
[Federal Register Volume 79, Number 78 (Wednesday, April 23, 2014)]
[Notices]
[Pages 22723-22728]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09236]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 31021; File No. 812-13597]


Vanguard Admiral Funds, et al.; Notice of Application

April 17, 2014.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order pursuant to (a) section 
6(c) of the Investment Company Act of 1940 (``Act'') granting an 
exemption from sections 18(f) and 21(b) of the Act; (b) section 
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of 
the Act; (c) sections 6(c) and 17(b) of the

[[Page 22724]]

Act granting an exemption from sections 17(a)(1), 17(a)(2) and 17(a)(3) 
of the Act; and (d) section 17(d) of the Act and rule 17d-1 under the 
Act to permit certain joint arrangements.

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SUMMARY:  Summary of the Application: Applicants request an order that 
would permit certain registered open-end management investment 
companies to participate in a joint lending and borrowing facility.
    Applicants: Vanguard Admiral Funds, Vanguard Bond Index Funds, 
Vanguard California Tax-Free Funds, Vanguard Charlotte Funds, Vanguard 
Chester Funds, Vanguard CMT Funds, Vanguard Convertible Securities 
Fund, Vanguard Explorer Fund, Vanguard Fenway Funds, Vanguard Fixed 
Income Securities Funds, Vanguard Florida Tax-Free Funds, Vanguard 
Horizon Funds, Vanguard Index Funds, Vanguard Institutional Index 
Funds, Vanguard International Equity Index Funds, Vanguard Malvern 
Funds, Vanguard Massachusetts Tax-Exempt Funds, Vanguard Money Market 
Reserves, Vanguard Montgomery Funds, Vanguard Morgan Growth Fund, 
Vanguard Municipal Bond Funds, Vanguard New Jersey Tax-Free Funds, 
Vanguard New York Tax-Free Funds, Vanguard Ohio Tax-Free Funds, 
Vanguard Pennsylvania Tax-Free Funds, Vanguard Quantitative Funds, 
Vanguard Scottsdale Funds, Vanguard Specialized Funds, Vanguard STAR 
Funds, Vanguard Tax-Managed Funds, Vanguard Trustees' Equity Fund, 
Vanguard Valley Forge Funds, Vanguard Variable Insurance Funds, 
Vanguard Wellesley Income Fund, Vanguard Wellington Fund, Vanguard 
Whitehall Funds, Vanguard Windsor Funds, Vanguard World Fund (each, a 
``Trust,'' and collectively, the ``Trusts''), and The Vanguard Group, 
Inc. (``Vanguard'').

DATES:  Filing Dates: The application was filed on November 3, 2008, 
and amended on August 4, 2009, June 9, 2011, October 11, 2012, May 29, 
2013, and January 28, 2014.
    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 May 12, 2014, 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: P.O. Box 2600, V26, 
Valley Forge, PA 19482.

FOR FURTHER INFORMATION CONTACT: Steven I. Amchan, Senior Counsel, at 
(202) 551-6826 or David P. Bartels, Branch Chief, at (202) 551-6821 
(Division of Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box, at http://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicants' Representations

    1. Each Trust is organized as a Delaware statutory trust and is 
registered under the Act as an open-end management investment company. 
Each Trust consists of one or more series (``Funds''). Certain of the 
Funds hold themselves out as money market funds in reliance on rule 2a-
7 under the Act (the ``Money Market Funds''). Vanguard, a Pennsylvania 
corporation, is registered as an investment adviser under the 
Investment Advisers Act of 1940, as amended (``Advisers Act''), and as 
a transfer agent under the Securities Exchange Act of 1934, as amended. 
Vanguard is wholly and jointly owned by 35 investment companies 
(including each Trust except for Vanguard CMT Funds and Vanguard 
Institutional Index Funds). Vanguard provides each of the Funds with 
corporate management, administrative, transfer agency, and, in some 
cases, investment advisory services.\1\
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    \1\ Applicants request that the relief also apply to any 
existing or future series of the Trusts and any future registered 
open-end management investment company or series thereof that: (i) 
Obtains corporate management, administrative and transfer agency 
services and/or investment advisory services from Vanguard; and (ii) 
is part of the same ``group of investment companies,'' as defined in 
section 12(d)(1)(G)(ii) of the Act, as the Trusts (each, a 
``Fund''). All entities that currently intend to rely on the 
requested order have been named as applicants. Any other entity that 
relies on the requested order in the future will comply with the 
terms and conditions set forth in the application.
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    2. At any particular time, while some Funds are entering into 
repurchase agreements or investing cash balances in Money Market Funds 
or other short-term instruments, other Funds may need to borrow money 
for temporary purposes to satisfy redemption requests, to cover 
unanticipated cash shortfalls such as a trade ``fail'' in which cash 
payment for a security sold by a Fund has been delayed, or for other 
temporary purposes. Presently, the Funds have access to uncommitted 
bank loans from their custodian banks, for temporary purposes. These 
loans are available at the custodian bank's discretion in the amounts 
that the bank chooses to make available at the time of the loan.
    3. If a Fund borrows from its custodian bank, it normally pays 
interest on the loan at a rate that is higher than the rate that is 
earned by other (non-borrowing) Funds on investments in repurchase 
agreements, Money Market Funds, and other short-term instruments of the 
same maturity as the bank loan. Applicants assert that this 
differential represents the profit earned by the lender on loans and is 
not attributable to any material difference in the credit quality or 
risk of such transactions.
    4. The Trusts seek to enter into master interfund lending 
agreements (``Interfund Lending Agreements'') with each other on behalf 
of the Funds that would permit each Fund to lend money directly to and 
borrow directly from other Funds through a credit facility for 
temporary purposes (an ``Interfund Loan''). Money Market Funds 
typically will not participate as borrowers in the proposed credit 
facility. Applicants state that the proposed credit facility would both 
reduce the Funds' potential borrowing costs and enhance the ability of 
the lending Funds to earn higher rates of interest on their short-term 
lendings. Although the proposed credit facility would reduce the Funds' 
need to borrow from banks, the Funds would be free to establish and 
maintain committed lines of credit or other borrowing arrangements with 
unaffiliated banks.
    5. Applicants anticipate that the proposed credit facility would 
provide a borrowing Fund with significant savings at times when the 
cash position of the borrowing Fund is insufficient to meet temporary 
cash requirements. This situation could arise when shareholder 
redemptions exceed anticipated volumes and certain Funds have 
insufficient cash on hand to satisfy such redemptions. When the Funds 
liquidate portfolio securities to meet redemption requests, they often 
do not receive payment in settlement for up to three days (or longer 
for certain foreign transactions). However, redemption requests 
normally are effected immediately. The proposed credit facility would 
provide a source of immediate, short-term liquidity pending

[[Page 22725]]

settlement of the sale of portfolio securities.
    6. Applicants also anticipate that a Fund could use the proposed 
credit facility when a sale of securities ``fails'' due to 
circumstances beyond the Fund's control, such as a delay in the 
delivery of cash to the Fund's custodian or improper delivery 
instructions by the broker effecting the transaction. ``Sales fails'' 
may present a cash shortfall if the Fund has undertaken to purchase a 
security using the proceeds from securities sold. Alternatively, the 
Fund could ``fail'' on its intended purchase due to lack of funds from 
the previous sale, resulting in additional cost to the Fund, or sell a 
security on a same-day settlement basis, earning a lower return on the 
investment. Use of the proposed credit facility under these 
circumstances would enable the Fund to have access to immediate short-
term liquidity.
    7. While bank borrowings generally could supply needed cash to 
cover unanticipated redemptions and sales fails, under the proposed 
credit facility, a borrowing Fund would pay lower interest rates than 
those that would be payable under short-term loans offered by banks. In 
addition, Funds making short-term cash loans directly to other Funds 
would earn interest at a rate higher than they otherwise could obtain 
from investing their cash in repurchase agreements or money market 
funds. Thus, applicants assert that the proposed credit facility would 
benefit both borrowing and lending Funds.
    8. The interest rate to be charged to the Funds on any Interfund 
Loan (the ``Interfund Loan Rate'') would be the average of the ``Repo 
Rate'' and the ``Bank Loan Rate,'' both as defined below. The Repo Rate 
for any day would be the highest or best (after giving effect to 
factors such as the credit quality of the counterparty) rate available 
to a lending Fund from investment in overnight repurchase agreements 
with counterparties approved by Vanguard. The Bank Loan Rate for any 
day would be calculated by Vanguard's Fund Financial Services 
Department (as defined below) each day an Interfund Loan is made 
according to a formula established by each Fund's board of trustees 
(the ``Trustees'') intended to approximate the lowest interest rate at 
which bank short-term loans would be available to the Funds. The 
formula would be based upon a publicly available rate (e.g., federal 
funds plus 25 basis points) and would vary with this rate so as to 
reflect changing bank loan rates. The initial formula and any 
subsequent modifications to the formula would be subject to the 
approval of each Fund's Trustees. In addition, each Fund's Trustees 
would periodically review the continuing appropriateness of using the 
formula to determine the Bank Loan Rate, as well as the relationship 
between the Bank Loan Rate and current bank loan rates that would be 
available to the Funds.
    9. The proposed credit facility would be administered by the 
officers and employees of Vanguard's Fund Financial Services Department 
(the ``Fund Financial Services Department''), which Applicants state is 
responsible for, among other things, projecting Fund available cash 
balances on any given day, reporting such information to Fund portfolio 
managers, ensuring accurate calculation of Fund net asset values, and 
preparing Fund financial statements and other reports. No portfolio 
manager of any Fund will serve in the Fund Financial Services 
Department.
    10. The Fund Financial Services Department on each business day 
would collect data on the uninvested cash and borrowing requirements of 
all participating Funds.\2\ Once it had determined the aggregate amount 
of cash available for loans and borrowing demand, the Fund Financial 
Services Department would allocate loans among borrowing Funds without 
any further communication from the portfolio managers of the Funds. 
Applicants anticipate that there typically will be far more available 
uninvested cash each day than borrowing demand. Therefore, after the 
Fund Financial Services Department has allocated cash for Interfund 
Loans, the Fund Financial Services Department will invest any remaining 
cash in accordance with the standing instructions of the portfolio 
managers or such remaining amounts will be invested directly by the 
portfolio managers of the Funds.
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    \2\ Under the proposed credit facility, the portfolio managers 
for each participating Fund could provide standing instructions to 
participate daily as a borrower or lender.
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    11. Applicants state that the Fund Financial Services Department 
would allocate borrowing demand and cash available for lending among 
the Funds on what the Fund Financial Services Department believes to be 
an equitable basis, subject to certain administrative procedures 
applicable to all Funds, such as the time of filing requests to 
participate, minimum loan lot sizes, and the need to minimize the 
number of transactions and associated administrative costs. To reduce 
transaction costs, each loan normally would be allocated in a manner 
intended to minimize the number of participants necessary to complete 
the loan transaction. The method of allocation and related 
administrative procedures would be approved by each Fund's Trustees, 
including a majority of Trustees who are not ``interested persons'' of 
the Fund, as that term is defined in section 2(a)(19) of the Act 
(``Independent Trustees''), to ensure that both borrowing and lending 
Funds participate on an equitable basis.
    12. The Fund Financial Services Department would: (a) Monitor the 
Interfund Loan Rate and the other terms and conditions of the loans; 
(b) limit the borrowings and loans entered into by each Fund to ensure 
that they comply with the Fund's investment policies and limitations; 
(c) ensure equitable treatment of each Fund; and (d) make quarterly 
reports to the Trustees concerning any transactions by the Funds under 
the proposed credit facility and the Interfund Loan Rate charged.
    13. Vanguard, through the Fund Financial Services Department, would 
administer the proposed credit facility as a disinterested fiduciary as 
part of its duties under the relevant management or service agreement 
with each Fund and would receive no additional fee as compensation for 
its services in connection with the administration of the proposed 
credit facility. No investment adviser to a Fund will collect any 
pricing, record keeping, bookkeeping or accounting fees associated with 
the transfer of cash and/or securities in connection with the 
transactions effected through the proposed credit facility.
    14. No Fund may participate in the proposed credit facility unless: 
(a) The Fund has obtained shareholder approval for its participation, 
if such approval is required by law; (b) the Fund has fully disclosed 
all material information concerning the credit facility in its 
prospectus and/or statement of additional information; and (c) the 
Fund's participation in the credit facility is consistent with its 
investment objectives, limitations and organizational documents.
    15. In connection with the credit facility, applicants request an 
order under section 6(c) of the Act exempting them from the provisions 
of sections 18(f) and 21(b) of the Act; under section 12(d)(1)(J) of 
the Act exempting them from section 12(d)(1) of the Act; under sections 
6(c) and 17(b) of the Act exempting them from sections 17(a)(1), 
17(a)(2), and 17(a)(3) of the Act; and under section 17(d) of the Act 
and rule 17d-1 under the Act to permit certain joint arrangements.

Applicants' Legal Analysis

    1. Section 17(a)(3) of the Act generally prohibits any affiliated 
person of a

[[Page 22726]]

registered investment company, or affiliated person of an affiliated 
person, from borrowing money or other property from the registered 
investment company. Section 21(b) of the Act generally prohibits any 
registered management company from lending money or other property to 
any person, directly or indirectly, if that person controls or is under 
common control with that company. Section 2(a)(3)(C) of the Act defines 
an ``affiliated person'' of another person, in part, to be any person 
directly or indirectly controlling, controlled by, or under common 
control with, such other person. Section 2(a)(9) of the Act defines 
``control'' as the ``power to exercise a controlling influence over the 
management or policies of a company,'' but excludes circumstances in 
which ``such power is solely the result of an official position with 
such company.'' Applicants state that the Funds may be under common 
control by virtue of having common Trustees and officers.
    2. Section 6(c) of the Act provides that an exemptive order may be 
granted where an 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 17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from section 17(a) provided that the terms of the 
transaction, including the consideration to be paid or received, are 
fair and reasonable and do not involve overreaching on the part of any 
person concerned, and the transaction is consistent with the policy of 
the investment company as recited in its registration statement and 
with the general purposes of the Act. Applicants believe that the 
proposed arrangements satisfy these standards for the reasons discussed 
below.
    3. Applicants assert that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a party with strong potential adverse 
interests to, and some influence over the investment decisions of, a 
registered investment company from causing or inducing the investment 
company to engage in lending transactions that unfairly inure to the 
benefit of such party and that are detrimental to the best interests of 
the investment company and its shareholders. Applicants assert that the 
proposed credit facility transactions do not raise these concerns 
because: (a) Vanguard, through the Fund Financial Services Department, 
would administer the program as a disinterested fiduciary as part of 
its duties under the relevant management or service agreement with each 
Fund; (b) all Interfund Loans would consist only of uninvested cash 
reserves that the lending Fund otherwise would invest in short-term 
repurchase agreements or other short-term instruments either directly 
or through a money market fund; (c) the Interfund Loans would not 
involve a significantly greater risk than such other investments; (d) 
the lending Fund would receive interest at a rate higher than it could 
otherwise obtain through such other investments; and (e) the borrowing 
Fund would pay interest at a rate lower than otherwise available to it 
under its bank loan agreements and avoid some up-front commitment fees 
associated with committed lines of credit. Moreover, applicants assert 
that the other terms and conditions that applicants propose also would 
effectively preclude the possibility of any Fund obtaining an undue 
advantage over any other Fund.
    4. Section 17(a)(1) of the Act generally prohibits an affiliated 
person of a registered investment company, or any affiliated person of 
such a person, from selling securities or other property to the 
investment company. Section 17(a)(2) of the Act generally prohibits an 
affiliated person of a registered investment company, or any affiliated 
person of such a person, from purchasing securities or other property 
from the investment company. Section 12(d)(1) of the Act generally 
prohibits a registered investment company from purchasing or otherwise 
acquiring any security issued by any other investment company except in 
accordance with the limitations set forth in that section.
    5. Applicants state that the obligation of a borrowing Fund to 
repay an Interfund Loan could be deemed to constitute a security for 
the purposes of sections 17(a)(1) and 12(d)(1). Applicants also state 
that any pledge of assets in connection with an Interfund Loan could be 
construed as a purchase of the borrowing Fund's securities or other 
property for purposes of section 17(a)(2) of the Act. Section 
12(d)(1)(J) of the Act provides that the Commission may exempt persons 
or transactions from any provision of section 12(d)(1) if and to the 
extent that such exemption is consistent with the public interest and 
the protection of investors. Applicants contend that the standards 
under sections 6(c), 17(b), and 12(d)(1)(J) are satisfied for all the 
reasons set forth above in support of their request for relief from 
sections 17(a)(3) and 21(b) and for the reasons discussed below. 
Applicants also state that the requested relief from section 17(a)(2) 
of the Act meets the standards of section 6(c) and 17(b) because any 
collateral pledged to secure an Interfund Loan would be subject to the 
same conditions imposed by any other lender to a Fund that imposes 
conditions on the quality of or access to collateral for a borrowing 
(if the lender is another Fund) or the same or better conditions (in 
any other circumstance).
    6. Applicants state that section 12(d)(1) was intended to prevent 
the pyramiding of investment companies in order to avoid imposing on 
investors additional and duplicative costs and fees attendant upon 
multiple layers of investments. Applicants submit that the proposed 
credit facility does not involve these abuses. Applicants note that 
there will be no duplicative costs or fees to the Funds or their 
shareholders, and that Vanguard will receive no additional compensation 
for its services in administering the credit facility. Applicants also 
note that the purpose of the proposed credit facility is to provide 
economic benefits for all the participating Funds and their 
shareholders.
    7. Section 18(f)(1) of the Act prohibits open-end investment 
companies from issuing any senior security except that a company is 
permitted to borrow from any bank, provided, that immediately after the 
borrowing, there is asset coverage of at least 300 per centum for all 
borrowings of the company. Under section 18(g) of the Act, the term 
``senior security'' generally includes any bond, debenture, note or 
similar obligation or instrument constituting a security and evidencing 
indebtedness. Applicants request exemptive relief under section 6(c) 
from section 18(f)(1) to the limited extent necessary to implement the 
proposed credit facility (because the lending Funds are not banks).
    8. Applicants believe that granting relief under section 6(c) is 
appropriate because the Funds would remain subject to the requirement 
of section 18(f)(1) that all borrowings of a Fund, including combined 
interfund and bank borrowings, have at least 300% asset coverage. Based 
on the conditions and safeguards described in the application, 
applicants also submit that to allow the Funds to borrow from other 
Funds pursuant to the proposed credit facility is consistent with the 
purposes and policies of section 18(f)(1).
    9. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit an affiliated person of a registered investment company, or 
any affiliated person of such a person, when acting as principal, from 
effecting any joint transaction in which the investment company 
participates, unless, upon application, the transaction has been 
approved by the Commission. Rule 17d-

[[Page 22727]]

1(b) under the Act provides that in passing upon an application filed 
under the rule, the Commission will consider whether the participation 
of the registered investment company in a joint enterprise on the basis 
proposed is consistent with the provisions, policies and purposes of 
the Act and the extent to which such participation is on a basis 
different from or less advantageous than that of the other 
participants.
    10. Applicants assert that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to insiders. Applicants assert 
that the proposed credit facility is consistent with the provisions, 
policies and purposes of the Act in that it offers both reduced 
borrowing costs and enhanced returns on loaned funds to all 
participating Funds and their shareholders. Applicants note that each 
Fund would have an equal opportunity to borrow and lend on equal terms 
consistent with its investment policies and fundamental investment 
limitations. Applicants assert that each Fund's participation in the 
proposed credit facility would be on terms that are no different from 
or less advantageous than that of other participating Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Interfund Loan Rate will be the average of the Repo Rate and 
the Bank Loan Rate.
    2. On each business day, the Fund Financial Services Department 
will compare the Bank Loan Rate with the Repo Rate and will make cash 
available for Interfund Loans only if the Interfund Loan Rate is: (a) 
More favorable to the lending Fund than the Repo Rate and, if 
applicable, the yield of any money market fund in which the lending 
Fund could otherwise invest; and (b) more favorable to the borrowing 
Fund than the Bank Loan Rate.
    3. If a Fund has outstanding bank borrowings, any Interfund Loans 
to the Fund: (a) Will be at an interest rate equal to or lower than the 
interest rate of any outstanding bank loan; (b) will be secured at 
least on an equal priority basis with at least an equivalent percentage 
of collateral to loan value as any outstanding bank loan that requires 
collateral; (c) will have a maturity no longer than any outstanding 
bank loan (and in any event not over seven days); and (d) will provide 
that, if an event of default by the Fund occurs under any agreement 
evidencing an outstanding bank loan to the Fund, that event of default 
will automatically (without need for action or notice by the lending 
Fund) constitute an immediate event of default under the Interfund 
Lending Agreement entitling the lending Fund to call the Interfund Loan 
(and exercise all rights with respect to any collateral) and that such 
call will be made if the lending bank exercises its right to call its 
loan under its agreement with the borrowing Fund.
    4. A Fund may make an unsecured borrowing through the proposed 
credit facility if its outstanding borrowings from all sources 
immediately after the interfund borrowing total 10% or less of its 
total assets, provided that if the Fund has a secured loan outstanding 
from any other lender, including but not limited to another Fund, the 
Fund's interfund borrowing will be secured on at least an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding loan that requires collateral. If a 
Fund's total outstanding borrowings immediately after an interfund 
borrowing would be greater than 10% of its total assets, the Fund may 
borrow through the proposed credit facility only on a secured basis. A 
Fund may not borrow through the proposed credit facility or from any 
other source if its total outstanding borrowings immediately after such 
borrowing would be more than 33\1/3\% of its total assets.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to exceed 10% of its total assets, the Fund must first 
secure each outstanding Interfund Loan by the pledge of segregated 
collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding Interfund Loans exceed 10% of its 
total assets for any other reason (such as a decline in net asset value 
or because of shareholder redemptions), the Fund will within one 
business day thereafter: (a) Repay all of its outstanding Interfund 
Loans; (b) reduce its outstanding indebtedness to 10% or less of its 
total assets; or (c) secure each outstanding Interfund Loan by the 
pledge of segregated collateral with a market value at least equal to 
102% of the outstanding principal value of the loan until the Fund's 
total outstanding borrowings cease to exceed 10% of its total assets, 
at which time the collateral called for by this condition 5 shall no 
longer be required. Until each Interfund Loan that is outstanding at 
any time that a Fund's total outstanding borrowings exceed 10% is 
repaid or the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, the Fund will mark the value of the collateral to 
market each day and will pledge such additional collateral as is 
necessary to maintain the market value of the collateral that secures 
each outstanding Interfund Loan at least equal to 102% of the 
outstanding principal value of the Interfund Loan.
    6. No Fund may lend to another Fund through the proposed credit 
facility if the loan would cause its aggregate outstanding loans 
through the proposed credit facility to exceed 15% of the lending 
Fund's current net assets at the time of the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. A Fund's borrowings through the proposed credit facility, as 
measured on the day when the most recent loan was made, will not exceed 
the greater of 125% of the Fund's total net cash redemptions for the 
preceding seven calendar days or 102% of the Fund's sales fails for the 
preceding seven calendar days.
    10. Each Interfund Loan may be called on one business day's notice 
by a lending Fund and may be repaid on any day by a borrowing Fund.
    11. A Fund's participation in the proposed credit facility must be 
consistent with its investment objectives and limitations and 
organizational documents.
    12. The Fund Financial Services Department will calculate total 
Fund borrowing and lending demand through the proposed credit facility, 
and allocate loans on an equitable basis among the Funds, without the 
intervention of any portfolio manager of the Funds. The Fund Financial 
Services Department will not solicit cash for the proposed credit 
facility from any Fund or prospectively publish or disseminate loan 
demand data to portfolio managers. The Fund Financial Services 
Department will invest any amounts remaining after satisfaction of 
borrowing demand in accordance with the standing instructions of the 
portfolio managers or such remaining amounts will be invested directly 
by the portfolio managers of the Funds.
    13. The Fund Financial Services Department will monitor the 
Interfund Loan Rate and the other terms and conditions of the Interfund 
Loans and will make a quarterly report to the Trustees of each Fund 
concerning the

[[Page 22728]]

participation of the Funds in the proposed credit facility and the 
terms and other conditions of any extensions of credit under the credit 
facility.
    14. The Trustees of each Fund, including a majority of the 
Independent Trustees, will:
    (a) review, no less frequently than quarterly, the Fund's 
participation in the proposed credit facility during the preceding 
quarter for compliance with the conditions of any order permitting such 
transactions;
    (b) establish the Bank Loan Rate formula used to determine the 
interest rate on Interfund Loans and review, no less frequently than 
annually, the continuing appropriateness of the Bank Loan Rate formula; 
and
    (c) review, no less frequently than annually, the continuing 
appropriateness of the Fund's participation in the proposed credit 
facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and such default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the Interfund Lending Agreement, Vanguard will 
promptly refer such loan for arbitration to an independent arbitrator 
selected by the Trustees of each Fund involved in the loan who will 
serve as arbitrator of disputes concerning Interfund Loans.\3\ The 
arbitrator will resolve any problem promptly, and the arbitrator's 
decision will be binding on both Funds. The arbitrator will submit, at 
least annually, a written report to the Trustees setting forth a 
description of the nature of any dispute and the actions taken by the 
Funds to resolve the dispute.
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    \3\ If the dispute involves Funds with different Trustees, the 
respective Trustees of each Fund will select an independent 
arbitrator that is satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
by it under the proposed credit facility occurred, the first two years 
in an easily accessible place, written records of all such transactions 
setting forth a description of the terms of the transactions, including 
the amount, the maturity and the Interfund Loan Rate, the rate of 
interest available at the time each Interfund Loan is made on overnight 
repurchase agreements and commercial bank borrowings, the yield of any 
money market fund in which the lending Fund could otherwise invest, and 
such other information presented to the Fund's Trustees in connection 
with the review required by conditions 13 and 14.
    17. The Fund Financial Services Department will prepare and submit 
to the Trustees for review an initial report describing the operations 
of the proposed credit facility and the procedures to be implemented to 
ensure that all Funds are treated fairly. After the commencement of the 
proposed credit facility, the Fund Financial Services Department will 
report on the operations of the proposed credit facility at the 
Trustees' meetings on a quarterly basis.
    Each Fund's chief compliance officer, as defined in rule 38a-
1(a)(4) under the Act, shall prepare an annual report for its Trustees 
each year that the Fund participates in the proposed credit facility, 
that evaluates the Fund's compliance with the terms and conditions of 
the application and the procedures established to achieve such 
compliance. Each Fund's chief compliance officer will also annually 
file a certification pursuant to Item 77Q3 of Form N-SAR as such Form 
may be revised, amended or superseded from time to time, for each year 
that the Fund participates in the proposed credit facility, that 
certifies that the Fund, and Vanguard have established procedures 
reasonably designed to achieve compliance with the terms and conditions 
of the order. In particular, such certification will address procedures 
designed to achieve the following objectives:
    (a) that the Interfund Loan Rate will be higher than the Repo Rate, 
and, if applicable, the yield of the money market funds, but lower than 
the Bank Loan Rate;
    (b) compliance with the collateral requirements as set forth in the 
application;
    (c) compliance with the percentage limitations on interfund 
borrowing and lending;
    (d) allocation of interfund borrowing and lending demand in an 
equitable manner and in accordance with procedures established by the 
Trustees; and
    (e) that the Interfund Loan Rate does not exceed the interest rate 
on any third party borrowings of a borrowing Fund at the time of the 
Interfund Loan.
    Additionally, each Fund's independent public accountants, in 
connection with their audit examination of the Fund, will review the 
operation of the proposed credit facility for compliance with the 
conditions of the application and their review will form the basis, in 
part, of the auditor's report on internal accounting controls in Form 
N-SAR.
    18. No Fund will participate in the proposed credit facility upon 
receipt of requisite regulatory approval unless it has fully disclosed 
in its prospectus and/or statement of additional information all 
material facts about its intended participation.


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09236 Filed 4-22-14; 8:45 am]
BILLING CODE 8011-01-P


