangements, with

PacifiCorp providing services to the

PacifiCorp Subsidiaries and on occasion

the PacifiCorp Subsidiaries providing

services to PacifiCorp and other

associate companies in the Scottish

Power System. All service transactions

will be priced at cost in accordance with

section 13(b) of the Act and the rules

under the Act.26

In addition, SPUK, or another member

of the SPUK Group, proposes to

perform, on a limited basis, services for

the PacifiCorp Group. These services

may include: (1) Transition plan

preparation and implementation; (2)

network performance and customer

service improvements; and (3) corporate

services. These service transactions also

will be priced at cost in accordance with

section 13(b) of the Act and the rules

under the Act.27 Applicants state that

the costs of services provided by SPUK,

or a SPUK, Subsidiary, to the PacifiCorp

Group will be directly attributed to

PacifiCorp. In the alternative, whenever

it is possible to do so accurately, these

costs will be attributed to a specific

PacifiCorp Subsidiary.

Scottish Power further states that a

PacifiCorp Group member may provide

incidental services to SPUK or a SPUK

Subsidiary at other than cost in

compliance with rule 90(d)(1) under the

Act. The PacifiCorp Subsidiaries also

request authority to provide services

and sell goods to SPUK and the SPUK

Subsidiaries at fair market prices, under

certain circumstances, to any nonutility

associates company in the Scottish

Power System.

For the Commission by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–26379 Filed 10–12–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Investment Company Act Release No.

24680; 812–12094]

Vanguard Index Funds, et al.; Notice of

Application

October 6, 2000.

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

(‘‘Act’’) for 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 exemption from sections 17(a)(1)

and (a)(2) of the Act.

Summary of Application: Applicants

request an order that would permit each

of certain registered open-end

management investment companies

whose portfolios consist of the

component securities of certain indices

to issue a new class of shares with

limited redeemability. The requested

order would permit transactions in the

shares of the new classes at negotiated

prices in the secondary market and

would allow dealers to sell the shares to

secondary market purchasers

unaccompanied by a prospectus, when

prospectus delivery is not required by

the Securities Act of 1933. The

requested order also would permit

certain affiliated persons of the

investment companies to deposit

securities into, and receive securities

from, the investment companies in

connection with the purchase and

redemption of aggregations of shares of

the new classes.

61006 Federal Register / Vol. 65, No. 199 / Friday, October 13, 2000 / Notices

1The Indices are the Standard & Poor’s (‘‘S&P’’)

500 Composite Stock Price Index, S&P MidCap 400

Index, S&P 500/BARRA Growth Index, S&P 500/

BARRA Value Index, S&P Small Cap 600/BARRA

Growth Index, S&P Small Cap 600/BARRA Value

Index, Wilshire 5000 Total Market Index, Wilshire

4500 Completion Index, and Russell 200 Index. No

entity that creates, complies, sponsors, or maintains

an Index is an affiliated person, as defined in

section 2(a)(3) of the Act, or an affiliated person of

an affiliated person, of the Funds, VGI, or VMC.

2Transactions in each Fund’s Conventional

Shares would continue to be priced at that day’s net

asset value (‘‘NAV’’), which is calculated once per

day at the close of trading on the New York Stock

Exchange.

3A Fund may require that an investor purchase

a minimum number of Creation Units.

4Applicants 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.

5On each business day, VGI will make available

through the NSCC, prior to the opening of trading

on the Exchange, the list of the names and the

required number of shares of each Deposit Security

for each Fund. In addition, each Fund reserves the

right to permit or require the substitution of an

amount of cash to be added to the Balancing

Amount, or of a different security, to replace any

Deposit Security in certain circumstances.

Applicants: Vanguard Index Funds

(‘‘Index Trust’’), The Vanguard Group,

Inc. (‘‘VGI’’), and Vanguard Marketing

Corporation (‘‘VMC’’).

Filing Dates: The application was

filed on May 12, 2000 and was amended

on July 12, 2000.

Hearing or Notification of Hearing: An

order granting the requested relief 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 October 31, 2000 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 may request

notification of a hearing by writing to

the Commission’s Secretary.

ADDRESSES: Secretary, Securities and

Exchange Commission, 450 Fifth Street,

NW, Washington, DC 20549–0609.

Applicants, P.O. Box 2600, Valley

Forge, PA 19482.

FOR FURTHER INFORMATION CONTACT:

Rachel H. Graham, Senior Counsel, or

Michael W. Mundt, Branch Chief, 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 (tel. 202–942–8090).

Applicants’ Representations

1. Index Trust is an open-end

management investment company

registered under the Act and organized

as a Delaware business trust. Index

Trust offers nine investment portfolios

(each a ‘‘Fund’’ and, collectively, the

‘‘Funds’’). Currently, eight of the Funds

offer separate classes of shares for retail

and institutional investors, and the

remaining Fund offers retail shares only

(shares of the retail and institutional

classes of the Funds collectively are

referred to as ‘‘Conventional Shares’’).

2. VGI is a Pennsylvania corporation

that is wholly and jointly owned by the

Vanguard family of mutual funds

(‘‘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 (including the Funds)

with corporate management,

administrative, and transfer agency

services at cost. VGI also provides

advisory services at cost to certain

Vanguard funds, including each Fund.

VMC is a wholly owned subsidiary of

VGI and is registered as a broker-dealer

under the Exchange Act. VMC provides

all distribution and marketing services

at cost to the Vanguard funds including

each Fund.

3. Each Fund seeks to tract, as closely

as possible, the performance of a

specified domestic securities index

(each an ‘‘Index’’ and, collectively, the

‘‘Indices’’).1 A Fund will utilize as an

investment approach either a replication

strategy or a representative sampling

strategy. A Fund using a replication

strategy will hold each of the

component securities in its Index in

about the same proportion as

represented in the Index itself. A Fund

using a representative sampling strategy

will hold a representative sample of the

component securities of its Index that

resembles the entire Index in terms of

industry weightings, market

capitalization, price/earnings ratio,

dividend yield, and other

characteristics. Applicants state that the

difference between the performance of a

Fund and that of its Index generally has

been significantly less than one

percentage point. Applicants expect that

the Funds will continue to track the

Indices with the same degree of

precision in the future.

4. Applicants state that some

investors trade in and out of the Funds’

Conventional Shares frequently, often as

part of a market timing strategy, to the

detriment of the Funds’ long-term

shareholders. Applicants state that the

purchase and redemption requests of

market timers increase a Fund’s

realization of capital gains, increase

Fund expenses, and hinder a Fund’s

ability to achieve its investment

objective of tracking its Index as closely

as possible. According to applicants,

Index Trust has adopted policies

designed to deter short-term investors,

but these efforts have proven

insufficient.

5. Each Fund proposes to create a

class of shares (Vanguard Index

Participation Equity Receipts, or ‘‘VIPER

Shares’’) that would be listed on a

national securities exchange

(‘‘Exchange’’) and would trade in the

secondary market at negotiated prices.

Applicants state that, by creating

exchange-traded classes of shares, the

Funds hope to provide short-term

investors with an attractive means of

purchasing Fund shares that can be

bought and sold continuously

throughout the day at market prices.2

Applicants further assert that the new

classes of VIPER Shares would benefit

holders of Conventional Shares by

reducing the portfolio disruption and

transaction costs caused by market

timing activity.

6. Except in connection with the

Exchange Option (defined below), the

Funds will sell VIPER Shares in

aggregations of a specified number

ranging from 20,000 to 200,000 shares

(‘‘Creation Units’’), depending on the

Fund. The price of a Creation Unit will

range from about $2,000,000 to

$6,000,000.3 Creation Units may be

purchased only by or through (i) a

participant in the Continuous Net

Settlement System of the National

Securities Clearing Corporation

(‘‘NSCC’’) or (ii) a Depository Trust

Company (‘‘DTC’’) participant. In either

case, the participant must enter into a

participant agreement with VMC.

Creation Units will be issued in

exchange for an in-kind deposit of

securities and cash. An investor wishing

to purchase a Creation Unit from a Fund

will have to transfer to the Fund a

‘‘Portfolio Deposit’’ consisting of (i) a

basket of securities selected by VGI from

among the securities contained in the

Fund’s portfolio (‘‘Deposit Securities’’),4

and (ii) a cash payment to equalize any

difference between (a) the total

aggregate market value of the Deposit

Securities and (b) the NAV per Creation

Unit of the Fund (‘‘Balancing

Amount’’).5 An investor purchasing a

Federal Register / Vol. 65, No. 199 / Friday, October 13, 2000 / Notices 61007

6 In situations where a Fund permits a purchaser

to substitute cash for one or more Deposit

Securities, the purchaser will be assessed a higher

Transaction Fee to offset the increased cost to the

Fund of buying those particular Deposit Securities.

7Applicants state that persons purchasing

Creation Units will be cautioned in the VIPER

Shares Prospectus that some activities on their part

may, depending on the circumstances, result in

their being deemed statutory underwriters and

subject them to the prospectus delivery and liability

provisions of the Securities Act of 1933 (‘‘Securities

Act’’). For example, a broker-dealer firm 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 Shares Prospectus will state that

whether a person is an underwriter depends upon

all the facts and circumstances pertaining to that

person’s activities. The VIPER Shares 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

ordinary secondary trading transactions), 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.

8 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.

9Every fifteen seconds throughout the trading

day, the Exchange will disseminate (i) via the

facilities of the Consolidated Tape Association, the

market value of a VIPER Share; and (ii) separately

from the consolidated tape, a calculation of the

estimated NAV of a VIPER Share, which estimate

is expected to be accurate to within a few basis

points. 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.

10Creation Units may be redeemed through either

NSCC or DTC. Investors who redeem through DTC

will pay a higher Transaction Fee.

11The terms of an exchange made pursuant to the

Exchange Option will comply with section 11(a) of

the Act and rule 11a–3 under the Act. The

Exchange Option would offer a ‘‘one way’’

exchange only. Therefore, a holder of a Fund’s

VIPER Shares who wishes to shift his or her

investment to the Fund’s Conventional Shares

would have to sell the VIPER Shares in the

secondary market and use the sale proceeds (less

brokerage commissions) to purchase Conventional

Shares from the Fund. The sale of the VIPER Shares

would be a taxable event.

Creation Unit from a Fund will be

charged a fee (‘‘Transaction Fee’’) to

prevent the dilution of the interests of

the remaining shareholders resulting

from the Fund incurring costs in

connection with the purchase of the

Creation Units.6 Each purchaser of a

Creation Unit will reveive a prospectus

for the VIPER Shares (‘‘VIPER Shares

Prospectus’’) that contains complete

disclosure about the Transaction Fee. A

Fund’s Conventional Shares will be

covered by a separate prospectus

(‘‘Conventional Shares Prospectus’’).

7. Orders to purchase Creation Units

will be placed with VMC, which will be

responsible for transmitting the orders

to the applicable Fund. VMC will

maintain a record of Creation Unit

purchasers and will send out a VIPER

Shares Prospectus and confirmation to

purchasers whose orders have been

accepted by the Fund.

8. Purchasers of Creation Units may

separate a Creation Unit into individual

VIPER Shares.7 VIPER Shares will be

listed on an Exchange and traded in the

secondary market in the same manner as

other equity securities. One or more

Exchange specialists will be assigned to

make a market in 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 a 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.

9. Applicants expect that purchasers

of Creation Units will include

institutional investors and arbitrageurs.

An Exchange specialist, in providing for

a fair and orderly secondary market for

VIPER Shares, also may purchase

Creation Units for use in its marketmaking activities on the Exchange.

Applicants expect that secondary

market purchasers of VIPER Shares will

include both institutional and retail

investors.8 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’ underlying 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. In other

words, applicants do not expect the

VIPER Shares to trade at a significant

premium or discount to their NAV.9

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 a Fund’s VIPER Shares

to deliver a Product Description to

investors purchasing VIPER Shares.

Applicants state that any other

Exchange that applies for unlisted

trading privileges in VIPER Shares will

have to adopt a similar rule. The

Product Description will provide a plain

English overview of a Fund, including

its investment objective and investment

strategies and the material risks and

potential rewards of investing in the

Fund. The Product Description also will

provide a brief, plain English

description of the salient aspects of the

Fund’s VIPER Shares. The Product

Description will advise investors that a

VIPER Shares Prospectus and the

Fund’s Statement of Additional

Information (‘‘SAI’’) may be obtained,

without charge, from the investor’s

broker or from VMC. The Product

Description also will provide a website

address (in most cases to a website

maintained by the sponsor of the

relevant Index) where investors can

obtain information about the

composition and compilation

methodology of the 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 a Fund’s VIPER

Share class, VIPER Shares will not be

individually redeemable. VIPER Shares

will only be redeemable in Creation

Unit aggregations through each Fund.10

To redeem, an investor will have to

accumulate enough VIPER Shares to

constitute a Creation Unit. An investor

redeeming a Creation Unit generally

will receive (i) a basket of securities

(‘‘Redemption Securities’’) that in most

cases will be the same as the Deposit

Securities required of investors

purchasing Creation Units on the same

day, and (ii) a cash payment that

generally will be the same as that day’s

Balancing Amount. An investor also

may receive the cash equivalent of a

Redemption Security if the Fund

determines that such alternative is

warranted, such as a case in which the

investor is not permitted to own a

particular Redemption Security by

regulation or policy. A redeeming

investor will pay a Transaction Fee to

cover the Fund’s transaction costs.

12. A Fund may offer holders of its

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

Shares (‘‘Exchange Option’’).11

Applicants state that the Exchange

Option would facilitate the movement

of investors currently holding

Conventional Shares, but desiring

intraday trading flexibility, out of the

Conventional Shares and into VIPER

Shares in an expeditious and tax

61008 Federal Register / Vol. 65, No. 199 / Friday, October 13, 2000 / Notices

12An exchange of Conventional Shares for VIPER

Shares of the same Fund generally is not a taxable

transaction. Applicants note that because DTC’s

systems currently 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 for VIPER Shares, however, any fractional

VIPER Share that results from the exchange would

be liquidated and the cash sent to the investor’s

broker for the benefit of the investor.

efficient manner.12 Around the time that

the Fund’s VIPER Shares begin trading,

VGI will send to existing holders of the

Fund’s Conventional Shares a notice

describing the Exchange Option 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, and will

highlight the key differences between

the Fund’s VIPER Shares and

Conventional Shares. Comparable

information about a Fund’s Exchange

Option also would be contained in a

separate section of the Conventional

Shares Prospectus. To effect an

exchange through the Exchange Option,

the investor must have a brokerage

account and must contact his or her

broker to initiate the exchange. The

investor will receive a VIPER Shares

Prospectus in connection with the

exchange transaction, as required by the

Securities Act. Subsequent to the

exchange, the investor would have to

contact his or her broker for account

information relating to his or her VIPER

Share holdings or to sell the VIPER

Shares.

Applicants’ Legal Analysis

1. Applicants request an order under

section 6(c) of the Act for exemption

from sections 2(a)(32), 18(f)(1), 18(i),

22(d), and 224(d) of the Act and rule

22c–1 under the Act; and under sections

6(c) and 17(b) of the Act for exemption

from sections 17(a)(1) and (a)(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 of persons, securities, or

transactions, 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

a ‘‘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) of

the Act to permit VIPER Shares to be

redeemed in Creation Unit aggregations

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.

Sections 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) of the Act 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 under the Act permits an

open-end fund to issue multiple classes

of shares representing interests in the

same portfolio without seeking

exemptive relief from sections 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 (i) other than the

differences allowed by the rule, each

class must have the same rights and

obligations as each other class, and (ii)

if a class has a different distribution

arrangement, the class must pay all of

the expenses of that arrangement.

Because they may not rely on rule 18f–

3, applicants 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: (i) Conventional

Shares will be individually redeemable

from the Fund, while VIPER Shares will

be redeemable only in Creation Unit

aggregations; (ii) VIPER Shares will be

traded on an Exchange, while

Conventional Shares will not; and (iii)

Conventional Shares may be exchanged

for VIPER Shares, but 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 vehicle that will not

disrupt management of the Fund.

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 a Fund’s classes of

VIPER Shares and Conventional 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 openend management investment company.

Any marketing or advertising materials

addressed primarily to prospective

investors will emphasize that (i) VIPER

Shares are not redeemable from a Fund

other than in Creation Unit aggregations;

(ii) VIPER Shares, other than in Creation

Unit aggregations, may be sold only

through a broker, and the shareholder

may have to pay brokerage commissions

in connection with the sale; and (iii) the

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 Shares

Prospectus, VIPER Shares Prospectus,

Product Description, SAI, and reports to

shareholders. Applicants also note that

(i) all references to a Fund’s exchangetraded class of shares will use a form of

the name ‘‘VIPERS’’ rather than the

Fund name; (ii) the cover and summary

page of the VIPER Shares Prospectus

will state that the VIPER Shares are

listed on an Exchange and are not

individually redeemable; (iii) VMC will

not market Conventional Shares and

VIPER Shares in the same advertisement

or marketing material; and (iv)

applicants will prepare educational

materials describing the VIPER Shares.

7. Applicants currently allocate

distribution expenses among all 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

Federal Register / Vol. 65, No. 199 / Friday, October 13, 2000 / Notices 61009

13 Investment Company Act Rel. No. 11645 (Feb.

25, 1981) (Opinion of the Commission and Final

Order). Under the formula, each fund’s contribution

is based 50% on the fund’s 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 the fund’s 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 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.

14Applicants 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 Exchange Option.

distribution services (‘‘1981 Order’’).13

For those funds in the Vanguard Fund

Complex offering multiple classes of

shares (including eight of the Funds),

applicants apply the formula in the

1981 Order by treating each class as a

separate fund (‘‘Multi-Class Distribution

Formula’’). Applicants state that the

Multi-Class Distribution Formula

currently is applied in a manner that is

consistent with rule 18f–3 because each

class currently has the same distribution

arrangement and, accordingly, the rule

does not require that each class pay its

actual distribution expenses.

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 may be inconsistent

with the rule. 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.

Applicants represent that prior to the

application of the Multi-Class

Distribution Formula to a class of VIPER

Shares, the board of trustees of Index

Trust (‘‘Board’’), including a majority of

trustees who are not interested persons

of Index Trust, as defined in section

2(a)(19) of the Act, will determine for

each Fund that the proposed allocation

is in the best interests of each class and

of the Fund as a whole. As a condition

to the order, the Board would be

required to make a similar finding for

each Fund on an annual basis.

Section 22(d) of the Act and Rule 22c–

1 Under the Act

9. Section 22(d) of the Act, 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 under the

Act 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 Shares

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. Applicants accordingly

request an exemption under section 6(c)

of the Act from these provisions.

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 (i) prevent dilution caused

by certain riskless-trading schemes by

principal underwriters and contract

dealers; (ii) prevent unjust

discrimination or preferential treatment

among buyers resulting from sales at

different prices; and (iii) assure 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 purchases because, to the extent

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 arbitrage

activity will ensure that the difference

between the market price of VIPER

Shares and their NAV remains narrow.

Section 24(d) of the Act

11. Section 24(d) of the Act 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 any

transaction 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.14

12. 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.

13. Applicants contend that VIPER

Shares, as a listed security, merit a

reduction in the compliance costs and

regulatory burdens resulting from the

imposition of prospectus delivery

obligations in the secondary market.

Because VIPER Shares will be exchangelisted, 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.

14. Investors also 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 (a)(2) of the Act

15. Sections 17(a)(1) and (a)(2) of the

Act generally prohibit an affiliated

person of a registered investment

company, or an affiliated person of such

person, from selling any security to or

purchasing any security from the

company. Section 2(a)(3)(A) of the Act

defines ‘‘affiliated person’’ as any

person owning five percent or more of

an issuer’s outstanding voting securities.

Applicants state that large institutional

investors may be affiliated persons of a

Fund under section 2(a)(3)(A) and,

because purchases and redemptions of

Creation Units would be ‘‘in-kind’’

transactions, those investors would be

precluded by sections 17(a)(1) and (a)(2)

from purchasing or redeeming Creation

Units from the Fund. Applicants

accordingly request an exemption under

sections 6(c) and 17(b) of the Act to

permit these affiliated persons to

61010 Federal Register / Vol. 65, No. 199 / Friday, October 13, 2000 / Notices

purchase and redeem Creation Units

from the Fund.

16. Section 17(b) 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 and the general provisions 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, 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 portfolio of Index Trust other

than the Funds will issue a class of

VIPER Shares unless applicants have

requested and received with respect to

such portfolio either exemptive relief

from the Commission or a no-action

letter from the Division of Investment

Management of the Commission.

2. The VIPER Shares 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 that 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 Shares

Prospectus of each Fund will

prominently disclose that VIPER Shares

are not individually redeemable and

will disclose that holders of VIPER

Shares may acquire those shares from

the Fund and tender those shares for

redemption to the Fund in Creation Unit

aggregations only. Any advertised

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 those shares from

the Fund and tender those shares for

redemption to the Fund in Creation Unit

aggregations only.

5. Before a Fund may rely on the

order, the Commission will have

approved, pursuant to rule 19b–4 under

the Securities Exchange Act of 1934, 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,

including a majority of trustees who are

not interested persons of Index Trust,

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. Index

Trust will preserve for a period of not

less than six years from 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

(i) record and preserve any investor

complaints or reports of confusion

concerning the Exchange Option that

are communicated to the Fund, VGI,

and/or VMC; and (ii) record data

tracking the number of investors that,

after VIPER Shares are offered, purchase

the Fund’s Conventional Shares and,

within 90 days, exchange those shares

for 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. Applicant’s website, which is and

will be publicly accessible at no charge,

will contain the following information,

on a per VIPER Share Basis, for each

Fund: (i) The prior business day’s NAV

and the closing market price, and a

calculation of the premium or discount

of the closing market price in relation to

the NAV; and (ii) 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

daily closing market price, 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: (i) the information listed in

condition 8(ii), (a) 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 (b) 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 (ii) 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 (a)

a VIPER Share based on NAV and

market price, and (b) the Fund’s Index.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 00–26380 Filed 10–12–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

Sunshine Act Meeting

Agency Meeting

Notice is hereby given, pursuant to

the provisions of the Government in the

Sunshine Act, Pub. L. 94–409, that the

Securities and Exchange Commission

will hold the following meeting during

the week of October 16, 2000.

A closed meeting will be held on

Tuesday, October 17, 2000 at 10:30 a.m.

Commissioners, Counsel to the

Commissioners, the Secretary to the

Commission, and recording secretaries

will attend the closed meeting. Certain

staff members who have an interest in

the matters may also be present.

The General Counsel of the

Commission, or his designee, has

certified that, in his opinion, one or

more of the exemptions set forth in 5

U.S.C. 552b(c)(4), (8), (9)(A) and (10)

and 17 CFR 200.402(a)(4), (8), (9)(A) and

(10), permit consideration for the

scheduled matters at the closed meeting.

The subject matters of the closed

meeting scheduled Tuesday, October 17,

2000 will be:

Institution and settlement of injunctive

actions; and