Vanguard Bond Index Funds, et al.; Notice of Application, 12227-12233 [E7-4721]
Download as PDF
<![CDATA[
12227
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
The proposed amendment to replace the
RCS DNB parameter limits in TS with
references to the COLR does not involve a
physical alteration of the plant, nor a change
or addition of a system function. The
proposed amendment does not involve
operation of any required SSCs in a manner
or configuration different from those
previously recognized or evaluated. No new
failure mechanisms will be introduced by the
proposed change.
Therefore, the proposed amendment does
not create the possibility of a new or different
kind of accident from any accident
previously evaluated.
Criterion 3: Does the Proposed Change
Involve a Significant Reduction in the Margin
of Safety?
Response: No.
The proposed amendment to replace the
RCS DNB parameter limits in TS with
references to the COLR will continue to
maintain the margin of safety. The DNB
parameter limits specified in the COLR will
be determined based on the safety analyses
of transients and accidents, performed using
the NRC-approved methodologies that show
that, with appropriate measurement
uncertainties of these parameters accounted
for, the acceptance criteria for each of the
analyzed transients are met. This provides
the same margin of safety as the limit values
currently specified in the TS. Any future
revisions to the safety analyses that require
prior NRC approval are identified per the 10
CFR 50.59 review process.
Therefore, the proposed amendment would
not involve a significant reduction in a
margin of safety.
Based on the staff’s review of the licensee’s
analysis, the staff concludes that the
proposed amendment presents no significant
hazards consideration under the standards
set forth in 10 CFR 50.92(c) and, accordingly,
a finding of ‘‘no significant hazards
consideration’’ is justified.
[Lit. face SIG]
Dated at Rockville, Maryland this lll
day of lll , 2007.
For The Nuclear Regulatory Commission.
Project Manager
Plant Licensing Branch [ ]
Division of Operating Reactor Licensing
Office of Nuclear Reactor Regulation
[FR Doc. E7–4752 Filed 3–14–07; 8:45 am]
BILLING CODE 7590–01–P
PENSION BENEFIT GUARANTY
CORPORATION
Required Interest Rate Assumption for
Determining Variable-Rate Premium for
Single-Employer Plans; Interest
Assumptions for Multiemployer Plan
Valuations Following Mass Withdrawal
Pension Benefit Guaranty
Corporation.
ACTION: Notice of interest rates and
assumptions.
rmajette on PROD1PC67 with NOTICES
AGENCY:
SUMMARY: This notice informs the public
of the interest rates and assumptions to
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
be used under certain Pension Benefit
Guaranty Corporation regulations. These
rates and assumptions are published
elsewhere (or can be derived from rates
published elsewhere), but are collected
and published in this notice for the
convenience of the public. Interest rates
are also published on the PBGC’s Web
site (https://www.pbgc.gov).
DATES: The required interest rate for
determining the variable-rate premium
under part 4006 applies to premium
payment years beginning in March
2007. The interest assumptions for
performing multiemployer plan
valuations following mass withdrawal
under part 4281 apply to valuation dates
occurring in April 2007.
FOR FURTHER INFORMATION CONTACT:
Catherine B. Klion, Manager, Regulatory
and Policy Division, Legislative and
Regulatory Department, Pension Benefit
Guaranty Corporation, 1200 K Street,
NW., Washington, DC 20005, 202–326–
4024. (TTY/TDD users may call the
Federal relay service toll-free at 1–800–
877–8339 and ask to be connected to
202–326–4024.)
SUPPLEMENTARY INFORMATION:
Variable-Rate Premiums
Section 4006(a)(3)(E)(iii)(II) of the
Employee Retirement Income Security
Act of 1974 (ERISA) and § 4006.4(b)(1)
of the PBGC’s regulation on Premium
Rates (29 CFR part 4006) prescribe use
of an assumed interest rate (the
‘‘required interest rate’’) in determining
a single-employer plan’s variable-rate
premium. Pursuant to the Pension
Protection Act of 2006, for premium
payment years beginning in 2006 or
2007, the required interest rate is the
‘‘applicable percentage’’ of the annual
rate of interest determined by the
Secretary of the Treasury on amounts
invested conservatively in long-term
investment grade corporate bonds for
the month preceding the beginning of
the plan year for which premiums are
being paid (the ‘‘premium payment
year’’).
On February 2, 2007 (at 72 FR 4955),
the Internal Revenue Service (IRS)
published final regulations containing
updated mortality tables for determining
current liability under section 412(l)(7)
of the Code and section 302(d)(7) of
ERISA for plan years beginning on or
after January 1, 2007. As a result, in
accordance with section
4006(a)(3)(E)(iii)(II) of ERISA, the
‘‘applicable percentage’’ to be used in
determining the required interest rate
for plan years beginning in 2007 is 100
percent.
The required interest rate to be used
in determining variable-rate premiums
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
for premium payment years beginning
in March 2007 is 5.85 percent (i.e., 100
percent of the 5.85 percent composite
corporate bond rate for February 2007 as
determined by the Treasury).
The following table lists the required
interest rates to be used in determining
variable-rate premiums for premium
payment years beginning between April
2006 and March 2007.
For premium payment years
beginning in:
The required
interest rate is:
April 2006 .............................
May 2006 ..............................
June 2006 .............................
July 2006 ..............................
August 2006 .........................
September 2006 ...................
October 2006 ........................
November 2006 ....................
December 2006 ....................
January 2007 ........................
February 2007 ......................
March 2007 ...........................
5.01
5.25
5.35
5.36
5.36
5.19
5.06
5.05
4.90
5.75
5.89
5.85
Multiemployer Plan Valuations
Following Mass Withdrawal
The PBGC’s regulation on Duties of
Plan Sponsor Following Mass
Withdrawal (29 CFR part 4281)
prescribes the use of interest
assumptions under the PBGC’s
regulation on Allocation of Assets in
Single-Employer Plans (29 CFR part
4044). The interest assumptions
applicable to valuation dates in April
2007 under part 4044 are contained in
an amendment to part 4044 published
elsewhere in today’s Federal Register.
Tables showing the assumptions
applicable to prior periods are codified
in appendix B to 29 CFR part 4044.
Issued in Washington, DC, on this 8th day
of March 2007.
Vincent K. Snowbarger,
Interim Director, Pension Benefit Guaranty
Corporation.
[FR Doc. E7–4679 Filed 3–14–07; 8:45 am]
BILLING CODE 7709–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–27750; 812–13336]
Vanguard Bond Index Funds, et al.;
Notice of Application
March 9, 2007.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application for an
order under section 6(c) of the
Investment Company Act of 1940 (the
‘‘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,
AGENCY:
E:\FR\FM\15MRN1.SGM
15MRN1
12228
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
and under sections 6(c) and 17(b) of the
Act for exemptions from sections
17(a)(1) and (2) of the Act.
Applicants
request an order that would permit the
following: (a) An open-end management
investment company, the series of
which consist of the component
securities of certain fixed income
securities indices, to issue a class of
shares (‘‘ETF Shares’’) that can be
purchased from the investment
company and redeemed only in large
aggregations (‘‘Creation Units’’); (b)
secondary market transactions in ETF
Shares to occur at negotiated prices on
a national securities exchange, as
defined in section 2(a)(26) of the Act
(‘‘Exchange’’); (c) dealers to sell ETF
Shares to purchasers in the secondary
market 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 series to deposit
securities into, and receive securities
from, the series in connection with the
purchase and redemption of Creation
Units.
APPLICANTS: Vanguard Bond Index
Funds (‘‘Trust’’), The Vanguard Group,
Inc. (‘‘VGI’’), and Vanguard Marketing
Corporation (‘‘VMC’’).
FILING DATES: The application was filed
on October 25, 2006 and amended on
January 23, 2007. Applicants have
agreed to file an amendment during the
notice period, the substance of which is
reflected in the notice.
HEARING OR NOTIFICATION OF HEARING: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the
Commission’s Secretary and serving
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on March 30, 2007, and
should be accompanied by proof of
service on applicants, in the form of an
affidavit, or for lawyers, a certificate of
service. Hearing requests should state
the nature of the writer’s interest, the
reason for the request, and the issues
contested. Persons who wish to be
notified of a hearing may request
notification by writing to the
Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F
Street, NE., Washington, DC 20549–
1090. Applicants, c/o Barry A.
Mendelson, The Vanguard Group, Inc.,
P.O. Box 2600, Valley Forge, PA 19482.
FOR FURTHER INFORMATION CONTACT:
Keith A. Gregory, Senior Counsel at
rmajette on PROD1PC67 with NOTICES
SUMMARY OF APPLICATION:
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
(202) 551–6815, or Michael W. Mundt,
Senior Special Counsel, at (202) 551–
6821 (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 Desk,
100 F Street, NE., Washington, DC
20549–0102, telephone (202) 551–5850.
Applicants’ Representations
1. The Trust is an open-end
management investment company
registered under the Act and organized
as a Delaware statutory trust. The Trust
currently has four series (‘‘Existing
Funds’’). Each Existing Fund currently
offers separate classes of shares for retail
and institutional investors (such classes
of shares collectively, ‘‘Conventional
Shares’’). In the future, the Trust or
another registered open-end
management investment company may
offer other series (‘‘Future Funds,’’ and
together with Existing Funds, ‘‘Funds’’).
Any Future Fund will: (a) Be advised by
VGI or an entity controlled by or under
common control with VGI and (b)
comply with the terms and conditions
of any order granted pursuant to the
application.
2. VGI is a Pennsylvania corporation
that is wholly and jointly owned by 35
investment companies and the series of
those investment companies (each
series, a ‘‘Vanguard Fund’’ and
collectively, the ‘‘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 with
corporate management, administrative,
and transfer agency services at cost. VGI
also provides advisory services at cost to
certain Vanguard Funds, including each
of the Existing Funds. VMC, a wholly
owned subsidiary of VGI, is registered
as a broker-dealer under the Exchange
Act. VMC provides all distribution and
marketing services to the Vanguard
Funds, including each of the Existing
Funds.
3. Each Existing Fund seeks to track
as closely as possible the performance of
a different index that measures the
performance of the bond market as a
whole or a discrete segment of the bond
market (the ‘‘Target Indexes’’).1 The
1 The Target Indexes are Lehman Brothers
Aggregate Bond Index ‘‘Lehman Agg. Index’’),
Lehman Brothers 1–5 Year Government/Credit
Index, Lehman Brothers 5–10 Year Government/
Credit Index and Lehman Brothers Long
Government/Credit Index.
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
bond holdings of each Existing Fund are
selected through a sampling process and
at least 80% (and in most cases more
than 90%) of an Existing Fund’s assets
will be invested in bonds included in
the Existing Fund’s Target Index.2 The
remainder is typically invested in bonds
that are not included in the Existing
Fund’s Target Index, cash and cash
equivalents, futures, and swap
contracts. Unlike the other three
Existing Funds, the Vanguard Total
Bond Market Index Fund (‘‘Total Bond
Market Index Fund’’) holds government
mortgage-backed securities (‘‘MBS’’),
asset backed securities (‘‘ABS’’), and
commercial mortgage-backed securities
(‘‘CMBS’’).3 The Total Bond Market
Index Fund seeks to track that portion
of the Lehman Agg. Index devoted to
MBS by investing a corresponding
percentage of its assets either in MBS
included in the index or in ‘‘to-beannounced’’ (‘‘TBA’’) transactions on
MBS.4
4. Applicants state that, historically,
the difference between the performance
of an Existing Fund and the
performance of its Target Index has
rarely exceeded one percentage point
and in almost all cases has been
significantly less than one percentage
point. Applicants expect that, in the
future, both the Existing Funds and
Future Funds will track their Target
Indexes with the same degree of
precision, and will have a tracking error
of less than 5% per annum. No entity
that creates, compiles, sponsors, or
maintains a Target Index is or will be an
affiliated person, as defined in section
2(a)(3) of the Act, or an affiliated person
of an affiliated person, of the Funds,
VGI, any adviser to or promoter of a
Fund, or VMC.
5. Each Fund proposes to create ETF
Shares, a class of shares that would be
listed on an Exchange and trade in the
secondary market at negotiated prices.
Applicants submit that the availability
of ETF Shares would satisfy market
2 Each Fund invests in a representative sample of
bonds from its Target Index that will resemble the
full index in terms of characteristics such as
maturity, credit quality, issuer type and yield.
3 The Total Bond Market Index Fund will hold
MBS, ABS, and CMBS in approxiamtely the same
percentages as those securities are represented in
the Lehman Agg. Index. ABS and CMBS will not
be among the Deposit Securities required to
purchase a Creation Unit or among the Redemption
Securities an investor will receive when redeeming
a Creation Unit.
4 A ‘‘TBA transaction’’ is essentially a purchase
or sale of an MBS for future settlement at an agreedupon date. Applicants state that most MBS trades
are executed as TBA transactions. Applicants state
that TBA transactions increase the liquidity and
pricing efficiency of transactions in MBS because
they permit similar MBS to be traded
interchangeably pursuant to commonly observed
settlement and delivery requirements.
E:\FR\FM\15MRN1.SGM
15MRN1
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
rmajette on PROD1PC67 with NOTICES
demand for investment company
securities which would provide intraday liquidity and low cost exposure to
an index of bonds. Applicants state that,
by creating an exchange-traded class of
shares, the Funds will offer short-term
investors an attractive means of
investing in the Funds.5 Applicants
state that offering ETF Shares will
benefit the Funds by reducing the
portfolio disruption and transaction
costs caused by short-term investors.
6. The Funds will issue ETF Shares
only in Creation Units, aggregations of
a specified number of shares ranging
from 50,000 to 100,000 shares. The price
of a Creation Unit will range from
$1,500,000 to $10,000,000. Orders to
purchase Creation Units must be placed
with VMC by or through an ‘‘Authorized
Participant,’’ which is a Depository
Trust Company (‘‘DTC’’) participant that
has executed a participant agreement
with VMC. Creation Units will be issued
in exchange for an in-kind deposit of
securities and cash (‘‘Creation
Deposit’’).6 The Creation Deposit will
consist of a basket of approximately 50
to 100 fixed income securities selected
by VGI (‘‘Deposit Securities’’) 7 and a
cash payment to equalize any difference
between the total aggregate market value
of the Deposit Securities and the NAV
per Creation Unit of the Fund
(‘‘Purchase Balancing Amount’’).8 An
5 Applicants expect ETF Shares to appeal to
short-term investors because they can be bought
and sold continuously throughout the day at market
price rather than at net asset value (‘‘NAV’’), which
is calculated only once per day at the close of
trading on the New York Stock Exchange (‘‘NYSE’’).
Transactions in Conventional Shares will continue
to be priced at NAV.
6 On each business day, prior to the opening of
trading on the Exchange, VGI will make available
through the National Securities Clearing
Corporation (‘‘NSCC’’) (or through some other party
if NSCC is unwilling or unable to perform this
function) the list of the names and the required
amount of each Deposit Security to be included in
the Creation Deposit for each Fund. Each Fund
reserves the right to permit or require the purchaser
of a Creation Unit to substitute cash or a different
security to replace a Deposit Security under certain
circumstances.
7 Applicants state that it would be impractical to
ask an Authorized Participant to assemble a basket
of several hundred or several thousand bonds that
replicate the portfolio of a Fund. Accordingly, VGI
will select a subset of the Fund’s portfolio using a
representative sampling strategy.
8 The Funds must comply with the federal
securities laws in accepting Deposit Securities and
satisfying redemptions with Redemption Securities
(as defined below), including that the Deposit
Securities and Redemption Securities are sold in
transactions that would be exempt from registration
under the Securities Act. If at any time in the future
the Funds accept Deposit Securities or satisfy
redemptions with Redemption Securities that are
restricted securities eligible for resale pursuant to
rule 144A under the Securities Act, the Funds will
comply with the conditions of rule 144A, including
in satisfying redemptions with such rule 144A
eligible restricted Redemption Securities. The
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
investor purchasing a Creation Unit
from a Fund will be charged a fee
(‘‘Transaction Fee’’) to prevent any
dilution of the interests of remaining
shareholders due to the Fund incurring
costs in connection with the investor’s
purchase of the Creation Unit(s).9 Each
purchaser of a Creation Unit will receive
a prospectus for the ETF Shares (the
‘‘ETF Prospectus’’) that discloses the
maximum Transaction Fee, and the
method of calculating Transaction Fees
will be disclosed in the Fund’s
Statement of Additional Information
(‘‘SAI’’). A Fund’s Conventional Shares
will be covered by a separate prospectus
(the ‘‘Conventional Prospectus’’).
7. The Funds will accept purchase
orders only on days that the NYSE is
open for business. Purchase orders must
be received by VMC prior to the closing
time of the regular trading session of the
NYSE. VMC will transmit all purchase
orders to the Funds, maintain a record
of each Creation Unit purchaser, and
send out an ETF Prospectus and
confirmation to such purchasers.
8. The purchaser of a Creation Unit
will be able to separate the Creation
Unit into individual ETF Shares.10 ETF
Shares will be listed on an Exchange
and traded in the secondary market in
the same manner as shares of other
exchange-traded funds. One or more
Exchange specialists (‘‘Specialists’’) will
be assigned to make a market in the ETF
prospectus for the Funds will state that ‘‘An
Authorized Participant that is not a ‘qualified
institutional buyer’ as defined in rule 144A under
the Securities Act of 1933 will not be able to
receive, as part of the redemption basket, restricted
securities eligible for resale under rule 144A.’’
9 When a Fund permits an investor to substitute
cash for a Deposit Security, the investor may be
assessed a higher Transaction Fee to offset the
increased cost to the Fund of buying the necessary
Deposit Security for its portfolio.
10 Applicants state that persons purchasing
Creation Units will be cautioned in the ETF
Prospectus that some activities on their part may,
depending on the circumstances, result in their
being deemed a statutory underwriter and subject
them to the prospectus delivery and liability
provisions of the Securities Act. For example, a
broker-dealer firm and/or its client may be deemed
a statutory underwriter if it purchases Creation
Units from a Fund, breaks them down into the
constituent ETF Shares, and sells ETF Shares
directly to its customers, or if it chooses to couple
the purchase of a supply of new ETF Shares with
an active selling effort involving solicitation of
secondary market demand for ETF Shares. The ETF
Prospectus will state that whether a person is an
underwriter depends on all the facts and
circumstances pertaining to that person’s activities.
The ETF Prospectus also will state that brokerdealer firms should note that dealers who are not
‘‘underwriters’’ but are participating in a
distribution (as contrasted to an ordinary secondary
trading transaction), and thus dealing with ETF
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.
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
12229
Shares. The price of ETF Shares traded
on an Exchange will be based on a
current bid/offer market, and each ETF
Share is expected to have an initial
market value of between $30 and $100.
Transactions involving the sale of ETF
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.
A Specialist, in providing for a fair and
orderly secondary market for ETF
Shares, also may purchase Creation
Units for use in its market making
activities on the Exchange. Applicants
expect that secondary market
purchasers of ETF Shares will include
both institutional and retail investors.11
Applicants believe that arbitrageurs will
purchase or redeem Creation Units to
take advantage of discrepancies between
the ETF Shares’ market price and the
ETF Shares’ 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 ETF Shares trade and their
NAV. Applicants do not expect ETF
Shares to trade at a significant premium
or discount to their NAV.12
10. Applicants will make available an
ETF Shares product description
(‘‘Product Description’’) for distribution
in accordance with an Exchange rule
requiring Exchange members and
member organizations effecting
transactions in ETF Shares to deliver a
Product Description to investors
purchasing ETF Shares, whether on or
away from the Exchange. Applicants
state that any other Exchange that
applies for unlisted trading privileges in
ETF Shares will have to adopt a similar
rule, requiring delivery of the Product
Description. The Product Description
will provide a plain English overview of
a Fund, including its investment
objective and investment strategies, the
identity of VGI, the material risks of
investing in the Fund, and the
frequency of dividends and capital gains
distributions. The Product Description
also will provide a brief, plain English
11 ETF Shares will be registered in book-entry
form only. DTC or its nominee will be the registered
owner of all outstanding ETF Shares. Records
reflecting the beneficial owners of ETF Shares will
be maintained by DTC or its participants.
12 Every 15 seconds throughout the trading day,
the Exchange will disseminate via the facilities of
the Consolidated Tape Association the market value
of an ETF Share and, separate from the consolidated
tape, the Exchange or another information provider
will disseminate a calculation of the approximate
NAV of an ETF Share. Applicants state that an
investor comparing the two figures will be able to
determine whether, and to what extent, ETF Shares
are selling at a premium or discount to NAV.
E:\FR\FM\15MRN1.SGM
15MRN1
12230
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
rmajette on PROD1PC67 with NOTICES
description of the salient features of ETF
Shares. The Product Description will
advise investors that an ETF Prospectus
and SAI may be obtained, without
charge, from the investor’s broker or
from VMC. The Product Description
also will identify a Web site address
where investors can obtain information
about the composition and compilation
methodology of the Target Index.
Applicants expect that the number of
purchases of ETF Shares in which an
investor will not receive a Product
Description will not constitute a
significant portion of the market activity
in ETF Shares.
11. Except in connection with the
liquidation of a Fund (or of a Fund’s
ETF Share class), ETF Shares will only
be redeemable in Creation Units through
each Fund. An investor redeeming a
Creation Unit generally will receive (a)
A basket of securities (‘‘Redemption
Securities’’), which in most cases will
be the same as the Deposit Securities
required of investors purchasing
Creation Units on the same day, and (b)
a cash amount equal to the difference in
the value of the Redemption Securities
and the NAV of a Creation Unit, which
in most cases will be the same as the
Purchase Balancing Amount paid (or
received) by investors purchasing
Creation Units on the same day. A Fund
may make redemptions partly in cash in
lieu of transferring one or more
Redemption Securities to a redeeming
investor, if the Fund determines that
such alternative is warranted. A Fund
may make such a determination if, for
example, a redeeming investor is
unable, by law or policy, from owning
a particular Redemption Security. In
order to cover the Fund’s transaction
costs, redeeming investors will pay a
Transaction Fee.13
Applicants’ Legal Analysis
1. Applicants request an order under
section 6(c) of the 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.
2. 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 or
provisions of the Act, or any rule or
regulation thereunder, 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
13 Investors who redeem for cash, rather than in
kind, may pay a higher Transaction Fee.
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
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
‘‘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) to
permit ETF Shares to be redeemed in
Creation Units only. Applicants note
that because of the arbitrage possibilities
created by the redeemability of Creation
Units, it is expected that the market
price of an ETF Share will not vary
much from its NAV.
Section 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) 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 permits an open-end fund to issue
multiple classes of shares representing
interests in the same portfolio without
seeking exemptive relief from section
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 (a) Each class
have the same rights and obligations as
each other class (other than the
differences allowed by the rule), and (b)
if a class has a different distribution
arrangement, the class must pay all of
the expenses of the arrangement.
Because applicants, therefore, may not
rely on rule 18f–3, they request an
exemption under section 6(c) from
sections 18(f)(1) and 18(i).
5. Applicants state that there are four
ways in which the Conventional Shares
and ETF Shares of each Fund will have
different rights: (a) Conventional Shares
are individually redeemable, while ETF
Shares will be redeemable in Creation
Units only; (b) ETF Shares will be
traded on an Exchange, while
Conventional Shares will not; (c)
Conventional Shares declare dividends
daily, while ETF Shares will declare
dividends monthly; and (d) although all
shares classes of a Fund will pay
dividends monthly, the payment date
for the Conventional Shares will be the
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
same as the ex dividend date (‘‘ex
date’’), while the payment date for the
ETF Share will be four days or more
after the ex date. Applicants assert that
different trading and redemption rights
are necessary if their proposal is to have
the desired benefits. Applicants note
that a Fund’s ETF Shares will be
tradable on an Exchange and
redeemable only in large aggregations in
order to encourage short-term investors
to conduct their trading activities in a
way that does not disrupt the
management of the Fund’s portfolio.
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 ETF Shares
individually redeemable.
6. Applicants state the proposal to
declare dividends to the ETF Share class
on a monthly basis, as opposed to on a
daily basis for the Conventional Share
class, will result in a higher net asset
value (‘‘NAV’’) for the ETF Share class
during a monthly period due to the
presence of accrued but undistributed
income.14 Applicants submit that absent
adjustment, this difference would result
in a disproportionate allocation of a
fund’s income, realized capital gains
and losses, and unrealized appreciation
and depreciation (‘‘Allocable Items’’) to
the ETF Shares relative to the
Conventional Shares because such items
are allocated among a fund’s classes
based upon relative net assets.
Applicants intend to eliminate this
potential inequality by allocating the
Allocable Items on the basis of classlevel net assets adjusted to factor out the
differences introduced by the
application of the different dividend
policies (‘‘Asset Adjustment’’).
Applicants submit that the use of the
Asset Adjustment will ensure that the
daily allocation of Allocable Items to
ETF Shares and Conventional Shares is
not distorted by the classes’ differing
dividend policies.15 Applicants state
14 When dividends are declared monthly, as
opposed to daily, each day’s accrued income is
reflected as an increase in the shares’ NAV. At the
end of the month, when dividends are declared, the
NAV drops by the amount of the dividend. By
contrast, when dividends are declared daily, the
amount of the daily income accrual is offset by a
corresponding distribution payable liability. As a
result, the net effect on the shares’ NAV typically
is zero.
15 Applicants will not rely on the requested order
until the board of trustees (‘‘Board’’) of each Fund
has formally determined that, after applying the
Asset Adjustment, the annualized rates of return of
the ETF and Conventional Share classes generally
will differ only by the expense differentials among
the classes, as required by rule 18f–3(c)(1)(v) under
the Act.
E:\FR\FM\15MRN1.SGM
15MRN1
rmajette on PROD1PC67 with NOTICES
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
that it is industry practice for bond ETFs
to declare dividends monthly.
7. Applicants state that the accrual of
dividends in the NAV of the ETF Shares
but not the Conventional Shares will
have an effect on the voting power of
the respective classes because the
shareholders of the Funds are given
voting rights proportionate to the NAV
of their shares. Applicants assert that
such effects on voting power will be
minor and that this treatment of voting
rights meets the standards of section
18(i) because every share issued by the
Funds will have equal voting rights in
that each share will be entitled to one
vote per dollar of NAV and a fractional
vote per fractional dollar of NAV.
8. Applicants state that although
Conventional Shares and ETF Shares
both pay dividends monthly, another
difference between the classes is that
the holders of Conventional Shares are
able to reinvest dividends immediately
when paid, while the ETF Shareholders
would have to wait a few days to receive
their payments through their brokers. As
a result, holders of Conventional Shares
of the Funds who reinvest will be
continuously invested, while ETF
Shareholders who reinvest will be ‘‘out
of the market’’ for four days with respect
to the amount of the dividend.16
Applicants state that the four day
difference will affect the relative
performance of the classes because
during the time the dividend is out of
the market, ETF Shareholders will not
receive income or experience
appreciation or depreciation on the
amount of the dividend. Applicants do
not expect this economic difference to
be significant.
9. Applicants assert that the different
rights do not implicate the concerns
underlying section 18 of the Act,
including excessive leverage, 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
Conventional Shares and ETF Shares.
Applicants state that the ETF Shares
will not be marketed as a mutual fund
investment. Marketing materials may
refer to ETF 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 ETF Shares
with the shares of a conventional openend management investment company.
Any marketing or advertising materials
16 Applicants assert that the delay between the ex
date and the payment/reinvestment date occurs for
all ETFs, whether they are stand-alone ETFs or part
of a multi-class structure, and regardless of whether
an ETF Shareholder elects to reinvest dividends.
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
addressed primarily to prospective
investors will emphasize that (a) ETF
Shares are not redeemable from a Fund
other than in Creation Units, (b) ETF
Shares, other than in Creation Units,
may be sold only through a broker, and
the shareholder may have to pay
brokerage commissions in connection
with the sale, and (c) a selling
shareholder may receive less than NAV
in connection with the sale of ETF
Shares. The same type of disclosure will
be provided in the Conventional
Prospectus, ETF Prospectus, Product
Description, SAI, and any document
addressed primarily to prospective
investors. The prospectus for the Fund’s
Conventional Shares will disclose that
dividends are declared daily and paid
monthly. The prospectus and Product
Description for the ETF Shares will
disclose that dividends are declared
monthly and paid monthly and that the
reinvestment of dividends (if elected),
will not occur until approximately four
days after the ex date. The applicants
also note that (a) All references to a
Fund’s exchange-traded class of shares
will use a form of the name ‘‘ETF
Shares’’ rather than the Fund name, (b)
the cover and summary page of the ETF
Prospectus will state that the ETF
Shares are listed on an Exchange and
are not individually redeemable, (c)
VMC will only market Conventional
Shares and ETF Shares in the same
advertisement or marketing material
when the advertisement or marketing
material contains appropriate disclosure
explaining the relevant features of each
class of shares and highlighting the
differences between the share classes,
and (d) applicants have prepared
educational materials describing the
ETF Shares.
10. Applicants currently allocate
distribution expenses among 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 distribution
services (‘‘1981 Order’’).17 For those
funds in the Vanguard Fund Complex
17 Investment Company Act Release No. 11645
(Feb. 25, 1981) (Opinion of the Commission and
Final Order). Under the formula, each Vanguard
Fund’s contribution is based 50% on its 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 its 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 Vanguard 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.
PO 00000
Frm 00068
Fmt 4703
Sfmt 4703
12231
offering multiple classes of shares,
applicants apply the formula in the
1981 Order by treating each class as a
separate fund (‘‘Multi-Class Distribution
Formula’’).
11. Applicants propose to apply the
Multi-Class Distribution Formula to
each Fund’s class of ETF Shares.
Applicants acknowledge that, because
ETF Shares may have a distribution
arrangement that differs from that for
Conventional Shares, the proposed
allocation method is inconsistent with
rule 18f–3. Applicants contend,
however, that the Multi-Class
Distribution Formula is a fundamental
feature of Vanguard’s unique, internallymanaged structure, and that the
proposed allocation method is
consistent with the method approved by
the Commission in the 1981 Order. The
Multi-Class Distribution Formula has
been approved by the Board of each
Fund, and the Board of each Fund,
including a majority of the trustees who
are not interested persons, as defined in
section 2(a)(19) of the Act
(‘‘Disinterested Trustees’’), will review
the application of the Multi-Class
Distribution Formula on an annual basis
and determine that the proposed
allocation is in the best interests of each
class of shareholders and of the Fund as
a whole.
Section 22(d) of the Act and Rule 22c–
1 Under the Act
12. Section 22(d), 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 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 ETF Shares will take place at
negotiated prices, not at a current
offering price described in the ETF
Prospectus, and not at a price based on
NAV. Thus, purchases and sales of ETF
Shares in the secondary market will not
comply with section 22(d) and rule 22c–
1. Accordingly, applicants request
exemptions from these provisions under
section 6(c) of the Act.
13. Applicants assert that the sale of
ETF 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 (a) Prevent dilution caused
by certain riskless trading schemes by
E:\FR\FM\15MRN1.SGM
15MRN1
12232
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
principal underwriters and contract
dealers, (b) prevent unjust
discrimination or preferential treatment
among buyers resulting from sales at
different prices, and (c) ensure 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 ETF 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 ETF Shares
would not lead to discrimination or
preferential treatment among purchasers
because, to the extent that 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, among other things,
arbitrage activity will ensure that the
difference between the market price of
ETF Shares and their NAV remains
narrow.
rmajette on PROD1PC67 with NOTICES
Section 24(d) of the Act
14. Section 24(d) 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
transactions 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 ETF Shares to rely on the
prospectus delivery exemption provided
by section 4(3) of the Securities Act.18
15. Applicants state that ETF 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. Applicants
contend that ETF Shares, as a listed
security, merit similar treatment,
reducing compliance costs and
regulatory burdens that result from the
imposition of a prospectus delivery
requirement on secondary market
transactions. Applicants state that
because ETF Shares will be exchange18 Applicants do not seek relief from the
prospectus delivery requirement for non-secondary
market transactions, including purchases of
Creation Units or those involving an underwriter.
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
listed, prospective investors will have
access to several types of market
information about the ETF 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.
16. Applicants further state that
investors that purchase ETF Shares in
the secondary market will receive a
Product Description, describing the
Fund and its ETF Shares. Applicants
state that, while not intended as a
substitute for a prospectus, the Product
Description will contain information
about ETF Shares that is tailored to meet
the needs of investors purchasing ETF
Shares in the secondary market.
Sections 17(a)(1) and (2) of the Act
17. Sections 17(a)(1) and (2) generally
prohibit an affiliated person of a
registered investment company, or an
affiliated person of an affiliated person,
acting as principal, from selling any
security to, or purchasing any security
from, the company. Sections 2(a)(3)(A)
and (C) of the Act define ‘‘affiliated
person,’’ respectively, as any person
who owns 5% or more of an issuer’s
outstanding voting securities and any
person who controls the fund. Section
2(a)(9) of the Act provides that a control
relationship will be presumed where
one person owns 25% or more of
another person’s voting securities.
Applicants state that a large
institutional investor or the Specialist
could own 5% or more, or more than
25%, of a Fund’s outstanding voting
securities and, as a result, be deemed to
be an affiliated person of the Fund
under section 2(a)(3)(A) or (C).
Applicants further state that, because
purchases and redemptions of Creation
Units would be in-kind, rather than for
cash, those investors would be
precluded by sections 17(a)(1) and (2)
from purchasing or redeeming Creation
Units from the Fund. Accordingly,
applicants request an exemption under
sections 6(c) and 17(b) of the Act to
permit these affiliated persons, and
affiliated persons of such affiliated
persons who are not otherwise affiliated
with the Fund, to purchase and redeem
Creation Units through in-kind
transactions.
18. Section 17(b) of the Act 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
PO 00000
Frm 00069
Fmt 4703
Sfmt 4703
reasonable and fair and do not involve
overreaching, and the proposed
transaction is consistent with the
policies of the registered investment
company involved and the general
purposes 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 and 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. The ETF Shares Prospectus and the
Product Description for each Fund will
clearly disclose that, for purposes of the
Act, ETF Shares are issued by the Fund
and the acquisition of ETF Shares by
investment companies is subject to the
restrictions of section 12(d)(1) of the
Act, except as permitted by an
exemptive order that permits registered
investment companies to invest in a
Fund beyond the limits of section
12(d)(1), subject to certain terms and
conditions.
2. As long as a Fund operates in
reliance on the requested order, the ETF
Shares will be listed on an Exchange.
3. The ETF Shares of a Fund will not
be advertised or marketed as shares of
an open-end investment company or
mutual fund. The ETF Shares
Prospectus of each Fund will
prominently disclose that ETF Shares
are not individually redeemable and
will disclose that holders of ETF Shares
may acquire the shares from the Fund
and tender the shares for redemption to
the Fund in Creation Unit aggregations
only. Any advertising material that
describes the purchase or sale of
Creation Units or refers to redeemability
will prominently disclose that ETF
Shares are not individually redeemable
and that holders of ETF Shares may
acquire the shares from the Fund and
tender the shares for redemption to the
Fund in Creation Unit aggregations
only.
E:\FR\FM\15MRN1.SGM
15MRN1
rmajette on PROD1PC67 with NOTICES
Federal Register / Vol. 72, No. 50 / Thursday, March 15, 2007 / Notices
4. Before a Fund may rely on the
order, the Commission will have
approved, pursuant to rule 19b–4 under
the Exchange Act, an Exchange rule
requiring Exchange members and
member organizations effecting
transactions in ETF Shares to deliver a
Product Description to purchasers of
ETF Shares.
5. On an annual basis the Board of
each Fund, including a majority of
Disinterested Trustees, must determine,
for each Fund, that the allocation of
distribution expenses among the classes
of Conventional Shares and ETF Shares
in accordance with the Multi-Class
Distribution Formula is in the best
interests of each class and of the Fund
as a whole. Each Fund 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.
6. Applicants’ Web site, which is and
will be publicly accessible at no charge,
will contain the following information,
on a per ETF Share basis, for each Fund:
(a) The prior business day’s closing
NAV and the midpoint of the bid-asked
spread at the time the Fund’s NAV is
calculated (‘‘Bid-Asked Price’’) and a
calculation of the premium or discount
of the Bid-Asked Price in relation to the
closing NAV; and (b) data for a period
covering at least the four previous
calendar quarters (or the life of a Fund,
if shorter) indicating how frequently
each Fund’s ETF Shares traded at a
premium or discount to NAV based on
the Bid-Asked Price and closing NAV,
and the magnitude of such premiums
and discounts. In addition, the Product
Description for each Fund will state that
applicants’ Web site has information
about the premiums and discounts at
which the Fund’s ETF Shares have
traded.
7. The ETF Shares Prospectus and
annual report will include, for each
Fund: (a) The information listed in
condition 6(b), (i) In the case of the ETF
Shares Prospectus, for the most recently
completed calendar year (and the most
recently completed quarter or quarters,
as applicable), and (ii) in the case of the
annual report, for no less than the
immediately preceding five fiscal years
(or the life of the Fund, if shorter); and
(b) the cumulative total return and the
average annual total return for one, five
and ten year periods (or the life of the
Fund, if shorter) of (i) an ETF Share
based on NAV and the Bid-Asked Price
and (ii) the Fund’s Target Index.
VerDate Aug<31>2005
14:20 Mar 14, 2007
Jkt 211001
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–4721 Filed 3–14–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55437; File No. SR–Amex–
2006–118]
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing of Amendment Nos. 2 and 3
to Proposed Rule Change Relating to
Generic Listing Standards for Series of
Portfolio Depositary Receipts and
Index Fund Shares Based on Fixed
Income Indexes and Accelerated
Approval of Proposed Rule Change as
Amended
March 9, 2007.
I. Introduction
On December 22, 2006, the American
Stock Exchange LLC (‘‘Amex’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
relating to generic listing standards for
series of portfolio depositary receipts
(‘‘PDRs’’) and index fund shares
(‘‘IFSs’’), together referred to as
‘‘exchange-traded funds’’ (‘‘ETFs’’),
based on fixed income indexes. On
January 26, 2007, the Exchange filed
Amendment No. 1. The proposed rule
change, as amended, was published for
comment in the Federal Register on
February 7, 2007 for a 15-day comment
period.3 The Commission received no
comments on the proposal. On March 2,
2007, Amex filed Amendment No. 2 to
the proposed rule change 4 and on
March 7, 2007, Amex filed Amendment
No. 3 to the proposed rule change.5 This
1 15
U.S.C. 78s(b)(l).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 55213
(January 31, 2007), 72 FR 5768 (‘‘Notice’’).
4 In Amendment No. 2, the Exchange (1) Updated
its proposal to reflect the migration of ETF shares
from Amex’s legacy platform to the AEMI platform
and (2) represented that an ETF based on a fixed
income index or combination index would be
covered under the Exchange’s existing surveillance
program for ETFs and that all products listed under
the proposed generic listing standards would be
subject to the full panoply of Amex rules and
procedures that now govern the trading of ETFs on
Amex.
5 In Amendment No. 3, the Exchange revised
proposed Commentary .06(g) to Rule 1000–AEMI
and proposed Commentary .05(g) to Rule 1000A–
2 17
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
12233
order provides notice of the proposed
rule change as modified by
Amendments No. 1, 2, and 3 and
approves the proposed rule change as
amended on an accelerated basis.
II. Description of the Proposal
The Exchange proposes to revise
Amex Rules 1000–AEMI and 1000A–
AEMI to include generic listing
standards to permit the listing and
trading of ETFs that are based on
indexes or portfolios consisting of fixed
income securities (‘‘Fixed Income
Indexes’’) or both fixed income and
equity securities (‘‘Combination
Indexes’’) pursuant to Rule 19b–4(e)
under the Act.6 Specifically, the
Exchange proposes to add
Commentaries .04, .05, and .06 to Amex
Rule 1000–AEMI and Commentaries .03,
.04, and .05 to Amex Rule 1000A–AEMI
and to revise the definitions of PDR and
IFS, in Amex Rules 1000–AEMI(b)(1)
and 1000A–AEMI(b)(1), respectively, to
include ETFs based on Fixed Income
Indexes and Combination Indexes.
The proposed rule change will enable
the Exchange to list and trade an ETF
pursuant to Rule 19b–4(e) under the Act
without a rule filing if each of the
conditions set forth in either
Commentaries .04 and .05 to Rule 1000–
AEMI or Commentaries .03 and .04 to
Rule 1000A–AEMI, as applicable, is
satisfied. The proposed listing standards
will apply to certain Fixed Income
Indexes and Combination Indexes that
the Commission has yet to review, as
well as those Fixed Income Indexes
described in exchange rules that have
previously been approved by the
Commission under Section 19(b)(2) of
the Act 7 for the trading of ETFs,
options, or other index-based
securities.8
A. Generic Listing Standards
Rule 19b–4(e) under the Act provides
that the listing and trading of a new
derivative securities product by a selfAEMI to clarify that Rule 1000–AEMI and Rules
1001 through 1006 as well as Rule 1000A–AEMI
and Rules 1001A through 1005A apply to the listing
and trading of fixed income and combination index
ETFs.
6 17 CFR 240.19b–4(e).
7 15 U.S.C. 78s(b)(2).
8 See proposed Commentary .04 to Amex Rule
1000–AEMI and Commentary .03 to Amex Rule
1000A–AEMI (permitting the Exchange to list and
trade an ETF pursuant to Rule 19b–4(e) provided
that the portfolio or index ‘‘has been reviewed and
approved for the trading of options, Portfolio
Depository Receipts, Index Fund Shares, IndexLinked Exchangeable Notes or Index-Linked
Securities by the Commission under Section
19(b)(2) of the Securities Exchange Act of 1934 and
rules thereunder and the conditions set forth in the
Commission’s approval order, continue to be
satisfied. * * *’’).
E:\FR\FM\15MRN1.SGM
15MRN1
]]>Agencies
[Federal Register Volume 72, Number 50 (Thursday, March 15, 2007)]
[Notices]
[Pages 12227-12233]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-4721]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-27750; 812-13336]
Vanguard Bond Index Funds, et al.; Notice of Application
March 9, 2007.
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 (the ``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,
[[Page 12228]]
and under sections 6(c) and 17(b) of the Act for exemptions from
sections 17(a)(1) and (2) of the Act.
-----------------------------------------------------------------------
Summary of Application: Applicants request an order that would permit
the following: (a) An open-end management investment company, the
series of which consist of the component securities of certain fixed
income securities indices, to issue a class of shares (``ETF Shares'')
that can be purchased from the investment company and redeemed only in
large aggregations (``Creation Units''); (b) secondary market
transactions in ETF Shares to occur at negotiated prices on a national
securities exchange, as defined in section 2(a)(26) of the Act
(``Exchange''); (c) dealers to sell ETF Shares to purchasers in the
secondary market 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 series to deposit securities
into, and receive securities from, the series in connection with the
purchase and redemption of Creation Units.
Applicants: Vanguard Bond Index Funds (``Trust''), The Vanguard Group,
Inc. (``VGI''), and Vanguard Marketing Corporation (``VMC'').
Filing Dates: The application was filed on October 25, 2006 and amended
on January 23, 2007. Applicants have agreed to file an amendment during
the notice period, the substance of which is reflected in the notice.
Hearing or Notification of Hearing: An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on March 30, 2007, and should be accompanied by proof of service
on applicants, in the form of an affidavit, or for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Applicants, c/o Barry A.
Mendelson, The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA
19482.
FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel at
(202) 551-6815, or Michael W. Mundt, Senior Special Counsel, at (202)
551-6821 (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 Desk, 100 F Street, NE., Washington, DC
20549-0102, telephone (202) 551-5850.
Applicants' Representations
1. The Trust is an open-end management investment company
registered under the Act and organized as a Delaware statutory trust.
The Trust currently has four series (``Existing Funds''). Each Existing
Fund currently offers separate classes of shares for retail and
institutional investors (such classes of shares collectively,
``Conventional Shares''). In the future, the Trust or another
registered open-end management investment company may offer other
series (``Future Funds,'' and together with Existing Funds, ``Funds'').
Any Future Fund will: (a) Be advised by VGI or an entity controlled by
or under common control with VGI and (b) comply with the terms and
conditions of any order granted pursuant to the application.
2. VGI is a Pennsylvania corporation that is wholly and jointly
owned by 35 investment companies and the series of those investment
companies (each series, a ``Vanguard Fund'' and collectively, the
``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 with corporate management, administrative, and
transfer agency services at cost. VGI also provides advisory services
at cost to certain Vanguard Funds, including each of the Existing
Funds. VMC, a wholly owned subsidiary of VGI, is registered as a
broker-dealer under the Exchange Act. VMC provides all distribution and
marketing services to the Vanguard Funds, including each of the
Existing Funds.
3. Each Existing Fund seeks to track as closely as possible the
performance of a different index that measures the performance of the
bond market as a whole or a discrete segment of the bond market (the
``Target Indexes'').\1\ The bond holdings of each Existing Fund are
selected through a sampling process and at least 80% (and in most cases
more than 90%) of an Existing Fund's assets will be invested in bonds
included in the Existing Fund's Target Index.\2\ The remainder is
typically invested in bonds that are not included in the Existing
Fund's Target Index, cash and cash equivalents, futures, and swap
contracts. Unlike the other three Existing Funds, the Vanguard Total
Bond Market Index Fund (``Total Bond Market Index Fund'') holds
government mortgage-backed securities (``MBS''), asset backed
securities (``ABS''), and commercial mortgage-backed securities
(``CMBS'').\3\ The Total Bond Market Index Fund seeks to track that
portion of the Lehman Agg. Index devoted to MBS by investing a
corresponding percentage of its assets either in MBS included in the
index or in ``to-be-announced'' (``TBA'') transactions on MBS.\4\
---------------------------------------------------------------------------
\1\ The Target Indexes are Lehman Brothers Aggregate Bond Index
``Lehman Agg. Index''), Lehman Brothers 1-5 Year Government/Credit
Index, Lehman Brothers 5-10 Year Government/Credit Index and Lehman
Brothers Long Government/Credit Index.
\2\ Each Fund invests in a representative sample of bonds from
its Target Index that will resemble the full index in terms of
characteristics such as maturity, credit quality, issuer type and
yield.
\3\ The Total Bond Market Index Fund will hold MBS, ABS, and
CMBS in approxiamtely the same percentages as those securities are
represented in the Lehman Agg. Index. ABS and CMBS will not be among
the Deposit Securities required to purchase a Creation Unit or among
the Redemption Securities an investor will receive when redeeming a
Creation Unit.
\4\ A ``TBA transaction'' is essentially a purchase or sale of
an MBS for future settlement at an agreed-upon date. Applicants
state that most MBS trades are executed as TBA transactions.
Applicants state that TBA transactions increase the liquidity and
pricing efficiency of transactions in MBS because they permit
similar MBS to be traded interchangeably pursuant to commonly
observed settlement and delivery requirements.
---------------------------------------------------------------------------
4. Applicants state that, historically, the difference between the
performance of an Existing Fund and the performance of its Target Index
has rarely exceeded one percentage point and in almost all cases has
been significantly less than one percentage point. Applicants expect
that, in the future, both the Existing Funds and Future Funds will
track their Target Indexes with the same degree of precision, and will
have a tracking error of less than 5% per annum. No entity that
creates, compiles, sponsors, or maintains a Target Index is or will be
an affiliated person, as defined in section 2(a)(3) of the Act, or an
affiliated person of an affiliated person, of the Funds, VGI, any
adviser to or promoter of a Fund, or VMC.
5. Each Fund proposes to create ETF Shares, a class of shares that
would be listed on an Exchange and trade in the secondary market at
negotiated prices. Applicants submit that the availability of ETF
Shares would satisfy market
[[Page 12229]]
demand for investment company securities which would provide intra-day
liquidity and low cost exposure to an index of bonds. Applicants state
that, by creating an exchange-traded class of shares, the Funds will
offer short-term investors an attractive means of investing in the
Funds.\5\ Applicants state that offering ETF Shares will benefit the
Funds by reducing the portfolio disruption and transaction costs caused
by short-term investors.
---------------------------------------------------------------------------
\5\ Applicants expect ETF Shares to appeal to short-term
investors because they can be bought and sold continuously
throughout the day at market price rather than at net asset value
(``NAV''), which is calculated only once per day at the close of
trading on the New York Stock Exchange (``NYSE''). Transactions in
Conventional Shares will continue to be priced at NAV.
---------------------------------------------------------------------------
6. The Funds will issue ETF Shares only in Creation Units,
aggregations of a specified number of shares ranging from 50,000 to
100,000 shares. The price of a Creation Unit will range from $1,500,000
to $10,000,000. Orders to purchase Creation Units must be placed with
VMC by or through an ``Authorized Participant,'' which is a Depository
Trust Company (``DTC'') participant that has executed a participant
agreement with VMC. Creation Units will be issued in exchange for an
in-kind deposit of securities and cash (``Creation Deposit'').\6\ The
Creation Deposit will consist of a basket of approximately 50 to 100
fixed income securities selected by VGI (``Deposit Securities'') \7\
and a cash payment to equalize any difference between the total
aggregate market value of the Deposit Securities and the NAV per
Creation Unit of the Fund (``Purchase Balancing Amount'').\8\ An
investor purchasing a Creation Unit from a Fund will be charged a fee
(``Transaction Fee'') to prevent any dilution of the interests of
remaining shareholders due to the Fund incurring costs in connection
with the investor's purchase of the Creation Unit(s).\9\ Each purchaser
of a Creation Unit will receive a prospectus for the ETF Shares (the
``ETF Prospectus'') that discloses the maximum Transaction Fee, and the
method of calculating Transaction Fees will be disclosed in the Fund's
Statement of Additional Information (``SAI''). A Fund's Conventional
Shares will be covered by a separate prospectus (the ``Conventional
Prospectus'').
---------------------------------------------------------------------------
\6\ On each business day, prior to the opening of trading on the
Exchange, VGI will make available through the National Securities
Clearing Corporation (``NSCC'') (or through some other party if NSCC
is unwilling or unable to perform this function) the list of the
names and the required amount of each Deposit Security to be
included in the Creation Deposit for each Fund. Each Fund reserves
the right to permit or require the purchaser of a Creation Unit to
substitute cash or a different security to replace a Deposit
Security under certain circumstances.
\7\ Applicants state that it would be impractical to ask an
Authorized Participant to assemble a basket of several hundred or
several thousand bonds that replicate the portfolio of a Fund.
Accordingly, VGI will select a subset of the Fund's portfolio using
a representative sampling strategy.
\8\ The Funds must comply with the federal securities laws in
accepting Deposit Securities and satisfying redemptions with
Redemption Securities (as defined below), including that the Deposit
Securities and Redemption Securities are sold in transactions that
would be exempt from registration under the Securities Act. If at
any time in the future the Funds accept Deposit Securities or
satisfy redemptions with Redemption Securities that are restricted
securities eligible for resale pursuant to rule 144A under the
Securities Act, the Funds will comply with the conditions of rule
144A, including in satisfying redemptions with such rule 144A
eligible restricted Redemption Securities. The prospectus for the
Funds will state that ``An Authorized Participant that is not a
`qualified institutional buyer' as defined in rule 144A under the
Securities Act of 1933 will not be able to receive, as part of the
redemption basket, restricted securities eligible for resale under
rule 144A.''
\9\ When a Fund permits an investor to substitute cash for a
Deposit Security, the investor may be assessed a higher Transaction
Fee to offset the increased cost to the Fund of buying the necessary
Deposit Security for its portfolio.
---------------------------------------------------------------------------
7. The Funds will accept purchase orders only on days that the NYSE
is open for business. Purchase orders must be received by VMC prior to
the closing time of the regular trading session of the NYSE. VMC will
transmit all purchase orders to the Funds, maintain a record of each
Creation Unit purchaser, and send out an ETF Prospectus and
confirmation to such purchasers.
8. The purchaser of a Creation Unit will be able to separate the
Creation Unit into individual ETF Shares.\10\ ETF Shares will be listed
on an Exchange and traded in the secondary market in the same manner as
shares of other exchange-traded funds. One or more Exchange specialists
(``Specialists'') will be assigned to make a market in the ETF Shares.
The price of ETF Shares traded on an Exchange will be based on a
current bid/offer market, and each ETF Share is expected to have an
initial market value of between $30 and $100. Transactions involving
the sale of ETF Shares in the secondary market will be subject to
customary brokerage commissions and charges.
---------------------------------------------------------------------------
\10\ Applicants state that persons purchasing Creation Units
will be cautioned in the ETF Prospectus that some activities on
their part may, depending on the circumstances, result in their
being deemed a statutory underwriter and subject them to the
prospectus delivery and liability provisions of the Securities Act.
For example, a broker-dealer firm and/or its client may be deemed a
statutory underwriter if it purchases Creation Units from a Fund,
breaks them down into the constituent ETF Shares, and sells ETF
Shares directly to its customers, or if it chooses to couple the
purchase of a supply of new ETF Shares with an active selling effort
involving solicitation of secondary market demand for ETF Shares.
The ETF Prospectus will state that whether a person is an
underwriter depends on all the facts and circumstances pertaining to
that person's activities. The ETF 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 an ordinary secondary trading transaction), and thus
dealing with ETF 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.
---------------------------------------------------------------------------
9. Applicants expect that purchasers of Creation Units will include
institutional investors and arbitrageurs. A Specialist, in providing
for a fair and orderly secondary market for ETF Shares, also may
purchase Creation Units for use in its market making activities on the
Exchange. Applicants expect that secondary market purchasers of ETF
Shares will include both institutional and retail investors.\11\
Applicants believe that arbitrageurs will purchase or redeem Creation
Units to take advantage of discrepancies between the ETF Shares' market
price and the ETF Shares' 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 ETF Shares trade and
their NAV. Applicants do not expect ETF Shares to trade at a
significant premium or discount to their NAV.\12 \
---------------------------------------------------------------------------
\11\ ETF Shares will be registered in book-entry form only. DTC
or its nominee will be the registered owner of all outstanding ETF
Shares. Records reflecting the beneficial owners of ETF Shares will
be maintained by DTC or its participants.
\12\ Every 15 seconds throughout the trading day, the Exchange
will disseminate via the facilities of the Consolidated Tape
Association the market value of an ETF Share and, separate from the
consolidated tape, the Exchange or another information provider will
disseminate a calculation of the approximate NAV of an ETF Share.
Applicants state that an investor comparing the two figures will be
able to determine whether, and to what extent, ETF Shares are
selling at a premium or discount to NAV.
---------------------------------------------------------------------------
10. Applicants will make available an ETF Shares product
description (``Product Description'') for distribution in accordance
with an Exchange rule requiring Exchange members and member
organizations effecting transactions in ETF Shares to deliver a Product
Description to investors purchasing ETF Shares, whether on or away from
the Exchange. Applicants state that any other Exchange that applies for
unlisted trading privileges in ETF Shares will have to adopt a similar
rule, requiring delivery of the Product Description. The Product
Description will provide a plain English overview of a Fund, including
its investment objective and investment strategies, the identity of
VGI, the material risks of investing in the Fund, and the frequency of
dividends and capital gains distributions. The Product Description also
will provide a brief, plain English
[[Page 12230]]
description of the salient features of ETF Shares. The Product
Description will advise investors that an ETF Prospectus and SAI may be
obtained, without charge, from the investor's broker or from VMC. The
Product Description also will identify a Web site address where
investors can obtain information about the composition and compilation
methodology of the Target Index. Applicants expect that the number of
purchases of ETF Shares in which an investor will not receive a Product
Description will not constitute a significant portion of the market
activity in ETF Shares.
11. Except in connection with the liquidation of a Fund (or of a
Fund's ETF Share class), ETF Shares will only be redeemable in Creation
Units through each Fund. An investor redeeming a Creation Unit
generally will receive (a) A basket of securities (``Redemption
Securities''), which in most cases will be the same as the Deposit
Securities required of investors purchasing Creation Units on the same
day, and (b) a cash amount equal to the difference in the value of the
Redemption Securities and the NAV of a Creation Unit, which in most
cases will be the same as the Purchase Balancing Amount paid (or
received) by investors purchasing Creation Units on the same day. A
Fund may make redemptions partly in cash in lieu of transferring one or
more Redemption Securities to a redeeming investor, if the Fund
determines that such alternative is warranted. A Fund may make such a
determination if, for example, a redeeming investor is unable, by law
or policy, from owning a particular Redemption Security. In order to
cover the Fund's transaction costs, redeeming investors will pay a
Transaction Fee.\13\
---------------------------------------------------------------------------
\13\ Investors who redeem for cash, rather than in kind, may pay
a higher Transaction Fee.
---------------------------------------------------------------------------
Applicants' Legal Analysis
1. Applicants request an order under section 6(c) of the 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.
2. 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 or provisions
of the Act, or any rule or regulation thereunder, 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 ``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) to permit ETF Shares to be redeemed in Creation Units
only. Applicants note that because of the arbitrage possibilities
created by the redeemability of Creation Units, it is expected that the
market price of an ETF Share will not vary much from its NAV.
Section 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) 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 permits an open-end fund to issue multiple
classes of shares representing interests in the same portfolio without
seeking exemptive relief from section 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 (a) Each class have the same rights and obligations as each other
class (other than the differences allowed by the rule), and (b) if a
class has a different distribution arrangement, the class must pay all
of the expenses of the arrangement. Because applicants, therefore, may
not rely on rule 18f-3, they request an exemption under section 6(c)
from sections 18(f)(1) and 18(i).
5. Applicants state that there are four ways in which the
Conventional Shares and ETF Shares of each Fund will have different
rights: (a) Conventional Shares are individually redeemable, while ETF
Shares will be redeemable in Creation Units only; (b) ETF Shares will
be traded on an Exchange, while Conventional Shares will not; (c)
Conventional Shares declare dividends daily, while ETF Shares will
declare dividends monthly; and (d) although all shares classes of a
Fund will pay dividends monthly, the payment date for the Conventional
Shares will be the same as the ex dividend date (``ex date''), while
the payment date for the ETF Share will be four days or more after the
ex date. Applicants assert that different trading and redemption rights
are necessary if their proposal is to have the desired benefits.
Applicants note that a Fund's ETF Shares will be tradable on an
Exchange and redeemable only in large aggregations in order to
encourage short-term investors to conduct their trading activities in a
way that does not disrupt the management of the Fund's portfolio.
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 ETF Shares
individually redeemable.
6. Applicants state the proposal to declare dividends to the ETF
Share class on a monthly basis, as opposed to on a daily basis for the
Conventional Share class, will result in a higher net asset value
(``NAV'') for the ETF Share class during a monthly period due to the
presence of accrued but undistributed income.\14\ Applicants submit
that absent adjustment, this difference would result in a
disproportionate allocation of a fund's income, realized capital gains
and losses, and unrealized appreciation and depreciation (``Allocable
Items'') to the ETF Shares relative to the Conventional Shares because
such items are allocated among a fund's classes based upon relative net
assets. Applicants intend to eliminate this potential inequality by
allocating the Allocable Items on the basis of class-level net assets
adjusted to factor out the differences introduced by the application of
the different dividend policies (``Asset Adjustment''). Applicants
submit that the use of the Asset Adjustment will ensure that the daily
allocation of Allocable Items to ETF Shares and Conventional Shares is
not distorted by the classes' differing dividend policies.\15\
Applicants state
[[Page 12231]]
that it is industry practice for bond ETFs to declare dividends
monthly.
---------------------------------------------------------------------------
\14\ When dividends are declared monthly, as opposed to daily,
each day's accrued income is reflected as an increase in the shares'
NAV. At the end of the month, when dividends are declared, the NAV
drops by the amount of the dividend. By contrast, when dividends are
declared daily, the amount of the daily income accrual is offset by
a corresponding distribution payable liability. As a result, the net
effect on the shares' NAV typically is zero.
\15\ Applicants will not rely on the requested order until the
board of trustees (``Board'') of each Fund has formally determined
that, after applying the Asset Adjustment, the annualized rates of
return of the ETF and Conventional Share classes generally will
differ only by the expense differentials among the classes, as
required by rule 18f-3(c)(1)(v) under the Act.
---------------------------------------------------------------------------
7. Applicants state that the accrual of dividends in the NAV of the
ETF Shares but not the Conventional Shares will have an effect on the
voting power of the respective classes because the shareholders of the
Funds are given voting rights proportionate to the NAV of their shares.
Applicants assert that such effects on voting power will be minor and
that this treatment of voting rights meets the standards of section
18(i) because every share issued by the Funds will have equal voting
rights in that each share will be entitled to one vote per dollar of
NAV and a fractional vote per fractional dollar of NAV.
8. Applicants state that although Conventional Shares and ETF
Shares both pay dividends monthly, another difference between the
classes is that the holders of Conventional Shares are able to reinvest
dividends immediately when paid, while the ETF Shareholders would have
to wait a few days to receive their payments through their brokers. As
a result, holders of Conventional Shares of the Funds who reinvest will
be continuously invested, while ETF Shareholders who reinvest will be
``out of the market'' for four days with respect to the amount of the
dividend.\16\ Applicants state that the four day difference will affect
the relative performance of the classes because during the time the
dividend is out of the market, ETF Shareholders will not receive income
or experience appreciation or depreciation on the amount of the
dividend. Applicants do not expect this economic difference to be
significant.
---------------------------------------------------------------------------
\16\ Applicants assert that the delay between the ex date and
the payment/reinvestment date occurs for all ETFs, whether they are
stand-alone ETFs or part of a multi-class structure, and regardless
of whether an ETF Shareholder elects to reinvest dividends.
---------------------------------------------------------------------------
9. Applicants assert that the different rights do not implicate the
concerns underlying section 18 of the Act, including excessive
leverage, 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
Conventional Shares and ETF Shares. Applicants state that the ETF
Shares will not be marketed as a mutual fund investment. Marketing
materials may refer to ETF 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 ETF Shares with the
shares of a conventional open-end management investment company. Any
marketing or advertising materials addressed primarily to prospective
investors will emphasize that (a) ETF Shares are not redeemable from a
Fund other than in Creation Units, (b) ETF Shares, other than in
Creation Units, may be sold only through a broker, and the shareholder
may have to pay brokerage commissions in connection with the sale, and
(c) a selling shareholder may receive less than NAV in connection with
the sale of ETF Shares. The same type of disclosure will be provided in
the Conventional Prospectus, ETF Prospectus, Product Description, SAI,
and any document addressed primarily to prospective investors. The
prospectus for the Fund's Conventional Shares will disclose that
dividends are declared daily and paid monthly. The prospectus and
Product Description for the ETF Shares will disclose that dividends are
declared monthly and paid monthly and that the reinvestment of
dividends (if elected), will not occur until approximately four days
after the ex date. The applicants also note that (a) All references to
a Fund's exchange-traded class of shares will use a form of the name
``ETF Shares'' rather than the Fund name, (b) the cover and summary
page of the ETF Prospectus will state that the ETF Shares are listed on
an Exchange and are not individually redeemable, (c) VMC will only
market Conventional Shares and ETF Shares in the same advertisement or
marketing material when the advertisement or marketing material
contains appropriate disclosure explaining the relevant features of
each class of shares and highlighting the differences between the share
classes, and (d) applicants have prepared educational materials
describing the ETF Shares.
10. Applicants currently allocate distribution expenses among 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 distribution services (``1981
Order'').\17\ For those funds in the Vanguard Fund Complex offering
multiple classes of shares, applicants apply the formula in the 1981
Order by treating each class as a separate fund (``Multi-Class
Distribution Formula'').
---------------------------------------------------------------------------
\17\ Investment Company Act Release No. 11645 (Feb. 25, 1981)
(Opinion of the Commission and Final Order). Under the formula, each
Vanguard Fund's contribution is based 50% on its 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 its
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 Vanguard 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.
---------------------------------------------------------------------------
11. Applicants propose to apply the Multi-Class Distribution
Formula to each Fund's class of ETF Shares. Applicants acknowledge
that, because ETF Shares may have a distribution arrangement that
differs from that for Conventional Shares, the proposed allocation
method is inconsistent with rule 18f-3. 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. The Multi-Class Distribution Formula has
been approved by the Board of each Fund, and the Board of each Fund,
including a majority of the trustees who are not interested persons, as
defined in section 2(a)(19) of the Act (``Disinterested Trustees''),
will review the application of the Multi-Class Distribution Formula on
an annual basis and determine that the proposed allocation is in the
best interests of each class of shareholders and of the Fund as a
whole.
Section 22(d) of the Act and Rule 22c-1 Under the Act
12. Section 22(d), 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 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 ETF Shares will take place at negotiated
prices, not at a current offering price described in the ETF
Prospectus, and not at a price based on NAV. Thus, purchases and sales
of ETF Shares in the secondary market will not comply with section
22(d) and rule 22c-1. Accordingly, applicants request exemptions from
these provisions under section 6(c) of the Act.
13. Applicants assert that the sale of ETF 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 (a) Prevent dilution caused by certain
riskless trading schemes by
[[Page 12232]]
principal underwriters and contract dealers, (b) prevent unjust
discrimination or preferential treatment among buyers resulting from
sales at different prices, and (c) ensure 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 ETF 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 ETF Shares would not lead to
discrimination or preferential treatment among purchasers because, to
the extent that 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, among other things, arbitrage activity
will ensure that the difference between the market price of ETF Shares
and their NAV remains narrow.
Section 24(d) of the Act
14. Section 24(d) 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 transactions 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 ETF Shares to rely on the prospectus delivery exemption
provided by section 4(3) of the Securities Act.\18\
---------------------------------------------------------------------------
\18\ Applicants do not seek relief from the prospectus delivery
requirement for non-secondary market transactions, including
purchases of Creation Units or those involving an underwriter.
---------------------------------------------------------------------------
15. Applicants state that ETF 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. Applicants contend that ETF Shares, as a listed
security, merit similar treatment, reducing compliance costs and
regulatory burdens that result from the imposition of a prospectus
delivery requirement on secondary market transactions. Applicants state
that because ETF Shares will be exchange-listed, prospective investors
will have access to several types of market information about the ETF
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.
16. Applicants further state that investors that purchase ETF
Shares in the secondary market will receive a Product Description,
describing the Fund and its ETF Shares. Applicants state that, while
not intended as a substitute for a prospectus, the Product Description
will contain information about ETF Shares that is tailored to meet the
needs of investors purchasing ETF Shares in the secondary market.
Sections 17(a)(1) and (2) of the Act
17. Sections 17(a)(1) and (2) generally prohibit an affiliated
person of a registered investment company, or an affiliated person of
an affiliated person, acting as principal, from selling any security
to, or purchasing any security from, the company. Sections 2(a)(3)(A)
and (C) of the Act define ``affiliated person,'' respectively, as any
person who owns 5% or more of an issuer's outstanding voting securities
and any person who controls the fund. Section 2(a)(9) of the Act
provides that a control relationship will be presumed where one person
owns 25% or more of another person's voting securities. Applicants
state that a large institutional investor or the Specialist could own
5% or more, or more than 25%, of a Fund's outstanding voting securities
and, as a result, be deemed to be an affiliated person of the Fund
under section 2(a)(3)(A) or (C). Applicants further state that, because
purchases and redemptions of Creation Units would be in-kind, rather
than for cash, those investors would be precluded by sections 17(a)(1)
and (2) from purchasing or redeeming Creation Units from the Fund.
Accordingly, applicants request an exemption under sections 6(c) and
17(b) of the Act to permit these affiliated persons, and affiliated
persons of such affiliated persons who are not otherwise affiliated
with the Fund, to purchase and redeem Creation Units through in-kind
transactions.
18. Section 17(b) of the Act 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 involved and the general purposes 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 and 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. The ETF Shares Prospectus and the Product Description for each
Fund will clearly disclose that, for purposes of the Act, ETF Shares
are issued by the Fund and the acquisition of ETF Shares by investment
companies is subject to the restrictions of section 12(d)(1) of the
Act, except as permitted by an exemptive order that permits registered
investment companies to invest in a Fund beyond the limits of section
12(d)(1), subject to certain terms and conditions.
2. As long as a Fund operates in reliance on the requested order,
the ETF Shares will be listed on an Exchange.
3. The ETF Shares of a Fund will not be advertised or marketed as
shares of an open-end investment company or mutual fund. The ETF Shares
Prospectus of each Fund will prominently disclose that ETF Shares are
not individually redeemable and will disclose that holders of ETF
Shares may acquire the shares from the Fund and tender the shares for
redemption to the Fund in Creation Unit aggregations only. Any
advertising material that describes the purchase or sale of Creation
Units or refers to redeemability will prominently disclose that ETF
Shares are not individually redeemable and that holders of ETF Shares
may acquire the shares from the Fund and tender the shares for
redemption to the Fund in Creation Unit aggregations only.
[[Page 12233]]
4. Before a Fund may rely on the order, the Commission will have
approved, pursuant to rule 19b-4 under the Exchange Act, an Exchange
rule requiring Exchange members and member organizations effecting
transactions in ETF Shares to deliver a Product Description to
purchasers of ETF Shares.
5. On an annual basis the Board of each Fund, including a majority
of Disinterested Trustees, must determine, for each Fund, that the
allocation of distribution expenses among the classes of Conventional
Shares and ETF Shares in accordance with the Multi-Class Distribution
Formula is in the best interests of each class and of the Fund as a
whole. Each Fund 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.
6. Applicants' Web site, which is and will be publicly accessible
at no charge, will contain the following information, on a per ETF
Share basis, for each Fund: (a) The prior business day's closing NAV
and the midpoint of the bid-asked spread at the time the Fund's NAV is
calculated (``Bid-Asked Price'') and a calculation of the premium or
discount of the Bid-Asked Price in relation to the closing NAV; and (b)
data for a period covering at least the four previous calendar quarters
(or the life of a Fund, if shorter) indicating how frequently each
Fund's ETF Shares traded at a premium or discount to NAV based on the
Bid-Asked Price and closing NAV, and the magnitude of such premiums and
discounts. In addition, the Product Description for each Fund will
state that applicants' Web site has information about the premiums and
discounts at which the Fund's ETF Shares have traded.
7. The ETF Shares Prospectus and annual report will include, for
each Fund: (a) The information listed in condition 6(b), (i) In the
case of the ETF Shares Prospectus, for the most recently completed
calendar year (and the most recently completed quarter or quarters, as
applicable), and (ii) in the case of the annual report, for no less
than the immediately preceding five fiscal years (or the life of the
Fund, if shorter); and (b) the cumulative total return and the average
annual total return for one, five and ten year periods (or the life of
the Fund, if shorter) of (i) an ETF Share based on NAV and the Bid-
Asked Price and (ii) the Fund's Target Index.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-4721 Filed 3-14-07; 8:45 am]
BILLING CODE 8010-01-P
