SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-27203)
UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 85 [X]
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AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 86 [X]
VANGUARD EXPLORER FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
HEIDI STAM, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
[x] ON FEBRUARY 20, 2009 PURSUANT TO PARAGRAPH (B)
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
[VANGUARD SHIP LOGO/R/]
VANGUARD EXPLORER FUND PROSPECTUS
Investor Shares & Admiral/TM/ Shares
This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2008.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
CONTENTS
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Fund Profile 1 Investing With Vanguard 24
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More on the Fund 6 Purchasing Shares 24
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The Fund and Vanguard 13 Converting Shares 27
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Investment Advisors 14 Redeeming Shares 28
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Dividends, Capital Gains, and Taxes 17 Exchanging Shares 31
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Share Price 19 Frequent-Trading Limits 31
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Financial Highlights 21 Other Rules You Should Know 33
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Fund and Account Updates 38
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Contacting Vanguard 40
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Glossary of Investment Terms 42
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Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.
Share Class Overview
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and Section 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from Vanguard; or
. Accounts maintained by financial intermediaries, except in limited circumstances.
The Fund's separate share classes have different expenses; as a result, their investment performances will differ.
An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Company or any other government agency.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests mainly in the stocks of small companies. These companies tend
to be unseasoned but are considered by the Fund's advisors to have superior
growth potential. Also, these companies often provide little or no dividend
income. The Fund uses multiple investment advisors. For additional information
on the Fund's investment strategies, please see More on the Fund.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
. Investment style risk, which is the chance that returns from small-capitalization growth stocks will trail returns from the overall stock market. Historically, small-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
. Manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of a relevant market index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Investor Shares ------------------------------------------------------------ [Bar Chart Range: 60% to -60%] 1999 37.26% 2000 9.22 2001 0.56 2002 -24.58 2003 44.25 2004 13.75 2005 9.28 2006 9.70 2007 5.06 2008 -40.40 ------------------------------------------------------------ |
During the periods shown in the bar chart, the highest return for a calendar quarter was 29.99% (quarter ended December 31, 1999), and the lowest return for a quarter was -26.16% (quarter ended December 31, 2008).
Average Annual Total Returns for Periods Ended December 31, 2008
1 Year 5 Years 10 Years
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Vanguard Explorer Fund Investor Shares
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Return Before Taxes -40.40% -3.11% 3.42%
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Return After Taxes on Distributions -40.46 -4.09 1.89
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Return After Taxes on Distributions and Sale of Fund Shares -26.18 -2.45 2.53
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Vanguard Explorer Fund Admiral Shares/1/
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Return Before Taxes -40.29% -2.94% --
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Russell 2500 Growth Index
(reflects no deduction for fees, expenses, or taxes) -41.50% -2.24% 0.75%
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1 From the inception date of the Fund's Admiral Shares on November 12, 2001,
through December 31, 2008, the average annual total returns were 0.74% for
the Admiral Shares and 0.32% for the Russell 2500 Growth Index.
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Note on after-tax returns. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and will differ for each share class in an amount approximately equal to the difference in expense ratios. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be
higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. However, these costs are reflected in the investment performance figures included in this prospectus. The expenses shown in the following table are based on those incurred in the fiscal year ended October 31, 2008.
Shareholder Fees
(Fees paid directly from your investment)
Investor Shares Admiral Shares
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Sales Charge (Load) Imposed on Purchases None None
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Purchase Fee None None
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Sales Charge (Load) Imposed on Reinvested Dividends None None
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Redemption Fee None None
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Account Service Fee (for fund account balances below $10,000) $20/year/1/ --
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Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
Investor Shares Admiral Shares
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Management Expenses 0.48% 0.28%
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12b-1 Distribution Fee None None
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Other Expenses 0.03% 0.04%
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Total Annual Fund Operating Expenses/2/ 0.51% 0.32%
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1 If applicable, the account service fee will be collected by redeeming Fund shares in the amount of $20.
2 The Total Annual Fund Operating Expenses have been restated to reflect expenses being deducted from current Fund assets.
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The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Shares provide a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period.
1 Year 3 Years 5 Years 10 Years
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Investor Shares $52 $164 $285 $640
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Admiral Shares 33 103 180 406
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These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown.
PLAIN TALK ABOUT FUND EXPENSES
Additional Information
As of October 31, 2008
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Net Assets (all share classes) $7.0 billion
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Investment Advisors . AXA Rosenberg Investment Management LLC, Orinda, Calif.,
since 2007
. Century Capital Management, LLC, Boston, Mass.,
since 2008
. Chartwell Investment Partners, L.P., Berwyn, Pa.,
since 1997
. Granahan Investment Management, Inc., Waltham, Mass., since
1990
. Kalmar Investment Advisers, Wilmington, Del., since 2005
. Wellington Management Company, LLP, Boston, Mass., since
inception
. The Vanguard Group, Inc., Valley Forge, Pa., since 1997
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Dividends and Capital Gains Distributed annually in December
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Suitable for IRAs Yes
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Investor Shares Admiral Shares
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Inception Date December 11, 1967 November 12, 2001
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Minimum Initial Investment $3,000 $100,000
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Conversion Features May be converted to Admiral May be converted to Investor
Shares if you meet eligibility shares if you are no longer
requirements eligible for Admiral Shares
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Newspaper Abbreviation Explr ExplrAdml
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Vanguard Fund Number 24 5024
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CUSIP Number 921926101 921926200
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Ticker Symbol VEXPX VEXRX
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MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental.
Market Exposure
The Fund focuses on companies that are considered small-cap by the Fund's
advisors.
Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2008, was $1.7 billion.
Small-cap stocks tend to have greater volatility than large-cap stocks because, among other things, smaller companies often have fewer customers, financial resources, and products than larger firms. Such characteristics can make small-cap companies more sensitive to changing economic conditions. In addition, these companies typically provide little or no dividend income.
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices.
To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur.
U.S. Stock Market Returns
(1926-2008)
1 Year 5 Years 10 Years 20 Years
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Best 54.2% 28.6% 19.9% 17.8%
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Worst -43.1 -12.4 -1.4 3.1
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Average 11.6 10.3 10.9 11.3
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2008. You can see, for example, that although the average return on common stocks for all of the 5-year periods was 10.3%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular.
Keep in mind that the Fund focuses on the stocks of smaller companies. Historically, small-cap stocks have been more volatile than--and at times have performed quite differently from--the large-cap stocks found in the S&P 500 Index. This volatility is due to several factors, including less-certain growth and dividend prospects for smaller companies.
[FLAG]
The Fund is subject to investment style risk, which is the chance that returns
from small-capitalization growth stocks will trail returns from the overall
stock market. Historically, small-cap stocks have been more volatile in price
than the large-cap stocks that dominate the overall market, and they often
perform quite differently.
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects, the prices of the securities, and the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment.
Each advisor uses a different process to select securities for its portion of the Fund's assets; however, each is committed to buying stocks of small companies that, in the advisor's opinion, have strong growth potential.
Granahan Investment Management, Inc. (Granahan), which manages approximately 26% of the Fund's assets, groups securities into three categories as part of its selection process. The first category, "core growth," emphasizes companies that have a well-known or established product or service and, as a result, have a proven record of growth and a strong market position. The second category, "pioneers," is made up of companies that offer unique products or services, technologies that may lead to new products, or expansion into new markets. Granahan judges "pioneer" stocks based on their estimated growth potential compared with market value. The third category, "special situation," includes companies that lack a record of strong growth but that, in Granahan's view, are both undervalued in the market and likely to grow in the next few years. "Core growth" stocks generally make up 35% to 70% of the advisor's share of Fund assets, with the other two categories generally at 10% to 35% each.
Kalmar Investment Advisers (Kalmar), which manages approximately 14% of the Fund's assets, is a research-driven investment firm that is entirely focused on the management of "growth-with-value" smaller-cap equity portfolios. Kalmar believes that there is a high-reward and low-risk anomaly offered by the equity market in the stocks of solid, well-managed, rapidly growing smaller companies that are not fully on the radar screen of most institutional growth managers. Through independent fundamental research, Kalmar attempts to discover such companies, buy them at undervalued levels, and own them for the longer term. Kalmar searches for companies that it believes have the following characteristics: strong products, strong balance sheets, attractive financial returns, conservative accounting, and superior management with the ability to deliver positive results.
Wellington Management Company, LLP (Wellington Management), which manages approximately 14% of the Fund's assets, uses research and analysis of individual companies to select stocks that the advisor feels have exceptional growth potential relative to their valuations in the marketplace. Wellington Management considers
each stock individually before purchase, and continually monitors developments at these companies for comparison with the advisor's expectations for growth. To help limit risk, the portfolio is broadly diversified both by number of stocks and by exposure to a range of industries.
AXA Rosenberg Investment Management LLC (AXA Rosenberg), which manages approximately 12% of the Fund's assets, constructs a portfolio of common stocks based on fundamental analysis using a two-part quantitative model: a valuation model and an earnings forecast model. The valuation model seeks to identify the fair value of a stock using a sum-of-the-parts technique. The sum of a company's parts is then compared to the current stock price to determine whether the stock appears to be under- or over-valued by the market. The earnings forecast model seeks to identify companies that are expected to have superior earnings over the next year. A mix of fundamental indicators (e.g., profitability measures) and indicators from market participants (e.g., analyst forecasts) is combined to generate a forecast of next year's earnings for a company. The output of the two models is combined to form a single predicted return for each company that AXA Rosenberg covers. The predicted returns are fed into a risk model that maximizes the portfolio's expected return while minimizing common factor differences versus the benchmark index. Each stock is compared with its next-best alternative, taking into account round-trip trading costs. AXA Rosenberg optimizes its portfolio against the Russell 2500 Growth Index, the benchmark for the Fund.
Chartwell Investment Partners, L.P. (Chartwell), which manages approximately 9% of the Fund's assets, uses a research-driven process to choose stocks judged to have exceptional growth potential and reasonable prices. After considering each stock individually before purchase, Chartwell constantly monitors the characteristics of its holdings as a group by using computerized techniques.
Century Capital Management, LLC (Century Capital), which manages approximately 6% of the Fund's assets, employs a fundamental, bottom-up investment approach that attempts to identify reasonably priced companies that will grow faster than the overall market. Independent research is a core tenet. Analysts are expected to make at least 80 company visits per year, including meeting with the second or third tier of management. The ideal investment is a reasonably valued, well-managed company in a non-capital-intensive business. Such a company would also need to have established products or services, a high return on equity, high recurring revenues, and improving margins.
The Vanguard Group, Inc. (Vanguard), manages approximately 14% of the Fund's assets by constructing a broadly diversified portfolio of small-cap domestic growth stocks based on its assessment of the relative return potential of the underlying securities. The advisor selects securities that it believes offer a good balance between reasonable valuations and attractive earnings growth prospects relative to their small-cap domestic
growth peers. Vanguard implements its stock selection process through the use of proprietary software programs that compare thousands of securities at a time.
In addition, Vanguard manages approximately 5% of the Fund's assets, by investing in stock index futures and/or shares of exchange-traded funds. For more details, see Other Investment Policies and Risks.
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection or focus on securities in a particular sector, category, or group of
companies will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in common stocks of growth companies, the Fund may make other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 25% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to country risk and currency risk. Country risk is the chance that world events--such as political upheaval, financial troubles, or natural disasters--will adversely affect the value of securities issued by companies in foreign countries. In addition, the prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. Currency risk is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
The Fund may invest up to 15% of its net assets in restricted securities with limited marketability or in other illiquid securities.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities can use these contracts
to guard against unfavorable changes in U.S. dollar/foreign currency exchange rates. These contracts, however, would not prevent the Fund's securities from falling in value during foreign market downswings.
Vanguard typically invests a small portion of the Fund's assets in stock index futures and/or shares of exchange-traded funds (ETFs), including ETF Shares issued by Vanguard stock funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies--for instance, by allocating substantial assets to cash, commercial paper, or other less volatile instruments--in response to adverse or unusual market, economic, political, or other conditions. In
doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.
See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value, will, when appropriate, use fair-value pricing, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for small growth funds was approximately 115%, as reported by Morningstar, Inc., on October 31, 2008.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 150 funds holding assets of approximately $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs.
INVESTMENT ADVISORS
The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the Fund's board of trustees. The board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time.
. Granahan Investment Management, Inc., 275 Wyman Street, Waltham, MA 02451, is an investment advisory firm founded in 1985. As of October 31, 2008, Granahan managed approximately $3.2 billion in assets.
. Kalmar Investment Advisers, Barley Mill House, 3701 Kennett Pike, Wilmington, DE 19807, is an investment advisory firm founded in 1996. As of October 31, 2008, Kalmar, together with its parent company, Kalmar Investments Inc., founded in 1982, managed approximately $2.1 billion in small-cap and small-/mid-cap assets.
. AXA Rosenberg Investment Management LLC, 4 Orinda Way, Building E, Orinda, CA 94563, is an investment advisory firm founded in 1985. As of October 31, 2008, AXA Rosenberg managed approximately $71.5 billion in assets.
. Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is a Massachusetts limited liability partnership and an investment counseling firm that provides investment services to investment companies, employee benefits plans, endowments, foundations, and other institutions. Wellington Management and its predecessor organizations have provided investment advisory services for over 70 years. As of October 31, 2008, Wellington Management had investment management authority with respect to approximately $427 billion in assets.
. Chartwell Investment Partners, L.P., 1235 Westlakes Drive, Suite 400, Berwyn, PA 19312, is an investment advisory firm founded in 1997. As of October 31, 2008, Chartwell managed approximately $4.9 billion in assets.
. Century Capital Management, LLC, 100 Federal Street, Boston, MA 02110, is an investment advisory firm that provides investment management services to institutions and individuals. The firm traces its origins to 1928 and the founding of Century Shares Trust. As of October 31, 2008, Century Capital managed approximately $1.8 billion in assets.
. The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2008, Vanguard served as advisor for approximately $868 billion in assets.
The Fund pays six of its investment advisors--Granahan, Kalmar, AXA Rosenberg, Wellington Management, Chartwell, and Century Capital--on a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to average daily net assets managed by the advisor during the most recent fiscal quarter. The fee paid to each advisor may be increased or decreased based on the advisor's performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund is compared with that of the Russell 2500 Growth Index (a 50/50 split of the Russell 2500 and 2500 Growth Indexes for Century Capital) over a trailing 36-month period. Please note that over time, changes in an advisor's relative performance may result in changes in the performance-based fees paid by the Fund, which in turn would result in an increase or decrease in the expenses borne by fund shareholders.
Vanguard provides services to the Fund on an at-cost basis. Vanguard's performance is also evaluated against the Russell 2500 Growth Index.
For the fiscal year ended October 31, 2008, the aggregate advisory fees paid represented an effective annual rate of 0.18% of the Fund's average net assets before a performance-based decrease of 0.02%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. As the Fund's sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised.
For a discussion of why the board of trustees approved the Fund's investment advisory arrangements, see the most recent semiannual report to shareholders covering the fiscal period ended April 30.
George U. Sauter, Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguard's Quantitative Equity and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the development of Vanguard's stock indexing and active quantitative equity investment strategies. He received his A.B. in Economics from Dartmouth College and an M.B.A. in Finance from the University of Chicago.
Joel M. Dickson, Ph.D., Principal of Vanguard and head of Active Quantitative Equity Management. He has direct oversight responsibility for all active quantitative equity portfolios managed by Vanguard's Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University.
The managers primarily responsible for the day-to-day management of the Fund are:
John J. Granahan, CFA, Founder and President of Granahan. He has worked in investment management since 1960; has been with Granahan since 1985; and has managed a portion of the Fund since 1990. Education: B.A., St. Joseph's University; Graduate Fellow of Catholic University of America.
Ford B. Draper, Jr., President, Chief Investment Officer, and Founder of Kalmar. He has worked in investment management since 1967; founded Kalmar Investments Inc., the parent company of Kalmar, in 1982; and has managed a portion of the Fund since 2005. Education: B.A., Yale University; M.B.A., Columbia University.
William E. Ricks, Americas Chief Executive and Chief Investment Officer at AXA Rosenberg. He has worked in investment management with AXA Rosenberg since 1989, including trading, operations, portfolio engineering, and portfolio construction; and has managed a portion of the Fund since 2007. Education: B.S., University of New Orleans; Ph.D., University of California, Berkeley.
Kenneth L. Abrams, Senior Vice President and Equity Portfolio Manager of Wellington Management. He has worked in investment management with Wellington Management since 1986; and has managed a portion of the Fund since 1994. Education: B.A. and M.B.A., Stanford University.
Edward N. Antoian, CFA, CPA, Managing Partner at Chartwell. He has managed equity funds since 1984 and has co-managed a portion of the Fund since 1997. Education: B.S., State University of New York; M.B.A., University of Pennsylvania.
John Heffern, Managing Partner at Chartwell. He has worked in investment management since 1988, has been with Chartwell since 2005, and has co-managed a
portion of the Fund since 2006. Education: B.S. and M.B.A., University of North Carolina at Chapel Hill.
Alexander L. Thorndike, Chief Investment Officer and Managing Partner at Century Capital. He has worked in investment management since 1988, has managed investment portfolios for Century Capital since 1999, and has managed a portion of the Fund since June 2008. Education: A.B., Harvard University; M.B.A., J.L. Kellogg Graduate School of Management at Northwestern University.
James D. Troyer, CFA, Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College.
The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Fund Distributions
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses) as well as any net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December. You
can receive distributions of income or capital gains in cash, or you can have
them automatically reinvested in more shares of the Fund.
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic federal income tax points:
. Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.
. Distributions declared in December--if paid to you by the end of January--are taxable as if received in December.
. Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced tax rates on "qualified dividend income," if any, distributed by the Fund.
. Any distributions of net long-term capital gains are taxable to you as long-term capital gains, no matter how long you've owned shares in the Fund.
. Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows.
. A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your tax return.
. Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event.
Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes.
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds.
Invalid addresses. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address.
Tax consequences. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you.
Share Price
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the shares. The values of any ETF or closed-end fund shares held by a fund are based on the market value of the shares.
When a fund determines that market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value pricing may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report online at www.vanguard.com or by contacting Vanguard by telephone or mail.
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Fund's Investor Shares as an example. The Investor Shares began fiscal year 2008 with a net asset value (price) of $83.93 per share. During the year, each Investor Share earned $0.295 from investment income (interest and dividends). There was a decline of $31.589 per share in the value of investments held or sold by the Fund, resulting in a net decline of $31.294 per share from investment operations.
Shareholders received $7.096 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains.
The share price at the end of the year was $45.54, reflecting losses of $31.294 per share and distributions of $7.096 per share. This was a decrease of $38.39 per share (from $83.93 at the beginning of the year to $45.54 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -40.17% for the year.
Explorer Fund Investor Shares
Year Ended October 31,
---------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $83.93 $80.26 $76.67 $67.01 $63.17
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) .295 .362 .302 .111 (.050)
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) (31.589) 11.052 9.724 9.622 3.890
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (31.294) 11.414 10.026 9.733 3.840
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.310) (.320) (.230) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (6.786) (7.424) (6.206) (.073) --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (7.096) (7.744) (6.436) (.073) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $45.54 $83.93 $80.26 $76.67 $67.01
===================================================================================================================================
Total Return/1/ -40.17% 15.31% 13.59% 14.53% 6.08%
===================================================================================================================================
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $5,026 $8,937 $8,517 $7,836 $7,302
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/2/ 0.44% 0.41% 0.46% 0.51% 0.57%
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income (Loss) to Average 0.40% 0.44% 0.36% 0.16% (0.11%)
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 112% 90% 96% 80% 82%
===================================================================================================================================
1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.
2 Includes performance-based investment advisory fee increases (decreases) of (0.02%), (0.04%), (0.03%), (0.01%), and 0.02%.
|
Explorer Fund Admiral Shares
Year Ended October 31,
------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $78.25 $74.82 $71.47 $62.37 $58.71
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .385 .478 .422 .215 .040
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments (29.442) 10.299 9.050 8.953 3.620
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (.29.057) 10.777 9.472 9.168 3.660
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.427) (.437) (.346) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (6.316) (6.910) (5.776) (.068) --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (6.743) (7.347) (6.122) (.068) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $42.45 $78.25 $74.82 $71.47 $62.37
===================================================================================================================================
Total Return -40.07% 15.53% 13.79% 14.70% 6.23%
===================================================================================================================================
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,023 $3,652 $3,264 $2,402 $1,161
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/1/ 0.26% 0.23% 0.28% 0.34% 0.43%
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average
Net Assets 0.58% 0.62% 0.54% 0.33% 0.04%
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 112% 90% 96% 80% 82%
===================================================================================================================================
1 Includes performance-based investment advisory fee increases (decreases) of (0.02%), (0.04%), (0.03%), (0.01%), and 0.02%.
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INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Please call or check online for current information.
Each fund you hold in an account is a separate "fund account." For example, if you hold three funds in a nonretirement account titled in your own name, two funds in a nonretirement account titled jointly with your spouse, and one fund in an individual retirement account, you have six fund accounts--and this is true even if you hold the same fund in multiple accounts.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Investor Shares
To open and maintain an account. $3,000.
Add to an existing account. By Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan).
Account Minimums for Admiral Shares
To open and maintain an account. $100,000 for new investors. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in the same Fund account are eligible to convert their Investor Shares to Admiral Shares. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them.
Add to an existing account. By Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan).
How to Initiate a Purchase Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your purchase request.
Online. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (using the proceeds from the redemption of shares from one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to begin the account registration process or request that the account-opening forms be sent to you. You may also request a purchase of shares by wire, by electronic bank transfer, or by an exchange. See Contacting Vanguard.
By mail. You may send your account registration form and check to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard to make an exchange. For a list of Vanguard addresses, see Contacting Vanguard.
How to Pay for a Purchase
By electronic bank transfer. You may purchase shares of a Vanguard fund through an electronic transfer of money held in a designated bank account. To establish the electronic bank transfer option on an account, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. After the option is set up on your account, you can purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or from time to time. Your purchase request can be initiated online, by telephone, or by mail.
By wire. Wiring instructions vary for different types of purchases. Please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Initiate a Purchase Request: By mail. Make your check payable to Vanguard and include the appropriate fund number (e.g., Vanguard--xx). For a list of Fund numbers (for share classes in this prospectus), see Contacting Vanguard.
By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares from another Vanguard fund. You may initiate an exchange online (if you are a registered user of Vanguard.com), by telephone, or by mail. See Exchanging Shares.
Trade Date
The trade date for any purchase request received in good order will depend on
the day and time Vanguard receives your request, the manner in which you are
paying, and the type of fund you are purchasing. Your purchase will be executed
using the NAV as calculated on the trade date. NAVs are calculated only on days
the New York Stock Exchange (NYSE) is open for trading (a business day).
For purchases by check into all funds other than money market funds, and for purchases by exchange or wire into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the purchase request is
received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.
For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the next business day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the second business day following the day Vanguard receives the purchase request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date will be one business day later than for other funds.
For purchases by electronic bank transfer using an Automatic Investment Plan:
Your trade date generally will be one business day before the date you
designated for withdrawal from your bank account.
For purchases by electronic bank transfer not using an Automatic Investment Plan: If the purchase request is received by Vanguard on a business day before 10 p.m., Eastern time, the trade date generally will be the next business day. If the purchase request is received on a business day after 10 p.m., Eastern time, or on a nonbusiness day, the trade date will be the second business day following the day Vanguard receives the request.
If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should Know--Good Order.
For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Admiral Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and Section 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from Vanguard; or
. Accounts maintained by financial intermediaries, except in limited circumstances.
Check purchases. All purchase checks must be written in U.S. dollars and must be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, Vanguard may refuse "starter checks" and checks that are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not
be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without prior notice, to close your account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large dollar amount.
No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.
CONVERTING SHARES
When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the "new" shares you receive equals the dollar value of the "old" shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the net asset values of the two share classes.
A conversion between share classes of the same fund is a nontaxable event.
Trade Date
The trade date for any conversion request received in good order will depend on
the day and time Vanguard receives your request. Your conversion will be
executed using the NAVs of the different share classes on the trade date. NAVs
are calculated only on days the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know.
Conversions From Investor Shares to Admiral Shares
Self-directed conversions. If your account balance in the Fund is at least $100,000, you may ask Vanguard to convert your Investor Shares to Admiral Shares. You can
make conversion requests online (if you are a registered user of Vanguard.com), by telephone, or by mail. See Contacting Vanguard.
Automatic conversions. Vanguard conducts periodic reviews of account balances and may, if your account balance in the Fund exceeds $100,000, automatically convert your Investor Shares to Admiral Shares. You will be notified before an automatic conversion occurs and will have an opportunity to instruct Vanguard not to effect the conversion.
Tenure conversions. You are eligible for a tenure conversion from Investor Shares to Admiral Shares if you have had an account in the Fund for ten years, that account balance is at least $50,000, and you are registered with Vanguard.com. You may request a tenure conversion online, by telephone, or by mail.
Mandatory Conversions to Investor Shares If an account no longer meets the balance requirements for Admiral Shares, Vanguard may automatically convert the shares in the account to Investor Shares. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.
REDEEMING SHARES
How to Initiate a Redemption Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before placing your redemption request.
Online. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares of one Vanguard fund using the proceeds of a simultaneous redemption from another Vanguard fund) through our website at www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard.
How to Receive Redemption Proceeds
By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. To establish the electronic bank transfer option on an account, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. After the option is set up on your account, you can redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request can be initiated online, by telephone, or by mail.
By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard generally charges a $5 fee for wire redemptions under $5,000.
By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are a registered user of Vanguard.com), by telephone, or by mail.
By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, normally within two business days of your trade date.
Trade Date
The trade date for any redemption request received in good order will depend on
the day and time Vanguard receives your request and the manner in which you are
redeeming. Your redemption will be executed using the NAV as calculated on the
trade date. NAVs are calculated only on days that the NYSE is open for trading
(a business day).
For redemptions by check, exchange, or wire: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.
.Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the redemption proceeds generally will leave Vanguard by the close of business on the next business day.
.Note on timing of wire redemptions from bond funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an Automatic Withdrawal Plan:
Your trade date generally will be the date you designated for withdrawal of
funds (redemption of shares) from your Vanguard account. Proceeds of redeemed
shares generally will be credited to your designated bank account two business
days after your trade date. If the date you designated for withdrawal of funds
from your Vanguard account falls on a weekend, holiday, or other nonbusiness
day, your trade date will be the previous business day.
For redemptions by electronic bank transfer not using an Automatic Withdrawal Plan: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. See Other Rules You Should Know--Good Order.
For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts.
Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.
Share certificates. If you hold shares in certificates, those shares cannot be redeemed, exchanged, or converted until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard.
Address change. If you change your address online or by telephone, there may be a 15-day restriction on your ability to make online and telephone redemptions. You can request a redemption in writing at any time. Confirmations of address changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, we can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners and may require a signature guarantee. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee.
No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.
Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.
EXCHANGING SHARES
An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are a registered user of Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming Shares.
If the NYSE is open for regular trading (a business day) at the time an exchange
request is received in good order, the trade date generally will be the same
day.
See Other Rules You Should Know--Good Order for additional information on all
transaction requests.
Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason.
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in
the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.
The frequent-trading policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold their accounts directly with Vanguard. (Transaction requests submitted by fax are not mail transactions and are subject to the policy.)
. Transfers and reregistrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.)
For participants in employer-sponsored defined contribution plans*, the frequent-trading policy does not apply to:
. Purchases of shares with participant payroll or employer contributions or loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the plan.
. Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Reregistrations of shares.
. Conversions of shares from one share class to another in the same fund.
. Exchange requests submitted by mail to Vanguard. (Exchange requests submitted by fax are not mail requests and remain subject to the policy.)
* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.
Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary or by an intermediary for the benefit of certain of the intermediary's clients. Intermediaries may also monitor their clients' trading activities with respect to Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by sending just one prospectus and/or report when two or more shareholders have the same last name and address. You may request individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or by e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your personal computer to review your account holdings; to buy, sell, or exchange shares of most Vanguard funds; and to perform most other transactions. You must register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "Account Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service.
Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:
. Authorization to act on the account (as the account owner or by legal documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private, and immediately review any account
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
Unusual Circumstances
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
Investing With Vanguard Through Other Firms You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees and monitoring of frequent trading for accounts held by intermediaries.
Account Service Fee
For most shareholders, Vanguard charges a $20 account service fee on all fund accounts that have a balance below $10,000 for any reason, including market fluctuation. The account service fee applies to both retirement and nonretirement fund accounts and will be assessed on fund accounts in all Vanguard funds, regardless of a fund's minimum investment amount. The fee, which will be collected by redeeming fund shares in the amount of $20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of statements, reports, and other materials for all of your fund accounts, the account service fee for balances below $10,000 will not be charged, so long as that election remains in effect.
The account service fee also does not apply to the following:
. Money market sweep accounts owned in connection with a Vanguard Brokerage Services/(R)/ account.
. Accounts held through intermediaries.
. Accounts held by Voyager, Voyager Select, and Flagship members. Membership is based on total household assets held at Vanguard, with a minimum of $100,000 to qualify for Vanguard Voyager Services/TM/, $500,000 for Vanguard Voyager Select Services/(R)/, and $1 million for Vanguard Flagship Services/TM/. Vanguard determines membership by aggregating assets of all eligible accounts held by the investor and immediate family members who reside at the same address. Aggregate assets include investments in Vanguard mutual funds, Vanguard ETFs/TM/, annuities through Vanguard, the Vanguard 529 Plan, certain small-business accounts, and employer-sponsored retirement plans for which Vanguard provides recordkeeping services.
. Participant accounts in employer-sponsored defined contribution plans*. Please consult your enrollment materials for the rules that apply to your account.
. Section 529 college savings plans.
* The following Vanguard fund accounts have alternative fee structures: SIMPLE IRAs, certain Section 403(b)(7) accounts, Vanguard Retirement Investment Program pooled plans, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.
Low-Balance Accounts
The Fund reserves the right to liquidate a fund account whose balance falls below the minimum initial investment for any reason, including market fluctuation. This policy applies to nonretirement fund accounts and accounts that are held through intermediaries.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if we reasonably believe a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
Fund and Account Updates
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividend or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs and other retirement plans. Registered users can view these statements online.
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard Explorer Fund twice a year, in June and December. These comprehensive
reports include overviews of the financial markets and provide the following
specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Reports from the advisors.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Portfolio section of the Fund's Portfolio & Management page, a detailed list of the securities held by the Fund, as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
CONTACTING VANGUARD
Web
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
----------------------------------------------------------------------------------------
Phone
----------------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R)/ For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
----------------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
----------------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
----------------------------------------------------------------------------------------
Admiral Service Center For Admiral account information
888-237-9949 For most Admiral transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
----------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
----------------------------------------------------------------------------------------
Intermediary Sales For information and services for financial intermediaries
Support including broker-dealers, trust institutions, insurance
800-997-2798 companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to
7 p.m., Eastern time
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|
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
----------------------------------------------------------------------
Regular Mail (Institutions) The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
|
Fund Numbers
Please use the specific fund number when contacting us:
Investor Shares Admiral Shares
---------------------------------------------------------------------
Vanguard Explorer Fund 24 5024
---------------------------------------------------------------------
|
CFA/(R)/ is a trademark owned by CFA Institute. Russell is a trademark of The Frank Russell Company. Standard & Poor's/(R)/,S&P/(R)/, S&P 500/(R)/, Standard & Poor's 500, and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds.
GLOSSARY OF INVESTMENT TERMS
Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances.
Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund's investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Capitalization. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.
Principal. The face value of a debt instrument or the amount of money put into an investment.
Securities. Stocks, bonds, money market instruments, and other investment vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price.
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[VANGUARD SHIP LOGO/R/]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Explorer Fund, the following
documents are available free upon request:
Annual/Semiannual Reports to Shareholders Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI) The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1530
(C) 2009 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
P024 022009
[VANGUARD SHIP LOGO/R/]
VANGUARD EXPLORER FUND PROSPECTUS
Investor Shares for Participants
This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2008.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Contents
----------------------------------------------------------------------------------------------- Fund Profile 1 Financial Highlights 19 ----------------------------------------------------------------------------------------------- More on the Fund 6 Investing With Vanguard 21 ----------------------------------------------------------------------------------------------- The Fund and Vanguard 13 Accessing Fund Information by Computer 24 ----------------------------------------------------------------------------------------------- Investment Advisors 14 Glossary of Investment Terms 25 ----------------------------------------------------------------------------------------------- Dividends, Capital Gains, and Taxes 17 ----------------------------------------------------------------------------------------------- Share Price 18 ----------------------------------------------------------------------------------------------- |
Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.
This prospectus offers the Funds' Investor Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 800-662-7447.
An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Company or any other government agency.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests mainly in the stocks of small companies. These companies tend
to be unseasoned but are considered by the Fund's advisors to have superior
growth potential. Also, these companies often provide little or no dividend
income. The Fund uses multiple investment advisors. For additional information
on the Fund's investment strategies, please see More on the Fund.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
. Investment style risk, which is the chance that returns from small-capitalization growth stocks will trail returns from the overall stock market. Historically, small-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
. Manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of relevant market index. Keep in mind that the Fund's past performance does not
indicate how the Fund will perform in the future.
Annual Total Returns--Investor Shares ------------------------------------------------------------ [Bar Chart Range: 60% to -60%] 1999 37.26% 2000 9.22 2001 0.56 2002 -24.58 2003 44.25 2004 13.75 2005 9.28 2006 9.70 2007 5.06 2008 -40.40 ------------------------------------------------------------ |
During the periods shown in the bar chart, the highest return for a calendar quarter was 29.99% (quarter ended December 31, 1999), and the lowest return for a quarter was -26.16% (quarter ended December 31, 2008).
Average Annual Total Returns for Periods Ended December 31, 2008
1 Year 5 Years 10 Years
-------------------------------------------------------------------------------------------------------------
Vanguard Explorer Fund Investor Shares -40.40% -3.11% 3.42%
-------------------------------------------------------------------------------------------------------------
Russell 2500 Growth Index
(reflects no deduction for fees, expenses, or taxes) -41.50% -2.24% 0.75%
-------------------------------------------------------------------------------------------------------------
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. However, these costs are reflected in the investment performance figures included in this prospectus. The expenses shown in the following table are based on those incurred in the fiscal year ended October 31, 2008.
Shareholder Fees (Fees paid directly from your investment) ----------------------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None ----------------------------------------------------------------------------------------------------------------------------- Purchase Fee None ----------------------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None ----------------------------------------------------------------------------------------------------------------------------- Redemption Fee None ----------------------------------------------------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) ----------------------------------------------------------------------------------------------------------------------------- Management Expenses 0.48% ----------------------------------------------------------------------------------------------------------------------------- 12b-1 Distribution Fee None ----------------------------------------------------------------------------------------------------------------------------- Other Expenses 0.03% ----------------------------------------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses/1/ 0.51% ----------------------------------------------------------------------------------------------------------------------------- 1 The Total Annual Fund Operating Expenses have been restated to reflect expenses being deducted from current Fund assets. |
The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Shares provide a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period.
1 Year 3 Years 5 Years 10 Years -------------------------------------- $52 $164 $285 $640 -------------------------------------- |
This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown.
PLAIN TALK ABOUT FUND EXPENSES
Additional Information
As of October 31, 2008
-------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.0 billion
-------------------------------------------------------------------------------------------
Investment Advisors . AXA Rosenberg Investment Management LLC, Orinda, Calif.,
since 2007
. Century Capital Management, LLC, Boston, Mass.,
since 2008
. Chartwell Investment Partners, L.P. Berwyn, Pa.,
since 1997
. Granahan Investment Management, Inc. Waltham, Mass.,
since 1990
. Kalmar Investment Advisers, Wilmington, Del., since 2005
. Wellington Management Company, LLP, Boston, Mass., since
inception
. The Vanguard Group, Inc., Valley Forge, Pa., since 1997
-------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------------------
Inception Date December 11, 1967
-------------------------------------------------------------------------------------------
Newspaper Abbreviation Explr
-------------------------------------------------------------------------------------------
Vanguard Fund Number 24
-------------------------------------------------------------------------------------------
CUSIP Number 921926101
-------------------------------------------------------------------------------------------
Ticker Symbol VEXPX
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|
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental.
Market Exposure
The Fund focuses on companies that are considered small-cap by the Fund's
advisors.
Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2008, was $1.7 billion.
Small-cap stocks tend to have greater volatility than large-cap stocks because, among other things, smaller companies often have fewer customers, financial resources, and products than larger firms. Such characteristics can make small-cap companies more sensitive to changing economic conditions. In addition, these companies typically provide little or no dividend income.
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices.
To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur.
U.S. Stock Market Returns
(1926-2008)
1 Year 5 Years 10 Years 20 Years
-----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
-----------------------------------------------------
Worst -43.1 -12.4 -1.4 3.1
-----------------------------------------------------
Average 11.6 10.3 10.9 11.3
-----------------------------------------------------
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2008. You can see, for example, that although the average return on common stocks for all of the 5-year periods was 10.3%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular.
Keep in mind that the Fund focuses on the stocks of smaller companies. Historically, small-cap stocks have been more volatile than--and at times have performed quite differently from--the large-cap stocks found in the S&P 500 Index. This volatility is due to several factors, including less-certain growth and dividend prospects for smaller companies.
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The Fund is subject to investment style risk, which is the chance that returns
from small-capitalization growth stocks will trail returns from the overall
stock market. Historically, small-cap stocks have been more volatile in price
than the large-cap stocks that dominate the overall market, and they often
perform quite differently.
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects, the prices of the securities, and the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment.
Each advisor uses a different process to select securities for its portion of the Fund's assets; however, each is committed to buying stocks of small companies that, in the advisor's opinion, have strong growth potential.
Granahan Investment Management, Inc. (Granahan), which manages approximately 26% of the Fund's assets, groups securities into three categories as part of its selection process. The first category, "core growth," emphasizes companies that have a well-known or established product or service and, as a result, have a proven record of growth and a strong market position. The second category, "pioneers," is made up of companies that offer unique products or services, technologies that may lead to new products, or expansion into new markets. Granahan judges "pioneer" stocks based on their estimated growth potential compared with market value. The third category, "special situation," includes companies that lack a record of strong growth but that, in Granahan's view, are both undervalued in the market and likely to grow in the next few years. "Core growth" stocks generally make up 35% to 70% of the advisor's share of Fund assets, with the other two categories generally at 10% to 35% each.
Kalmar Investment Advisers (Kalmar), which manages approximately 14% of the Fund's assets, is a research-driven investment firm that is entirely focused on the management of "growth-with-value" smaller-cap equity portfolios. Kalmar believes that there is a high-reward and low-risk anomaly offered by the equity market in the stocks of solid, well-managed, rapidly growing smaller companies that are not fully on the radar screen of most institutional growth managers. Through independent fundamental research, Kalmar attempts to discover such companies, buy them at undervalued levels, and own them for the longer term. Kalmar searches for companies that it believes have the following characteristics: strong products, strong balance sheets, attractive financial returns, conservative accounting, and superior management with the ability to deliver positive results.
Wellington Management Company, LLP (Wellington Management), which manages approximately 14% of the Fund's assets, uses research and analysis of individual companies to select stocks that the advisor feels have exceptional growth potential relative to their valuations in the marketplace. Wellington Management considers
each stock individually before purchase, and continually monitors developments at these companies for comparison with the advisor's expectations for growth. To help limit risk, the portfolio is broadly diversified both by number of stocks and by exposure to a range of industries.
AXA Rosenberg Investment Management LLC (AXA Rosenberg), which manages approximately 12% of the Fund's assets, constructs a portfolio of common stocks based on fundamental analysis using a two-part quantitative model: a valuation model and an earnings forecast model. The valuation model seeks to identify the fair value of a stock using a sum-of-the-parts technique. The sum of a company's parts is then compared to the current stock price to determine whether the stock appears to be under- or over-valued by the market. The earnings forecast model seeks to identify companies that are expected to have superior earnings over the next year. A mix of fundamental indicators (e.g., profitability measures) and indicators from market participants (e.g., analyst forecasts) is combined to generate a forecast of next year's earnings for a company. The output of the two models is combined to form a single predicted return for each company that AXA Rosenberg covers. The predicted returns are fed into a risk model that maximizes the portfolio's expected return while minimizing common factor differences versus the benchmark index. Each stock is compared with its next-best alternative, taking into account round-trip trading costs. AXA Rosenberg optimizes its portfolio against the Russell 2500 Growth Index, the benchmark for the Fund.
Chartwell Investment Partners, L.P. (Chartwell), which manages approximately 9% of the Fund's assets, uses a research-driven process to choose stocks judged to have exceptional growth potential and reasonable prices. After considering each stock individually before purchase, Chartwell constantly monitors the characteristics of its holdings as a group by using computerized techniques.
Century Capital Management, LLC (Century Capital), which manages approximately 6% of the Fund's assets, employs a fundamental, bottom-up investment approach that attempts to identify reasonably priced companies that will grow faster than the overall market. Independent research is a core tenet. Analysts are expected to make at least 80 company visits per year, including meeting with the second or third tier of management. The ideal investment is a reasonably valued, well-managed company in a non-capital-intensive business. Such a company would also need to have established products or services, a high return on equity, high recurring revenues, and improving margins.
The Vanguard Group, Inc. (Vanguard), manages approximately 14% of the Fund's assets by constructing a broadly diversified portfolio of small-cap domestic growth stocks based on its assessment of the relative return potential of the underlying securities. The advisor selects securities that it believes offer a good balance between reasonable valuations and attractive earnings growth prospects relative to their small-cap domestic
growth peers. Vanguard implements its stock selection process through the use of proprietary software programs that compare thousands of securities at a time.
In addition, Vanguard manages approximately 5% of the Fund's assets, by investing in stock index futures and/or shares of exchange-traded funds. For more details, see "Other Investment Policies and Risks."
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The Fund is subject to manager risk, which is the chance that poor security
selection or focus on securities in a particular sector, category, or group of
companies will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in common stocks of growth companies, the Fund may make other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 25% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to country risk and currency risk. Country risk is the chance that world events--such as political upheaval, financial troubles, or natural disasters--will adversely affect the value of securities issued by companies in foreign countries. In addition, the prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. Currency risk is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
The Fund may invest up to 15% of its net assets in restricted securities with limited marketability or in other illiquid securities.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities can use these contracts
to guard against unfavorable changes in U.S. dollar/foreign currency exchange rates. These contracts, however, would not prevent the Fund's securities from falling in value during foreign market downswings.
Vanguard typically invests a small portion of the Fund's assets in stock index futures and/or shares of exchange-traded funds (ETFs), including ETF Shares issued by Vanguard stock funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies--for instance, by allocating substantial assets to cash, commercial paper, or other less volatile instruments--in response to adverse or unusual market, economic, political, or other conditions. In
doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, a participant from exchanging into a fund account for 60 calendar days after the participant has exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.
See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value, will, when appropriate, use fair-value pricing, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for small growth funds was approximately 115%, as reported by Morningstar, Inc., on October 31, 2008.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 150 funds holding assets of approximately $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs.
INVESTMENT ADVISORS
The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the Fund's board of trustees. The board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time.
. Granahan Investment Management, Inc., 275 Wyman Street, Waltham, MA 02451, is an investment advisory firm founded in 1985. As of October 31, 2008, Granahan managed approximately $3.2 billion in assets.
. Kalmar Investment Advisers, Barley Mill House, 3701 Kennett Pike, Wilmington, DE 19807, is an investment advisory firm founded in 1996. As of October 31, 2008, Kalmar, together with its parent company, Kalmar Investments Inc., founded in 1982, managed approximately $2.1 billion in small-cap and small-/mid-cap assets.
. AXA Rosenberg Investment Management LLC, 4 Orinda Way, Building E, Orinda, CA 94563, is an investment advisory firm founded in 1985. As of October 31, 2008, AXA Rosenberg managed approximately $71.5 billion in assets.
. Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is a Massachusetts limited liability partnership and an investment counseling firm that provides investment services to investment companies, employee benefits plans, endowments, foundations, and other institutions. Wellington Management and its predecessor organizations have provided investment advisory services for over 70 years. As of October 31, 2008, Wellington Management had investment management authority with respect to approximately $427 billion in assets.
. Chartwell Investment Partners, L.P., 1235 Westlakes Drive, Suite 400, Berwyn, PA 19312, is an investment advisory firm founded in 1997. As of October 31, 2008, Chartwell managed approximately $4.9 billion in assets.
. Century Capital Management, LLC, 100 Federal Street, Boston, MA 02110, is an investment advisory firm that provides investment management services to institutions and individuals. The firm traces its origins to 1928 and the founding of Century Shares Trust. As of October 31, 2008, Century Capital managed approximately $1.8 billion in assets.
. The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2008, Vanguard served as advisor for approximately $868 billion in assets.
The Fund pays six of its investment advisors--Granahan, Kalmar, AXA Rosenberg, Wellington Management, Chartwell, and Century Capital--on a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to average daily net assets managed by the advisor during the most recent fiscal quarter. The fee paid to each advisor may be increased or decreased based on the advisor's performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund is compared with that of the Russell 2500 Growth Index (a 50/50 split of the Russell 2500 and 2500 Growth Indexes for Century Capital) over a trailing 36-month period. Please note that over time, changes in an advisor's relative performance may result in changes in the performance-based fees paid by the Fund, which in turn would result in an increase or decrease in the expenses borne by fund shareholders.
Vanguard provides services to the Fund on an at-cost basis. Vanguard's performance is also evaluated against the Russell 2500 Growth Index.
For the fiscal year ended October 31, 2008, the aggregate advisory fees paid represented an effective annual rate of 0.18% of the Fund's average net assets before a performance-based decrease of 0.02%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. As the Fund's sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised.
For a discussion of why the board of trustees approved the Fund's investment advisory arrangements, see the most recent semiannual report to shareholders covering the fiscal period ended April 30.
George U. Sauter, Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguard's Quantitative Equity and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the development of Vanguard's stock indexing and active quantitative equity investment strategies. He received his A.B. in Economics from Dartmouth College and an M.B.A. in Finance from the University of Chicago.
Joel M. Dickson, Ph.D., Principal of Vanguard and head of Active Quantitative Equity Management. He has direct oversight responsibility for all active quantitative equity portfolios managed by Vanguard's Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University.
The managers primarily responsible for the day-to-day management of the Fund are:
John J. Granahan, CFA, Founder and President of Granahan. He has worked in investment management since 1960; has been with Granahan since 1985; and has managed a portion of the Fund since 1990. Education: B.A., St. Joseph's University; Graduate Fellow of Catholic University of America.
Ford B. Draper, Jr., President, Chief Investment Officer, and Founder of Kalmar. He has worked in investment management since 1967; founded Kalmar Investments Inc., the parent company of Kalmar, in 1982; and has managed a portion of the Fund since 2005. Education: B.A., Yale University; M.B.A., Columbia University.
William E. Ricks, Americas Chief Executive and Chief Investment Officer at AXA Rosenberg. He has worked in investment management with AXA Rosenberg since 1989, including trading, operations, portfolio engineering, and portfolio construction; and has managed a portion of the Fund since 2007. Education: B.S., University of New Orleans; Ph.D., University of California, Berkeley.
Kenneth L. Abrams, Senior Vice President and Equity Portfolio Manager of Wellington Management. He has worked in investment management with Wellington Management since 1986; and has managed a portion of the Fund since 1994. Education: B.A. and M.B.A., Stanford University.
Edward N. Antoian, CFA, CPA, Managing Partner at Chartwell. He has managed equity funds since 1984 and has co-managed a portion of the Fund since 1997. Education: B.S., State University of New York; M.B.A., University of Pennsylvania.
John Heffern, Managing Partner at Chartwell. He has worked in investment management since 1988, has been with Chartwell since 2005, and has co-managed a
portion of the Fund since 2006. Education: B.S. and M.B.A., University of North Carolina at Chapel Hill.
Alexander L. Thorndike, Chief Investment Officer and Managing Partner at Century Capital. He has worked in investment management since 1988, has managed investment portfolios for Century Capital since 1999, and has managed a portion of the Fund since June 2008. Education: A.B., Harvard University; M.B.A., J.L. Kellogg Graduate School of Management at Northwestern University.
James D. Troyer, CFA, Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College.
The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December.
Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals.
SHARE PRICE
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the shares. The values of any ETF or closed-end fund shares held by a fund are based on the market value of the shares.
When a fund determines that market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value pricing may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the Investor Shares' financial performance for the periods shown, and certain information reflects financial results for a single Investor Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Investor Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report online at www.vanguard.com or by contacting Vanguard by telephone or mail.
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Investor Shares began fiscal year 2008 with a net asset value (price) of $83.93 per share. During the year, each Investor Share earned $0.295 from investment income (interest and dividends). There was a decline of $31.589 per share in the value of investments held or sold by the Fund, resulting in a net decline of $31.294 per share from investment operations.
Shareholders received $7.096 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains.
The share price at the end of the year was $45.54, reflecting losses of $31.294 per share and distributions of $7.096 per share. This was a decrease of $38.39 per share (from $83.93 at the beginning of the year to $45.54 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -40.17% for the year.
Explorer Fund Investor Shares
Year Ended October 31,
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2008 2007 2006 2005 2004
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Net Asset Value, Beginning of Period $83.93 $80.26 $76.67 $67.01 $63.17
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Investment Operations
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Net Investment Income (Loss) .295 .362 .302 .111 (.050)
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Net Realized and Unrealized Gain (Loss) (31.589) 11.052 9.724 9.622 3.890
on Investments
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Total from Investment Operations (31.294) 11.414 10.026 9.733 3.840
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Distributions
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Dividends from Net Investment Income (.310) (.320) (.230) -- --
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Distributions from Realized Capital Gains (6.786) (7.424) (6.206) (.073) --
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Total Distributions (7.096) (7.744) (6.436) (.073) --
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Net Asset Value, End of Period $45.54 $83.93 $80.26 $76.67 $67.01
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Total Return -40.17% 15.31% 13.59% 14.53% 6.08%
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Ratios/Supplemental Data
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Net Assets, End of Period (Millions) $5,026 $8,937 $8,517 $7,836 $7,302
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Ratio of Total Expenses to Average Net Assets/1/ 0.44% 0.41% 0.46% 0.51% 0.57%
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Ratio of Net Investment Income (Loss) to Average 0.40% 0.44% 0.36% 0.16% (0.11%)
Net Assets
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Turnover Rate 112% 90% 96% 80% 82%
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1 Includes performance-based investment advisory fee increases (decreases) of (0.02%), (0.04%), (0.03%), (0.01%), and 0.02%.
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INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option.
. If you have any questions about the Fund or Vanguard, including those about the Fund's investment objective, strategies, or risks, contact Vanguard Participant Services, toll-free, at 800-523-1188.
. If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with Vanguard.
Vanguard reserves the right to change its policies without prior notice to shareholders.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the next-determined NAV of the Fund's Investor Shares after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that day's NAV. This is known as your trade date. NAVs are calculated only on days the NYSE is open for trading.
Frequent Trading
The exchange privilege (your ability to purchase shares of a fund using the
proceeds from the simultaneous redemption of shares of another fund) may be
available to you through your plan. Although we make every effort to maintain
the exchange privilege, Vanguard reserves the right to revise or terminate this
privilege, limit the amount of an exchange, or reject any exchange, at any time,
without notice. Because excessive exchanges can disrupt the management of the
Vanguard funds and increase their transaction costs, Vanguard places certain
limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount. Please note that the 60-day clock restarts after every exchange out of the fund.
The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax are not mail requests and remain subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased with reinvested dividend or capital gains distributions; distributions, loans, and in-service withdrawals from a plan; redemptions of shares as part of a plan termination or at the direction of the plan; redemptions of shares to pay fund or account fees; share or asset transfers or rollovers; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan, consider the following:
. Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions.
. Be sure to read the Fund's prospectus. Contact Vanguard Participant Services, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not serve as recordkeeper for your plan, your plan's recordkeeper will establish accounts in Vanguard funds for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary or by an intermediary for the benefit of certain of the intermediary's clients. Intermediaries may also monitor participants' trading activity with respect to Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess purchase and redemption fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If a firm other than Vanguard
serves as recordkeeper for your plan, please read that firm's materials carefully to learn of any other rules or fees that may apply.
No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.
Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:
. Authorization to act on the account (as the account owner or by legal documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Uncashed Checks
Vanguard will not pay interest on uncashed checks.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Portfolio section of the Fund's Portfolio & Management page, a detailed list of the securities held by the Fund, as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies.
CFA/(R)/ is a trademark owned by CFA Institute. Russell is a trademark of The Frank Russell Company. Standard & Poor's/(R)/,S&P/(R)/, S&P 500/(R)/, Standard & Poor's 500, and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds.
GLOSSARY OF INVESTMENT TERMS
Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances.
Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund's investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Capitalization. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.
Principal. The face value of a debt instrument or the amount of money put into an investment.
Securities. Stocks, bonds, money market instruments, and other investment vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price.
[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Explorer Fund, the following
documents are available free upon request:
Annual/Semiannual Reports to Shareholders Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI) The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Services
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1776
(C) 2009 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
I024 022009
[VANGUARD SHIP LOGO/R/]
VANGUARD EXPLORER FUND PROSPECTUS
Admiral/TM/ Shares for Participants
This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2008.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Contents
----------------------------------------------------------------------------------------------- Fund Profile 1 Financial Highlights 19 ----------------------------------------------------------------------------------------------- More on the Fund 6 Investing With Vanguard 21 ----------------------------------------------------------------------------------------------- The Fund and Vanguard 13 Accessing Fund Information by Computer 24 ----------------------------------------------------------------------------------------------- Investment Advisors 14 Glossary of Investment Terms 25 ----------------------------------------------------------------------------------------------- Dividends, Capital Gains, and Taxes 17 ----------------------------------------------------------------------------------------------- Share Price 18 ----------------------------------------------------------------------------------------------- |
Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference.
This prospectus offers the Funds' Admiral Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 800-662-7447.
An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Company or any other government agency.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests mainly in the stocks of small companies. These companies tend
to be unseasoned but are considered by the Fund's advisors to have superior
growth potential. Also, these companies often provide little or no dividend
income. The Fund uses multiple investment advisors. For additional information
on the Fund's investment strategies, please see More on the Fund.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
. Investment style risk, which is the chance that returns from small-capitalization growth stocks will trail returns from the overall stock market. Historically, small-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
. Manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of a relevant market index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
Annual Total Returns--Admiral Shares ------------------------------------------------------------ [Bar Chart Range: 60% to -60%] 2002 -24.50% 2003 44.45 2004 13.92 2005 9.46 2006 9.88 2007 5.26 2008 -40.29 ------------------------------------------------------------ |
During the periods shown in the bar chart, the highest return for a calendar quarter was 22.44% (quarter ended June 30, 2003), and the lowest return for a quarter was -26.11% (quarter ended December 31, 2008).
Average Annual Total Returns for Periods Ended December 31, 2008
1 Year 5 Years Since Inception/1/
-------------------------------------------------------------------------------------------------------------
Vanguard Explorer Fund Admiral Shares -40.29% -2.94% 0.74%
-------------------------------------------------------------------------------------------------------------
Russell 2500 Growth Index
(reflects no deduction for fees or expenses) -41.50% -2.24% 0.32%
-------------------------------------------------------------------------------------------------------------
1 Since-inception returns are from November 12, 2001--the inception date of the Admiral
Shares--through December 31, 2008.
|
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. However, these costs are reflected in the investment performance figures included in this prospectus. The expenses shown in the following table are based on those incurred in the fiscal year ended October 31, 2008.
Shareholder Fees (Fees paid directly from your investment) ----------------------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None ----------------------------------------------------------------------------------------------------------------------------- Purchase Fee None ----------------------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None ----------------------------------------------------------------------------------------------------------------------------- Redemption Fee None ----------------------------------------------------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) ----------------------------------------------------------------------------------------------------------------------------- Management Expenses 0.28% ----------------------------------------------------------------------------------------------------------------------------- 12b-1 Distribution Fee None ----------------------------------------------------------------------------------------------------------------------------- Other Expenses 0.04% ----------------------------------------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses/1/ 0.32% ----------------------------------------------------------------------------------------------------------------------------- 1 The Total Annual Fund Operating Expenses have been restated to reflect expenses being deducted from current Fund assets. |
The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Shares provide a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period.
1 Year 3 Years 5 Years 10 Years -------------------------------------------------------- $33 $103 $180 $406 -------------------------------------------------------- |
This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown.
PLAIN TALK ABOUT FUND EXPENSES
Additional Information
As of October 31, 2008
-------------------------------------------------------------------------------------------
Net Assets (all share classes) $7.0 billion
-------------------------------------------------------------------------------------------
Investment Advisors . AXA Rosenberg Investment Management LLC, Orinda, Calif.,
since 2007
. Century Capital Management, LLC, Boston, Mass.,
since 2008
. Chartwell Investment Partners, L.P. Berwyn, Pa.,
since 1997
. Granahan Investment Management, Inc. Waltham, Mass.,
since 1990
. Kalmar Investment Advisers, Wilmington, Del., since 2005
. Wellington Management Company, LLP, Boston, Mass., since
inception
. The Vanguard Group, Inc., Valley Forge, Pa., since 1997
-------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------------------
Inception Date Investor Shares--December 11, 1967
Admiral Shares--November 12, 2001
-------------------------------------------------------------------------------------------
Newspaper Abbreviation ExplrAdml
-------------------------------------------------------------------------------------------
Vanguard Fund Number 5024
-------------------------------------------------------------------------------------------
CUSIP Number 921926200
-------------------------------------------------------------------------------------------
Ticker Symbol VEXRX
-------------------------------------------------------------------------------------------
|
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental.
Market Exposure
The Fund focuses on companies that are considered small-cap by the Fund's advisors.
Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2008, was $1.7 billion.
Small-cap stocks tend to have greater volatility than large-cap stocks because, among other things, smaller companies often have fewer customers, financial resources, and products than larger firms. Such characteristics can make small-cap companies more sensitive to changing economic conditions. In addition, these companies typically provide little or no dividend income.
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices.
To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur.
U.S. Stock Market Returns
(1926-2008)
1 Year 5 Years 10 Years 20 Years
-----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
-----------------------------------------------------
Worst -43.1 -12.4 -1.4 3.1
-----------------------------------------------------
Average 11.6 10.3 10.9 11.3
-----------------------------------------------------
|
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2008. You can see, for example, that although the average return on common stocks for all of the 5-year periods was 10.3%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular.
Keep in mind that the Fund focuses on the stocks of smaller companies. Historically, small-cap stocks have been more volatile than--and at times have performed quite differently from--the large-cap stocks found in the S&P 500 Index. This volatility is due to several factors, including less-certain growth and dividend prospects for smaller companies.
[FLAG]
The Fund is subject to investment style risk, which is the chance that returns
from small-capitalization growth stocks will trail returns from the overall
stock market. Historically, small-cap stocks have been more volatile in price
than the large-cap stocks that dominate the overall market, and they often
perform quite differently.
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects, the prices of the securities, and the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment.
Each advisor uses a different process to select securities for its portion of the Fund's assets; however, each is committed to buying stocks of small companies that, in the advisor's opinion, have strong growth potential.
Granahan Investment Management, Inc. (Granahan), which manages approximately 26% of the Fund's assets, groups securities into three categories as part of its selection process. The first category, "core growth," emphasizes companies that have a well-known or established product or service and, as a result, have a proven record of growth and a strong market position. The second category, "pioneers," is made up of companies that offer unique products or services, technologies that may lead to new products, or expansion into new markets. Granahan judges "pioneer" stocks based on their estimated growth potential compared with market value. The third category, "special situation," includes companies that lack a record of strong growth but that, in Granahan's view, are both undervalued in the market and likely to grow in the next few years. "Core growth" stocks generally make up 35% to 70% of the advisor's share of Fund assets, with the other two categories generally at 10% to 35% each.
Kalmar Investment Advisers (Kalmar), which manages approximately 14% of the Fund's assets, is a research-driven investment firm that is entirely focused on the management of "growth-with-value" smaller-cap equity portfolios. Kalmar believes that there is a high-reward and low-risk anomaly offered by the equity market in the stocks of solid, well-managed, rapidly growing smaller companies that are not fully on the radar screen of most institutional growth managers. Through independent fundamental research, Kalmar attempts to discover such companies, buy them at undervalued levels, and own them for the longer term. Kalmar searches for companies that it believes have the following characteristics: strong products, strong balance sheets, attractive financial returns, conservative accounting, and superior management with the ability to deliver positive results.
Wellington Management Company, LLP (Wellington Management), which manages approximately 14% of the Fund's assets, uses research and analysis of individual companies to select stocks that the advisor feels have exceptional growth potential relative to their valuations in the marketplace. Wellington Management considers
each stock individually before purchase, and continually monitors developments at these companies for comparison with the advisor's expectations for growth. To help limit risk, the portfolio is broadly diversified both by number of stocks and by exposure to a range of industries.
AXA Rosenberg Investment Management LLC (AXA Rosenberg), which manages approximately 12% of the Fund's assets, constructs a portfolio of common stocks based on fundamental analysis using a two-part quantitative model: a valuation model and an earnings forecast model. The valuation model seeks to identify the fair value of a stock using a sum-of-the-parts technique. The sum of a company's parts is then compared to the current stock price to determine whether the stock appears to be under- or over-valued by the market. The earnings forecast model seeks to identify companies that are expected to have superior earnings over the next year. A mix of fundamental indicators (e.g., profitability measures) and indicators from market participants (e.g., analyst forecasts) is combined to generate a forecast of next year's earnings for a company. The output of the two models is combined to form a single predicted return for each company that AXA Rosenberg covers. The predicted returns are fed into a risk model that maximizes the portfolio's expected return while minimizing common factor differences versus the benchmark index. Each stock is compared with its next-best alternative, taking into account round-trip trading costs. AXA Rosenberg optimizes its portfolio against the Russell 2500 Growth Index, the benchmark for the Fund.
Chartwell Investment Partners, L.P. (Chartwell), which manages approximately 9% of the Fund's assets, uses a research-driven process to choose stocks judged to have exceptional growth potential and reasonable prices. After considering each stock individually before purchase, Chartwell constantly monitors the characteristics of its holdings as a group by using computerized techniques.
Century Capital Management, LLC (Century Capital), which manages approximately 6% of the Fund's assets, employs a fundamental, bottom-up investment approach that attempts to identify reasonably priced companies that will grow faster than the overall market. Independent research is a core tenet. Analysts are expected to make at least 80 company visits per year, including meeting with the second or third tier of management. The ideal investment is a reasonably valued, well-managed company in a non-capital-intensive business. Such a company would also need to have established products or services, a high return on equity, high recurring revenues, and improving margins.
The Vanguard Group, Inc. (Vanguard), manages approximately 14% of the Fund's assets by constructing a broadly diversified portfolio of small-cap domestic growth stocks based on its assessment of the relative return potential of the underlying securities. The advisor selects securities that it believes offer a good balance between reasonable valuations and attractive earnings growth prospects relative to their small-cap domestic
growth peers. Vanguard implements its stock selection process through the use of proprietary software programs that compare thousands of securities at a time.
In addition, Vanguard manages approximately 5% of the Fund's assets, by investing in stock index futures and/or shares of exchange-traded funds. For more details, see "Other Investment Policies and Risks."
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection or focus on securities in a particular sector, category, or group of
companies will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in common stocks of growth companies, the Fund may make other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 25% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to country risk and currency risk. Country risk is the chance that world events--such as political upheaval, financial troubles, or natural disasters--will adversely affect the value of securities issued by companies in foreign countries. In addition, the prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. Currency risk is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
The Fund may invest up to 15% of its net assets in restricted securities with limited marketability or in other illiquid securities.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities can use these contracts
to guard against unfavorable changes in U.S. dollar/foreign currency exchange rates. These contracts, however, would not prevent the Fund's securities from falling in value during foreign market downswings.
Vanguard typically invests a small portion of the Fund's assets in stock index futures and/or shares of exchange-traded funds (ETFs), including ETF Shares issued by Vanguard stock funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategies--for instance, by allocating substantial assets to cash, commercial paper, or other less volatile instruments--in response to adverse or unusual market, economic, political, or other conditions. In
doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, a participant from exchanging into a fund account for 60 calendar days after the participant has exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.
See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value, will, when appropriate, use fair-value pricing, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The Financial Highlights section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for small growth funds was approximately 115%, as reported by Morningstar, Inc., on October 31, 2008.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 150 funds holding assets of approximately $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs.
INVESTMENT ADVISORS
The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the Fund's board of trustees. The board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time.
. Granahan Investment Management, Inc., 275 Wyman Street, Waltham, MA 02451, is an investment advisory firm founded in 1985. As of October 31, 2008, Granahan managed approximately $3.2 billion in assets.
. Kalmar Investment Advisers, Barley Mill House, 3701 Kennett Pike, Wilmington, DE 19807, is an investment advisory firm founded in 1996. As of October 31, 2008, Kalmar, together with its parent company, Kalmar Investments Inc., founded in 1982, managed approximately $2.1 billion in small-cap and small-/mid-cap assets.
. AXA Rosenberg Investment Management LLC, 4 Orinda Way, Building E, Orinda, CA 94563, is an investment advisory firm founded in 1985. As of October 31, 2008, AXA Rosenberg managed approximately $71.5 billion in assets.
. Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is a Massachusetts limited liability partnership and an investment counseling firm that provides investment services to investment companies, employee benefits plans, endowments, foundations, and other institutions. Wellington Management and its predecessor organizations have provided investment advisory services for over 70 years. As of October 31, 2008, Wellington Management had investment management authority with respect to approximately $427 billion in assets.
. Chartwell Investment Partners, L.P., 1235 Westlakes Drive, Suite 400, Berwyn, PA 19312, is an investment advisory firm founded in 1997. As of October 31, 2008, Chartwell managed approximately $4.9 billion in assets.
. Century Capital Management, LLC, 100 Federal Street, Boston, MA 02110, is an investment advisory firm that provides investment management services to institutions and individuals. The firm traces its origins to 1928 and the founding of Century Shares Trust. As of October 31, 2008, Century Capital managed approximately $1.8 billion in assets.
. The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began
operations in 1975, serves as advisor to the Fund through its Quantitative
Equity Group. As of October 31, 2008, Vanguard served as advisor for
approximately
$868 billion in assets.
The Fund pays six of its investment advisors--Granahan, Kalmar, AXA Rosenberg, Wellington Management, Chartwell, and Century Capital--on a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to average daily net assets managed by the advisor during the most recent fiscal quarter. The fee paid to each advisor may be increased or decreased based on the advisor's performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund is compared with that of the Russell 2500 Growth Index (a 50/50 split of the Russell 2500 and 2500 Growth Indexes for Century Capital) over a trailing 36-month period. Please note that over time, changes in an advisor's relative performance may result in changes in the performance-based fees paid by the Fund, which in turn would result in an increase or decrease in the expenses borne by fund shareholders.
Vanguard provides services to the Fund on an at-cost basis. Vanguard's performance is also evaluated against the Russell 2500 Growth Index.
For the fiscal year ended October 31, 2008, the aggregate advisory fees paid represented an effective annual rate of 0.18% of the Fund's average net assets before a performance-based decrease of 0.02%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional
advisor. Any significant change in the Fund's advisory arrangements will be
communicated to shareholders in writing. As the Fund's sponsor and overall
manager, The Vanguard Group may provide additional investment advisory services
to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to
the board of trustees that an advisor be hired, terminated, or replaced, or that
the terms of an existing advisory agreement be revised.
For a discussion of why the board of trustees approved the Fund's investment advisory arrangements, see the most recent semiannual report to shareholders covering the fiscal period ended April 30.
George U. Sauter, Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguard's Quantitative Equity and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the development of Vanguard's stock indexing and active quantitative equity investment strategies. He received his A.B. in Economics from Dartmouth College and an M.B.A. in Finance from the University of Chicago.
Joel M. Dickson, Ph.D., Principal of Vanguard and head of Active Quantitative Equity Management. He has direct oversight responsibility for all active quantitative equity portfolios managed by Vanguard's Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University.
The managers primarily responsible for the day-to-day management of the Fund are:
John J. Granahan, CFA, Founder and President of Granahan. He has worked in investment management since 1960; has been with Granahan since 1985; and has managed a portion of the Fund since 1990. Education: B.A., St. Joseph's University; Graduate Fellow of Catholic University of America.
Ford B. Draper, Jr., President, Chief Investment Officer, and Founder of Kalmar. He has worked in investment management since 1967; founded Kalmar Investments Inc., the parent company of Kalmar, in 1982; and has managed a portion of the Fund since 2005. Education: B.A., Yale University; M.B.A., Columbia University.
William E. Ricks, Americas Chief Executive and Chief Investment Officer at AXA Rosenberg. He has worked in investment management with AXA Rosenberg since 1989, including trading, operations, portfolio engineering, and portfolio construction; and has managed a portion of the Fund since 2007. Education: B.S., University of New Orleans; Ph.D., University of California, Berkeley.
Kenneth L. Abrams, Senior Vice President and Equity Portfolio Manager of Wellington Management. He has worked in investment management with Wellington Management since 1986; and has managed a portion of the Fund since 1994. Education: B.A. and M.B.A., Stanford University.
Edward N. Antoian, CFA, CPA, Managing Partner at Chartwell. He has managed equity funds since 1984 and has co-managed a portion of the Fund since 1997. Education: B.S., State University of New York; M.B.A., University of Pennsylvania.
John Heffern, Managing Partner at Chartwell. He has worked in investment management since 1988, has been with Chartwell since 2005, and has co-managed a
portion of the Fund since 2006. Education: B.S. and M.B.A., University of North Carolina at Chapel Hill.
Alexander L. Thorndike, Chief Investment Officer and Managing Partner at Century Capital. He has worked in investment management since 1988, has managed investment portfolios for Century Capital since 1999, and has managed a portion of the Fund since June 2008. Education: A.B., Harvard University; M.B.A., J.L. Kellogg Graduate School of Management at Northwestern University.
James D. Troyer, CFA, Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College.
The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December.
Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals.
SHARE PRICE
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the shares. The values of any ETF or closed-end fund shares held by a fund are based on the market value of the shares.
When a fund determines that market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value pricing may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral Share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report online at www.vanguard.com or by contacting Vanguard by telephone or mail.
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Admiral Shares began fiscal year 2008 with a net asset value (price) of $78.25 per share. During the year, each Admiral Share earned $0.385 from investment income (interest and dividends). There was a decline of $29.442 per share in the value of investments held or sold by the Fund, resulting in a net decline of $29.057 per share from investment operations.
Shareholders received $6.743 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains.
The share price at the end of the year was $42.45, reflecting losses of $29.057 per share and distributions of $6.743 per share. This was a decrease of $35.80 per share (from $78.25 at the beginning of the year to $42.45 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -40.07% for the year.
Explorer Fund Admiral Shares
Year Ended October 31,
------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $78.25 $74.82 $71.47 $62.37 $58.71
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .385 .478 .422 .215 .040
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments (29.442) 10.299 9.050 8.953 3.620
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (.29.057) 10.777 9.472 9.168 3.660
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.427) (.437) (.346) -- --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (6.316) (6.910) (5.776) (.068) --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (6.743) (7.347) (6.122) (.068) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $42.45 $78.25 $74.82 $71.47 $62.37
===================================================================================================================================
Total Return -40.07% 15.53% 13.79% 14.70% 6.23%
===================================================================================================================================
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $2,023 $3,652 $3,264 $2,402 $1,161
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/1/ 0.26% 0.23% 0.28% 0.34% 0.43%
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average
Net Assets 0.58% 0.62% 0.54% 0.33% 0.04%
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 112% 90% 96% 80% 82%
===================================================================================================================================
1 Includes performance-based investment advisory fee increases (decreases) of (0.02%), (0.04%), (0.03%), (0.01%), and 0.02%.
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INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option.
. If you have any questions about the Fund or Vanguard, including those about the Fund's investment objective, strategies, or risks, contact Vanguard Participant Services, toll-free, at 800-523-1188.
. If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with Vanguard.
Vanguard reserves the right to change its policies without prior notice to shareholders.
Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
Transactions
Contribution, exchange, or redemption requests must be in good order. Good order
means that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the next-determined NAV of the Fund's Admiral Shares after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that day's NAV. This is known as your trade date. NAVs are calculated only on days the NYSE is open for trading.
Frequent Trading
The exchange privilege (your ability to purchase shares of a fund using the
proceeds from the simultaneous redemption of shares of another fund) may be
available to you through your plan. Although we make every effort to maintain
the exchange privilege, Vanguard reserves the right to revise or terminate this
privilege, limit the amount of an exchange, or reject any exchange, at any time,
without notice. Because excessive exchanges can disrupt the management of the
Vanguard funds and increase their transaction costs, Vanguard places certain
limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount. Please note that the 60-day clock restarts after every exchange out of the fund.
The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax are not mail requests and remain subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased with reinvested dividend or capital gains distributions; distributions, loans, and in-service withdrawals from a plan; redemptions of shares as part of a plan termination or at the direction of the plan; redemptions of shares to pay fund or account fees; share or asset transfers or rollovers; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider
the following:
. Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions.
. Be sure to read the Fund's prospectus. Contact Vanguard Participant Services, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not serve as recordkeeper for your plan, your plan's recordkeeper will establish accounts in Vanguard funds for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary or by an intermediary for the benefit of certain of the intermediary's clients. Intermediaries may also monitor participants' trading activity with respect to Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess purchase and redemption fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If a firm other than Vanguard
serves as recordkeeper for your plan, please read that firm's materials carefully to learn of any other rules or fees that may apply.
No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.
Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:
. Authorization to act on the account (as the account owner or by legal documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Uncashed Checks
Vanguard will not pay interest on uncashed checks.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Portfolio section of the Fund's Portfolio & Management page, a detailed list of the securities held by the Fund, as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings.
Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings.
ACCESSING FUND INFORMATION BY COMPUTER
Vanguard on the World Wide Web WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies.
CFA/(R)/ is a trademark owned by CFA Institute. Russell is a trademark of The Frank Russell Company. Standard & Poor's/(R)/,S&P/(R)/, S&P 500/(R)/, Standard & Poor's 500, and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds.
GLOSSARY OF INVESTMENT TERMS
Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances.
Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund's investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Capitalization. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time.
Principal. The face value of a debt instrument or the amount of money put into an investment.
Securities. Stocks, bonds, money market instruments, and other investment vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price.
[VANGUARD SHIP LOGO/R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard Explorer Fund, the following
documents are available free upon request:
Annual/Semiannual Reports to Shareholders Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI) The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Services
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1530
(C) 2009 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
I524 022009
PART B
VANGUARD/(R)/ EXPLORER(TM) FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 20, 2009
This Statement of Additional Information is not a prospectus but should be read in conjunction with the Fund's current prospectus (dated February 20, 2009). To obtain, without charge, a prospectus or\\ \\the most recent Annual Report to Shareholders, which contains the Fund's financial statements as hereby incorporated by reference, please contact The Vanguard Group, Inc. (Vanguard).
PHONE: INVESTOR INFORMATION DEPARTMENT AT 800-662-7447
ONLINE: WWW.VANGUARD.COM
TABLE OF CONTENTS
DESCRIPTION OF THE TRUST..............................................B-1
INVESTMENT POLICIES...................................................B-3
INVESTMENT LIMITATIONS................................................B-17
SHARE PRICE...........................................................B-18
PURCHASE AND REDEMPTION OF SHARES.....................................B-18
MANAGEMENT OF THE FUND ...............................................B-19
INVESTMENT ADVISORY SERVICES..........................................B-29
PORTFOLIO TRANSACTIONS................................................B-38
PROXY VOTING GUIDELINES...............................................B-39
FINANCIAL STATEMENTS..................................................B-44
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DESCRIPTION OF THE TRUST
ORGANIZATION
Vanguard Explorer Fund (the Trust) was organized as a Delaware corporation in 1967, and reorganized as a Maryland corporation in 1973. It was subsequently reorganized as a Delaware statutory trust in June 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard Explorer Fund, Inc. The Trust is registered with the United States Securities and Exchange Commission (the SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company. The Trust currently offers the following fund (and classes thereof):
FUND SHARE CLASSES/1/ ---- ---------------- Vanguard Explorer Fund Investor and Admiral 1 Individually, a class; collectively, the classes. |
The Trust has the ability to offer additional funds or classes of shares. There is no limit on the number of full and fractional shares that may be issued for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. Citibank, N.A., 111 Wall Street, New York, NY 10005, serves as the Fund's custodian. The custodian is responsible for maintaining the Fund's assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign sub-custodians or foreign securities depositories.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the Fund's independent registered public accounting
firm. The independent registered public accounting firm audits the Fund's annual financial statements and provides other related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and dividend-paying agent is Vanguard, P.O. Box 2600, Valley Forge, PA 19482.
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on the right of shareholders to retain or dispose of the Fund's shares, other than those described in the Fund's current prospectus and elsewhere in this Statement of Additional Information or the possible future termination of the Fund or a share class. The Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the Fund or class. Unless terminated by reorganization or liquidation, the Fund and share class will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. This means that a shareholder of the Fund generally will not be personally liable for payment of the Fund's debts. Some state courts, however, may not apply Delaware law on this point. We believe that the possibility of such a situation arising is remote.
DIVIDEND RIGHTS. The shareholders of each class of the Fund are entitled to receive any dividends or other distributions declared by the Fund for each such class. No shares of the Fund have priority or preference over any other shares of the Fund with respect to distributions. Distributions will be made from the assets of the Fund and will be paid ratably to all shareholders of a particular class according to the number of shares of the class held by shareholders on the record date. The amount of dividends per share may vary between separate share classes of the Fund based upon differences in the net asset values of the different classes and differences in the way that expenses are allocated between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (1) the matter concerns an amendment to the Declaration of Trust that would adversely affect to a material degree the rights and preferences of the shares of the Fund or any class; (2) the trustees determine that it is necessary or desirable to obtain a shareholder vote; (3) a merger or consolidation, share conversion, share exchange, or sale of assets is proposed and a shareholder vote is required by the 1940 Act to approve the transaction; or (4) a shareholder vote is required under the 1940 Act. The 1940 Act requires a shareholder vote under various circumstances, including to elect or remove trustees upon the written request of shareholders representing 10% or more of the Fund's net assets, to change any fundamental policy of the Fund, and to enter into certain merger transactions. Unless otherwise required by applicable law, shareholders of the Fund receive one vote for each dollar of net asset value owned on the record date, and a fractional vote for each fractional dollar of net asset value owned on the record date. However, only the shares of the Fund or class affected by a particular matter are entitled to vote on that matter. In addition, each class has exclusive voting rights on any matter submitted to shareholders that relates solely to that class, and each class has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of another. Voting rights are noncumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event that the Fund is liquidated, shareholders will be entitled to receive a pro rata share of the Fund's net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to receive a pro rata share of the Fund's net assets that are allocated to that class. Shareholders may receive cash, securities, or a combination of the two.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Fund's shares.
CONVERSION RIGHTS. Fund shareholders may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements.
REDEMPTION PROVISIONS. The Fund's redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information.
SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.
CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and non-assessable.
TAX STATUS OF THE FUND
The Fund expects to qualify each year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC). This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, the Fund must comply with certain requirements. If the Fund fails to meet these requirements in any taxable year, it will be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, will be taxable to shareholders as ordinary income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company.
Dividends received and distributed by the Fund on shares of stock of domestic corporations may be eligible for the dividends-received deduction applicable to corporate shareholders. Corporations must satisfy certain requirements in order to claim the deduction. Capital gains distributed by the Fund are not eligible for the dividends-received deduction.
INVESTMENT POLICIES
Some of the investment policies described below and in the Fund's prospectus set forth percentage limitations on the Fund's investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these policies will be determined immediately after the acquisition of such securities or assets. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Fund's investment policies and limitations.
The following policies and explanations supplement the Fund's investment objective and policies set forth in the prospectus. With respect to the different investments discussed below, the Fund may acquire such investments to the extent consistent with its investment objective and policies.
BORROWING. A fund's ability to borrow money is limited by its investment policies and limitations, by the 1940 Act, and by applicable exemptions, no-action letters, interpretations, and other pronouncements issued from time to time by the SEC and its staff or any other regulatory authority with jurisdiction. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund's total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or for other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.
Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund's portfolio. Money borrowed will be subject to interest costs that may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund for purposes of the 1940 Act. These transactions can include entering into reverse repurchase agreements; engaging in mortgage-dollar-roll transactions; selling securities short (other than short sales "against-the-box"); buying and selling certain derivatives (such as futures contracts); selling (or writing) put and call options; engaging in sale-buybacks; entering into firm-commitment and standby-commitment agreements; engaging in when-issued, delayed-delivery, or forward-commitment transactions; and other trading practices that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing (additional discussion about a number of these transactions can be found below). A borrowing transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund (1) maintains an offsetting financial position; (2) segregates liquid assets (with such liquidity determined by the advisor in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the fund's potential economic exposure under the borrowing transaction; or (3) otherwise "covers" the transaction in
accordance with applicable SEC guidance (collectively, "covers" the transaction). A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction. In addition, segregated assets may not be available to satisfy redemptions or for other purposes.
COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on such stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders, and owners of preferred stock take precedence over the claims of those who own common stock.
CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that combine the investment characteristics of bonds and common stocks. Convertible securities typically consist of debt securities or preferred stock that may be converted (on a voluntary or mandatory basis) within a specified period of time (normally for the entire life of the security) into a certain amount of common stock or other equity security of the same or a different issuer at a predetermined price. Convertible securities also include debt securities with warrants or common stock attached and derivatives combining the features of debt securities and equity securities. Other convertible securities with features and risks not specifically referred to herein may become available in the future. Convertible securities involve risks similar to those of both fixed income and equity securities.
The market value of a convertible security is a function of its "investment value" and its "conversion value." A security's "investment value" represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer, and the seniority of the security in the issuer's capital structure. A security's "conversion value" is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. In that circumstance, the convertible security takes on the characteristics of a bond, and its price moves in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. In that case, the convertible security's price may be as volatile as that of common stock. Because both interest rate and market movements can influence its value, a convertible security generally is not as sensitive to interest rates as a similar fixed income security, nor is it as sensitive to changes in share price as its underlying equity security. Convertible securities are often rated below investment-grade or are not rated, and are generally subject to a high degree of credit risk.
While all markets are prone to change over time, the generally high rate at which convertible securities are retired (through mandatory or scheduled conversions by issuers or voluntary redemptions by holders) and replaced with newly issued convertibles may cause the convertible securities market to change more rapidly than other markets. For example, a concentration of available convertible securities in a few economic sectors could elevate the sensitivity of the convertible securities market to the volatility of the equity markets and to the specific risks of those sectors. Moreover, convertible securities with innovative structures, such as mandatory conversion securities and equity-linked securities, have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities.
DEBT SECURITIES. A debt security, sometimes called a fixed income security, is a security consisting of a certificate or other evidence of a debt (secured or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest for a specified length of time, and to repay the debt on the specified maturity date. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Debt securities include a variety of fixed income obligations, including, but not limited to, corporate bonds, government securities, municipal securities, convertible securities, mortgage-backed securities, and asset-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, call/prepayment risk, inflation risk, credit risk, and (in the case of foreign securities) country risk and currency risk. The reorganization of an issuer under the federal bankruptcy laws may result in the issuer's debt securities being cancelled without repayment, repaid only in part, or repaid in part or in whole through an exchange thereof for any
combination of cash, debt securities, convertible securities, equity securities, or other instruments or rights in respect of the same issuer or a related entity.
DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade
securities, also referred to as "high-yield securities" or "junk bonds," are
debt securities that are rated lower than the four highest rating categories by
a nationally recognized statistical rating organization (for example, lower than
Baa3 by Moody's Investors Service, Inc., or lower than BBB- by Standard &
Poor's) or are determined to be of comparable quality by the fund's advisor.
These securities are generally considered to be, on balance, predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and will generally involve more
credit risk than securities in the investment-grade categories.
Non-investment-grade securities generally provide greater income and opportunity
for capital appreciation than higher quality securities, but they also typically
entail greater price volatility and principal and income risk.
Analysis of the creditworthiness of issuers of high-yield securities may be more complex than for issuers of investment-grade securities. Thus, reliance on credit ratings in making investment decisions entails greater risks for high-yield securities than for investment-grade debt securities. The success of a fund's advisor in managing high-yield securities is more dependent upon its own credit analysis than is the case with investment-grade securities.
Some high-yield securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition, merger, or leveraged buyout. Companies that issue high-yield securities are often highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with investment-grade securities. Some high-yield securities were once rated as investment-grade but have been downgraded to junk bond status because of financial difficulties experienced by their issuers.
The market values of high-yield securities tend to reflect individual issuer developments to a greater extent than do investment-grade securities, which in general react to fluctuations in the general level of interest rates. High-yield securities also tend to be more sensitive to economic conditions than are investment-grade securities. A projection of an economic downturn or of a sustained period of rising interest rates, for example, could cause a decline in junk bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high-yield securities defaults, in addition to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses to seek recovery.
The secondary market on which high-yield securities are traded may be less liquid than the market for investment-grade securities. Less liquidity in the secondary trading market could adversely affect the ability of a fund to sell a high-yield security or the price at which a fund could sell a high-yield security, and could adversely affect the daily net asset value of fund shares. When secondary markets for high-yield securities are less liquid than the market for investment-grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available.
Except as otherwise provided in a fund's prospectus, if a credit-rating agency changes the rating of a portfolio security held by a fund, the fund may retain the portfolio security if the advisor deems it in the best interests of shareholders.
DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the United States. Although the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the
disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipt holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request.
For purposes of a fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depositary receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers.
DERIVATIVES. A derivative is a financial instrument that has a value that is based on--or "derived from"--the values of other assets, reference rates, or indexes. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates, and related indexes. Derivatives include futures contracts and options on futures contracts, forward-commitment transactions, options on securities, caps, floors, collars, swap agreements, and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter (OTC) market. The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the securities, assets, or market indexes on which the derivatives are based. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. There is no assurance that any derivatives strategy used by a fund's advisor will succeed. The counterparties to the funds' derivatives will not be considered the issuers thereof for purposes of certain provisions of the 1940 Act and the IRC, although such derivatives may qualify as securities or investments under such laws. The fund's advisors, however, will monitor and adjust, as appropriate, the funds' credit risk exposure to derivative counterparties.
Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds, and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions.
The use of derivatives generally involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the other party to the contract (usually referred to as a "counterparty") or the failure of the counterparty to make required payments or otherwise comply with the terms of the contract. Additionally, the use of credit derivatives can result in losses if a fund's advisor does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based.
Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price.
Derivatives may be subject to pricing or "basis" risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity.
Because many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A derivative transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be
subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its advisor will incorrectly forecast future market trends or the values of assets, reference rates, indexes, or other financial or economic factors in establishing derivative positions for the fund. If the advisor attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.
EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds (ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock or bond market. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage.
An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded) that has the same investment objective, strategies, and policies. The price of an ETF can fluctuate within a wide range, and a fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETF's shares may trade at a discount to their net asset value; (2) an active trading market for an ETF's shares may not develop or be maintained; or (3) trading of an ETF's shares may be halted if the listing exchange's officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally.
Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares generally are subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described under the heading "Other Investment Companies."
Vanguard ETF(TM) *Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard funds. A fund's investments in Vanguard ETF Shares are also generally subject to the descriptions, limitations, and risks described under the heading "Other Investment Companies," except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1) of the 1940 Act, subject to certain terms and conditions.
FOREIGN SECURITIES. Typically, foreign securities are considered to be equity or debt securities issued by entities organized, domiciled, or with a principal executive office outside the United States, such as foreign corporations and governments. Securities issued by certain companies organized outside the United States may not be deemed to be foreign securities if the company's principal operations are conducted from the United States or when the company's equity securities trade principally on a U.S. stock exchange. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments (depositary receipts) for foreign securities. Depositary receipts are securities that are listed on exchanges or quoted in OTC markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in securities of U.S. companies or governments.
Because foreign issuers are not generally subject to uniform accounting, auditing, and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there is a risk that a fund's trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers are generally less liquid than securities of
comparable U.S. issuers. In certain countries, there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the United States. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments that could affect U.S. investments in those countries. Although an advisor will endeavor to achieve most favorable execution costs for a fund's portfolio transactions in foreign securities under the circumstances, commissions (and other transaction costs) are generally higher than those on U.S. securities. In addition, it is expected that the custodian arrangement expenses for a fund that invests primarily in foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Certain foreign governments levy withholding taxes against dividend and interest income from foreign securities. Although in some countries a portion of these taxes is recoverable by the fund, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies making up a fund.
The value of the foreign securities held by a fund that are not U.S. dollar-denominated may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed below, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations, and political and economic developments.
FOREIGN SECURITIES -- EMERGING MARKET RISK. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign countries. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
FOREIGN SECURITIES -- FOREIGN CURRENCY TRANSACTIONS. The value in U.S. dollars of a fund's non-dollar-denominated foreign securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To seek to minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange and will enter into foreign currency transactions only to attempt to "hedge" the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss that would result from a decline in the value of the hedged currency, they also may limit any potential gain that might result should the value of such currency increase.
Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and therefore such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against part or all of the possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as "transaction hedging." In addition, when the advisor reasonably believes that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as "portfolio hedging." Similarly, when the advisor reasonably believes that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount.
A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency futures, options, and "cross-hedge" transactions. In cross-hedge transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the advisor reasonably believes generally tracks the currency being hedged with regard to price movements). The advisor may select the tracking (or substitute) currency rather than the currency in which the security is denominated for various reasons, including in order to take advantage of pricing or other opportunities presented by the tracking currency or because the market for the tracking currency is more liquid or more efficient. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies.
A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations.
The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its advisor's predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll-over a foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder.
FOREIGN SECURITIES -- FOREIGN INVESTMENT COMPANIES. Some of the countries in which a fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Fund investments in such countries may be permitted only through foreign government approved or authorized investment vehicles, which may include other investment companies. Such investments may be made through registered or unregistered closed-end investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies."
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts and options on futures contracts are derivatives. A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the
settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies, and broad-based securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market." A futures transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
An option on a futures contract (or futures option) conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a specific price (called the "exercise" or "strike" price) any time before the option expires. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer.
A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as described above in the case of futures contracts. A futures option transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission, under which a mutual fund is conditionally excluded from the definition of the term "commodity pool operator." A fund will only enter into futures contracts and futures options that are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss in trading futures contracts and in writing futures options can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds.
A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange that provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. Treasury futures are generally not subject to such daily limits.
A fund bears the risk that its advisor will incorrectly predict future market trends. If the advisor attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments.
A fund could lose margin payments it has deposited with its FCM, if, for example, the FCM breaches its agreement with the fund or becomes insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the fund.
INTERFUND BORROWING AND LENDING. The SEC has granted an exemption permitting the Vanguard funds to participate in Vanguard's interfund lending program. This program allows the Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including, among other things, the requirement that: (1) no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction; (2) no equity, taxable bond, or money market fund may loan money if the loan would cause its aggregate outstanding loans through the program to exceed 5%, 7.5%, or 10%, respectively, of its net assets at the time of the loan; and (3) a fund's interfund loans to any one fund shall not exceed 5% of the lending fund's net assets. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund's investment objective and investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs.
OPTIONS. An option is a derivative. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price prior to the expiration date of the option. The writer of an option on a security has the obligation upon exercise of the option (1) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (2) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the size of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
The buyer (or holder) of an option is said to be "long" the option, while the seller (or writer) of an option is said to be "short" the option. A call option grants to the holder the right to buy (and obligates the writer to sell) the underlying security at the strike price. A put option grants to the holder the right to sell (and obligates the writer to buy) the
underlying security at the strike price. The purchase price of an option is called the "premium." The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
If a trading market in particular options were to become unavailable, investors in those options (such as the funds) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options.
A fund bears the risk that its advisor will not accurately predict future market trends. If the advisor attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.
OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to the extent permitted by applicable law or SEC exemption. Under Section 12(d)(1) of the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company, as long as no investment represents more than 3% of the voting stock of an acquired investment company. In addition, no funds for which Vanguard acts as an advisor may, in the aggregate, own more than 10% of the voting stock of a closed-end investment company. The 1940 Act and related rules provide certain exemptions from these restrictions. If a fund invests in other investment companies, shareholders will bear not only their proportionate share of the fund's expenses (including operating expenses and the fees of the advisor), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded on the secondary market.
PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer. Preferred stock normally pays dividends at a specified rate and has precedence over common stock in the event the issuer is liquidated or declares bankruptcy. However, in the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. Preferred stock is subject to many of the risks to which common stock and debt securities are subject.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the investment advisor will monitor a fund's repurchase agreement transactions generally and will evaluate the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The aggregate amount of any such agreements is not limited except to the extent required by law.
The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement.
RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a fund's books. A fund may experience difficulty valuing and selling illiquid securities and in some cases may be unable to value or sell certain illiquid securities for an indefinite period of time. Illiquid securities may include a wide variety of investments, such as: (1) repurchase agreements maturing in more than seven days (unless the agreements have demand/redemption features); (2) OTC options contracts and certain other derivatives (including certain swap agreements); (3) fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits); (4) loan interests and other direct debt instruments; (5) municipal lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933 (the 1933 Act); and (7) securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by a fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered, that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act, or that are exempt from registration under the 1933 Act, such as commercial paper. While a fund's advisor monitors the liquidity of restricted securities on a daily basis, the board of trustees oversees and retains ultimate responsibility for the advisor's liquidity determinations. Several factors that the trustees consider in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers, and dealers that trade in the security, and the availability of information about the security's issuer.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund that it is obligated to repurchase. A reverse repurchase agreement may be considered a borrowing transaction for purposes of the 1940 Act. A reverse repurchase agreement transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing." A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the advisor.
SECURITIES LENDING. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who may need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver securities, or completing arbitrage operations. By lending its investment securities, a fund attempts to increase its net investment income through the receipt of interest on the securities lent. Any gain or loss in the market price of the securities lent that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the securities lent, a fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment to market appreciation or depreciation.
The terms and the structure of the loan arrangements, as well as the aggregate
amount of securities loans must be consistent with the 1940 Act, and the rules
or interpretations of the SEC thereunder. These provisions limit the amount of
securities a fund may lend to 33 1/3% of the fund's total assets, and require
that (1) the borrower pledge and maintain with the fund collateral consisting of
cash, an irrevocable letter of credit, or securities issued or guaranteed by the
U.S. government having at all times not less than 100% of the value of the
securities lent; (2) the borrower add to such collateral whenever the price of
the securities lent rises (i.e., the borrower "marks-to-market" on a daily
basis); (3) the loan be made subject to termination by the fund at any time; and
(4) the fund receive reasonable interest on the loan (which may include the
fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the lent securities, and any increase in their
market value. Loan arrangements made by each fund will comply with all other
applicable regulatory requirements, including the rules of the New York Stock
Exchange, which presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. The advisor
will consider the creditworthiness of the borrower, among other things, in
making decisions with respect to the lending of securities, subject to oversight
by the board of trustees. At the present time, the SEC does not object if an
investment company pays reasonable negotiated fees in connection with lent
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the lent securities, but if a fund has knowledge that a material event will
occur affecting securities on loan, and in respect of which the holder of the
securities will be entitled to vote or consent, the lender must be entitled to
call the loaned securities in time to vote or consent.
SWAP AGREEMENTS. A swap agreement is a derivative. A swap agreement is an agreement between two parties (counterparties) to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index.
Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted, and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index.
An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.
The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions.
Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, swap transactions may be subject to a fund's limitation on investments in illiquid securities.
Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement.
Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. A leveraged swap transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its advisor will not accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in establishing swap positions for the fund. If the advisor attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many swaps, in particular OTC swaps, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.
The use of a swap agreement also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund's advisor does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based.
The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
TAX MATTERS -- FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required for federal income tax purposes to recognize for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. In these cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Gains and losses on certain other futures contracts (primarily non-U.S. futures contracts) are not recognized until the contracts are closed and are treated as long-term or short-term, depending on the holding period of the contract. Sales of futures contracts that are intended to hedge against a change in the value of securities held by a fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A fund may be required to defer the recognition of losses on one position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position held by the fund.
In order for a fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies, or other income derived with respect to the fund's business of investing in securities or currencies. It is anticipated that any net gain recognized on futures contracts will be considered qualifying income for purposes of the 90% requirement.
A fund will distribute to shareholders annually any net capital gains that have been recognized for federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the fund's other investments and shareholders will be advised on the nature of the distributions.
TAX MATTERS -- FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the federal income tax treatment of certain transactions denominated in a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option, or
similar financial instrument if such instrument is not marked to market. The
disposition of a currency other than the U.S. dollar by a taxpayer whose
functional currency is the U.S. dollar is also treated as a transaction subject
to the special currency rules. However, foreign currency-related regulated
futures contracts and non-equity options are generally not subject to the
special currency rules if they are or would be treated as sold for their fair
market value at year-end under the marking-to-market rules applicable to other
futures contracts unless an election is made to have such currency rules apply.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary income or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts, and options that
are capital assets in the hands of the taxpayer and that are not part of a
straddle. The Treasury Department issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the IRC and the Treasury regulations)
will be integrated and treated as a single transaction or otherwise treated
consistently for purposes of the IRC. Any gain or loss attributable to the
foreign currency component of a transaction engaged in by a fund that is not
subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) will be treated as capital gain or loss and will
not be segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts a fund may make or enter into will be subject to the special
currency rules described above.
TAX MATTERS -- FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities held by a fund. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains that were actually distributed by the fund.
TEMPORARY INVESTMENTS. A fund may take temporary defensive positions that are inconsistent with the fund's normal fundamental or non-fundamental investment policies and strategies in response to adverse or unusual market, economic, political, or other conditions as determined by the advisor. Such positions could include, but are not limited to, investments in (1) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. government and its agencies, commercial paper, and bank certificates of deposit; (2) repurchase agreements involving any such securities; and (3) other money market instruments. There is no limit on the extent to which the fund may take temporary defensive positions. In taking such positions, the fund may fail to achieve its investment objective.
WARRANTS. Warrants are instruments that give the holder the right, but not the obligation, to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. When a fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward-commitment transaction and may sell the underlying securities before delivery, which may result in
capital gains or losses for the fund. When-issued, delayed-delivery, and forward-commitment transactions will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the fund, if the fund covers the transaction in accordance with the requirements described under the heading "Borrowing."
INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the Fund's shares. For these purposes, a "majority" of shares means shares representing the lesser of: (1) 67% or more of the Fund's net assets voted, so long as shares representing more than 50% of the Fund's net assets are present or represented by proxy; or (2) more than 50% of the Fund's net assets.
BORROWING. The Fund may borrow money for temporary or emergency purposes only in an amount not to exceed 15% of the Fund's net assets. The Fund may borrow money through banks or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. The Fund may not make any additional investments whenever its outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may invest in stock futures contracts, stock options, and options on stock futures contracts. No more than 5% of the Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of the Fund's total assets may be invested in futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not: (1) purchase more than 10% of the outstanding voting securities of any one issuer; or (2) purchase securities of any issuer if, as a result, more than 5% of the Fund's total assets would be invested in that issuer's securities. This limitation does not apply to obligations of the U.S. government or its agencies or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of controlling its management.
INVESTMENT OBJECTIVE. The investment objective of the Fund may not be materially changed without a shareholder vote.
LOANS. The Fund may not lend money to any person except by purchasing fixed income securities, by entering into repurchase agreements, by lending its portfolio securities, or through Vanguard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities short, except as permitted by the Fund's investment policies relating to commodities.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more than 15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate and bonds secured by real estate.
SENIOR SECURITIES. The Fund may not issue senior securities, except in compliance with the 1940 Act.
UNDERWRITING. The Fund may not act as an underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the 1933 Act, in connection with the purchase and sale of portfolio securities.
Compliance with the investment limitations set forth above is generally measured at the time the securities are purchased. Unless otherwise required by the 1940 Act, if a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. All investment limitations must comply with applicable regulatory requirements. For more details, see "Investment Policies."
None of these limitations prevents the Fund from having an ownership interest in Vanguard. As a part owner of Vanguard, the Fund may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other financial requirements. See "Management of the Fund" for more information.
SHARE PRICE
Multiple-class funds do not have a single share price. Rather, each class has a share price, called its net asset value, or NAV, that is calculated each business day as of the close of regular trading on the New York Stock Exchange (the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by dividing the total assets, minus liabilities, allocated to each share class by the number of Fund shares outstanding for that class.
The Exchange typically observes the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day (Washington's Birthday), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although the Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time.
PURCHASE AND REDEMPTION OF SHARES
PURCHASE OF SHARES
The purchase price of shares of the Fund is the NAV per share next determined after the purchase request is received in good order, as defined in the Fund's prospectus.
REDEMPTION OF SHARES
The redemption price of shares of the Fund is the NAV next determined after the redemption request is received in good order, as defined in the Fund's prospectus.
The Fund may suspend redemption privileges or postpone the date of payment for redeemed shares: (1) during any period that the Exchange is closed or trading on the Exchange is restricted as determined by the SEC; (2) during any period when an emergency exists, as defined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of securities it owns or to fairly determine the value of its assets; and (3) for such other periods as the SEC may permit.
The Trust has filed a notice of election with the SEC to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of such period.
If Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of the Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions.
No charge is made by the Fund for redemptions. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Fund.
RIGHT TO CHANGE POLICIES
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if we reasonably believe a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
The Fund has authorized certain agents to accept on its behalf purchase and redemption orders, and those agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf (collectively, Authorized Agents). The Fund will be deemed to have received a purchase or redemption order when an Authorized Agent accepts the order in accordance with the Fund's instructions. In most instances, a customer order that is properly transmitted to an Authorized Agent will be priced at the Fund's NAV next determined after the order is received by the Authorized Agent.
MANAGEMENT OF THE FUND
VANGUARD
The Fund is part of the Vanguard group of investment companies, which consists of more than 150 funds. Through their jointly-owned subsidiary, Vanguard, the funds obtain at cost virtually all of their corporate management, administrative, and distribution services. Vanguard also provides investment advisory services on an at-cost basis to several of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings, and equipment. Each fund pays its share of Vanguard's total expenses, which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing, and custodian fees.
The funds' officers are also officers and employees of Vanguard.
Vanguard, Vanguard Marketing Corporation (VMC), the funds' advisors, and the funds have adopted Codes of Ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by a fund, but place substantive and procedural restrictions on the trading activities of access persons. For example, the Codes require that access persons receive advance approval for most securities trades to ensure that there is no conflict with the trading activities of the funds. The Codes also limit the ability of Vanguard employees to engage in short-term trading of Vanguard funds.
Vanguard was established and operates under an Amended and Restated Funds' Service Agreement. The Amended and Restated Funds' Service Agreement provides as follows: (1) each Vanguard fund may be called upon to invest up to 0.40% of its current net assets in Vanguard, and (2) there is no other limitation on the dollar amount that each Vanguard fund may contribute to Vanguard's capitalization. The amounts that each fund has invested are adjusted from time to time in order to maintain the proportionate relationship between each fund's relative net assets and its contribution to Vanguard's capital. As of October 31, 2008, the Fund had contributed $825,000 to Vanguard, which represented 0.01% of the Fund's net assets and was 0.82% of Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1) executive staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder account maintenance; (5) monitoring and control of custodian relationships; (6) shareholder reporting; and (7) review and evaluation of advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, 400 Devon Park Drive A39, Wayne, PA 19087, a wholly-owned subsidiary of Vanguard, is the principal underwriter for the funds and in that capacity performs and finances marketing, promotional, and distribution activities (collectively, marketing and distribution activities) that are primarily intended to result in the sale of the funds' shares. VMC performs marketing and distribution activities at cost in accordance with the terms and conditions of a 1981 SEC exemptive order that permits the Vanguard funds to internalize and jointly finance the marketing, promotion, and distribution of their shares. Under the terms of the SEC order, the funds' trustees review and approve the marketing and distribution expenses incurred on their behalf, including the nature and cost of the activities and the desirability of each fund's continued participation in the joint arrangement.
To ensure that each fund's participation in the joint arrangement falls within a reasonable range of fairness, each fund contributes to VMC's marketing and distribution expenses in accordance with an SEC-approved formula. Under that formula, one half of the marketing and distribution expenses are allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each fund's sales for the
preceding 24 months relative to the total sales of the funds as a group; provided, however, that no fund's aggregate quarterly rate of contribution for marketing and distribution expenses shall exceed 125% of the average marketing and distribution expense rate for Vanguard, and that no fund shall incur annual marketing and distribution expenses in excess of 0.20 of 1% of its average month-end net assets. As of October 31, 2008, none of the Vanguard funds' allocated share of VMC's marketing and distribution expenses was greater than 0.03% of the fund's average month-end net assets. Each fund's contribution to these marketing and distribution expenses helps to maintain and enhance the attractiveness and viability of the Vanguard complex as a whole, which benefits all of the funds and their shareholders.
VMC's principal marketing and distribution expenses are for advertising, promotional materials, and marketing personnel. Other marketing and distribution activities that VMC undertakes on behalf of the funds may include, but are not limited to:
. Conducting or publishing Vanguard-generated research and analysis concerning the funds, other investments, the financial markets, or the economy;
. Providing views, opinions, advice, or commentary concerning the funds, other investments, the financial markets, or the economy;
. Providing analytical, statistical, performance, or other information concerning the funds, other investments, the financial markets, or the economy;
. Providing administrative services in connection with investments in the funds or other investments, including, but not limited to, shareholder services, recordkeeping services, and educational services;
. Providing products or services that assist investors or financial service providers (as defined below) in the investment decision-making process;
. Providing promotional discounts, commission-free trading, fee waivers, and other benefits to clients of Vanguard Brokerage Services/(R)/ who maintain qualifying investments in the funds; and
. Sponsoring, jointly sponsoring, financially supporting, or participating in conferences, programs, seminars, presentations, meetings, or other events involving fund shareholders, financial service providers, or others concerning the funds, other investments, the financial markets, or the economy, such as industry conferences, prospecting trips, due diligence visits, training or education meetings, and sales presentations.
VMC performs most marketing and distribution activities itself. Some activities may be conducted by third parties pursuant to shared marketing arrangements under which VMC agrees to share the costs and performance of marketing and distribution activities in concert with a financial service provider. Financial service providers include, but are not limited to, investment advisors, broker-dealers, financial planners, financial consultants, banks, and insurance companies. Under these cost- and performance-sharing arrangements, VMC may pay or reimburse a financial service provider (or a third party it retains) for marketing and distribution activities that VMC would otherwise perform. VMC's cost- and performance-sharing arrangements may be established in connection with Vanguard investment products or services offered or provided to or through the financial service providers. VMC's arrangements for shared marketing and distribution activities may vary among financial service providers, and its payments or reimbursements to financial service providers in connection with shared marketing and distribution activities may be significant. VMC does not participate in the offshore arrangement Vanguard has established for qualifying Vanguard funds to be distributed in certain foreign countries on a private-placement basis to government-sponsored and other institutional investors through a third-party "asesor de inversiones" (investment advisor), which includes incentive-based remuneration.
In connection with its marketing and distribution activities, VMC may give financial service providers (or their representatives): (1) promotional items of nominal value that display Vanguard's logo, such as golf balls, shirts, towels, pens, and mouse pads; (2) gifts that do not exceed $100 per person annually and are not preconditioned on achievement of a sales target; (3) an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target; and (4) reasonable travel and lodging accommodations to facilitate participation in marketing and distribution activities.
VMC, as a matter of policy, does not pay asset-based fees, sales-based fees, or account-based fees to financial service providers in connection with its marketing and distribution activities for the Vanguard funds. VMC policy also prohibits marketing and distribution activities that are intended, designed, or likely to compromise suitability determinations by, or the fulfillment of any fiduciary duties or other obligations that apply to, financial service providers. Nonetheless, VMC's marketing and distribution activities are primarily intended to result in the sale of the funds' shares,
and, as such, its activities, including shared marketing and distribution activities, may influence participating financial service providers (or their representatives) to recommend, promote, include, or invest in a Vanguard fund or share class. In addition, Vanguard or any of its subsidiaries may retain a financial service provider to provide consulting or other services, and that financial service provider also may provide services to investors. Investors should consider the possibility that any of these activities or relationships may influence a financial service provider's (or its representatives') decision to recommend, promote, include, or invest in a Vanguard fund or share class. Each financial service provider should consider its suitability determinations, fiduciary duties, and other legal obligations (or those of its representatives) in connection with any decision to consider, recommend, promote, include, or invest in a Vanguard fund or share class.
The following table describes the expenses of Vanguard and VMC that are shared by the funds on an at-cost basis under the terms of two SEC exemptive orders. Amounts captioned "Management and Administrative Expenses" include a fund's allocated share of expenses associated with the management, administrative, and transfer agency services Vanguard provides to the funds. Amounts captioned "Marketing and Distribution Expenses" include a fund's allocated share of expenses associated with the marketing and distribution activities that VMC conducts on behalf of the Vanguard funds.
As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. Annual Shared Fund Operating Expenses are based on expenses incurred in the fiscal years ended October 31, 2006, 2007, and 2008, and are presented as a percentage of the Fund's average month-end net assets.
ANNUAL SHARED FUND OPERATING EXPENSES
(SHARED EXPENSES DEDUCTED FROM FUND ASSETS)
-------------------------------------------
FUND 2006 2007 2008
---- ---- ---- ----
Vanguard Explorer Fund
Management and
Administrative Expenses: 0.38% 0.33% 0.36%
Marketing and
Distribution Expenses: 0.03 0.02 0.02
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Each investment advisor may direct certain security trades to brokers who have agreed to rebate to the Fund part of the commissions generated. Such rebates are used solely to reduce the Fund's management and administrative expenses and are not reflected in these totals.
OFFICERS AND TRUSTEES
The Fund is governed by the board of trustees to the Trust and a single set of officers. The officers manage the day-to-day operations of the Fund under the direction of the Fund's board of trustees. The trustees set broad policies for the Fund; select investment advisors; monitor fund operations, performance, and costs; nominate and select new trustees; and elect fund officers. Each trustee serves the Fund until its termination; until the trustee's retirement, resignation, or death; or as otherwise specified in the Trust's organizational documents. Any trustee may be removed at a meeting of shareholders by a vote representing two-thirds of the total net asset value of all shares of the Fund. Each trustee also serves as a director of Vanguard.
The following chart shows information for each trustee and executive officer of the Fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
VANGUARD PRINCIPAL OCCUPATION(S) DURING THE
POSITION(S) FUNDS' TRUSTEE/ PAST FIVE YEARS AND OUTSIDE DIRECTORSHIPS NUMBER OF VANGUARD FUNDS
NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE OVERSEEN BY TRUSTEE/OFFICER
------------------- --------------- -------------- -------------------------- ---------------------------
INTERESTED TRUSTEE
John J. Brennan/1/ Chairman of the May 1987 Chairman of the Board and Director 156
(1954) Board and Trustee (Trustee)of Vanguard and of each of the
investment companies served by Vanguard;
Chief Executive Officer and President
of Vanguard (1996-2008).
INDEPENDENT TRUSTEES
Charles D. Ellis Trustee January 2001 Applecore Partners (pro bono ventures in education); 156
(1937) Senior Advisor to Greenwich Associates (international
business strategy consulting); Successor Trustee of Yale
University; Overseer of the Stern School of Business at
New York University; Trustee of the Whitehead Institute
INDEPENDENT TRUSTEES
Emerson U. Fullwood Trustee January 2008 Retired Executive Chief Staff and Marketing Officer for 156
(1948) North America and Corporate Vice President of Xerox
Corporation (photocopiers and printers); Director of
SPX Corporation (multi-industry manufacturing), of the
United Way of Rochester, and of the Boy Scouts of
America.
Rajiv L. Gupta Trustee December 2001 Chairman, President, and Chief Executive Officer of Rohm 156
(1945) and Haas Co. (chemicals); Board Member of American Chemistry
Council; Director of Tyco International, Ltd.
(diversified manufacturing and services) since 2005.
Amy Gutmann Trustee June 2006 President of the University of Pennsylvania; 156
(1949) Professor in the School of Arts and Sciences, Annenberg School
for Communication, and Graduate School of Education of the
University of Pennsylvania; Director of Carnegie Corporation of
New York since 2005, and of Schuylkill
River Development Corporation and Greater
Philadelphia Chamber of Commerce; Trustee of
the National Constitution Center since 2007.
JoAnn Heffernan Heisen Trustee July 1998 Retired Corporate Vice President, Chief Global 156
(1950) Diversity Officer, and Member of the Executive
Committee of Johnson & Johnson (pharmaceuticals/
consumer products); Vice President and Chief
Information Officer (1997-2005) of Johnson &
Johnson; Director of the University Medical Center at
Princeton and Women's Research and Education Institute.
Andre F. Perold Trustee December 2004 George Gund Professor of Finance and Banking, 156
(1952) Harvard Business School; Senior Associate Dean,
Director of Faculty Recruiting, Harvard Business School;
Director and Chairman of UNX, Inc. (equities trading firm);
Chair of the Investment Committee of HighVista
Strategies LLC (private investment firm) since 2005.
Alfred M. Rankin, Jr. Trustee January 1993 Chairman, President, Chief Executive Officer, and 156
(1941) Director of NACCO Industries, Inc. (forklift trucks/
housewares/lignite); Director of Goodrich Corporation
(industrial products/aircraft systems and services).
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VANGUARD PRINCIPAL OCCUPATION(S) DURING THE
POSITION(S) FUNDS' TRUSTEE/ PAST FIVE YEARS AND OUTSIDE DIRECTORSHIPS NUMBER OF VANGUARD FUNDS
NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE OVERSEEN BY TRUSTEE/OFFICER
------------------- --------------- -------------- -------------------------- ---------------------------
J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive Officer of 156
(1936) Rohm and Haas Co. (chemicals); Director of Cummins
Inc.(diesel engines) and AmerisourceBergen Corp.
(pharmaceutical distribution); Trustee of Vanderbilt
University and of Culver Educational Foundation.
EXECUTIVE OFFICERS
Thomas J. Higgins/1/ Chief Financial September 2008 Principal of Vanguard; Chief Financial Officer 156
(1957) Officer of each of the investment companies
served by Vanguard, since September 2008;
Treasurer of each of the investmentcompanies
served by Vanguard (1998--2008).
Kathryn J. Hyatt/1/ Treasurer November 2008 Principal of Vanguard; Treasurer of each of the
(1955) investment companies served by Vanguard, since
November 2008; Assistant Treasurer of each
of the investment companies served by Vanguard
(1988-2008).
F. William McNabb III/1/ Chief Executive March 2008 Chief Executive Officer of Vanguard since August 2008; 156
(1957) Officer and Director and President of Vanguard since March 2008;
President Chief Executive Officer and President of each of the
investment companies served by Vanguard, since March 2008;
Director of VMC; Managing Director of Vanguard (1995-2008).
Heidi Stam/1/ Secretary July 2005 Managing Director of Vanguard since 2006; General Counsel 156
(1956) of Vanguard since 2005; Secretary of Vanguard and of each
of the investment companies served by Vanguard, since 2005;
Director and Senior Vice President of VMC since 2005; Principal of
Vanguard (1997-2006).
1 Officers of the Funds are "interested persons" as defined in the 1940 Act.
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Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on business strategy to professional financial services organizations in markets around the world. A large number of financial service providers, including Vanguard, subscribe to programs of research-based consulting. During calendar years 2007 and 2008, Vanguard paid Greenwich subscription fees amounting to approximately $400,000. Vanguard's subscription rates are similar to those of other subscribers.
Board Committees: The Trust's board has the following committees:
. Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of each fund and Vanguard. All independent trustees serve as members of the committee. The committee held two meetings during the Fund's last fiscal year.
. Compensation Committee: This committee oversees the compensation programs established by each fund and Vanguard for the benefit of their employees, officers, and trustees/directors. All independent trustees serve as members of the committee. The committee held five meetings during the Fund's last fiscal year.
. Nominating Committee: This committee nominates candidates for election to Vanguard's board of directors and the board of trustees of each fund (collectively, the Vanguard boards). The committee also has the authority to recommend the removal of any director or trustee from the Vanguard boards. All independent trustees serve as members of the committee. The committee held nine meetings during the Fund's last fiscal year.
The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Rankin, Chairman of the Committee.
TRUSTEE COMPENSATION
The same individuals serve as trustees of all Vanguard funds and each fund pays a proportionate share of the trustees' compensation. The funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways:
. The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings.
. The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings.
. Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee's separate account was generally equal to the net present value of the benefits he or she had accrued under the trustees' former retirement plan. Each eligible trustee's separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as an officer of Vanguard.
COMPENSATION TABLE. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the Fund for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds.
VANGUARD EXPLORER FUND
TRUSTEES' COMPENSATION TABLE
PENSION OR ACCRUED ANNUAL TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS RETIREMENT FROM ALL
COMPENSATION ACCRUED AS PART OF BENEFIT AT VANGUARD FUNDS
TRUSTEE FROM THIS FUND/1/ THIS FUND'S EXPENSES/1/ JANUARY 1, 2008/2/ PAID TO TRUSTEES/3/
------- ----------------- ---------------------- ------------------ -------------------
John J. Brennan -- -- -- --
Charles D. Ellis $1,541 -- -- $152,500
Emerson U. Fullwood/4/ 899 -- -- 148,200
Rajiv L. Gupta 1,541 -- -- 152,500
Amy Gutmann 1,541 -- -- 148,200
JoAnn Heffernan Heisen 1,541 $586 $2,733 152,500
Andre F. Perold 1,541 -- -- 152,500
Alfred M. Rankin, Jr. 1,786 710 5,355 176,700
J. Lawrence Wilson. 1,541 749 7,783 152,500
1 The amounts shown in this column are based on the Fund's fiscal year ended October 31, 2008.
2 Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service
as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month
following the trustee's retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees who
began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan.
3 The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 155
Vanguard funds for the 2008 calendar year.
4 Mr. Fullwood became a member of the Fund's board effective January 2008.
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OWNERSHIP OF FUND SHARES
All trustees allocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustee's ownership of shares of the Fund and of all Vanguard funds served by the trustee as of December 31, 2008.
DOLLAR RANGE OF FUND AGGREGATE DOLLAR
SHARES RANGE OF VANGUARD FUND
FUND TRUSTEE OWNED BY TRUSTEE SHARES OWNED BY TRUSTEE
---- ------- --------------------- -----------------------
Vanguard Explorer Fund John J. Brennan Over $100,000 Over $100,000
Charles D. Ellis None Over $100,000
Emerson U. Fullwood/1/ None Over $100,000
Rajiv L. Gupta None Over $100,000
Amy Gutmann $10,001-$50,000 Over $100,000
JoAnn Heffernan Heisen None Over $100,000
Andre F. Perold None Over $100,000
Alfred M. Rankin, Jr. $50,001-$100,000 Over $100,000
J. Lawrence Wilson None Over $100,000
1 Mr. Fullwood became a member of the Funds' board effective January 2008.
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As of January 31, 2009, the trustees and executive officers of the Fund owned, in the aggregate, less than 1% of each class of the Fund's outstanding shares.
As of January 31, 2009, those listed below owned of record 5% or more of each class's outstanding shares:
Vanguard Explorer Fund - Investor Shares: Vanguard STAR Fund, Malvern, PA (9.68%); Vanguard Explorer Fund - Admiral Shares: Fidelity Investments, Covington, KY (12.41%), Merrill Lynch, Pierce, Fenner & Smith, Jacksonville, FL (5.31%), State Street Corporation, Westwood, MA (6.61%).
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
INTRODUCTION
Vanguard and the Boards of Trustees of the Vanguard funds (Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Policies and Procedures) to govern the disclosure of the portfolio holdings of each Vanguard fund. Vanguard and the Boards considered each of the circumstances under which Vanguard fund portfolio holdings may be disclosed to different categories of persons under the Policies and Procedures. Vanguard and the Boards also considered actual and potential material conflicts that could arise in such circumstances between the interests of Vanguard fund shareholders, on the one hand, and those of the fund's investment advisor, distributor, or any affiliated person of the fund, its investment advisor, or its distributor, on the other. After giving due consideration to such matters and after the exercise of their fiduciary duties and reasonable business judgment, Vanguard and the Boards determined that the Vanguard funds have a legitimate business purpose for disclosing portfolio holdings to the persons described in each of the circumstances set forth in the Policies and Procedures and that the Policies and Procedures are reasonably designed to ensure that disclosure of portfolio holdings and information about portfolio holdings is in the best interests of fund shareholders and appropriately addresses the potential for material conflicts of interest.
The Boards exercise continuing oversight of the disclosure of Vanguard fund portfolio holdings by (1) overseeing the implementation and enforcement of the Policies and Procedures, the Code of Ethics, and the Policies and Procedures Designed to Prevent the Misuse of Inside Information (collectively, the portfolio holdings governing policies) by the Chief Compliance Officer of Vanguard and the Vanguard funds; (2) considering reports and recommendations by the Chief Compliance Officer concerning any material compliance matters (as defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings governing policies; and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. Vanguard and the Boards reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice at their sole discretion. For purposes of the Policies and Procedures, the term "portfolio holdings" means the equity and debt securities (e.g., stocks and bonds) held by a Vanguard fund and does not mean the cash investments, derivatives, and other investment positions (collectively, other investment positions) held by the fund.
ONLINE DISCLOSURE OF TEN LARGEST STOCK HOLDINGS
Each of the Vanguard equity funds and Vanguard balanced funds generally will seek to disclose the fund's ten largest stock portfolio holdings and the percentages that each of these ten largest stock portfolio holdings represents of the fund's total assets as of the most recent calendar-quarter-end (quarter-end ten largest stock holdings) online at www.vanguard.com in the "Portfolio" section of the fund's Portfolio & Management page, 15 calendar days after the end of the calendar quarter. In addition, those funds generally will seek to disclose the fund's ten largest stock portfolio holdings as of the most recent month-end (month-end ten largest stock holdings, and together with quarter-end ten largest stock holdings, ten largest stock holdings) online at www.vanguard.com in the "Portfolio" section of the fund's Portfolio & Management page, 10 business days after the end of the month. Online disclosure of the ten largest stock holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons.
ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS
Each of the Vanguard funds, excluding Vanguard money market funds and Vanguard Market Neutral Fund, generally will seek to disclose the fund's complete portfolio holdings (complete portfolio holdings) as of the most recent calendar-quarter-end online at www.vanguard.com in the "Portfolio" section of the fund's Portfolio & Management page, 30 calendar days after the end of the calendar quarter. Vanguard Market Neutral Fund generally will seek to disclose the Fund's complete portfolio holdings as of the most recent calendar-quarter-end online at www.vanguard.com, in the "Portfolio" section of the Fund's Portfolio & Management page, 60 calendar days after the end of the calendar quarter. Online disclosure of complete portfolio holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons. Vanguard's Portfolio Review Department will review complete portfolio holdings before online disclosure is made as described above and, after consultation with a Vanguard fund's investment advisor, may withhold any portion of the fund's complete portfolio holdings from online disclosure as described above when deemed to be in the best interests of the fund.
DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS
Vanguard, for legitimate business purposes, may disclose Vanguard fund complete portfolio holdings at times it deems necessary and appropriate to rating and ranking organizations, financial printers, proxy voting service providers, pricing information vendors, third parties that deliver analytical, statistical, or consulting services, and other third parties that provide services (collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider is conditioned on the Service Provider being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information.
The frequency with which complete portfolio holdings may be disclosed to a Service Provider, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the Service Provider, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to a Service Provider varies and may be as frequent as daily, with no lag. Disclosure of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider must be authorized by a Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal Department. Any disclosure of Vanguard fund complete portfolio holdings to a Service Provider as previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives.
Currently, Vanguard fund complete portfolio holdings are disclosed to the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: Abel/Noser Corporation, Advisor Software, Inc., Alcom Printing Group Inc., Apple Press, L.C., Bloomberg L.P., Broadridge Financial Solutions, Inc., Brown Brothers Harriman & Co., FactSet Research Systems Inc., Intelligencer Printing Company, Investment Technology Group, Inc., Lipper, Inc., McMunn Associates Inc., Oce' Business Services, Inc., Reuters America Inc., R.R. Donnelley, Inc., State Street Bank and Trust Company, Triune Color Corporation, and Tursack Printing Inc.
DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS
Vanguard fund complete portfolio holdings may be disclosed between and among the following persons (collectively, Affiliates and Fiduciaries) for legitimate business purposes within the scope of their official duties and responsibilities, subject to such persons' continuing legal duty of confidentiality and legal duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics, the Policies and Procedures Designed to Prevent the Misuse of Inside Information, by agreement, or under applicable laws, rules, and regulations: (1) persons who are subject to the Code of Ethics or the Policies and Procedures Designed to Prevent the Misuse of Inside Information; (2) an investment advisor, distributor, administrator, transfer agent, or custodian to a Vanguard fund; (3) an accounting firm, an auditing firm or outside legal counsel retained by Vanguard, a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor to whom complete portfolio holdings are disclosed for due diligence purposes when the advisor is in merger or acquisition talks with a Vanguard fund's current advisor; and (5) a newly hired investment advisor or sub-advisor to whom complete portfolio holdings are disclosed prior to the time it commences its duties.
The frequency with which complete portfolio holdings may be disclosed between and among Affiliates and Fiduciaries, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed between and among the Affiliates and Fiduciaries, is determined by such Affiliates and Fiduciaries based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure between and among Affiliates and Fiduciaries varies and may be as frequent as daily, with no lag. Any disclosure of Vanguard fund complete portfolio holdings to any Affiliates and Fiduciaries as previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives. Disclosure of Vanguard fund complete portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be authorized by a Vanguard fund officer or a Principal of Vanguard.
Currently, Vanguard fund complete portfolio holdings are disclosed to the following Affiliates and Fiduciaries as part of ongoing arrangements that serve legitimate business purposes: Vanguard and each investment advisor, custodian, and independent registered public accounting firm identified in this Statement of Additional Information.
DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF
MANAGING A
FUND'S ASSETS
An investment advisor, administrator, or custodian for a Vanguard fund may, for legitimate business purposes within the scope of its official duties and responsibilities, disclose portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions that make up the fund to one or more broker-dealers during the course of, or in connection with, normal day-to-day securities and derivatives transactions with or through such broker-dealers subject to the broker-dealer's legal obligation not to use or disclose material nonpublic information concerning the fund's portfolio holdings, other investment positions, securities transactions, or derivatives transactions without the consent of the fund or its agents. The Vanguard funds have not given their consent to any such use or disclosure and no person or agent of Vanguard is authorized to give such consent except as approved in writing by the Boards of the Vanguard funds. Disclosure of portfolio holdings or other investment positions by Vanguard to broker-dealers must be authorized by a Vanguard fund officer or a Principal of Vanguard.
DISCLOSURE OF NON-MATERIAL INFORMATION
The Policies and Procedures permit Vanguard fund officers, Vanguard fund portfolio managers, and other Vanguard representatives (collectively, Approved Vanguard Representatives) to disclose any views, opinions, judgments, advice, or commentary, or any analytical, statistical, performance, or other information, in connection with or relating to a Vanguard fund or its portfolio holdings and/or other investment positions (collectively, commentary and analysis) or any changes in the portfolio holdings of a Vanguard fund that occurred after the most recent calendar-quarter end (recent portfolio changes) to any person if (1) such disclosure serves a legitimate business purpose, (2) such disclosure does not effectively result in the disclosure of the complete portfolio holdings of any Vanguard fund (which can be disclosed only in accordance with the Policies and Procedures), and (3) such information does not constitute material nonpublic information. Disclosure of commentary and analysis or recent portfolio changes by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be authorized by a Vanguard fund officer or a Principal of Vanguard.
An Approved Vanguard Representative must make a good faith determination
whether the information constitutes material nonpublic information, which
involves an assessment of the particular facts and circumstances. Vanguard
believes that in most cases recent portfolio changes that involve a few or even
several securities in a diversified portfolio or commentary and analysis would
be immaterial and would not convey any advantage to a recipient in making an
investment decision concerning a Vanguard fund. Nonexclusive examples of
commentary and analysis about a Vanguard fund include (1) the allocation of the
fund's portfolio holdings and other investment positions among various asset
classes, sectors, industries, and countries; (2) the characteristics of the
stock and bond components of the fund's portfolio holdings and other investment
positions; (3) the attribution of fund returns by asset class, sector, industry,
and country; and (4) the volatility characteristics of the fund. Approved
Vanguard Representatives may at their sole discretion determine whether to deny
any request for information made by any person, and may do so for any reason or
for no reason. "Approved Vanguard Representatives" include, for purposes of the
Policies and Procedures, persons employed by or associated with Vanguard or a
subsidiary of Vanguard who have been authorized by Vanguard's Portfolio Review
Department to disclose recent portfolio changes and/or commentary and analysis
in accordance with the Policies
and Procedures.
Currently, Vanguard non-material portfolio holdings information is disclosed to KPMG, LLP, and R.V. Kuhns & Associates.
DISCLOSURE OF PORTFOLIO HOLDINGS RELATED INFORMATION TO THE ISSUER OF A SECURITY FOR LEGITIMATE BUSINESS PURPOSES
Vanguard, at its sole discretion, may disclose portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security if the issuer presents, to the satisfaction of Fund Financial Services, convincing evidence that the issuer has a legitimate business purpose for such information. Disclosure of this information to an issuer is conditioned on the issuer being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which portfolio holdings information concerning a security may be disclosed to the issuer of such security, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the issuer, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to an issuer cannot be determined in advance of a specific request and will vary based upon the particular facts and circumstances and the legitimate business purposes, but in unusual situations could be as frequent as daily, with no lag. Disclosure of portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security must be authorized by a Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal Department.
DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW
Vanguard fund portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions that make up a fund shall be disclosed to any person as required by applicable laws, rules, and regulations. Examples of such required disclosure include, but are not limited to, disclosure of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC or another regulatory body, (2) in connection with seeking recovery on defaulted bonds in a federal bankruptcy case, (3) in connection with a lawsuit, or (4) as required by court order. Disclosure of portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as required by applicable laws, rules, and regulations must be authorized by a Vanguard fund officer or a Principal of Vanguard.
PROHIBITIONS ON DISCLOSURE OF PORTFOLIO HOLDINGS
No person is authorized to disclose Vanguard fund portfolio holdings or other investment positions (whether online at www.vanguard.com, in writing, by fax, by e-mail, orally, or by other means) except in accordance with the Policies and Procedures. In addition, no person is authorized to make disclosure pursuant to the Policies and Procedures if such disclosure is otherwise unlawful under the antifraud provisions of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act). Furthermore, Vanguard's management, at its sole discretion, may determine not to disclose portfolio holdings or other investment positions that make up a Vanguard fund to any person who would otherwise be eligible to receive such information under the Policies and Procedures, or may determine to make such disclosures publicly as provided by the Policies and Procedures.
PROHIBITIONS ON RECEIPT OF COMPENSATION OR OTHER CONSIDERATION
The Policies and Procedures prohibit a Vanguard fund, its investment advisor, and any other person from paying or receiving any compensation or other consideration of any type for the purpose of obtaining disclosure of Vanguard fund portfolio holdings or other investment positions. "Consideration" includes any agreement to maintain assets in the fund or in other investment companies or accounts managed by the investment advisor or by any affiliated person of the investment advisor.
INVESTMENT ADVISORY SERVICES
Vanguard Explorer Fund currently uses seven investment advisors:
. AXA Rosenberg Investment Management LLC provides investment advisory services for a portion of the assets in the Fund.
. Century Capital Management, LLC, provides investment advisory services for a portion of the assets in the Fund.
. Chartwell Investment Partners, L.P., provides investment advisory services for a portion of the assets in the Fund.
. Granahan Investment Management, Inc., provides investment advisory services for a portion of the assets in the Fund.
. Kalmar Investment Advisers, provides investment advisory services for a portion of the assets in the Fund.
. Vanguard provides investment advisory services for a portion of the assets in the Fund.
. Wellington Management Company, LLP, provides investment advisory services for a portion of the assets in the Fund.
The Fund previously employed one other firm as investment advisor:
. Grantham, Mayo, Van Otterloo & Co. LLC provided advisory services for a portion of the Fund's assets from 2000 until February 26, 2008.
For funds that are advised by independent third-party advisory firms unaffiliated with Vanguard, Vanguard hires investment advisory firms, not individual portfolio managers, to provide investment advisory services to such funds. Vanguard negotiates each advisory agreement, which contains advisory fee arrangements, on an arms-length basis with the advisory firm. Each advisory agreement is reviewed annually by each fund's board of trustees, taking into account numerous factors, which include, without limitation: the nature, extent, and quality of the services provided; investment performance; and fair market value of services provided. Each advisory agreement is between the Trust and the advisory firm, not between the Trust and the portfolio manager. The structure of the advisory fee paid to each unaffiliated investment advisory firm is described in the following sections. In addition, each firm has established policies and procedures designed to address the potential for conflicts of interest. Each firm's compensation structure and management of potential conflicts of interest are summarized by the advisory firm in the following sections for the period ended October 31, 2008.
Vanguard Explorer Fund uses a multimanager approach. The Fund is a party to an investment advisory agreement with each advisor whereby each advisor manages the investment and reinvestment of the portion of the Explorer Fund's assets that the Fund's board of trustees determines to assign to each advisor. Hereafter, each portion is referred to as the Portfolio. In this capacity, each advisor continuously reviews, supervises, and administers the Portfolio's investment program. Each advisor discharges its responsibilities subject to the supervision and oversight of Vanguard's Portfolio Review Group and the officers and trustees of the Fund. Vanguard's Portfolio Review Group is responsible for recommending changes in a fund's advisory arrangements to the fund's board of trustees, including changes in the amount of assets allocated to each advisor, and whether to hire, terminate, or replace an advisor.
The Fund pays each advisor on a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to the average daily net assets managed by the advisor during the most recent fiscal quarter. The fee may be increased or decreased based on the advisor's performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisor's Portfolio is compared with that of the Russell 2500 Growth Index (a 50/50 split of the Russell 2500 and Russell 2500 Growth Indexes for Century Capital) over a trailing 36-month period. Vanguard provides advisory services to a portion of the Fund on an at-cost basis.
For the fiscal years ended October 31, 2006, 2007, and 2008, Vanguard Explorer Fund incurred aggregate investment advisory fees and expenses of $19,593,000 (before a performance-based decrease of $3,024,000), $21,326,000 (before a performance-based decrease of $5,033,000), and $17,981,000 (before a performance-based decrease of $2,213,000), respectively.
Of the aggregate fees and expenses previously described, the investment advisory expenses paid to Vanguard for the fiscal year ended October 31, 2008, were $454,000 (representing an effective annual rate of less than 0.01%). The investment advisory fees paid to the remaining advisors for the fiscal year ended October 31, 2008, were $15,314,000 (representing an effective annual rate of 0.15%).
A. AXA ROSENBERG INVESTMENT MANAGEMENT LLC (AXA ROSENBERG)
AXA Rosenberg is an independently operated, 75%-owned subsidiary of AXA Group; the remaining 25% is owned by the firm's founding partners.
1. OTHER ACCOUNTS MANAGED
William E. Ricks, Ph.D., manages a portion of the Explorer Fund. As of October 31, 2008, the Fund held assets of $7.0 billion. As of October 31, 2008, Dr. Ricks also managed 22 other registered investment companies with total assets of $4.1 billion (including eight with total assets of $1.4 billion for which the advisory fee was based on account performance); 23 other pooled investment vehicles with total assets of $2.7 billion (including one with assets of $18.1 million for which the advisory fee was based on account performance); and 159 other accounts with total assets of $16.1 billion (including 31 with total assets of $3.7 billion for which the advisory fee was based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
AXA Rosenberg recognizes that conflicts of interest are inherent in its business and accordingly has developed policies, procedures, and disclosures that it believes are reasonably designed to detect, manage, and mitigate the effects of potential conflicts of interest in the areas of employee personal trading; managing multiple accounts for multiple clients, including funds; and allocating investment opportunities. Employees are subject to these policies, and oversight is designed to ensure that all clients are treated fairly.
Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities for more than one fund or account (including Vanguard Explorer Fund), such as devotion of unequal time and attention to the management of the accounts, inability to allocate limited investment opportunities across a broad band of accounts, and incentive to allocate opportunities to an account where there is a greater financial incentive, such as a performance fee account. AXA Rosenberg believes it has adopted policies and procedures that are reasonably designed to address these types of conflicts and to ensure that the company operates in a manner that is fair and equitable among its clients, including the Fund.
Dr. Ricks's management of other accounts may give rise to potential conflicts of interest in connection with his management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts might have investment objectives similar to the Fund's, or hold, purchase, or sell securities that are eligible to be held, purchased, or sold by the Fund. AXA Rosenberg believes that its quantitative investment process and pro rata allocation of investment opportunities diminish the possibility of any conflict of interest resulting in unfair or inequitable allocation of investment opportunities among accounts. AXA Rosenberg also believes that it has adopted policies and procedures designed to manage those conflicts in an appropriate way.
3. DESCRIPTION OF COMPENSATION
Portfolio manager compensation is paid by AXA Rosenberg. The components include base salary and bonus, both of which are discretionary, and not derived formulaically from performance of any individual accounts, including mutual funds like the Explorer Fund.
4. OWNERSHIP OF SECURITIES
As of October 31, 2008, Dr. Ricks owned no shares of the Explorer Fund.
B. CENTURY CAPITAL MANAGEMENT, LLC (CENTURY CAPITAL)
Century Capital is a Massachusetts-based investment advisory firm, owned by the investment professionals within the firm, that provides investment management services to institutions and individuals. The firm traces its origins to 1928 and the founding of Century Shares Trust.
1. OTHER ACCOUNTS MANAGED
Alexander L. Thorndike manages a portion of Vanguard Explorer Fund. As of October 31, 2008, the Fund held assets of approximately $7.0 billion. As of October 31, 2008, Mr. Thorndike also managed two other registered investment companies with total assets of $535 million and 30 other accounts with total assets of $354 million (none of which had advisory fees based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
Century Capital seeks to identify potential conflicts of interest resulting from a portfolio manager's management of a fund and other accounts and has adopted policies and procedures designed to address such circumstances. These include procedures for the allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. Potential conflicts of interest may be related to the knowledge and timing of a fund's trades, broker selection, and fund investments. It is theoretically possible that certain information could be used to the advantage of some accounts managed by a portfolio manager to the detriment of others. A portfolio manager may have an incentive to allocate favorable or limited-opportunity investments or structure the timing of investments to favor accounts that have a higher advisory fee or a performance fee. Additionally, a portfolio manager may be the beneficial owner of a fund or other pooled investment vehicle, and a conflict may arise in which the portfolio manager may have an incentive to treat that fund or other pooled investment vehicle preferentially as compared to other accounts.
3. DESCRIPTION OF COMPENSATION
Mr. Thorndike receives a base salary, a cash bonus, and a package of employee benefits that is generally available to all salaried employees of Century Capital. Mr. Thorndike's base salary is determined annually and reflects his level of experience and his responsibilities and tenure at Century Capital. In addition, he is eligible for a cash bonus that is linked to the pre-tax investment performance of the two Century Funds for which he serves as portfolio manager. The performance of each Fund is measured against a specified index (the S&P 500 Index for Century Shares Trust and the Russell 2000 Growth Index for Century Small Cap Select Fund) over a three-year period. His bonus is not linked to the investment performance of any other account for which he serves as portfolio manager. Mr. Thorndike is an equity owner of Century Capital, which is a private, employee-owned limited liability company. Century Capital's profits are distributed to the firm's owners in the form of annual cash distributions. Such distributions represent a more significant percentage of Mr. Thorndike's total compensation than the base salary and performance bonus described above.
4. OWNERSHIP OF SECURITIES
As of October 31, 2008, Mr. Thorndike owned no shares of the Explorer Fund.
C. CHARTWELL INVESTMENT PARTNERS, L.P. (CHARTWELL)
Chartwell is a Pennsylvania limited partnership.
1. OTHER ACCOUNTS MANAGED
The management of and investment decisions for the Chartwell Portfolio are made by the Chartwell Growth Group, of which, Edward N. Antoian, CFA, and John A. Heffern are senior members.
The Chartwell Growth Group manages a portion of the Explorer Fund; as of October 31, 2008, the Fund held assets of $7.0 billion. As of October 31, 2008, Mr. Antoian and Mr. Heffern co-managed one other pooled investment vehicle with total assets of $8.7 million, and 56 other accounts with total assets of $748 million (none of which had advisory fees
based on account performance). In addition, as of October 31,2008, Mr. Antoian solely managed one other pooled investment vehicle with total assets of $177 million (advisory fee not based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
With the exception of a hedge fund managed by Mr. Antoian (discussed below), all portfolios are managed in like-style, except for possible client-imposed portfolio restrictions, there are no material conflicts of interest that may arise in connection with simultaneous management of the Chartwell Portfolio and such other accounts. In the allocation of investment opportunities, unless prohibited by client guidelines, trade orders for multiple portfolios in a given investment product are generally "batched" or placed as an aggregated order for execution. Placing an aggregate order may enable Chartwell to obtain more favorable execution and net price for the combined order. All portfolios included in an aggregated trade are allocated the same average price per share. If in fact there are multiple orders on the trade blotter for the same security that can not be aggregated due to client restrictions, a simple rotational system is implemented.
Proprietary Accounts: Certain new investment products developed begin as incubator funds and, in some cases, are funded by internal officers, directors, partners, and portfolio managers' personal assets. These new products are traded exactly the same as regular client accounts except they do not participate in IPOs. Such accounts are not favored over any other account. The Compliance Group monitors all activity in these accounts regularly. No investment or performance fees are received by the investors nor the firm. Once sufficient client assets are raised in the product, the incubator is closed. Our Code of Ethics requires disclosure of any Private Placement investments by all employees including firm incubator funds.
Hedge Fund: Mr. Antoian manages a hedge fund. There is generally a limited amount of overlap of investments between the hedge fund and all other accounts listed above that are managed by the Chartwell Growth Group (client accounts). Investment opportunities that are appropriate for both the client accounts as well as the hedge fund are allocated on a pro-rata basis and no one account is favored over another when participating in the same trade. When investment opportunities are of a limited nature (such as IPOs), shares are allocated on a pro-rata basis for all accounts for which the investment is appropriate; if an allocation from the broker(s) is too small to satisfy a 0.05% position in the participating accounts, a rotational system is deployed. The holdings of the hedge fund and all client accounts, and all IPO allocations, are reviewed by the Compliance Group to ensure that controls are working properly.
Other rules to prevent conflicts of interest: No portfolio manager shall initiate a short sale in an investment account when a registered fund or other investment account either holds, or intends to acquire, a long position in the security. If an investment account has an existing short position in a security that is subsequently purchased as a long position in any other client account, the portfolio manager is prohibited from initiating further short sales and any purchases of the security shall be allocated in a fair and equitable manner in accordance with the firm's trade allocation policies.
3. DESCRIPTION OF COMPENSATION
The compensation paid to a Chartwell portfolio manager consists of base salary, annual bonus, and ownership distributions. A portfolio manager's base salary is determined by Chartwell's Compensation Committee and is reviewed at least annually. A portfolio manager's experience, historical performance, and role in firm or product team management are the primary considerations in determining the base salary. Industry benchmarking is utilized by the Compensation Committee on an annual basis.
Annual bonuses are determined by the Compensation Committee based on a number of factors. The primary factor is a performance-based compensation schedule that is applied to all accounts managed by a portfolio manager within a particular investment product, and is not specific to any one account. The bonus is calibrated based on the gross composite performance (before taxes) of such accounts for 1-year and 3-year periods (where applicable) versus (1) the appropriate benchmark (the Russell 2000 Growth Index for Small-Cap Growth portfolios and the Russell Midcap Growth Index for Mid-Cap Growth portfolios), and (2) peer group rankings by product category. The bonus also considers the individual's stock selection performance as it relates to sector responsibilities versus sector performance within the appropriate benchmark. Portfolio construction, sector and security weighting, and performance are reviewed by the Compliance Committee and Compensation Committee to prevent a manager from taking undue risks. Additional factors used to determine the annual bonus include the portfolio manager's contribution as an analyst, product team management, and contribution to the strategic planning and development of the investment group as well as the firm.
Ownership distributions are paid to a portfolio manager based on the portfolio manager's ownership interest, or percentage limited partnership interest, in Chartwell, multiplied by total net cash distributions paid during the year.
4. OWNERSHIP OF SECURITIES
As of October 31, 2008, Mr. Antoian and Mr. Heffern owned no shares of the Explorer Fund.
D. GRANAHAN INVESTMENT MANAGEMENT, INC. (GRANAHAN)
Granahan is a Massachusetts corporation.
1. OTHER ACCOUNTS MANAGED
Day-to-day management of the Granahan Portfolio is the responsibility of several investment professionals at Granahan. John J. Granahan, President and CEO of Granahan, is the senior member of the portfolio management team for the Granahan Portfolio. As of October 31, 2008, the Fund held assets of $7.0 billion. As of October 31, 2008, Mr. Granahan managed two other registered investment companies with total assets of $603 million (including one with total assets of $336 million where the advisory firm's fee was based on account performance), one other pooled investment vehicle with total assets of $3 million, and five other accounts with total assets of $54 million (none of which had advisory fees based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
Granahan manages long-only, small-cap client portfolios, in addition to the portion of the Explorer Fund placed with the firm. The other portfolios invest in many of the same securities in which the Granahan Portfolio invests, which could lead to a conflict of interest when allocating purchases or sales across multiple client portfolios. In addition, the clients' portfolios vary in size and in fees, which creates a potential for conflict in managing these accounts side by side. The firm has policies and procedures in place designed to prevent favoritism toward any account(s) over others.
3. DESCRIPTION OF COMPENSATION
Compensation for portfolio managers at Granahan is made up of four components:
(1) a base salary, (2) an individual performance bonus, (3) an investment-team
performance bonus, and (4) some form of profit sharing, be
it direct ownership or participation in the firm's profit sharing plan. In
addition, all employees receive health and retirement benefits.
Base salary for portfolio managers varies depending on qualitative and quantitative factors such as: salary levels in the industry, experience, length of employment, and the nature and number of other duties for which they have responsibility.
The individual performance bonus is based on a manager's portfolio(s) with respect to the following: one- and three- year pre-tax performance relative to the Russell 2000 Growth Index; one- and three-year pre-tax performance relative to the Russell 2000 sector for which the manager has responsibility as an analyst; and the percentage of client assets under management. Portfolio managers and analysts are also compensated based on the dollar contribution of their stocks to all client portfolios.
Non-owner portfolio managers are also eligible for the annual investment-team bonus, which is based on the number of portfolio styles that beat their respective benchmarks in that year. All non-owner employees participate in the firm's profit sharing plan, which is based primarily on the firm's profits in that year.
4. OWNERSHIP OF SECURITIES
As of October 31, 2008, Mr. Granahan owned shares of the Explorer Fund within the $500,001-$1,000,000 range.
E. KALMAR INVESTMENT ADVISERS (KALMAR)
Kalmar, a business trust registered in the state of Delaware, is a research-driven investment firm that is entirely focused on the management of "growth-with-value" smaller-cap equity mutual fund portfolios, and owned in its entirety by active Kalmar employees. Kalmar is a sister company of Kalmar Investments Inc., the firm's separate account management arm.
1. OTHER ACCOUNTS MANAGED
Ford B. Draper, Jr., along with Kalmar's investment team, managed a portion of the Explorer Fund; as of October 31, 2008, the Fund held assets of $7.0 billion. As of October 31, 2008, Mr. Draper and the investment team also managed one other registered investment company with total assets of $250 million (advisory fee not based on account performance) and 311 other accounts with total assets of $850 million (none of which had advisory fees based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
Kalmar's policy from the firm's inception is to avoid conflicts of interest by neither favoring nor disfavoring any account systematically versus any other. Accordingly, on a best efforts basis, investment opportunities are shared among all accounts of the same market-cap size class as even-handedly as possible over time. Kalmar has two market-cap size classes of accounts under management, Small-Cap and Small/Mid-Cap. Kalmar's investment strategy is applied uniformly and individual securities are owned approximately uniformly by all accounts within a size class, except for those clients with particular investment restrictions or guidelines. In those cases, the same strategy is applied except for elimination of restricted securities.
3. DESCRIPTION OF COMPENSATION
Kalmar seeks to maintain a competitive and incentivized compensation program in order to attract and retain outstanding, high-caliber investment professionals. Therefore, Kalmar closely links the investment professionals' compensation to their particular contributions to client returns and to the attainment of the performance goals of Kalmar's "growth-with-value" investment philosophy, in which the Kalmar Portfolio participates. Portfolio managers receive base salaries, substantial incentive bonus opportunities, benefits packages, and opportunities (if invited by Kalmar's board of directors) to purchase equity in Kalmar. Portfolio manager compensation is reviewed and modified each year as appropriate to reflect changes in the marketplace, as well as to adjust the factors used to determine bonuses in order to promote good sustained client performance, including the Kalmar Portfolio's performance.
Fixed Based Salary: In setting portfolio manager base salaries, Kalmar seeks to be competitive in light of each particular person's experience, tenure, contribution, and responsibilities.
Annual Bonus: Each portfolio manager is eligible to receive an annual incentive cash bonus that has quantitative and non-quantitative components. The quantitative component, which generally comprises 60-70% of the bonus, is based on the specific contribution of the individual's research ideas to the pre-tax success of managed portfolios in absolute and index-relative terms for short-term (1 year) and long-term (2-5 year) periods. The comparative indexes employed are the Russell 2000 and Russell 2500 as well as their Growth versions.
The non-quantitative component is based on an evaluation of the individual's
contribution to Kalmar's team-oriented research and portfolio management process
and of his or her other contributions to client satisfaction, client
communication, and the overall success of the firm over the past year. For
purposes of illustration, examples of factors weighed in this evaluation are:
(1) maintenance of insightful knowledge and opinions on companies owned by the
portfolio; (2) generation and development of new investment ideas, including the
quality of security analysis and identification of appreciation catalysts; (3)
ability and willingness to develop and share ideas and contribute to idea
deliberation on a team basis; and (4) contribution to investment strategy, buy
and sell discipline, and the overall performance results of the portfolios
managed by the investment team as well as the productive functioning of the
team.
Benefits Package: All employees, including portfolio managers, participate in Kalmar's benefits package, which includes a 401k plan with a contribution by Kalmar and a profit sharing plan based on the overall success of the firm. The opportunity for equity ownership in Kalmar is open to all key, high-contributing employees of the firm from all professional disciplines, solely at the discretion and invitation of Kalmar's board of directors. Such ownership is purchased from the firm, rather than awarded as a bonus. Mr. Draper is the lead partner in Kalmar. This equity ownership, coupled with the
other competitive and incentivizing ingredients in Kalmar's compensation package, is intended to link the partner's compensation directly, plus indirectly but effectively, to client success and performance outcomes.
4. OWNERSHIP OF SECURITIES
As of October 31, 2008, Mr. Draper owned no shares of the Explorer Fund.
F. WELLINGTON MANAGEMENT COMPANY, LLP (WELLINGTON MANAGEMENT)
Wellington Management is a Massachusetts limited liability partnership with principal offices at 75 State Street, Boston, Massachusetts 02109. Wellington Management is a professional investment counseling firm that provides investment services to investment companies, employee benefits plans, endowments, foundations, and other institutions. Wellington Management and its predecessor organizations have provided investment advisory services for over 70 years. Kenneth L. Abrams, Senior Vice President and Equity Portfolio Manager of Wellington Management, has served as a portfolio manager of the Fund since 1994.
1. OTHER ACCOUNTS MANAGED
Kenneth L. Abrams manages a portion of the Explorer Fund; as of October 31, 2008, the Fund held assets of $7.0 billion. As of October 31, 2008, Mr. Abrams managed two other registered investment companies with total assets of $135 million; eight other pooled investment vehicles with total assets of $870 million; and 12 other accounts with total assets of $1.2 billion (none for which the advisory firm's fee was based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
Individual investment professionals at Wellington Management manage multiple accounts for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions, such as pension funds, insurance companies, foundations, or separately managed account programs sponsored by financial intermediaries), bank common trust accounts, and hedge funds. The Wellington Management Portfolio's manager listed in the prospectus, who is primarily responsible for the day-to-day management of the Wellington Management Portfolio (the Portfolio Manager), generally manages accounts in several different investment styles. These accounts may have investment objectives, strategies, time horizons, tax considerations, and risk profiles that differ from those of the Wellington Management Portfolio. The Portfolio Manager makes investment decisions for each account, including the Wellington Management Portfolio, based on the investment objectives, policies, practices, benchmarks, cash flows, tax, and other relevant investment considerations applicable to that account. Consequently, the Portfolio Manager may purchase or sell securities, including IPOs, for one account and not another account, and the performance of securities purchased for one account may vary from the performance of securities purchased for other accounts. Alternatively, these accounts may be managed in a similar fashion to the Wellington Management Portfolio and thus the accounts may have similar, and in some cases nearly identical, objectives, strategies, and/or holdings to those of the Wellington Management Portfolio.
The Portfolio Manager or other investment professionals at Wellington Management may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Wellington Management Portfolio, or make investment decisions that are similar to those made for the Wellington Management Portfolio, both of which have the potential to adversely impact the Wellington Management Portfolio, depending on market conditions. For example, an investment professional may purchase a security in one account while appropriately selling that same security in another account. Similarly, the Portfolio Manager may purchase the same security for the Wellington Management Portfolio and one or more other accounts at or about the same time, and in those instances the other accounts will have access to their respective holdings prior to the public disclosure of the Wellington Management Portfolio's holdings. In addition, some of these accounts have fee structures, including performance fees, which are or have the potential to be higher, in some cases significantly higher, than the fees Wellington Management receives for managing the Wellington Management Portfolio. Because incentive payments paid by Wellington Management to the Portfolio Manager are tied to revenues earned by Wellington Management and, where noted, to the performance achieved by the manager in each account, the incentives associated with any given account may be significantly higher
or lower than those associated with other accounts managed by the Portfolio Manager. Finally, the Portfolio Manager may hold shares or investments in the other pooled investment vehicles and/or other accounts identified above.
Wellington Management's goal is to meet its fiduciary obligation to treat all clients fairly and provide high quality investment services to all of its clients. Wellington Management has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, which it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Wellington Management monitors a variety of areas, including compliance with primary account guidelines, the allocation of IPOs, and compliance with the firm's Code of Ethics, and places additional investment restrictions on investment professionals who manage hedge funds and certain other accounts. Furthermore, senior investment and business personnel at Wellington Management periodically review the performance of Wellington Management's investment professionals. Although Wellington Management does not track the time an investment professional spends on a single account, Wellington Management does periodically assess whether an investment professional has adequate time and resources to effectively manage the investment professional's various client mandates.
3. DESCRIPTION OF COMPENSATION
Wellington Management receives a fee based on the assets under management of the Wellington Management Portfolio as set forth in the Investment Advisory Agreement between Wellington Management and the Fund. Wellington Management pays its investment professionals out of its total revenues and other resources, including the advisory fees earned with respect to the Fund. The following information relates to the fiscal year ended October 31, 2008.
Wellington Management's compensation structure is designed to attract and retain high-caliber investment professionals necessary to deliver high quality investment management services to its clients. Wellington Management's compensation of the Portfolio Manager includes a base salary and incentive components. The base salary for the Portfolio Manager, who is a partner of Wellington Management, is determined by the Managing Partners of the firm. A partner's base salary is generally a fixed amount that may change as a result of an annual review.
The Portfolio Manager is eligible to receive an incentive payment based on the revenues earned by Wellington Management from the Wellington Management Portfolio and generally each other account managed by the Portfolio Manager. The Portfolio Manager's incentive payment relating to the Wellington Management Portfolio is linked to the net pre-tax performance of the portion of the Fund managed by the Portfolio Manager compared to the Russell 2500 Growth Index over rolling three year periods, and is additionally tied to a competitive average of six small-company equity funds over a one year period. The emphasis is on the three year results versus the index. Wellington Management applies similar incentive compensation structures (although the benchmarks or peer groups, time periods, and rates may differ) to other accounts managed by the Portfolio Manager, including accounts with performance fees.
Portfolio-based incentives across all accounts managed by an investment professional can, and typically do, represent a significant portion of an investment professional's overall compensation; incentive compensation varies significantly by individual and can vary significantly from year to year. The Portfolio Manager may also be eligible for bonus payments based on his overall contribution to Wellington Management's business operations. Senior management at Wellington Management may reward individuals as it deems appropriate based on factors other than account performance. Each partner of Wellington Management is eligible to participate in a partner-funded tax-qualified retirement plan, the contributions to which are made pursuant to an actuarial formula. Mr. Abrams is a partner of the firm.
4. OWNERSHIP OF SECURITIES
As of October 31, 2008, Mr. Abrams owned shares of the Explorer Fund in an amount exceeding $1 million.
G. VANGUARD
Vanguard, through its Quantitative Equity Group, provides investment advisory services on an at-cost basis for a portion of the Fund's assets. The compensation and other expenses of the advisory staff are allocated among the funds utilizing these services.
1. OTHER ACCOUNTS MANAGED
James D. Troyer manages a portion of the Explorer Fund; as of October 31, 2008, the Fund held assets of $7.0 billion. As of October 31, 2008, Mr. Troyer managed all or a portion of six other registered investment companies with total assets of $43.9 billion and two other pooled investment vehicle(s) with total assets of $72.0 million (none of which had advisory fees based on account performance).
2. MATERIAL CONFLICTS OF INTEREST
At Vanguard, individual portfolio managers may manage multiple accounts for multiple clients. In addition to mutual funds, these other accounts may include separate accounts, collective trusts, or offshore funds. Managing multiple accounts may give rise to potential conflicts of interest including, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. Vanguard manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal review processes, and oversight by directors and independent third parties. Vanguard has developed trade allocation procedures and controls to ensure that no one client, regardless of type, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities.
3. DESCRIPTION OF COMPENSATION
The named Vanguard portfolio manager is a Vanguard employee. This section describes the compensation of the Vanguard employees who manage Vanguard mutual funds. As of October 31, 2008, a Vanguard portfolio manager's compensation generally consists of base salary, bonus, and payments under Vanguard's long-term incentive compensation program. In addition, portfolio managers are eligible for the standard retirement benefits and health and welfare benefits available to all Vanguard employees. Also, certain portfolio managers may be eligible for additional retirement benefits under several supplemental retirement plans that Vanguard adopted in the 1980's to restore dollar-for-dollar the benefits of management employees that had been cut back solely as a result of tax-law changes. These plans are structured to provide the same retirement benefits as the standard retirement plans.
In the case of portfolio managers responsible for managing multiple Vanguard funds or accounts, the method used to determine their compensation is the same for all funds and investment accounts. A portfolio manager's base salary is determined by the manager's experience and performance in the role, taking into account the ongoing compensation benchmark analyses performed by the Vanguard Human Resources Department. A portfolio manager's base salary is generally a fixed amount that may change as a result of an annual review, upon assumption of new duties, or when a market adjustment of the position occurs.
A portfolio manager's bonus is determined by a number of factors. One factor is gross, pre-tax performance of a fund relative to expectations for how the fund should have performed, given its objective, policies, strategies, and limitations, and the market environment during the measurement period. This performance factor is not based on the value of assets held in the fund's portfolio. For the portion of the Explorer Fund managed by Vanguard, the performance factor depends on how successfully the portfolio manager outperforms the Russell 2500 Growth Index and maintains the risk parameters of the Fund over a three-year period. Additional factors include the portfolio manager's contributions to the investment management functions within the sub-asset class, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for the investment group. The target bonus is expressed as a percentage of base salary. The actual bonus paid may be more or less than the target bonus, based on how well the manager satisfies the objectives stated above. The bonus is paid on an annual basis.
Under the long-term incentive compensation program, all full-time employees receive a payment from Vanguard's long-term incentive compensation plan based on their years of service, job level, and, if applicable, management responsibilities. Each year, Vanguard's independent directors determine the amount of the long-term incentive compensation award for that year based on the investment performance of the Vanguard funds relative to competitors and Vanguard's operating efficiencies in providing services to the Vanguard funds.
4. OWNERSHIP OF SECURITIES
Vanguard employees, including portfolio managers, allocate their investments among the various Vanguard funds based on their own individual investment needs and goals. Vanguard employees as a group invest a sizable portion of their
personal assets in Vanguard funds. As of October 31, 2008, Vanguard employees
collectively invested more than
$1.7 billion in Vanguard funds. John J. Brennan, Chairman of the Board of
Vanguard and the Vanguard funds; F. William McNabb III, Chief Executive Officer
and President of Vanguard and the Vanguard funds; and George U. Sauter, Chief
Investment Officer and Managing Director of Vanguard, invest substantially all
of their personal financial assets in Vanguard funds.
As of October 31, 2008, Mr. Troyer owned no shares of the Explorer Fund.
H. DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The Fund's current agreements with Chartwell, Granahan, Kalmar, and Wellington
Management are renewable for successive one-year periods, only if (1) each
renewal is specifically approved by a vote of the Fund's board of trustees,
including the affirmative votes of a majority of the trustees who are not
parties to the agreement or "interested persons" (as defined in the 1940 Act) of
any such party, cast in person at a meeting called for the purpose of
considering such approval, or (2) each renewal is specifically approved by a
vote of a majority of the Fund's outstanding voting securities. An agreement is
automatically terminated if assigned, and may be terminated without penalty at
any time either (1) by vote of the board of trustees of the Fund upon thirty
(30) days' written notice to the advisor (sixty (60) days' written notice for
Chartwell), (2) by a vote of a majority of the Fund's outstanding voting
securities upon 30 days' written notice to the advisor (60 days' written notice
for Chartwell), or (3) by the advisor upon ninety (90) days' written notice to
the Fund.
The Trust's investment advisory agreements with AXA Rosenberg and Century Capital are binding for a two-year period. At the end of that time, each agreement will become renewable for successive one-year periods, subject to the above conditions.
Vanguard provides at-cost investment advisory services to the Fund pursuant to the terms of the Fourth Amended and Restated Funds' Service Agreement. This agreement will continue in full force and effect until terminated or amended by mutual agreement of the Vanguard funds and Vanguard.
PORTFOLIO TRANSACTIONS
Each advisor decides which securities to buy and sell on behalf of the Fund and then selects the brokers or dealers that will execute the trades on an agency basis or the dealers with whom the trades will be effected on a principal basis. For each trade, the advisor must select a broker-dealer that it believes will provide "best execution." Best execution does not necessarily mean paying the lowest spread or commission rate available. In seeking best execution, the SEC has said that an advisor should consider the full range of a broker-dealer's services. The factors considered by the advisor in seeking best execution include, but are not limited to, the broker-dealer's execution capability, clearance and settlement services, commission rate, trading expertise, willingness and ability to commit capital, ability to provide anonymity, financial responsibility, reputation and integrity, responsiveness, access to underwritten offerings and secondary markets, and access to company management, as well as the value of any research provided by the broker-dealer. In assessing which broker-dealer can provide best execution for a particular trade, the advisor also may consider the timing and size of the order and available liquidity and current market conditions. Subject to applicable legal requirements, the advisor may select a broker based partly on brokerage or research services provided to the advisor and its clients, including the Fund. The advisor may cause the Fund to pay a higher commission than other brokers would charge if the advisor determines in good faith that the amount of the commission is reasonable in relation to the value of services provided. The advisor also may receive brokerage or research services from broker-dealers that are provided at no charge in recognition of the volume of trades directed to the broker. To the extent research services or products may be a factor in selecting brokers, services and products may include written research reports analyzing performance or securities, discussions with research analysts, meetings with corporate executives to obtain oral reports on company performance, market data, and other products and services that will assist the advisor in its investment decision-making process. The research services provided by brokers through which the Fund effects securities transactions may be used by the advisor in servicing all of its accounts, and some of the services may not be used by the advisor in connection with the Fund.
During the fiscal years ended October 31, 2006, 2007, and 2008, the Fund paid the following amounts in brokerage commissions: $19,276,000, $19,719,000, and $20,738,000, respectively.
Some securities that are considered for investment by the Fund may also be appropriate for other Vanguard funds or for other clients served by the advisors. If such securities are compatible with the investment policies of the Fund and
one or more of an advisor's other clients, and are considered for purchase or sale at or about the same time, then transactions in such securities will be aggregated by the advisor and the purchased securities or sale proceeds will be allocated among the participating Vanguard funds and the other participating clients of the advisor in a manner deemed equitable by the advisor. Although there may be no specified formula for allocating such transactions, the allocation methods used, and the results of such allocations, will be subject to periodic review by the Fund's board of trustees.
As of October 31, 2008, the Fund held securities of its "regular brokers or dealers," as that term is defined in Rule 10b-1 of the 1940 Act, as follows:
REGULAR BROKER OR DEALER (OR PARENT) AGGREGATE HOLDINGS Jefferies & Company, Inc. $15,345,000 |
PROXY VOTING GUIDELINES
The Board of Trustees (the Board) of each Vanguard fund that invests in stocks has adopted proxy voting procedures and guidelines to govern proxy voting by the fund. The Board has delegated oversight of proxy voting to the Proxy Oversight Committee (the Committee), made up of senior officers of Vanguard, a majority of whom are also officers of each Vanguard fund, and subject to the operating procedures and guidelines described below. The Committee reports directly to the Board. Vanguard is subject to these guidelines to the extent the guidelines call for Vanguard to administer the voting process and implement the resulting voting decisions, and for these purposes have been approved by the Board of Directors of Vanguard.
The overarching objective in voting is simple: to support proposals and director nominees that maximize the value of a fund's investments--and those of fund shareholders--over the long term. While the goal is simple, the proposals the funds receive are varied and frequently complex. As such, the guidelines adopted by the Board provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented.
For ease of reference, the procedures and guidelines often refer to all funds. However, our processes and practices seek to ensure that proxy voting decisions are suitable for individual funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the funds and the funds voting as a block. In some cases, however, a fund may vote differently, depending upon the nature and objective of the fund, the composition of its portfolio, and other factors.
The guidelines do not permit the Board to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting if that would be in the fund's and its shareholders' best interests. These circumstances may arise, for example, if the expected cost of voting exceeds the expected benefits of voting, or if exercising the vote would result in the imposition of trading or other restrictions.
In evaluating proxy proposals, we consider information from many sources, including but not limited to the investment advisor for the fund, management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company's board, absent guidelines or other specific facts that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Proxy Oversight Committee, who are accountable to the fund's Board.
While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the fund's vote in a manner that, in the Committee's view, will maximize the value of the fund's investment, subject to the individual circumstances of the fund.
I. THE BOARD OF DIRECTORS
A. ELECTION OF DIRECTORS
Good governance starts with a majority-independent board, whose key committees are made up entirely of independent directors. As such, companies should attest to the independence of directors who serve on the Compensation, Nominating, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained in the proxy statement.
While the funds will generally support the board's nominees, the following factors will be taken into account in determining each fund's vote:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL
-------------------- ------------------------
Nominated slate results in board made Nominated slate results in board made up
up of a majority of independent directors. of a majority of non-independent directors.
All members of Audit,Nominating, and Compensation Audit, Nominating, and/or Compensation committees include non-
committees are independent of management. independent members.
Incumbent board member failed to attend at least 75% of meetings in the
previous year.
Actions of committee(s) on which nominee serves are inconsistent with
other guidelines (e.g., excessive option grants, substantial non-audit,
fees lack of board independence).
|
B. CONTESTED DIRECTOR ELECTIONS
In the case of contested board elections, we will evaluate the nominees' qualifications, the performance of the incumbent board, as well as the rationale behind the dissidents' campaign, to determine the outcome that we believe will maximize shareholder value.
C. CLASSIFIED BOARDS
The funds will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures in which only part of the board is elected each year.
II. APPROVAL OF INDEPENDENT AUDITORS
The relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. The funds will generally support management's recommendation for the ratification of the auditor, except in instances in which audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether independence has been compromised.
III. COMPENSATION ISSUES
A. STOCK-BASED COMPENSATION PLANS
Appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders with the interests of management, employees, and directors. The funds oppose plans that substantially dilute their ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features.
An independent compensation committee should have significant latitude to deliver varied compensation to motivate the company's employees. However, we will evaluate compensation proposals in the context of several factors (a company's industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the company's other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account.
The following factors will be among those considered in evaluating these proposals.
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL -------------------- ------------------------ Company requires senior executives to Total potential dilution (including all stock-based plans) exceeds hold a minimum amount of company stock 15% of shares outstanding. (frequently expressed as a multiple of salary). Company requires stock acquired through Annual option grants have exceeded 2% of shares outstanding. option exercise to be held for a certain period of time. Compensation program includes Plan permits repricing or replacement of options without performance-vesting awards, indexed shareholder approval. options, or other performance-linked grants. Concentration of option grants to Plan provides for the issuance of reload options. senior executives is limited (indicating that the plan is very broad-based). Stock-based compensation is Plan contains automatic share replenishment (evergreen) feature. clearly used as a substitute for cash in delivering market-competitive total pay. |
B. BONUS PLANS
Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the IRC, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported.
C. EMPLOYEE STOCK PURCHASE PLANS
The funds will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan amount to less than 5% of the outstanding shares.
D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES)
While executives' incentives for continued employment should be more significant than severance benefits, there are instances--particularly in the event of a change in control--in which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executive's salary and bonus may generally be approved by the compensation committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonus--or where severance is guaranteed absent a change in control--should be submitted for shareholder approval.
IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS
The exercise of shareholder rights, in proportion to economic ownership, is a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders' ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. In general, the market for corporate control should be allowed to function without undue interference from these artificial barriers.
The funds' positions on a number of the most commonly presented issues in this area are as follows:
A. SHAREHOLDER RIGHTS PLANS (POISON PILLS)
A company's adoption of a so-called poison pill effectively limits a potential acquirer's ability to buy a controlling interest without the approval of the target's board of directors. Such a plan, in conjunction with other takeover defenses, may serve to entrench incumbent management and directors. However, in other cases, a poison pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium.
In general, shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL -------------------- ----------------------------- Plan is relatively short-term (3-5 years). Plan is long term (>5 years). Plan requires shareholder approval for renewal. Renewal of plan is automatic or does not require shareholder approval. Plan incorporates review by a committee Ownership trigger is less than 15%. of independent directors at least every three years (so-called TIDE provisions). Plan includes permitted-bid/qualified-offer Classified board. feature (chewable pill) that mandates a shareholder vote in certain situations. Ownership trigger is reasonable (15-20%). Board with limited independence. Highly independent, non-classified board. |
B. CUMULATIVE VOTING
The funds are generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation.
C. SUPERMAJORITY VOTE REQUIREMENTS
The funds support shareholders' ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, the funds will support proposals to remove supermajority requirements and oppose proposals to impose them.
D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT
The funds support shareholders' right to call special meetings of the board (for good cause and with ample representation) and to act by written consent. The funds will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them.
E. CONFIDENTIAL VOTING
The integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, the funds support proposals to provide confidential voting.
F. DUAL CLASSES OF STOCK
We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. We will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes.
V. CORPORATE AND SOCIAL POLICY ISSUES
Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. The Board generally believes that these are "ordinary business matters" that are primarily the responsibility of management and should be evaluated and approved solely by the corporation's board of directors. Often, proposals may address concerns with which the Board philosophically agrees, but absent a compelling economic impact on shareholder value (e.g., proposals to require expensing of stock options), the funds will typically abstain from voting on these proposals. This reflects the belief that regardless of our philosophical perspective on the issue, these decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund's investment and management is not responsive to the matter.
VI. VOTING IN FOREIGN MARKETS
Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. Each fund's votes will be used, where applicable, to advocate
for improvements in governance and disclosure by each fund's portfolio companies. We will evaluate issues presented to shareholders for each fund's foreign holdings in the context with the guidelines described above, as well as local market standards and best practices. The funds will cast their votes in a manner believed to be philosophically consistent with these guidelines, while taking into account differing practices by market. In addition, there may be instances in which the funds elect not to vote, as described below.
Many foreign markets require that securities be "blocked" or reregistered to vote at a company's meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements.
The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets may be substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances where the issues presented are unlikely to have a material impact on shareholder value.
VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS
Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund.
VIII. THE PROXY VOTING GROUP
The Board has delegated the day-to-day operations of the funds' proxy voting process to the Proxy Voting Group, which the Committee oversees. While most votes will be determined, subject to the individual circumstances of each fund, by reference to the guidelines as separately adopted by each of the funds, there may be circumstances when the Proxy Voting Group will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, at the Board's or the Committee's discretion, such action is warranted.
The Proxy Voting Group performs the following functions: (1) managing proxy voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals using factors described in the guidelines; (4) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and special reports to the Board, and any proposed amendments to the procedures and guidelines.
IX. THE PROXY OVERSIGHT COMMITTEE
The Board, including a majority of the independent trustees, appoints the members of the Committee who are senior officers of Vanguard, a majority of whom are also officers of each Vanguard fund.
The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse himself or herself from the committee meeting at which the matter is addressed, and not participate in the voting decision.
The Committee works with the Proxy Voting Group to provide reports and other guidance to the Board regarding proxy voting by the funds. The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness, and Vanguard's Code of Ethics. The Committee shall authorize proxy votes that the Committee determines, at its sole discretion, to be in the best interests of each fund's shareholders. In determining how to apply the guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of fund shareholders in maximizing the value of their investments.
The Board may review these procedures and guidelines and modify them from time to time. The procedures and guidelines are available on Vanguard's website at www.vanguard.com.
You may obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30 by logging on to Vanguard's internet site, at www.vanguard.com, or the SEC's website at www.sec.gov.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended October 31, 2008, appearing in the Fund's 2008 Annual Report to Shareholders, and the report thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of the Fund's performance, please see the Fund's Annual and Semiannual Reports to Shareholders, which may be obtained without charge.
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and does not accept any liability in relation to its issue, operation, and
trading. The funds or securities referred to herein are not sponsored, endorsed,
or promoted by MSCI, and MSCI bears no liability with respect to any such funds
or securities. For any such funds or securities, the prospectus or the Statement
of Additional Information contains a more detailed description of the limited
relationship MSCI has with The Vanguard Group and any related funds. Russell is
a trademark of The Frank Russell Company. Standard & Poor's(R), S&P(R), S&P
500(R), Standard & Poor's 500, and 500 are trademarks of The McGraw-Hill
Companies, Inc., and have been licensed for use by The Vanguard Group, Inc.
Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard
& Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the funds. Vanguard ETFs are not sponsored,
endorsed, sold, or promoted by Barclays Capital. Barclays Capital makes no
representation or warranty, express or implied, to the owners of Vanguard ETFs
or any member of the public regarding the advisability of investing in
securities generally or in Vanguard ETFs particularly or the ability of the
Barclays Capital Index to track general bond market performance. Barclays
Capital hereby expressly disclaims all warranties of merchantability and fitness
for a particular purpose with respect to the Barclays Capital index and any data
included therein. Barclays Capital's only relationship to Vanguard and Vanguard
ETFs is the licensing of the Barclays Capital Index which is determined,
composed, and calculated by Barclays Capital without regard to Vanguard or the
Vanguard ETFs. Barclays Capital is not responsible for and has not participated
in the determination of the timing of, prices of, or quantities of Vanguard ETFs
to be issued.CFA(R) and Chartered Financial Analyst(R) are trademarks owned by
CFA Institute.
SAI024 022009
PART C
VANGUARD EXPLORER FUND
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation, Amended and Restated Agreement, and
Declaration of Trust, is filed herewith.
(b) By-Laws are filed herewith.
(c) Instruments Defining Rights of Security Holders, reference is made to
Articles III and V of the Registrant's Amended and Restated Agreement and
Declaration of Trust, refer to Exhibit (a) above.
(d) Investment Advisory Contracts, for Chartwell Investment Partners, L.P.,
filed on December 1, 2005, Post-Effective Amendment No. 75; for Kalmar
Investment Advisers, filed on February 1, 2005, Post-Effective Amendment
No. 74; for Wellington Management Company, LLP, and Granahan Investment
Management, Inc., filed on February 17, 2006, Post-Effective Amendment
No. 76; are hereby incorporated by reference. For AXA Rosenberg
Investment Management LLC, filed on August 14, 2007, Post-Effective
Amendment No. 79, is hereby incorporated by reference; for Century
Capital Management LLC, filed on June 12, 2008, Post-Effective Amendment
No. 83; is hereby incorporated by reference. The Vanguard Group, Inc.
provides investment advisory services to the Fund at cost pursuant to the
Amended and Restated Funds' Service Agreement, refer to Exhibit (h)
below.
(e) Underwriting Contracts, not applicable.
(f) Bonus or Profit Sharing Contracts, reference is made to the section
entitled "Management of the Fund" in Part B of this Registration
Statement.
(g) Custodian Agreements, for Citibank, N.A., filed on December 1, 2005,
Post-Effective Amendment No. 75, is hereby incorporated by reference.
(h) Other Material Contracts, Amended and Restated Funds' Service Agreement,
filed on February 20, 2008, Post-Effective Amendment No. 80, is hereby
incorporated by reference.
(i) Legal Opinion, not applicable.
(j) Other Opinions, Consent of Independent Registered Public Accounting Firm,
is filed herewith.
(k) Omitted Financial Statements, not applicable.
(l) Initial Capital Agreements, not applicable.
(m) Rule 12b-1 Plan, not applicable.
(n) Rule 18f-3 Plan, is filed herewith.
(o) Reserved.
(p) Codes of Ethics, for Chartwell Investment Partners, filed on December 22,
2004, Post-Effective Amendment No 73; for Kalmar Investment Advisers,
filed on February 1, 2005, Post-Effective Amendment No. 74; for The
Vanguard Group, Inc., filed on February 23, 2007, Post-Effective
Amendment No. 77; filed on June 14, 2007, Post-Effective Amendment No.
78; for AXA Rosenberg Investment Management LLC, filed on August 14,
2007, Post-Effective Amendment No. 79; and for Century Capital Management
LLC, filed on June 12, 2008, Post-Effective Amendment No. 83, are
incorporated by reference. For for Wellington Management, LLP., is filed
herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacity. Article VII, Section 2 of the Amended and Restated Agreement and Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee's or officer's office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Wellington Management Company, LLP (Wellington Management) is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the Advisers Act). The list required by this Item 26 of officers and partners of Wellington Management, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and partners during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Wellington Management pursuant to the Advisers Act (SEC File No. 801-15908).
Granahan Investment Management, Inc. (Granahan) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Granahan, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Granahan pursuant to the Advisers Act (SEC File No. 801-23705).
Chartwell Investment Partners (Chartwell) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and partners of Chartwell, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and partners during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Chartwell pursuant to the Advisers Act (SEC File No. 801-54124).
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under the Investment Advisers Act of 1940, as amended. The list required by this Item 26 of officers and directors of Vanguard, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-11953).
Kalmar Investment Advisers (Kalmar) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Kalmar, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Kalmar pursuant to the Advisers Act (SEC File No. 801-53608).
AXA Rosenberg Investment Management LLC (AXA) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and partners of AXA, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and partners during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by AXA pursuant to the Advisers Act (SEC File No. 801-56080).
Century Capital Management, LLC (Century Capital) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Century Capital, together with any information as to any business, profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Century Capital pursuant to the Advisers Act (SEC File No. 801-62860).
ITEM 27. PRINCIPAL UNDERWRITERS
a) Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group, Inc., is the principal underwriter of each fund within the Vanguard group of investment companies, a family of 37 investment companies with more than 150 funds.
(b) The principal business address of each named director and officer of Vanguard Marketing Corporation is 100 Vanguard Boulevard, Malvern, PA 19355.
Name Positions and Office with Underwriter Positions and Office with Funds
---- ------------------------------------- -------------------------------
R. Gregory Barton Director and Senior Vice President None
Mortimer J. Buckley Director and Senior Vice President None
F. William McNabb III Chairman and Director Chief Executive Officer and President
Michael S. Miller Director and Managing Director None
Glenn W. Reed Director None
George U. Sauter Director and Senior Vice President None
Heidi Stam Director and Senior Vice President Secretary
Richard D. Carpenter Treasurer None
David L. Cermak Principal None
Joseph Colaizzo Financial and Operations Principal and Assistant None
Treasurer
Michael L. Kimmel Secretary None
Sean P. Hagerty Principal None
John C. Heywood Principal None
Steve Holman Principal None
Jack T. Wagner Assistant Treasurer None
Jennifer M. Halliday Assistant Treasurer None
Brian P. McCarthy Senior Registered Options Principal None
Deborah McCracken Assistant Secretary None
Miranda O'Keefe Compliance Registered Options Principal None
Joseph F. Miele Registered Municipal Securities Principal None
Scott M. Bishop Registered Municipal Securities Principal None
Bradley J. Sacco Registered Municipal Securities Principal None
Jane K. Myer Principal None
Pauline C. Scalvino Chief Compliance Officer Chief Compliance Officer
|
(c) Not applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section 31(a) of the Investment Company Act and the rules promulgated thereunder will be maintained at the offices of the Registrant, 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; the Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and the Registrant's Custodian, Citibank, N.A., 111 Wall Street, New York, New York 10005.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth in the section entitled "Management of the Fund" in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that it meets all requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 19th day of February, 2009.
VANGUARD EXPLORER FUND
BY:_________/s/ F. William McNabb III*____________
F. WILLIAM MCNABB III
CHIEF EXECUTIVE OFFICER AND PRESIDENT
|
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
/S/ JOHN J. BRENNAN* Chairman of the Board February 19, 2009
------------------------------ and Trustee
John J. Brennan
/S/ F. WILLIAM MCNABB III* Chief Executive Officer February 19, 2009
------------------------------ and President
F. William McNabb III
/S/ CHARLES D. ELLIS* Trustee February 19, 2009
------------------------------
Charles D. Ellis
/S/ EMERSON U. FULLWOOD* Trustee February 19, 2009
------------------------------
Emerson U. Fullwood
/S/ RAJIV L. GUPTA* Trustee February 19, 2009
------------------------------
Rajiv L. Gupta
/S/ AMY GUTMANN* Trustee February 19, 2009
------------------------------
Amy Gutmann
/S/ JOANN HEFFERNAN HEISEN* Trustee February 19, 2009
------------------------------
JoAnn Heffernan Heisen
/S/ ANDRE F. PEROLD* Trustee February 19, 2009
------------------------------
Andre F. Perold
/S/ ALFRED M. RANKIN, JR.* Trustee February 19, 2009
------------------------------
Alfred M. Rankin, Jr.
/S/ J. LAWRENCE WILSON* Trustee February 19, 2009
------------------------------
J. Lawrence Wilson
/S/ THOMAS J. HIGGINS* Chief Financial Officer February 19, 2009
------------------------------
Thomas J. Higgins
|
*By: /s/ Heidi Stam
--------------
Heidi Stam, pursuant to a Power of Attorney filed on January 18, 2008, see
File Number 2-29601, Incorporated by Reference; and pursuant to a Power of
Attorney filed on September 26, 2008, see File Number 2-47371, Incorporated
by Reference.
|
INDEX TO EXHIBITS
Articles of Incorporation, Amended and Restated Agreement, and Declaration of Trust. . . . . . . . . . . . . . . . . . . . . . . . . . .Ex-99.A
By-Laws. . . . . . . . . . . . . . . . . . . . . . . . . .Ex-99.B
Other Opinions, Consent of Independent Registered Public Accounting Firm Ex-99.J
Rule 18f-3 Plan . . . . . . . . . . . . . . . . . . . . . Ex-99.N
Code of Ethics, Wellington Management Company, LLC . . . .Ex-99.P
INSTRUMENT
THIS INSTRUMENT is entered into by the undersigned trustees (the "Trustees") as of November 18, 2008.
WHEREAS, the undersigned Trustees constitute all of the trustees holding office for each of the trusts identified on Attachment A hereto (the "Trusts");
WHEREAS, the Agreement and Declaration of Trust and By-Laws now in effect for each of the Trusts provide that each such Agreement and Declaration of Trust and such By-Laws may be amended by the Trustees (subject to certain limitations not here applicable);
NOW, THEREFORE, the undersigned Trustees hereby adopt for each Trust the Amended and Restated Agreement and Declaration of Trust and By-Laws of such Trust attached hereto as Attachment B.
[Signature Page Follows]
IN WITNESS WHEREOF, the Trustees named below are signing this Instrument on the date stated in the introductory clause.
/s/ John J. Brennan /s/ JoAnn Heffernan Heisen -------------------------------- -------------------------------- John J. Brennan JoAnn Heffernan Heisen Trustee Trustee /s/ Charles D. Ellis /s/ Andre Perold -------------------------------- -------------------------------- Charles D. Ellis Andre Perold Trustee Trustee /s/ Emerson U. Fullwood /s/ Alfred M. Rankin, Jr. -------------------------------- -------------------------------- Emerson U. Fullwood Alfred M. Rankin, Jr. Trustee Trustee /s/ Rajiv L. Gupta /s/ J. Lawrence Wilson -------------------------------- -------------------------------- Rajiv L. Gupta J. Lawrence Wilson Trustee Trustee /s/ Amy Gutmann -------------------------------- Amy Gutmann Trustee |
ATTACHMENT A
LIST OF TRUSTS
Vanguard Admiral Funds Vanguard Bond Index Funds Vanguard CMT Funds Vanguard California Tax-Free Funds Vanguard Chester 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 STAR Funds Vanguard Specialized Funds Vanguard Tax-Managed Funds Vanguard Treasury Fund 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 |
ATTACHMENT B
Amended and Restated Agreement and Declaration of Trust and By-Laws of each Trust
AMENDED AND RESTATED
AGREEMENT AND DECLARATION OF TRUST
OF
VANGUARD EXPLORER FUND
WHEREAS, this AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST of Vanguard Explorer Fund (the "Trust") is made and entered into as of the date set forth below by the Trustees named hereunder for the purpose of continuing the Trust as a Delaware statutory trust in accordance with the provisions hereinafter set forth;
WHEREAS, the Trust was formed upon the filing of a certificate of trust in the Office of the Secretary of State of the State of Delaware on January 28, 1998 pursuant to a declaration of trust dated January 23, 1998 (the "Original Declaration of Trust");
WHEREAS, the Original Declaration of Trust was amended on July 19, 2002 (as so amended, the "Amended Declaration of Trust"); and
WHEREAS, the Trustees consider it appropriate to amend and restate the Amended Declaration of Trust in accordance with the terms of the Amended Declaration of Trust and the Delaware Act.
NOW, THEREFORE, the Amended Declaration of Trust is hereby amended and restated as follows and the Trustees do hereby declare that the Trustees will hold IN TRUST all cash, securities and other assets that the Trust now possesses or may hereafter acquire from time to time in any manner and manage and dispose of the same upon the following terms and conditions.
ARTICLE I.
Name and Definitions
Section 1. Name. The name of the Trust is "VANGUARD EXPLORER FUND" and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine. If the Trustees determine to change the name of the Trust, they may adopt such other name for the Trust as they deem proper. Any name change shall become effective upon approval by the Trustees of such change and the filing of a certificate of amendment under the Delaware Act. Any such action shall have the status of an amendment to this Declaration of Trust.
Section 2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided:
(a) "Amended Declaration of Trust" shall have the meaning set forth in the recitals to this Declaration of Trust;
(b) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time;
(c) "Commission" shall have the respective meanings given it in Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act;
(d) "Declaration of Trust" shall mean this Amended and Restated Agreement and Declaration of Trust, as amended or restated from time to time;
(e) "Delaware Act" refers to Delaware Statutory Trust Act, 12 Del. C. ss. 3801 et. seq. (as amended and in effect from time to time);
(f) "Interested Person" shall have the meaning given it in Section 2(a)(19) of the 1940 Act;
(g) "Investment Adviser" or "Adviser" means a party furnishing services to the Trust pursuant to any contract described in Article IV, Section 6(a) hereof;
(h) "1940 Act" refers to the Investment Company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time. References herein to specific sections of the 1940 Act shall be deemed to include such Rules and Regulations as are applicable to such sections as determined by the Trustees or their designees;
(i) "Original Declaration of Trust" shall have the meaning set forth in the recitals to this Declaration of Trust;
(j) "Principal Underwriter" shall have the respective meanings given it in
Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act;
(k) "Prior Declaration of Trust" refers to the original Declaration of Trust and the Amended Declaration of Trust, each as from time to time in effect prior to the date hereof;
(l) "Person" means and includes individuals, corporations, partnerships, trusts, foundations, plans, associations, joint ventures, estates and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof, whether domestic or foreign;
(m) "Series" refers to each Series of Shares referenced in, or established under or in accordance with, the provisions of Article III.
(n) "Shareholder" means a record owner of outstanding Shares;
(o) "Shares" means the shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares;
(p) "Trust" shall have the meaning set forth in the recitals to this Declaration of Trust;
(q) "Trustees" or "Board of Trustees" refers to the persons who have signed this Declaration of Trust and all other persons who were or may from time to time be duly elected or appointed to serve on the Board of Trustees in accordance with the provisions hereof or of the Prior Declaration of Trust, so long as they continue in office in accordance with the terms hereof and reference herein to a Trustee or the Trustees shall refer to such person or persons in their capacity as trustees hereunder; and
(r) "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business of a management investment company registered under the 1940 Act through one or more Series investing primarily in securities.
ARTICLE III.
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in the Trust shall at all times be divided into an unlimited number of Shares, with a par value of $ .001 per Share unless the Trustees shall designate another par value in connection with the issuance of Shares or with respect to outstanding Shares as provided in Section 5 of this Article III. The Trustees may authorize the division of Shares into separate Series and the division of Series into separate classes of Shares. The different Series shall be established and designated, and the variations in the relative rights and preferences as between the different Series shall be fixed and determined, by the Trustees. If no Series shall be established or if only one Series shall be established, the Shares shall have the rights and preferences provided for herein and in Article III, Section 6 hereof to the extent relevant and not otherwise provided for herein.
Subject to the provisions of Section 6 of this Article III, each Share shall have voting rights as provided in Article V hereof, and holders of the Shares of any Series shall be entitled to receive dividends, when, if and as declared with respect thereto in the manner provided in Article VI, Section 1 hereof. No Share shall have any priority or preference over any other Share of the same Series with respect to dividends or distributions of the Trust or
otherwise. All dividends and distributions shall be made ratably among all Shareholders of a Series (or class) from the assets held with respect to such Series according to the number of Shares of such Series (or class) held of record by such Shareholders on the record date for any dividend or distribution. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or any Series. The Trustees may from time to time divide or combine the Shares of a Series into a greater or lesser number of Shares of such Series without thereby materially changing the proportionate beneficial interest of such Shares in the assets held with respect to that Series or materially affecting the rights of Shares of any other Series.
All references to Shares in this Declaration of Trust shall be deemed to be Shares of the Trust and of any or all Series or classes thereof, as the context may require. All provisions herein relating to the Trust shall apply equally to each Series of the Trust and each class thereof, except as the context otherwise requires.
All Shares issued hereunder, including Shares issued in connection with a dividend in Shares or a split or reverse split of Shares, shall be fully paid and non-assessable.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series (and class). No certificates evidencing the ownership of Shares shall be issued except as the Board of Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the transfer of Shares of each Series (and class) and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders of each Series (and class) and as to the number of Shares of each Series (and class) held from time to time by each Shareholder.
Section 3. Investments in the Trust. Investments may be accepted by the Trust from such Persons, at such times, on such terms, and for such consideration as the Trustees from time to time may authorize. Each investment shall be credited to the Shareholder's account in the form of full and fractional Shares of the Trust, in such Series (or class) as the purchaser shall select, at the net asset value per Share next determined for such Series (or class) after receipt of the investment; provided, however, that the Trustees may, in their sole discretion, impose a sales charge or reimbursement fee upon investments in the Trust.
Section 4. Status of Shares and Limitation of Personal Liability. Shares shall be deemed to be personal property giving only the rights provided in this Declaration of Trust and the By-Laws of the Trust. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof. The death, incapacity, dissolution, termination or bankruptcy of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any such Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but shall entitle such representative only to the rights of such Shareholder under this Declaration of Trust. Ownership of Shares shall not entitle a Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners or joint venturers. Neither the Trust nor the Trustees, nor any officer, employee nor agent of the Trust shall have any power to bind personally any Shareholder, or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time agree to pay.
Section 5. Power of Board of Trustees to Change Provisions Relating to Shares. Notwithstanding any other provision of this Declaration of Trust to the contrary, and without limiting the power of the Board of Trustees to amend the Declaration of Trust as provided elsewhere herein, the Board of Trustees shall have the power to amend this Declaration of Trust, at any time and from time to time, in such manner as the Board of Trustees may determine in their sole discretion, without the need for Shareholder action, so as to add to, delete, replace or otherwise modify any provisions relating to the Shares contained in this Declaration of Trust, provided that before adopting any such amendment without Shareholder approval the Board of Trustees shall determine that it is consistent with the fair and equitable treatment of all Shareholders and that Shareholder approval is not required by the 1940 Act or other applicable federal law. If Shares have been issued, Shareholder approval shall be required to adopt any amendments to this Declaration of Trust which would adversely affect to a material degree the rights and preferences of the Shares of any Series (or class) or to increase or decrease the par value of the Shares of any Series (or class).
Section 6. Establishment and Designation of Shares. The Series and classes of Shares existing as of the date of this Declaration of Trust are those Series and classes that have been established under the Prior Declaration of Trust and not heretofore terminated which are indicated on Schedule A attached hereto and made a part hereof ("Schedule A"). The establishment of any additional Series (or class) of Shares shall be effective upon the adoption by the Trustees of a resolution that sets forth the designation of, or otherwise identifies, such Series (or class), whether directly in such resolution or by reference to, or approval of, another document that sets forth the designation of, or otherwise identifies, such Series (or class) including any registration statement of the Trust or such Series (or class), any amendment and/or restatement of this Declaration of Trust and/or Schedule A or as otherwise provided in such resolution. Upon the establishment of any additional Series (or class) of Shares or the termination of any existing Series (or class) of Shares, Schedule A shall be amended to reflect the addition or termination of such Series (or class) and any officer of the Trust is hereby authorized to make such amendment; provided that amendment of Schedule A shall not be a condition precedent to the establishment or termination of any Series (or class) in accordance with this Declaration of Trust. The relative rights and preferences of the Shares of the Trust and each Series and each class thereof shall be as set forth herein and as set forth in any registration statement relating thereto, unless otherwise provided in the resolution establishing such Series or class.
Shares of each Series (or class) established pursuant to this Section 6, unless otherwise provided in the resolution establishing such Series (or class) or in any registration statement relating thereto, shall have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration received by the Trust for the issue or sale of Shares of a Series, including dividends and distributions paid by, and reinvested in, such Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably be held with respect to that Series for all purposes, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets held with respect to" that Series. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments that are not readily identifiable as assets held with respect to the Trust or any particular Series (collectively "General Assets"), the Trustees shall allocate such General Assets to, between or among the Trust and/or any one or more of the Series in such manner and on such basis as the Trustees, in their sole discretion, deem fair and equitable, and any General Asset so allocated to a particular Series shall be held with respect to that Series. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest error.
(b) Liabilities Held with Respect to a Particular Series. The assets of the Trust held with respect to each Series shall be charged with the liabilities of the Trust with respect to such Series and all expenses, costs, charges and reserves attributable to such Series, and any general liabilities of the Trust that are not readily identifiable as being held in respect of a Series shall be allocated and charged by the Trustees to and among the Trust and/or any one or more Series in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The liabilities, expenses, costs, charges, and reserves so charged to a Series are herein referred to as "liabilities held with respect to" that Series. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest error. All liabilities held with respect to a particular Series shall be enforceable against the assets held with respect to such Series only and not against the assets of the Trust generally or against the assets held with respect to any other Series and, except as otherwise provided in this Declaration of Trust, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other Series thereof shall be enforceable against the assets of such Series. As and to the extent provided in Section 3804(a) of the Delaware Act, separate and distinct records shall be maintained for each Series and the assets held with respect to each Series shall be held in such separate and distinct records (directly or indirectly, including through a nominee or otherwise) and accounted for in such separate and distinct records separately from the assets held with respect to all other Series and the General Assets of the Trust not allocated to such Series. Notice of this limitation on inter-Series liabilities shall be set forth in the certificate of trust of the Trust (whether originally or by amendment).
(c) Dividends, Distributions, Redemptions, and Repurchases. No dividend or distribution including any distribution paid in connection with termination of the Trust or of any Series (or class) with respect to, or any redemption or repurchase of, the Shares of any Series (or class) shall be effected by the Trust other than from the assets held with respect to such Series, nor shall any Shareholder of any Series otherwise have any right or claim against the assets held with respect to any other Series except to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders in absence of manifest error.
(d) Voting. All Shares entitled to vote on a matter shall vote without differentiation between the separate Series on a one-vote-per-each dollar (and a fractional vote for each fractional dollar) of the net asset value of each Share (including fractional shares) basis; provided however, if a matter to be voted on affects only the interests of one or more but not all Series (or one or more but not all of a class of a Series), then only the Shareholders of such affected Series (or class) shall be entitled to vote on the matter.
(e) Equality. All the Shares of each Series shall represent an equal proportionate undivided interest in the assets held with respect to such Series (subject to the liabilities of such Series and such rights and preferences as may have been established and designated with respect to classes of Shares within such Series), and each Share of a Series shall be equal to each other Share of such Series.
(f) Fractions. Any fractional Share of a Series shall have proportionately all the rights and obligations of a whole share of such Series, including rights with respect to voting, receipt of dividends and distributions and redemption of Shares.
(g) Exchange Privilege. The Trustees shall have the authority to provide that the Shareholders of any Series shall have the right to exchange such Shares for Shares of one or more other Series in accordance with such requirements and procedures as may be established by the Trustees.
(h) Combination of Series. The Trustees shall have the authority, without the approval of the Shareholders of any Series unless otherwise required by applicable federal law, to combine the assets and liabilities held with respect to any two or more Series into assets and liabilities held with respect to a single Series.
(i) Elimination of Series. At any time that there are no Shares outstanding of a Series (or class), the Trustees may abolish such Series (or class).
ARTICLE IV.
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees constituting
the Board of Trustees shall be fixed from time to time by a written instrument
signed, or by resolution approved at a duly constituted meeting, by a majority
of the Board of Trustees, provided, however, that the number of Trustees shall
at all times be at least one (1). Subject to the requirements of Section 16(a)
of the 1940 Act, the Board of Trustees, by action of a majority of the then
Trustees at a duly constituted meeting, may fill vacancies in the Board of
Trustees and remove Trustees with or without cause. Each Trustee shall serve
during the continued lifetime of the Trust until he or she dies, resigns, is
declared bankrupt or incompetent by a court of competent jurisdiction, or is
removed. Any Trustee may resign at any time by written instrument signed by him
and delivered to any officer of the Trust or to a meeting of the Trustees. Such
resignation shall be effective upon receipt unless specified to be effective at
some other time. Except to the extent expressly provided in a written agreement
with the Trust, no Trustee resigning and no Trustee removed shall have any right
to any compensation for any period following his or her resignation or removal,
or any right to damages or other payment on account of such removal. Any Trustee
may be removed at any meeting of Shareholders by a vote of two-thirds of the
total combined net asset value of all Shares of the Trust issued and
outstanding. A meeting of Shareholders for the purpose of electing or removing
one or more Trustees may be called (i) by the Trustees upon their own vote, or
(ii) upon the demand of Shareholders owning 10% or more of the Shares entitled
to vote.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death, declination, resignation, retirement, removal, or incapacity of one or more Trustees, or all of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled as provided in Article IV, Section 1, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Board of Trustees, and such Board of Trustees shall have all powers necessary or convenient to carry out that responsibility including the power to engage in transactions of all kinds on behalf of the Trust. Trustees, in all instances, shall act as principals and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts, documents and instruments that they may consider desirable, necessary or appropriate in connection with the administration of the Trust. Without limiting the foregoing, the Trustees may: adopt, amend and repeal By-Laws not inconsistent with this Declaration of Trust providing for the regulation and management of the affairs of the Trust; elect and remove such officers and appoint and terminate such agents as they consider appropriate; appoint from their own number and establish and terminate one or more committees consisting of one or more Trustees who may exercise the powers and authority of the Board of Trustees to the extent that the Trustees determine; employ one or
more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities or with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both; provide for the issuance and distribution of Shares by the Trust directly or through one or more Principal Underwriters or otherwise; redeem, repurchase and transfer Shares pursuant to applicable federal law; set record dates for the determination of Shareholders with respect to various matters; declare and pay dividends and distributions to Shareholders of each Series from the assets of such Series; establish from time to time, in accordance with the provisions of Article III, Section 6 hereof, any Series of Shares, each such Series to operate as a separate and distinct investment medium and with separately defined investment objectives and policies and distinct investment purpose; and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian, transfer or shareholder servicing agent, Investment Adviser or Principal Underwriter. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Trustees.
Without limiting the foregoing, the Trust shall have power and authority:
(a) To invest and reinvest cash and cash items, to hold cash uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts for the future acquisition or delivery of all types of securities, futures contracts and options thereon, and forward currency contracts of every nature and kind, including all types of bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, bankers' acceptances, and other securities of any kind, issued, created, guaranteed, or sponsored by any and all Persons, including states, territories, and possessions of the United States and the District of Columbia and any political subdivision, agency, or instrumentality thereof, any foreign government or any political subdivision of the U.S. Government or any foreign government, or any international instrumentality or organization, or by any bank or savings institution, or by any corporation or organization organized under the laws of the United States or of any state, territory, or possession thereof, or by any corporation or organization organized under any foreign law, or in "when issued" contracts for any such securities, futures contracts and options thereon, and forward currency contracts, to change the investments of the assets of the Trust; and to exercise any and all rights, powers, and privileges of ownership or interest in respect of any and all such investments of every kind and description, including the right to consent and otherwise act with respect thereto, with power to designate one or more Persons, to exercise any of said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write options with respect to or otherwise deal in any property rights relating to any or all of the assets of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating that it is trust property, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in each case to the applicable provisions of the 1940 Act;
(f) To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or issuer of any security which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee, depository, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depository or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depository or trustee as the Trustees shall deem proper;
(h) To litigate, compromise, arbitrate, settle or otherwise adjust claims in favor of or against the Trust or a Series, or any matter in controversy, including but not limited to claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust or Series exclusively for Trust (or such Series) purposes;
(k) To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such insurance as the Trustees may deem necessary, desirable or appropriate for the conduct of the business, including insurance policies insuring the assets of the Trust or
payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, Investment Adviser, principal underwriters, or independent contractors of the Trust, individually against all claims and liabilities of every nature arising by reason of holding Shares, holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person as Trustee, officer, employee, agent, Investment Adviser, Principal Underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such Person against liability;
(m) To adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust; and
(n) Subject to the 1940 Act, to engage in any other lawful act or activity in which a statutory trust organized under the Delaware Act may engage.
The Trust shall not be limited to investing in obligations maturing before the possible termination of the Trust or one or more of its Series. The Trust shall not in any way be bound or limited by any present or future law or custom in regard to investment by fiduciaries. The Trust shall not be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder.
Section 4. Payment of Expenses by the Trust. Subject to the provisions of Article III, Section 6(b), the Trustees are authorized to pay or cause to be paid out of the principal or income of the Trust or Series, or partly out of the principal and partly out of income, and to charge or allocate the same to, between or among such one or more of the Series that may be established or designated pursuant to Article III, Section 6, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or Series, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, Investment Adviser, Principal Underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur.
Section 5. Ownership of Assets of the Trust. Title to all of the assets of the Trust shall at all times be considered as vested in the Trust, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine. Upon the resignation, incompetency, bankruptcy, removal, or death of a Trustee he or she shall automatically cease to have any such title in any of the Trust Property, and the title of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered. The Trustees may determine that the Trust or the Trustees, acting for and on behalf of the Trust, shall be deemed to hold beneficial ownership of any income earned on the securities owned by the Trust, whether domestic or foreign.
Section 6. Service Contracts.
(a) The Trustees may, at any time and from time to time, contract for exclusive or nonexclusive advisory, management and/or administrative services for the Trust or for any Series with any Person; and any such contract may contain such other terms as the Trustees may determine, including authority for the Investment Adviser to determine from time to time without prior consultation with the Trustees what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held uninvested and to make changes in the Trust's investments, and such other responsibilities as may specifically be delegated to such Person.
(b) The Trustees may also, at any time and from time to time, contract with any Persons, appointing such Persons exclusive or nonexclusive distributor or Principal Underwriter for the Shares of one or more of the Series or other securities to be issued by the Trust. Every such contract may contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to time, to contract with any Persons, appointing such Person(s) to serve as custodian(s), transfer agent and/or shareholder servicing agent for the Trust or one or more of its Series. Every such contract shall comply with such terms as may be required by the Trustees.
(d) The Trustees are further empowered, at any time and from time to time, to contract with any Persons to provide such other services to the Trust or one or more of the Series, as the Trustees determine to be in the best interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, Investment Adviser, Principal Underwriter, distributor, or affiliate or agent of or for any Person with which an advisory, management or administration contract, or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made, or that
(ii) any Person with which an advisory, management or administration contract or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made also has an advisory, management or administration contract, or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other service contract, or has other business or interests with any
other Person, shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust or its Shareholders, provided approval of each such contract is made pursuant to the applicable requirements of the 1940 Act.
ARTICLE V.
Shareholders' Voting Powers and Meetings
Subject to the provisions of Article III, Sections 5 and 6(d), the Shareholders shall have right to vote only (i) for the election or removal of Trustees as provided in Article IV, Section 1, and (ii) with respect to such additional matters relating to the Trust as may be required by the applicable provisions of the 1940 Act, including Section 16(a) thereof, and (iii) on such other matters as the Trustees may consider necessary or desirable. Provisions relating to meetings, quorum, required vote, record date and other matters relating to Shareholder voting rights are as provided in the By-Laws.
ARTICLE VI.
Net Asset Value, Distributions, and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their absolute discretion, may prescribe and shall set forth in the By-Laws or in a duly adopted resolution of the Trustees such bases and time for determining the per Share net asset value of the Shares of the Trust or any Series (or class) and the declaration and payment of dividends and distributions on the Shares of the Trust or any Series (or class), as they may deem necessary or desirable.
Section 2. Redemptions and Repurchases. The Trust shall purchase such Shares as are offered by any Shareholder for redemption, upon receipt by the Trust or a Person designated by the Trust that the Trust redeem such Shares or in accordance with such procedures for redemption as the Trustees may from time to time authorize; and the Trust will pay therefor the net asset value thereof, in accordance with the By-Laws and the applicable provisions of the 1940 Act. Payment for said Shares shall be made by the Trust to the Shareholder within seven days after the date on which the request for redemption is received in proper form. The obligation set forth in this Section 2 is subject to the provision that in the event that any time the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays, or if permitted by the Rules of the Commission during periods when trading on the Exchange is restricted or during any emergency which makes it impracticable for the Trust to dispose of the investments of the applicable Series or to determine fairly the value of the net assets held with respect to such Series or during any other period permitted by order of the Commission for the protection of investors, such obligations may be suspended or postponed by the Trustees.
The redemption price may in any case or cases be paid in cash or wholly or partly in kind in accordance with Rule 18f-1 under the 1940 Act if
the Trustees determine that such payment is advisable in the interest of the remaining Shareholders of the Series of which the Shares are being redeemed. Subject to the foregoing, the selection and quantity of securities or other property so paid or delivered as all or part of the redemption price shall be determined by or under authority of the Trustees. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities selected for delivery as all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have the right, at its option, upon 30 days notice to the affected Shareholder at any time to redeem Shares of any Shareholder at the net asset value thereof as described in Section 1 of this Article VI: (i) if at such time such Shareholder owns Shares of any Series having an aggregate net asset value of less than a minimum value determined from time to time by the Trustees; or (ii) to the extent that such Shareholder owns Shares of a Series equal to or in excess of a maximum percentage of the outstanding Shares of such Series determined from time to time by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal to or in excess of a maximum percentage, determined from time to time by the Trustees, of the outstanding Shares of the Trust.
Section 4. Transfer of Shares. The Trust shall transfer shares held of record by any Person to any other Person upon receipt by the Trust or a Person designated by the Trust of a written request therefore in such form and pursuant to such procedures as may be approved by the Trustees.
ARTICLE VII.
Compensation and Limitation of Liability
Section 1. Compensation of Trustees. Any Trustee, whether or not he is a salaried officer or employee of the Trust, may be compensated for his services as Trustee or as a member of a committee of Trustees, or as chairman of a committee by fixed periodic payments or by fees for attendance at meetings, by both or otherwise, and in addition may be reimbursed for transportation and other expenses, all in such manner and amounts as the Board of Trustees may from time to time determine. Nothing herein shall in any way prevent the employment of any Trustee to provide advisory, management, legal, accounting, investment banking or other services to the Trust and to be specially compensated for such services by the Trust.
Section 2. Limitation of Liability and Indemnification. A Trustee, when acting in such capacity, shall not be personally liable to any Person, other than the Trust or a Shareholder to the extent provided in this Article VII, for any act, omission or obligation of the Trust, of such Trustee or of any other Trustee. The Trustees shall not be responsible or liable in any event for any neglect or wrong-doing of any officer, agent, employee, Investment Adviser or Principal Underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, and, subject to the provisions of the By-Laws, the Trust out of its assets may indemnify and hold harmless each and every Trustee and officer of the Trust from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or
related to such Trustee's or officer's performance of his or her duties as a Trustee or officer of the Trust.
Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever issued, executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been issued, executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The exercise by the Trustees of their powers hereunder shall be binding upon everyone interested in or dealing with the Trust. A Trustee shall be liable to the Trust and to any Shareholder solely for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and shall be under no liability for any act or omission in accordance with such advice nor for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to the fullest extent permitted by law to purchase with Trust assets insurance for liability and for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify him or her against such liability under the provisions of this Article.
ARTICLE VIII.
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No Person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order.
Section 2. Termination of the Trust or Any Series. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be dissolved at any time by the Trustees upon 60 days prior written notice to the Shareholders. Any Series of Shares may be dissolved at any time by the Trustees upon 60 days prior written notice to the Shareholders of such Series. Any action to dissolve the Trust shall be deemed to also be an action to dissolve each Series and each class thereof.
In accordance with Section 3808 of the Delaware Act, upon dissolution of the Trust or any Series, as the case may be, after paying or otherwise providing
for all charges, taxes, expenses and liabilities held, severally, with respect to each Series or the applicable Series, as the case may be, whether due or accrued or anticipated as may be determined by the Trustees, the Trust shall, in accordance with such procedures as the Trustees consider appropriate, reduce the remaining assets held, severally, with respect to each Series or the applicable Series, as the case may be, to distributable form in cash or shares or other securities, and any combination thereof, and distribute the proceeds held with respect to each Series or the applicable Series, as the case may be, to the Shareholders of that Series, as a Series, ratably according to the number of Shares of that Series held by the several Shareholders on the date of termination.
Section 3. Reorganization and Master/Feeder.
(a) Notwithstanding anything else herein, the Trustees may, without Shareholder approval unless such approval is required by the 1940 Act, (i) cause the Trust to convert or merge, reorganize or consolidate with or into one or more trusts, partnerships, limited liability companies, associations, corporations or other business entities (or a series of any of the foregoing to the extent permitted by law) (including trusts, partnerships, limited liability companies, associations, corporations or other business entities created by the Trustees to accomplish such conversion, merger, reorganization or consolidation) so long as the surviving or resulting entity is an open-end management investment company under the 1940 Act, or is a series thereof, to the extent permitted by law, and that, in the case of any trust, partnership, limited liability company, association, corporation or other business entity created by the Trustees to accomplish such conversion, merger, reorganization or consolidation, may succeed to or assume the Trust's registration under the 1940 Act and that, in any case, is formed, organized or existing under the laws of the United States or of a state, commonwealth, possession or colony of the United States, (ii) cause the Shares to be exchanged under or pursuant to any state or federal statute to the extent permitted by law, (iii) cause the Trust to incorporate under the laws of a state, commonwealth, possession or colony of the United States (iv) sell or convey all or substantially all of the assets of the Trust or any Series or Class to another Series or Class of the Trust or to another trust, partnership, limited liability company, association, corporation or other business entity (or a series of any of the foregoing to the extent permitted by law) (including a trust, partnership, limited liability company, association, corporation or other business entity created by the Trustees to accomplish such sale and conveyance), organized under the laws of the United States or of any state, commonwealth, possession or colony of the United States so long as such trust, partnership, limited liability company, association, corporation or other business entity is an open-end management investment company under the 1940 Act and, in the case of any trust, partnership, limited liability company, association, corporation or other business entity created by the Trustees to accomplish such sale and conveyance, may succeed to or assume the Trust's registration under the 1940 Act, for adequate consideration as determined by the Trustees which may include the assumption of all outstanding obligations, taxes and other liabilities, accrued or contingent of the Trust or any affected Series or Class, and which may include Shares of such other Series or Class of the Trust or shares of beneficial interest, stock or other ownership interest of such trust, partnership, limited liability company, association, corporation or other business entity (or series thereof) or (v) at any time sell or convert into money all or any part of the assets of the Trust or any Series or Class thereof. Any agreement of merger, reorganization, consolidation or conversion or exchange or certificate of merger, certificate of conversion or
other applicable certificate may be signed by a majority of the Trustees and facsimile signatures conveyed by electronic or telecommunication means shall be valid.
(b) Pursuant to and in accordance with the provisions of Section 3815(f) of the Delaware Act, and notwithstanding anything to the contrary contained in this Declaration of Trust, an agreement of merger or consolidation approved by the Trustees in accordance with this Section 3 may effect any amendment to this Declaration of Trust or effect the adoption of a new governing instrument of the Trust if the Trust is the surviving or resulting entity in the merger or consolidation.
(c) Notwithstanding anything else herein, the Trustees may, without Shareholder approval unless such approval is required by the 1940 Act, invest all or a portion of the Trust Property of any Series, or dispose of all or a portion of the Trust Property of any Series, and invest the proceeds of such disposition in interests issued by one or more other investment companies registered under the 1940 Act. Any such other investment company may (but need not) be a trust (formed under the laws of the State of Delaware or any other state or jurisdiction) (or subtrust thereof) which is classified as a partnership for federal income tax purposes. Notwithstanding anything else herein, the Trustees may, without Shareholder approval unless such approval is required by the 1940 Act, cause a Series that is organized in the master/feeder fund structure to withdraw or redeem its Trust Property from the master fund and cause such Series to invest its Trust Property directly in securities and other financial instruments or in another master fund.
Section 4. Amendments. Subject to the provisions of Section 5 of Article III relating to the requirement of Shareholder approval for certain amendments to this Declaration of Trust or requirements for certain determinations by the Board of Trustees for certain amendments hereto without Shareholder approval and any requirements under the 1940 Act requiring Shareholder approval of an amendment to this Declaration of Trust, the Trustees may, without any Shareholder vote or approval, amend this Declaration of Trust by making an amendment to this Declaration of Trust (including Schedule A), an agreement supplemental hereto, or an amended and restated trust instrument. Unless otherwise provided by the Trustees, any such amendment will be effective (i) upon the adoption by a majority of the Trustees then holding office of a resolution specifying the amendment, supplemental agreement or amendment and restatement or (ii) upon the execution in writing of an instrument signed by a majority of the Trustees then holding office specifying the amendment, supplemental agreement or amended and restated trust instrument. A certification signed by an officer of the Trust setting forth an amendment to this Declaration of Trust and reciting that it was duly adopted by the Trustees as aforesaid, or a copy of the instrument referenced above executed by the Trustees as aforesaid, shall be conclusive evidence of such amendment when lodged among the records of the Trust. The certificate of trust of the Trust may be restated and/or amended by any Trustee as necessary or desirable to reflect any change in the information set forth therein, and any such restatement and/or amendment shall be effective immediately upon filing with the Office of the Secretary of State of the State of Delaware or upon such future date as may be stated therein.
Section 5. Filing of Copies, References, Headings. The original or a copy of this Declaration of Trust shall be kept at the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to any matters in connection with the Trust hereunder; and, with the same effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this Declaration of Trust. In this Declaration of Trust, references to this Declaration of Trust, and all expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to this Declaration of Trust. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this Declaration of Trust. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. This Declaration of Trust may be executed in any number of counterparts each of which shall be deemed an original but all of which together will constitute one and the same instrument. To the extent permitted by the 1940 Act, (i) any document, consent, instrument or notice referenced in or contemplated by this Declaration of Trust or the By-Laws that is to be executed by one or more Trustees may be executed by means of original, facsimile or electronic signature and (ii) any document, consent, instrument or notice referenced in or contemplated by this Declaration of Trust or the By-Laws that is to be delivered by one or more Trustees may be delivered by facsimile or electronic means (including e-mail), unless, in the case of either clause (i) or (ii), otherwise expressly provided herein or in the By-Laws or determined by the Trustees. The terms "include," "includes" and "including" and any comparable terms shall be deemed to mean "including, without limitation."
Section 6. Applicable Law. This Agreement and Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the Delaware Act. The Trust shall be a Delaware statutory trust pursuant to the Delaware Act, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a statutory trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable federal laws and regulations, the conflicting provision shall be deemed never to have constituted a part of the Declaration of Trust; provided, however, that such determination shall not affect any of the remaining provisions of the Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of the Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of the Declaration of Trust in any jurisdiction.
Section 8. Statutory Trust Only. It is the intention of the Trustees to create a statutory trust pursuant to the Delaware Act, and thereby to create only the relationship of trustee and beneficial owners within the meaning of such Act between the Trustees and each Shareholder. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment, joint venture, or any form of legal relationship other than a statutory trust pursuant to the Delaware Act. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association.
Section 9. Use of the Name "The Vanguard Group, Inc.". The name "The Vanguard Group, Inc." and any variants thereof and all rights to the use of the name "The Vanguard Group, Inc." or any variants thereof shall be the sole and exclusive property of The Vanguard Group, Inc. ("VGI"). VGI has permitted the use by the Trust of the identifying word "Vanguard" and the use of the name "Vanguard" as part of the name of the Trust and the name of any Series of Shares. Upon the Trust's withdrawal from the Amended and Restated Funds' Service Agreement among the Trust, the other investment companies within the Vanguard Group of Investment Companies and VGI, and upon the written request of VGI, the Trust and any Series of Shares thereof shall cease to use or in any way to refer to itself as related to "The Vanguard Group, Inc." or any variant thereof.
Section 10. Derivative Actions. In addition to the requirements set forth in Section 3816 of the Delaware Act, a Shareholder may bring a derivative action on behalf of the Trust only if the following conditions are met:
(a) The Shareholder or Shareholders must make a pre-suit demand upon the Trustees to bring the subject action unless an effort to cause the Trustees to bring such an action is not likely to succeed. For purposes of this Section 10(a), a demand on the Trustees shall only be deemed not likely to succeed and therefore excused if a majority of the Board of Trustees, or a majority of any committee established to consider the merits of such action, is composed of Trustees who are not "independent trustees" (as that term is defined in the Delaware Act).
(b) Unless a demand is not required under paragraph (a) of this
Section 10, Shareholders eligible to bring such derivative action under the
Delaware Act who collectively hold at least 10% of the outstanding Shares
of the Trust, or who collectively hold at least 10% of the outstanding
Shares of the Series or class to which such action relates, shall join in
the request for the Trustees to commence such action; and
(c) Unless a demand is not required under paragraph (a) of this
Section 10, the Trustees must be afforded a reasonable amount of time to
consider such Shareholder request and to investigate the basis of such
claim. The Trustees shall be entitled to retain counsel or other advisors
in considering the merits of the request and shall require an undertaking
by the Shareholders making such request to reimburse the Trust for the
expense of any such advisors in the event that the Trustees determine not
to bring such action.
SCHEDULE A
VANGUARD EXPLORER FUND
SERIES AND CLASSES OF THE TRUST
SERIES CLASSES
Vanguard Explorer Fund Investor, Admiral |
TABLE OF CONTENTS
Page
ARTICLE I. Name and Definitions.......................................... 1
Section 1. Name............................................. 1
Section 2. Definitions...................................... 1
(a) Amended Declaration of Trust............................ 2
(b) By-Laws................................................. 2
(c) Commission.............................................. 2
(d) Declaration of Trust.................................... 2
(e) Delaware Act............................................ 2
(f) Interested Person....................................... 2
(g) Investment Adviser or Adviser........................... 2
(h) 1940 Act................................................ 2
(i) Original Declaration of Trust........................... 2
(j) Principal Underwriter................................... 2
(k) Prior Declaration of Trust.............................. 2
(l) Person.................................................. 2
(m) Series.................................................. 2
(n) Shareholder............................................. 2
(o) Shares.................................................. 3
(p) Trust................................................... 3
(q) Trustees or Board of Trustees........................... 3
(r) Trust Property.......................................... 3
ARTICLE II. Purpose of Trust............................................. 3
ARTICLE III. Shares...................................................... 3
Section 1. Division of Beneficial Interest.................. 3
Section 2. Ownership of Shares.............................. 4
Section 3. Investments in the Trust......................... 4
Section 4. Status of Shares and Limitation of Personal
Liability...................................... 4
Section 5. Power of Board of Trustees to Change
Provisions Relating to Shares.................. 5
Section 6. Establishment and Designation of Shares.......... 5
(a) Assets Held with Respect to a Particular Series......... 6
(b) Liabilities Held with Respect to a
Particular Series..................................... 6
(c) Dividends, Distributions, Redemptions, and
Repurchases........................................... 7
(d) Voting.................................................. 7
(e) Equality................................................ 7
(f) Fractions............................................... 7
(g) Exchange Privilege...................................... 7
|
(h) Combination of Series.................................. 7
(i) Elimination of Series.................................. 7
ARTICLE IV. The Board of Trustees....................................... 8
Section 1. Number, Election and Tenure..................... 8
Section 2. Effect of Death, Resignation, etc.
of a Trustee.................................. 8
Section 3. Powers.......................................... 8
Section 4. Payment of Expenses by the Trust................ 11
Section 5. Ownership of Assets of the Trust................ 11
Section 6. Service Contracts............................... 12
ARTICLE V. Shareholders' Voting Powers and Meetings..................... 13
ARTICLE VI. Net Asset Value, Distributions, and Redemptions............. 13
Section 1. Determination of Net Asset Value, Net
Income, and Distributions..................... 13
Section 2. Redemptions and Repurchases..................... 13
Section 3. Redemptions at the Option of the Trust.......... 14
Section 4. Transfer of Shares.............................. 14
ARTICLE VII. Compensation and Limitation of Liability................... 14
Section 1. Compensation of Trustees........................ 14
Section 2. Limitation of Liability and Indemnification..... 14
Section 3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety..................... 15
Section 4. Insurance....................................... 15
ARTICLE VIII. Miscellaneous............................................. 15
Section 1. Liability of Third Persons Dealing
with Trustees................................. 15
Section 2. Termination of the Trust or Any Series.......... 15
Section 3. Reorganization and Master/Feeder................ 16
Section 4. Amendments...................................... 17
Section 5. Filing of Copies, References, Headings.......... 18
Section 6. Applicable Law.................................. 18
Section 7. Provisions in Conflict with Law or Regulations.. 18
Section 8. Statutory Trust Only............................ 19
Section 9. Use of the Name "The Vanguard Group, Inc."...... 19
Section 10. Derivatives Actions............................. 19
|
INSTRUMENT
THIS INSTRUMENT is entered into by the undersigned trustees (the "Trustees") as of November 18, 2008.
WHEREAS, the undersigned Trustees constitute all of the trustees holding office for each of the trusts identified on Attachment A hereto (the "Trusts");
WHEREAS, the Agreement and Declaration of Trust and By-Laws now in effect for each of the Trusts provide that each such Agreement and Declaration of Trust and such By-Laws may be amended by the Trustees (subject to certain limitations not here applicable);
NOW, THEREFORE, the undersigned Trustees hereby adopt for each Trust the Amended and Restated Agreement and Declaration of Trust and By-Laws of such Trust attached hereto as Attachment B.
[Signature Page Follows]
IN WITNESS WHEREOF, the Trustees named below are signing this Instrument on the date stated in the introductory clause.
/s/ John J. Brennan /s/ JoAnn Heffernan Heisen -------------------------------- -------------------------------- John J. Brennan JoAnn Heffernan Heisen Trustee Trustee /s/ Charles D. Ellis /s/ Andre Perold -------------------------------- -------------------------------- Charles D. Ellis Andre Perold Trustee Trustee /s/ Emerson U. Fullwood /s/ Alfred M. Rankin, Jr. -------------------------------- -------------------------------- Emerson U. Fullwood Alfred M. Rankin, Jr. Trustee Trustee /s/ Rajiv L. Gupta /s/ J. Lawrence Wilson -------------------------------- -------------------------------- Rajiv L. Gupta J. Lawrence Wilson Trustee Trustee /s/ Amy Gutmann -------------------------------- Amy Gutmann Trustee |
ATTACHMENT A
LIST OF TRUSTS
Vanguard Admiral Funds Vanguard Bond Index Funds Vanguard CMT Funds Vanguard California Tax-Free Funds Vanguard Chester 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 STAR Funds Vanguard Specialized Funds Vanguard Tax-Managed Funds Vanguard Treasury Fund 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 |
ATTACHMENT B
Amended and Restated Agreement and Declaration of Trust and By-Laws of each Trust
AMENDED AND RESTATED
BY-LAWS
OF
VANGUARD EXPLORER FUND
These By-Laws of Vanguard Explorer Fund, a Delaware statutory trust, are subject to the Amended and Restated Declaration of Trust of the Trust dated as of November 19, 2008, as from time to time amended, supplemented or restated (the "Declaration of Trust"). In the event of any conflict between the provisions of these By-Laws and the provisions of the Declaration of Trust, the provisions of the Declaration of Trust will control. Capitalized terms used herein which are defined in the Declaration of Trust are used as therein defined.
ARTICLE I
Fiscal Year and Offices
Section 1. Fiscal Year. Unless otherwise provided by resolution of the Board of Trustees, the fiscal year of the Trust shall begin on the 1st day of November and end on the last day of October.
Section 2. Delaware Office. The Board of Trustees shall establish a registered office in the State of Delaware and shall appoint as the Trust's registered agent for service of process in the State of Delaware an individual resident of the State of Delaware or a Delaware corporation or a foreign corporation authorized to transact business in the State of Delaware; in each case the business office of such registered agent for service of process shall be identical with the registered Delaware office of the Trust.
Section 3. Principal Office. The principal office of the Trust shall be located at 100 Vanguard Boulevard, Malvern, Pennsylvania 19355, or such other location s the Trustees may from time to time determine.
Section 4. Other Offices. The Board of Trustees may at any time establish branch or subordinate offices at any place or places where the Trust intends to do business.
ARTICLE II
Meetings of Shareholders
Section 1. Place of Meeting. Meetings of the Shareholders for the election of Trustees shall be held in such place as shall be fixed by resolution of the Board of Trustees and stated in the notice of the meeting.
Section 2. Annual Meetings. An annual meeting of Shareholders will not be held unless the 1940 Act requires the election of Trustees to be acted upon.
Section 3. Special Meetings. Special meetings of the
Shareholders may be called at any time by the chairman, or president, or by the
Board of Trustees, and shall be called by the secretary upon written request of
the holders of Shares entitled to cast not less than twenty percent of all the
votes entitled to be cast at such meeting provided that (a) such request shall
state the purposes of such meeting and the matters proposed to be acted on and
(b) the Shareholders requesting such meeting shall have paid to the Trust the
reasonable estimated cost of preparing and mailing the notice thereof, which the
secretary shall determine and specify to such Shareholders. No special meeting
need be called upon the request of Shareholders entitled to cast less than a
majority of all votes entitled to be cast at such meeting to consider any matter
which is substantially the same as a matter voted on at any meeting of the
Shareholders held during the preceding twelve months. The foregoing provisions
of this Section 3 notwithstanding a special meeting of Shareholders shall be
called upon the request of the holders of at least ten percent of the votes
entitled to be cast for the purpose of consideration removal of a Trustee from
office as provided in section 16(c) of the 1940 Act.
Section 4. Notice. Not less than ten, nor more than ninety
(90) days before the date of every annual or special meeting, the secretary
shall cause to be delivered to each Shareholder entitled to vote at such meeting
a written notice in accordance with Article IV, Section 1 of these By-Laws
stating the time and place of the meeting and, in the case of a special meeting
of Shareholders, shall state the purposes of the meeting and the matters to be
acted on and the purposes of such special meeting and matters to be acted on
shall be limited to those stated in such written notice. Notice of adjournment
of a Shareholders meeting to another time or place need not be given, if such
time and place are announced at the meeting. No notice need be given to any
Shareholder who shall have failed to inform the Trust of his or her current
address or if a written waiver of notice, executed before or after the meeting
by the Shareholder or his or her attorney thereunto authorized, is filed with
the records of the meeting.
Section 5. Record Date for Meetings. The Board of Trustees may fix in advance a date not more than ninety (90), nor less than ten, days prior to the date of any annual or special meeting of the Shareholders as a record date for the determination of the Shareholders entitled to receive notice of, and to vote at any meeting and any adjournment thereof; and in such case such Shareholders and only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to receive notice of and to vote at such meeting and any adjournment thereof as the case may be, notwithstanding any transfer of any stock on the books of the Trust after any such record date fixed as aforesaid.
Section 6. Quorum. Except as otherwise provided by the 1940 Act or in the Trust's Declaration of Trust, at any meeting of Shareholders, the presence in person or by proxy of the holders of record of Shares issued and outstanding and entitled to vote representing more than fifty percent of the total combined net asset value of all Shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any business at the meeting.
If, however, a quorum shall not be present or represented at any meeting of the Shareholders, either the chairman of the meeting (without a Shareholder vote) or the holders of a majority of the votes present or in person or by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented to a date not more than 120 days after the original record date. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified.
Section 7. Voting. Each Shareholder shall have one vote for
each dollar (and a fractional vote for each fractional dollar) of the net asset
value of each share (including fractional Shares) held by such Shareholder on
the record date set pursuant to Section 5 on each matter submitted to a vote at
a meeting of Shareholders. For purposes of this section and Section 6 of this
Article II, net asset value shall be determined pursuant to Section 3, Article
VIII of these By-Laws as of the record date for such meeting set pursuant to
Section 5. There shall be no cumulative voting in the election of Trustees. At
any meeting of Shareholders, any Shareholder entitled to vote thereat may vote
either in person or by written proxy signed by the Shareholder, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the secretary, or with such other officer or agent of the Trust as the
secretary may direct, for verification prior to the time at which such vote
shall be taken; provided, however, that notwithstanding any other provision of
this Section 7 to the contrary, the Trustees or any officer of the Trust with
responsibility for such matters may at any time adopt one or more electronic,
telecommunication, telephonic, computerized or other alternatives to execution
of a written instrument that will enable Shareholders entitled to vote at any
meeting to appoint a proxy to vote such Shareholders' Shares at such meeting;
provided, further, that, until the Trustees or such officer adopt such
electronic, telecommunication, telephonic, computerized or other alternatives,
no Shareholder may act to appoint a proxy to vote such holder's Shares at a
meeting by any such alternatives and if the Trustees or such officer do adopt
such electronic, telecommunication, telephonic, computerized or other
alternatives, then Shareholders may only act in the manner prescribed by the
Trustees. Proxies may be solicited in the name of one or more Trustees or one or
more of the officers of the Trust. Only Shareholders of record shall be entitled
to vote. When any share is held jointly by several persons, any one of them may
vote at any meeting in person or by proxy in respect of such share, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such share. Unless otherwise
specifically limited by their terms, proxies shall entitle the holder thereof to
vote at any adjournment of a meeting. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise, and the burden of proving invalidity shall rest on the challenger.
If the holder of any such share is a minor or a person of unsound mind, and
subject to guardianship or the legal control of any other person as regards the
charge or management of such share, he or she may vote by his or her guardian or
such other person appointed or having such control, and such vote may be given
in person or by proxy. Except as otherwise provided herein or in the Declaration
of Trust or the Delaware Act, all matters relating to the giving, voting or
validity of proxies shall be governed by the General Corporation Law of the
State of Delaware relating to proxies, and judicial interpretations thereunder,
as if the Trust were a Delaware corporation and the Shareholders were
Shareholders of a Delaware corporation.
At all meetings of the Shareholders, a quorum being present, the Trustees shall be elected by the vote of a plurality of the votes cast by Shareholders present in person or by proxy and all other matters shall be decided by majority of the votes cast by Shareholders present in person or by proxy, unless the question is one for which by express provision of the 1940 Act or the Declaration of Trust, a different vote is required, in which case such express provision shall control the decision of such question. There shall be no cumulative voting for Trustees. At all meetings of Shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the Chairman of the meeting.
Section 8. Inspectors. At any election of Trustees, the Board of Trustees prior thereto may, or, if they have not so acted, the chairman of the meeting may appoint one or more inspectors of election who shall first subscribe an oath of affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall after the election make a certificate of the result of the vote taken.
Section 9. Stock Ledger and List of Shareholders. It shall be the duty of the secretary or assistant secretary of the Trust to cause an original or duplicate share ledger to be maintained at the office of the Trust's transfer agent. Such share ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection.
Section 10. Action Without Meeting. Any action to be taken by Shareholders may be taken without a meeting if (a) all Shareholders entitled to vote on the matter consent to the action in writing, (b) all Shareholders entitled to notice of the meeting but not entitled to vote at it sign a written waiver of any right to dissent, and (c) the written consents are filed with the records of the meeting of Shareholders. Such consent shall be treated for all purposes as a vote at a meeting.
ARTICLE III
Trustees
Section 1. Place of Meeting. Meetings of the Board of Trustees, regular or special, may be held at any place as the Board may from time to time determine.
Section 2. Quorum. At all meetings of the Board of Trustees, one-third of the Trustees then in office shall constitute a quorum for the transaction of business provided that in no case may a quorum be fewer than two persons (unless there is only one Trustee then in office, in which case such Trustee shall constitute a quorum). The action of a majority of the Trustees present at any meeting at which a quorum is present shall be the action of the Board of Trustees unless the concurrence of a greater proportion is required for such action by the 1940 Act or the Declaration of Trust. If a quorum shall not be present at any meeting of Trustees, the Trustees present thereat may by a majority vote adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present.
Section 3. Regular Meetings. Regular meetings of the Board of Trustees may be held without additional notice at such time and place as shall from time to time be determined by the Board of Trustees provided that notice of any change in the time or place of such meetings shall be sent promptly to each Trustee not present at the meeting at which such change was made in the manner provided for notice of special meetings.
Section 4. Special Meetings. Special meetings of the Board of Trustees may be called by the chairman or president on one day's notice to each Trustee; special meetings shall be called by the chairman or president or secretary in like manner and on like notice on the written request of two Trustees.
Section 5. Telephone Meeting. Members of the Board of Trustees or a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time.
Section 6. Informal Actions. Any action required or permitted to be taken at any meeting of the Board of Trustees or of any committee thereof may be taken without a meeting, if a written consent to such action is signed by a majority of the Trustees then in office or by a majority of the members of such committee, as the case may be (unless, in either case, the question is one for which by express provision of the 1940 Act or the Declaration of Trust, a different vote is required, in which case such express provision shall control the decision of such question). Any such written consent shall be filed with the minutes of proceedings of the Board or committee, as applicable.
Section 7. Committees. The Board of Trustees may appoint from among its members an Executive Committee and other committees composed of two or more Trustees, and may delegate to such committees any or all of the powers of the Board of Trustees in the management of the business and affairs of the Trust.
Section 8. Action of Committees. In the absence of an appropriate resolution of the Board of Trustees, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that the quorum shall not be fewer than two Trustees. The committees shall keep minutes of their proceedings and shall report the same to the Board of Trustees at the meeting next succeeding, and any action by the committee shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration. In the absence of any member of such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Trustees to act in the place of such absent member.
ARTICLE IV
Notices
Section 1. Form. Subject to the 1940 Act, notices and all other communications to Shareholders shall be in writing and delivered personally, or sent by electronic transmission to an electronic mail address provided by the Shareholder or mailed to the Shareholders at their addresses appearing on the books of the Trust. Notices to Trustees shall be oral or by telephone or in writing delivered personally or mailed to the Trustees at their addresses appearing on the books of the Trust or by electronic transmission to an electronic mail address provided by the Trustee. Notice by mail shall be deemed to be given at the time when the same shall be mailed and notice by electronic transmission shall be deemed given at the time when sent. Subject to the provisions of the 1940 Act, notice to Trustees need not state the purpose of a regular or special meeting.
Section 2. Waiver. Whenever any notice of the time, place or purpose of any meeting of Shareholders, Trustees or a committee is required to be given under the provisions of the Declaration of Trust or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting of Shareholders in person or by proxy, or at the meeting of Trustees or a committee in person, shall be deemed equivalent to the giving of such notice to such persons.
ARTICLE V
Officers
Section 1. Executive Officers. The officers of the Trust shall be chosen by the Board of Trustees and shall include a chairman, president, a secretary and a treasurer. The Board of Trustees may, from time to time, elect or appoint a controller, one or more vice presidents, assistant secretaries, assistant treasurers, and assistant controllers. The Board of Trustees, at its discretion, may also appoint a Trustee as senior chairman of the Board of Trustees who shall perform and execute such executive and administrative duties and powers as the Board of Trustees shall from time to time prescribe. The same person may hold two or more offices, except that no person shall be both president and vice president and no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, the Declaration of Trust or these By-Laws to be executed, acknowledged or verified by two or more officers.
Section 2. Election. The Board of Trustees shall choose a chairman, president, a secretary and a treasurer.
Section 3. Other Officers. The Board of Trustees from time to time may appoint such other officers and agents as it shall deem advisable, who shall hold their offices for such terms and shall exercise powers and perform such duties as shall be determined from time to time by the Board of Trustees. The Board of Trustees from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties.
Section 4. Compensation. The salaries or other compensation of all officers and agents of the Trust shall be fixed by the Board of Trustees, except that the Board of Trustees may delegate to any person or group of persons the power to fix the salary or other compensation of any subordinate officers or agents appointed pursuant to Section 3 of this Article V.
Section 5. Tenure. The officers of the Trust shall serve at the pleasure of the Board of Trustees. Any officer or agent may be removed by the affirmative vote of the Board of Trustees with or without cause whenever, in its judgment, the best interests of the Trust will be served thereby. In addition, any officer or agent appointed pursuant to Section 3 may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Board of Trustees. Any vacancy occurring in any office of the Trust by death, resignation, removal or otherwise shall be filled by the Board of Trustees, unless pursuant to Section 3 the power of appointment has been conferred by the Board of Trustees on any other officer.
Section 6. President and Chief Executive Officer. The president shall be the chief executive officer of the Trust, unless the Board of Trustees designates the chairman as chief executive officer. The chief executive officer shall see that all orders and resolutions of the Board of Trustees are carried into effect. The chief executive officer shall also be the chief administrative officer of the Trust and shall perform such other duties and have such other powers as the Board of Trustees may from time to time prescribe.
Section 7. Chairman. The chairman of the Board of Trustees shall perform and execute such duties and administrative powers as the Board of Trustees shall from time to time prescribe.
Section 8. Senior Chairman of the Board. The senior chairman of the Board of Trustees, if one shall be chosen, shall perform and execute such executive duties and administrative powers as the Board of Trustees shall from time to time prescribe.
Section 9. Vice President. The vice presidents, in order of their seniority, shall, in the absence or disability of the chief executive officer, perform the duties and exercise the powers of the chief executive officer and shall perform such other duties as the Board of Trustees or the chief executive officer may from time to time prescribe.
Section 10. Secretary. The secretary shall attend all meetings of the Board of Trustees and all meetings of the Shareholders and record all the proceedings thereof and shall perform like duties for any committee when required. He shall give, or cause to be given, notice of meetings of the Shareholders and of the Board of Trustees, shall have charge of the records of the Trust, including the stock books, and shall perform such other duties as may be prescribed by the Board of Trustees or chief executive officer, under whose supervision he shall be. He shall keep in safe custody the seal of the Trust and, when authorized by the Board of Trustees, shall affix and attest the same to any instrument requiring it. The Board of Trustees may give general authority to any other officer to affix the seal of the Trust and to attest the affixing by his signature.
Section 11. Assistant Secretaries. The assistant secretaries in order of their seniority, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties as the Board of Trustees or the chief executive officer shall prescribe.
Section 12. Treasurer. The treasurer, unless another officer has been so designated, shall be the chief financial officer of the Trust. He shall have general charge of the finances and books of account of the Trust. Except as otherwise provided by the Board of Trustees, he shall have general supervision of the funds and property of the Trust and of the performance by the custodian of its duties with respect thereto. He shall render to the Board of Trustees, whenever directed by the Board of Trustees, an account of the financial condition of the Trust and of all his transactions as treasurer. He shall cause to be prepared annually a full and correct statement of the affairs of the Trust, including a balance sheet and a statement of operations for the preceding fiscal year. He shall perform all of the acts incidental to the office of treasurer, subject to the control of the Board of Trustees or the chief executive officer.
Section 13. Assistant Treasurer. The assistant treasurer shall in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties as the Board of Trustees or the chief executive officer may from time to time prescribe.
ARTICLE VI
Indemnification and Insurance
Section 1. Agents, Proceedings and Expenses. For the purpose of this Article, "agent" means any person who is or was a Trustee or officer of this Trust and any person who, while a Trustee or officer of this Trust, is or was serving at the request of this Trust as a Trustee, director, officer, partner, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "Trust" includes any domestic or foreign predecessor entity of this Trust in a merger, consolidation, or other transaction in which the predecessor's existence ceased upon consummation of the transaction; "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes without limitation attorney's fees and any expenses of establishing a right to indemnification under this Article.
Section 2. Actions Other Than by Trust. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Trust) by reason of the fact that such person is or was an agent of this Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed: (a) in the case of conduct in his official capacity as an agent of the Trust, that his conduct was in the Trust's best interests and (b) in all other cases, that his conduct was at least not opposed to the Trust's best interests and (c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order or settlement shall not of itself create a presumption that the person did not meet the requisite standard of conduct set forth in this Section. The termination of any proceeding by conviction, or a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the person did not meet the requisite standard of conduct set forth in this Section.
Section 3. Actions by the Trust. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding by or in the right of this Trust to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Trust, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Trust and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
Section 4. Exclusion of Indemnification. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any proceeding as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity; or
(b) In respect of any proceeding as to which that person shall have been adjudged to be liable in the performance of that person's duty to this Trust, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the relevant circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; however, in such case, indemnification with respect to any proceeding by or in the right of the Trust or in which liability shall have been adjudged by reason of the disabling conduct set forth in the preceding paragraph shall be limited to expenses; or
(c) Of amounts paid in settling or otherwise disposing of
a proceeding, with or without court approval, or of
expenses incurred in defending a proceeding which is
settled or otherwise disposed of without court
approval, unless the required approval set forth in
Section 6 of this Article is obtained.
Section 5. Successful Defense by Agent. To the extent that an agent of this Trust has been successful, on the merits or otherwise, in the defense of any proceeding referred to in Sections 2 or 3 of this Article before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Board of Trustees, including a majority who are disinterested, non-party Trustees, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. Required Approval. Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Trust only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees who are not parties to the proceeding and are not interested persons of the Trust (as defined in the 1940 Act);
(b) A written opinion by an independent legal counsel; or
(c) The Shareholders; however, Shares held by agents who are parties to the proceeding may not be voted on the subject matter under this Sub-Section.
Section 7. Advance of Expenses. Expenses incurred in defending any proceeding may be advanced by this Trust before the final disposition of the proceeding if (a) receipt of a written affirmation by the agent of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article and a written undertaking by or on behalf of the agent, such undertaking being an unlimited general obligation to repay the amount of the advance if it is ultimately determined that he has not met those requirements, and (b) a determination that the facts then known to those making the determination would not preclude indemnification under this Article. Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible.
Section 8. Other Contractual Rights. Nothing contained in this Article shall affect any right to indemnification to which persons other than Trustees and officers of this Trust or any subsidiary hereof may be entitled by contract or otherwise.
Section 9. Limitations. No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears:
(a) That it would be inconsistent with a provision of the Agreement and Declaration of Trust of the Trust, a resolution of the Shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
Section 10. Insurance. Upon and in the event of a determination by the Board of Trustees of this Trust to purchase such insurance, this Trust shall purchase and maintain insurance on behalf of any agent or employee of this Trust against any liability asserted against or incurred by the agent or employee in such capacity or arising out of the agent's or employee's status as such to the fullest extent permitted by law.
Section 11. Fiduciaries of Employee Benefit Plan. This Article does not apply to any proceeding against any Trustee, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a Trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article.
ARTICLE VII
Shares of Beneficial Interest
Section 1. Certificates. A certificate or certificates representing and certifying the series or class and the full, but not fractional, number of Shares of beneficial interest owned by each Shareholder in the Trust shall not be issued except as the Board of Trustees may otherwise determine from time to time. Any such certificate issued shall be signed by facsimile signature or otherwise by the chairman or president or a vice president and counter-signed by the secretary or an assistant secretary or the treasurer or an assistant treasurer.
Section 2. Signature. In case any officer who has signed any certificate ceases to be an officer of the Trust before the certificate is issued, the certificate may nevertheless be issued by the Trust with the same effect as if the officer had not ceased to be such officer as of the date of its issue.
Section 3. Recording and Transfer Without Certificates. The Trust shall have the full power to participate in any program approved by the Board of Trustees providing for the recording and transfer of ownership of the Trust's Shares by electronic or other means without the issuance of certificates.
Section 4. Lost Certificates. The Board of Trustees may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Trust alleged to have been stolen, lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to have been stolen, lost or destroyed, or upon other satisfactory evidence of such theft, loss or destruction and may in its discretion and as a condition precedent to the issuance thereof, require the owner of such stolen, lost or destroyed certificate or certificates, or his legal representative, to give the Trust a bond with sufficient surety, to the Trust to indemnify it against any loss or claim that may be made by reason of the issuance of a new certificate.
Section 5. Transfer of Shares. Transfers of Shares of beneficial interest of the Trust shall be made on the books of the Trust by the holder of record thereof (in person or by his attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the secretary of the Trust) (i) if a certificate or certificates have been issued, upon the surrender of the certificate or certificates, properly endorsed or accompanied by proper instruments of transfer, representing such Shares, or (ii) as otherwise prescribed by the Board of Trustees. Every certificate exchanged, surrendered for redemption or otherwise returned to the Trust shall be marked "Canceled" with the date of cancellation.
Section 6. Registered Shareholders. The Trust shall be entitled to recognize the exclusive right of a person registered on its books as the owner of Shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of Shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or Shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law or the Declaration of Trust.
Section 7. Transfer Agents and Registrars. The Board of Trustees may, from time to time, appoint or remove transfer agents and or registrars of the Trust, and they may appoint the same person as both transfer agent and registrar. Upon any such appointment being made, all certificates representing Shares of beneficial interest thereafter issued shall be countersigned by such transfer agent and shall not be valid unless so countersigned.
Section 8. Stock Ledger. The Trust shall maintain an original stock ledger containing the names and addresses of all Shareholders and the number and series or class of Shares held by each Shareholder. Such stock ledger may be in written form or any other form capable of being converted into written form within reasonable time for visual inspection.
ARTICLE VIII
General Provisions
Section 1. Custodianship. Except as otherwise provided by resolution of the Board of Trustees, the Trust shall place and at all times maintain in the custody of a custodian (including any sub-custodian for the custodian) all funds, securities and similar investments owned by the Trust. Subject to the approval of the Board of Trustees, the custodian may enter into arrangements with securities depositories, provided such arrangements comply with the provisions of the 1940 Act and the rules and regulations promulgated thereunder.
Section 2. Execution of Instruments. All deeds, documents, transfers, contracts, agreements and other instruments requiring execution by the Trust may be signed by the chairman or president or a vice president or the treasurer or the secretary or any other duly authorized officer or agent of the Trust, which authority may be general or specific.
Section 3. Net Asset Value. Subject to Section 1 of Article VI of the Declaration of Trust, the net asset value per Share shall be determined separately as to each series or class of the Trust's Shares, by dividing the sum of the total market value of the series' or class's investments and other assets, less any liabilities, by the total outstanding Shares of such series or class, subject to the 1940 Act and any other applicable Federal securities law or rule or regulation currently in effect.
ARTICLE IX
Amendments
The Board of Trustees, without a vote by the Shareholders, shall have the power to make, alter and repeal the By-Laws of the Trust.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 85 to the registration statement on Form N-1A (the "Registration Statement") of our report dated December 19, 2008, relating to the financial statements and financial highlights appearing in the October 31, 2008 Annual Report to Shareholders of Vanguard Explorer Fund, which report is also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectuses and under the headings "Financial Statements" and "Service Providers-Independent Registered Public Accounting Firm" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 17, 2009
VANGUARD FUNDS
MULTIPLE CLASS PLAN
I. INTRODUCTION
This Multiple Class Plan (the "Plan") describes six separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the "Funds," individually a "Fund"). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes.
The Plan has been approved by the Board of Directors of The Vanguard Group ("Vanguard"). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time.
II. SHARE CLASSES
A Fund may offer any one or more of the following share classes:
Investor Shares Admiral Shares Signal Shares Institutional Shares Institutional Plus Shares ETF Shares
III. DISTRIBUTION, AVAILABILITY AND ELIGIBILITY
Distribution arrangements for all classes are described below. Vanguard retains sole discretion in determining share class availability, and whether Fund shares shall be offered either directly or through certain financial intermediaries, or on certain financial intermediary platforms. Eligibility requirements for purchasing shares of each class will differ, as follows:
A. Investor Shares
Investor Shares generally will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for
Investor Shares will be substantially lower than the amount required for any other class of shares.
B. Admiral Shares
Admiral Shares generally will be available to individual and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may include, but are not limited to the following factors: (i) the total amount invested the Fund; (ii) the length of time that the Fund account has been maintained; (iii) whether the investor has registered for on-line access to the Fund account through Vanguard's web site; or (iv) any other factors deemed appropriate by a Fund's Board of Trustees.
C. Signal Shares
Signal Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that Signal Shares will be offered to Vanguard's institutional clients according to eligibility criteria that may include, but are not limited to the following factors: (i) the total amount invested in the Fund; (ii) nature and extent of client's relationship with Fund, including services provided by the Fund to the client's account; and (iii) any other factors deemed appropriate by the Fund's Board of Trustees.
D. Institutional Shares
Institutional Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount per account for Institutional Shares will be substantially higher than the amounts required for Investor Shares, Admiral Shares or Signal Shares.
E. Institutional Plus Shares
Institutional Plus Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Plus Shares will be substantially higher than the amount required for any other class of the Fund's shares.
F. ETF Shares
The Fund will sell ETF Shares to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their ETF shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund's distributor. Additional eligibility requirements may be specified in Schedule B hereto, as such Schedule may be amended from time to time. Investors who are not Authorized Participants may buy and sell ETF shares through various exchanges and market centers.
IV. SERVICE ARRANGEMENTS
All share classes will receive a range of services provided by Vanguard on a per account basis. These "account-based" services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows:
A. Investor Shares
Investor Shares generally will receive the most basic level of service from Vanguard. Investor Shares generally will be serviced through a pool of Vanguard client service representatives. Investor Shares shareholders may receive VISTA recordkeeping services from Vanguard.
B. Admiral Shares
Admiral Shares will receive a different level of service from Vanguard as compared to Investor Shares, including but not limited to special client service representatives who are assigned to service Admiral Shares through a dedicated phone service center. In addition, holders of Admiral Shares may from time to time receive special mailings and unique additional services from Vanguard. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Admiral Shares.
C. Signal Shares
Signal Shares will receive a level of service from Vanguard that differs from the service provided to the holders of shares of other classes. Such services
may include informational newsletters and other similar materials devoted to investment topics of interest and which have been developed exclusively for Signal shareholders. Such newsletters or other materials may be mailed on a periodic basis. These newsletters or other materials may also be available to Signal shareholders through separate electronic venues including a dedicated web site. In addition, special client service representatives may be assigned to service Signal Shares through a dedicated phone service center. Signal Shares' shareholders generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Signal shareholders may receive VISTA recordkeeping services from Vanguard.
D. Institutional Shares
Institutional Shares will receive from Vanguard a level of service that differs from the service provided to the holders of shares of other classes. Such services may include special client service representatives who will be assigned to service Institutional Shares. Most holders of Institutional Shares periodically will receive special investment updates from Vanguard's investment staff. Holders of Institutional Shares also may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Institutional Shares.
E. Institutional Plus Shares
Institutional Plus Shares generally will receive a very high level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Plus Shares, and most holders of such shares periodically, but more than the holders of all other shares, will receive special updates from Vanguard's investment staff. Holders of Institutional Plus Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Institutional Plus Shares
F. ETF Shares
A Fund is expected to maintain only one shareholder of record for ETF Shares--DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled
electronically. Due to the nature and purpose of the DTC account, ETF Shares will not receive any special updates from Vanguard's investment staff.
V. CONVERSION FEATURES
A. Voluntary Conversions
1. Conversion into Investor Shares. An investor may convert Admiral Shares, Signal Shares, or Institutional Shares into Investor Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order.
2. Conversion into Admiral Shares. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order.
3. Conversion into Signal Shares. An investor may convert Investor Shares or Institutional Shares into Signal Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Signal Shares; and (ii) receives services consistent with Signal Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order.
4. Conversion into Institutional Shares. An investor may convert Investor Shares, Admiral Shares, or Signal Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order.
5. Conversion into Institutional Plus Shares. An investor may convert Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares into Institutional Plus Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility
requirements for Institutional Plus Shares; and (ii) receives services consistent with Institutional Plus Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order.
6. Conversion into ETF Shares. Except as otherwise provided, an investor may convert Investor Shares, Admiral Shares, Signal Shares or Institutional Shares into ETF Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold ETF Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. None of the Funds that are series of Vanguard Bond Index Funds (see Schedule A) shall permit holders of Investor Shares, Admiral Shares, Signal Shares or Institutional Shares to convert those shares into ETF Shares.
B. Automatic Conversions
1. Automatic conversion into Admiral Shares. Vanguard may automatically convert Investor Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's conversion without the imposition of any charge. Such automatic conversions may occur on a periodic, or one-time basis. Automatic conversions may occur at different times due to the differing mechanisms through which an account is funded or meets the required investment minimum. Automatic conversions do not apply to certain types of accounts, or to accounts that are eligible for Admiral Shares as a result of tenure in the Fund.
2. Automatic conversion into Signal Shares, Institutional Shares or Institutional Plus Shares. Vanguard will not conduct automatic conversions of any share class into either Signal Shares, Institutional Shares, or Institutional Plus Shares. Shareholders may convert eligible shares into either Signal Shares, Institutional Shares, or Institutional Plus Shares only through either a self-directed conversion, or with the assistance of Vanguard representatives. Notwithstanding this rule, once a Fund offers Signal Shares, Admiral Shares of that Fund held by institutional clients may be automatically converted into Signal Shares to align the share class investor eligibility requirements.
C. Involuntary Conversions and Cash Outs
1. Cash Outs. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor's remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund's normal redemption fees, if any.
2. Conversion of Admiral Shares. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
3. Conversion of Signal Shares. If an investor no longer meets the eligibility requirements for Signal Shares, the Fund may convert the investor's Signal Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
4. Conversion of Institutional Shares. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor, according to the investor's ability to satisfy then current eligibility requirements, into Admiral Shares, Signal Shares, or Investor Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
5. Conversion of Institutional Plus Shares. If an investor no longer meets the eligibility requirements for Institutional Plus Shares, the Fund may convert the investor's Institutional Plus Shares into Institutional Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
VI. EXPENSE ALLOCATION AMONG CLASSES
A. Background
Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a
Funds' Service Agreement between itself and the Funds (the "Agreement"), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission ("Exemptive Orders"). Vanguard's direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement.
B. Class Specific Expenses
1. Expenses for Account-Based Services. Expenses associated with Vanguard's provision of account-based services to the Funds will be allocated among the share classes of each Fund on the basis of the amount incurred by each such class as follows:
(a) Account maintenance expenses. Expenses associated with the maintenance of investor accounts will be proportionately allocated among each Fund's share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class.
(b) Expenses of special servicing arrangements. Expenses relating to any special servicing arrangements for a specific class will be proportionally allocated among each eligible Fund's share classes primarily based on their percentage of total shareholder accounts receiving the special servicing arrangements.
(c) Literature production and mailing expenses. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among each Fund's share classes based upon the number of such items produced and mailed for each class.
2. Other Class Specific Expenses. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class.
C. Fund-Wide Expenses
1. Marketing and Distribution Expenses. Expenses associated with Vanguard's marketing and distribution activities will be allocated among the Funds and their separate share classes according to the "Vanguard Modified Formula," with each share class treated as if it were a
separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund's Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940.
2. Asset Management Expenses. Expenses associated with management of a Fund's assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund's share classes on the basis of their relative net assets.
3. Other Fund Expenses. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets.
VII. ALLOCATION OF INCOME, GAINS AND LOSSES
Income, gains and losses will be allocated among each Fund's share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time.
VIII. VOTING AND OTHER RIGHTS
Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan.
IX. AMENDMENTS
All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard.
Original Board Approval: July 21, 2000
Last Approved by Board: March 28, 2008
70124.29
SCHEDULE A
to
VANGUARD FUNDS MULTIPLE CLASS PLAN
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Vanguard Fund Share Classes Authorized
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Vanguard Admiral Funds
o Admiral Treasury Money Market Fund Investor
Vanguard Bond Index Funds
o Short-Term Bond Index Fund Investor, Admiral, Signal, ETF
o Intermediate-Term Bond Index Fund Investor, Admiral, Signal, Institutional, ETF
o Long-Term Bond Index Fund Investor, Institutional, ETF
o Total Bond Market Index Fund Investor, Admiral, Signal, Institutional, ETF
o Total Bond Market II Index Fund Investor, Institutional,
o Inflation-Protected Securities Fund Investor, Admiral, Institutional
Vanguard California Tax-Exempt Funds
o Tax-Exempt Money Market Fund Investor
o Intermediate-Term Tax-Exempt Fund Investor, Admiral
o Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard Chester Funds
o PRIMECAP Fund Investor, Admiral
o Vanguard Target Retirement Income Fund Investor
o Vanguard Target Retirement 2005 Fund Investor
o Vanguard Target Retirement 2010 Fund Investor
o Vanguard Target Retirement 2015 Fund Investor
o Vanguard Target Retirement 2020 Fund Investor
o Vanguard Target Retirement 2025 Fund Investor
o Vanguard Target Retirement 2030 Fund Investor
o Vanguard Target Retirement 2035 Fund Investor
o Vanguard Target Retirement 2040 Fund Investor
o Vanguard Target Retirement 2045 Fund Investor
o Vanguard Target Retirement 2050 Fund Investor
Vanguard Convertible Securities Fund Investor
Vanguard Explorer Fund Investor, Admiral
Vanguard Fenway Funds
o Equity Income Fund Investor, Admiral
o Growth Equity Fund Investor
o PRIMECAP Core Fund Investor
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Vanguard Fund Share Classes Authorized
---------------------------------------------------------------------------------------------------------------------
Vanguard Fixed Income Securities Funds
o Short-Term Treasury Fund Investor, Admiral
o Short-Term Federal Fund Investor, Admiral
o Short-Term Investment-Grade Fund Investor, Admiral, Institutional
o Intermediate-Term Treasury Fund Investor, Admiral
o Intermediate-Term Investment-Grade Fund Investor, Admiral
o GNMA Fund Investor, Admiral
o Long-Term Treasury Fund Investor, Admiral
o Long-Term Investment-Grade Fund Investor, Admiral
o High-Yield Corporate Fund Investor, Admiral,
Vanguard Florida Tax-Exempt Fund Investor, Admiral
Vanguard Horizon Funds
o Capital Opportunity Fund Investor, Admiral
o Global Equity Fund Investor
o Strategic Equity Fund Investor
o Strategic Small-Cap Equity Fund Investor
Vanguard Index Funds
o 500 Index Fund Investor, Admiral, Signal
o Extended Market Index Fund Investor, Admiral, Signal, Institutional, ETF
o Growth Index Fund Investor, Admiral, Signal, Institutional, ETF
o Large-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
o Mid-Cap Growth Index Fund Investor, ETF
o Mid-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
o Mid-Cap Value Index Fund Investor, ETF
o Small-Cap Growth Index Fund Investor, Institutional, ETF
o Small-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
o Small-Cap Value Index Fund Investor, Institutional, ETF
o Total Stock Market Index Fund Investor, Admiral, Signal, Institutional, ETF
o Value Index Fund Investor, Admiral, Signal, Institutional, ETF
Vanguard International Equity Index Funds
o Emerging Markets Stock Index Fund Investor, Admiral, Signal, Institutional,ETF
o European Stock Index Fund Investor, Admiral, Signal, Institutional, ETF o
o FTSE All-World ex US Index Fund Investor, Institutional, ETF
o Pacific Stock Index Fund Investor, Admiral, Signal, Institutional, ETF
o Total World Stock Index Fund Investor, Institutional, ETF
o FTSE All World ex-US Small-Cap Index Fund Investor, Institutional, ETF
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Vanguard Fund Share Classes Authorized
---------------------------------------------------------------------------------------------------------------------
Vanguard Malvern Funds
o Asset Allocation Fund Investor, Admiral
o Capital Value Fund Investor
o U.S. Value Fund Investor
Vanguard Massachusetts Tax-Exempt Fund Investor
Vanguard Money Market Funds
o Prime Money Market Fund Investor, Institutional
o Federal Money Market Fund Investor
Vanguard Morgan Growth Fund Investor, Admiral
Vanguard Montgomery Funds
o Vanguard Market Neutral Fund Investor, Institutional
Vanguard Municipal Bond Funds
o Tax-Exempt Money Market Fund Investor
o Short-Term Tax-Exempt Fund Investor, Admiral
o Limited-Term Tax-Exempt Fund Investor, Admiral
o Intermediate-Term Tax-Exempt Fund Investor, Admiral
o Long-Term Tax-Exempt Fund Investor, Admiral
o High-Yield Tax-Exempt Fund Investor, Admiral
Vanguard New Jersey Tax-Free Funds
o Tax-Exempt Money Market Fund Investor
o Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard New York Tax-Free Funds
o Tax-Exempt Money Market Fund Investor
o Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard Ohio Tax-Free Funds
o Tax-Exempt Money Market Fund Investor
o Long-Term Tax-Exempt Fund Investor
Vanguard Pennsylvania Tax- Free Funds
o Tax-Exempt Money Market Fund Investor
o Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard Quantitative Funds
o Growth and Income Fund Investor, Admiral
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Vanguard Fund Share Classes Authorized
---------------------------------------------------------------------------------------------------------------------
Vanguard Specialized Funds
o Energy Fund Investor, Admiral
o Precious Metals Fund Investor
o Health Care Fund Investor, Admiral
o Dividend Growth Fund Investor
o REIT Index Fund Investor, Admiral, Institutional, ETF
o Dividend Appreciation Index Fund Investor, ETF
Vanguard Tax-Managed Funds
o Tax-Managed Balanced Fund Investor
o Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional
o Tax-Managed Growth and Income Fund Investor, Admiral, Institutional
o Tax-Managed International Fund Investor, Institutional
Vanguard Europe Pacific ETF ETF
o Tax-Managed Small-Cap Fund Investor, Institutional
Vanguard Treasury Funds
o Treasury Money Market Fund Investor
Vanguard Trustees' Equity Fund
o International Value Fund Investor
o Diversified Equity Fund Investor
Vanguard Valley Forge Funds
o Vanguard Balanced Index Fund Investor, Admiral, Signal, Institutional
o Vanguard Managed Payout Growth Focus Fund Investor
o Vanguard Managed Payout Growth
and Distribution Fund Investor
o Vanguard Managed Payout
Distribution Focus Fund Investor
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Vanguard Fund Share Classes Authorized ------------------------------------------------------------------------------------------------------------------- Vanguard Variable Insurance Funds o Balanced Portfolio Investor o Diversified Value Portfolio Investor o Equity Income Portfolio Investor o Equity Index Portfolio Investor o Growth Portfolio Investor o Total Bond Market Index Portfolio Investor o High Yield Bond Portfolio Investor o International Portfolio Investor o Mid-Cap Index Portfolio Investor o Money Market Portfolio Investor o REIT Index Portfolio Investor o Short-Term Investment Grade Portfolio Investor o Small Company Growth Portfolio Investor o Capital Growth Portfolio Investor o Total Stock Market Index Portfolio Investor Vanguard Wellesley Income Fund Investor, Admiral Vanguard Wellington Fund Investor, Admiral Vanguard Whitehall Funds o Selected Value Fund Investor o Mid-Cap Growth Fund Investor o International Explorer Fund Investor o High Dividend Yield Index Fund Investor, ETF Vanguard Windsor Funds o Windsor Fund Investor, Admiral o Windsor II Investor, Admiral --------------------------------------------------------------------------------------------------------------------- |
Vanguard Fund Share Classes Authorized -------------------------------------------------------------------------------------------------------------------- Vanguard World Funds o Extended Duration Treasury Index Fund Institutional, Institutional Plus, ETF o FTSE Social Index Fund Investor, Institutional o International Growth Fund Investor, Admiral o Mega Cap 300 Index Fund Institutional, ETF o Mega Cap 300 Growth Index Fund Institutional, ETF o Mega Cap 300 Value Index Fund Institutional, ETF o U.S. Growth Fund Investor, Admiral o Consumer Discretionary Index Fund Admiral, ETF o Consumer Staples Index Fund Admiral, ETF o Energy Index Fund Admiral, ETF o Financials Index Fund Admiral, ETF o Health Care Index Fund Admiral, ETF o Industrials Index Fund Admiral, ETF o Information Technology Index Fund Admiral, ETF o Materials Index Fund Admiral, ETF o Telecommunication Services Index Fund Admiral, ETF o Utilities Index Fund Admiral, ETF |
Original Board Approval: July 21, 2000
Last Approved by Board: December 19, 2008
71024.29
1
SCHEDULE B
to
VANGUARD FUNDS MULTIPLE CLASS PLAN
Vanguard has policies and procedures designed to ensure consistency and compliance with the offering of multiple classes of shares within this Multiple Class Plan's eligibility requirements. These policies are reviewed and monitored on an ongoing basis in conjunction with Vanguard's Compliance Department.
Investor Shares - Eligibility Requirements
Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors.
Admiral Shares - Eligibility Requirements
Admiral Shares generally are intended for clients who meet the required minimum initial investment and ongoing account balance of $100,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Admiral Shares. Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Share class eligibility also is subject to the following rules:
o Account Tenure: The minimum amount for Admiral Shares is $50,000
if the investor has maintained an account in the applicable Fund
for 10 years, subject to administrative policies developed by
Vanguard to exclude costly accounts. For these purposes, a Fund
may, in appropriate cases, count periods during which an investor
maintained an account in the Fund through a financial
intermediary. To take advantage of the tenure rule, an investor
generally must be registered for on-line access to their Fund
account through Vanguard.com, or otherwise transact with Vanguard
on a similarly cost-effective basis.
o Certain Retirement Plans: Admiral Shares generally are not
available to 403(b)(7) custodial accounts and SIMPLE IRAs held
directly with Vanguard; as well as other Vanguard Retirement Plans
receiving special administrative services from Vanguard.
o Financial Intermediaries -Admiral Shares are not available to
financial intermediaries who would meet eligibility requirements
by aggregating the holdings of underlying investors within an
omnibus account. However, a financial intermediary may hold
Admiral Shares in an omnibus account if:
(1) each underlying investor in the omnibus account
individually meets the $100,000 minimum amount or the
tenure rule described above; and
(2) the financial intermediary agrees to monitor ongoing compliance of the
underlying investor accounts with the $100,000
minimum amount or the tenure rule described above; or
(3) a sub-accounting arrangement between Vanguard and the
financial intermediary for the omnibus account allows
Vanguard to monitor compliance with the eligibility
requirements established by Vanguard.
o VISTA - Admiral Shares are not available to participants in
employee benefit plans that use Vanguard's VISTA system for plan
recordkeeping.
o Asset Allocation Fund -- Admiral Shares of Asset Allocation Fund
are not available to certain institutional clients who receive no
special recordkeeping services from Vanguard.
o Account Aggregation -- Vanguard clients may hold Admiral Shares by
aggregating up to three separate accounts within the same Vanguard
Fund, provided that the total balance of the aggregated accounts
in the Fund is at least $1 million. For purposes of this rule,
Vanguard management is authorized to permit aggregation of a
greater number of accounts in the case of clients whose aggregate
assets within the Vanguard Funds are expected to generate
substantial economies in the servicing of their accounts. The
aggregation rule does not apply to clients receiving special
recordkeeping or sub-accounting services from Vanguard, nor does
it apply to nondiscretionary omnibus accounts maintained by
financial intermediaries.
o Accumulation Period -- Accounts funded through regular
contributions (e.g. employer sponsored participant contribution
plans), whose assets are expected to quickly achieve eligibility
levels, may qualify for Admiral Shares upon account creation,
rather than undergoing the conversion process shortly after
account set-up if Vanguard management determines that the account
will become eligible for Admiral Shares within a limited period of
time (generally 90 days).
|
Signal Shares - Eligibility Requirements
Signal Shares generally are intended for institutional clients who meet the eligibility requirements set forth by Vanguard's institutional client service departments. Institutional clients generally must maintain a minimum balance of no less than $1 million in the Fund. Eligibility criteria are subject to the discretion of Vanguard management, and Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors and to change such requirements at any time. Signal Share class eligibility also is subject to the following rules:
o Previously held Admiral Shares. Admiral Shares held by institutional clients prior to the effective date of Signal Shares will be converted at the discretion of Vanguard management into Signal Shares.
o Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Signal Shares only if the total amount invested across all accounts held by the intermediary in the Fund is at least $5 million. Signal Shares generally are not available to financial intermediaries that serve as retail fund supermarkets.
o Institutional clients whose accounts are not recordkept by
Vanguard. Institutional clients, including but not limited to
financial intermediary and defined benefit and contribution plan
clients, endowments, and foundations whose accounts are not
recordkept by Vanguard may hold Signal Shares if the total amount
aggregated among all accounts held by such client and invested in
a single Fund is at least $1 million. Such institutional clients
must disclose to Vanguard on behalf of their accounts the
following: (1) that each account has a common decision-maker; and
(2) the total balance in each account held by the client in the
Fund.
o Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if they meet eligibility criteria established by Vanguard management. These eligibility criteria include, but are not limited to the following factors, which may be changed at any time and without prior notice: (1) the total amount invested in the Fund must be greater than $15 million; (2) the amount of the client's underlying account balances in the Fund; and (3) the extent to which the client uses Fund and Vanguard account services. For purposes of this analysis, Vanguard management may consider clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts.
o Accumulation Period. Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Signal Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Signal Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management.
Institutional Shares - Eligibility Requirements
Institutional Shares generally require a minimum initial investment and ongoing account balance of $5,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Share class eligibility also is subject to the following special rules:
o Vanguard Short-Term Investment Grade Fund - $50,000,000 minimum amount for Institutional Shares
o Vanguard Long-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares
o Vanguard Intermediate-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares
o Individual clients. Individual clients may hold Institutional Shares by aggregating up to 3 accounts held by the same client (same tax I.D. number) in a single Fund.
o Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Institutional Shares for the benefit of their underlying clients provided that each underlying client account invests at least $5 million (or such higher minimum required by the individual fund) in the Fund.
o Institutional clients whose accounts are not recordkept by
Vanguard. Institutional clients, including but not limited to
financial intermediary and defined benefit and contribution plan
clients, endowments, and foundations whose accounts are not
recordkept by Vanguard may hold Institutional Shares if the total
amount aggregated among all accounts held by such client and
invested in the Fund is at least $5 million (or such higher
minimum required by the individual fund). Such institutional
clients must disclose to Vanguard on behalf of their accounts the
following: (1) that each account has a common decision-maker; and
(2) the total balance in each account held by the client in the
Fund.
o Institutional clients whose accounts are recordkept by Vanguard - Institutional Shares are not available to institutional clients whose accounts are recordkept by Vanguard unless Vanguard management determines that the client's aggregate assets within a Fund as well as the extent to which the client uses Fund and Vanguard account services will likely generate substantial economies in the servicing of their accounts.
o Investment by Vanguard Target Retirement Collective Trust. A Vanguard Target Retirement Trust that is a collective trust exempt from regulation under the Investment Company Act and that seeks to achieve its investment objective by investing in underlying Vanguard Funds (a "TRT") may hold Institutional Shares of an underlying Fund whether or not its investment meets the minimum investment threshold specified above.
o Accumulation Period -- Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management.
Institutional Plus Shares - Eligibility Requirements
Institutional Plus Shares generally require a minimum initial investment and ongoing account balance of $100,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Plus Share class eligibility also is subject to the following special rules:
o Financial Intermediaries - Institutional Plus Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. However, a financial intermediary may hold Institutional Plus Shares in an omnibus account if:
(1) each underlying investor in the omnibus account individually
meets the investment minimum amount described above; and
(2) the financial intermediary agrees to monitor ongoing
compliance of the underlying investor accounts with the investment
minimum amount; or
(3) a sub-accounting arrangement between Vanguard and the
financial intermediary for the omnibus account allows Vanguard to
monitor compliance with the eligibility requirements established
by Vanguard.
o VISTA - Institutional Plus Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping, unless Vanguard management determines that a plan sponsor's aggregate assets within the Vanguard Funds will likely generate substantial economies in the servicing of their accounts.
o Account Aggregation - Vanguard clients may hold Institutional Plus Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund meets the minimum investment for the Fund's Institutional Plus Shares. For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries.
o Accumulation Period - Accounts funded through regular contributions e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Plus Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Plus Shares within a limited period of time (generally 90 days).
o Asset Allocation Models - Vanguard clients with defined asset allocation models whose assets meet eligibility requirements may qualify for Institutional Plus Shares if such models comply with policies and procedures that have been approved by Vanguard management.
ETF Shares - Eligibility Requirements
The eligibility requirements for ETF Shares will be set forth in the Fund's Registration Statement. To be eligible to purchase ETF Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing ETF Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of ETF Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund's ETF Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash.
Original Board Approval: July 21, 2000
Last Approved by Board: May 22, 2008
71024.29
Wellington Management Code of Ethics
Personal Investing
Gifts and Entertainment
Outside Activities
Client Confidentiality
[GRAPHIC OMITTED]October 1, 2008Wellington Management Code of Ethics
A Message From Our CEO
Wellington Management's reputation is our most valuable asset, and it is built on trust - trust that we will always put our clients' interests first and that our actions will fully meet our obligations as fiduciaries for our clients.
Our personnel around the world play a critical role in ensuring that we continue to earn this trust. We must all adhere to the highest standards of professional and ethical conduct. We must be sensitive to situations that may give rise to an actual conflict or the appearance of a conflict with our clients' interests, or have the potential to cause damage to the firm's reputation. To this end, each of us must act with integrity, honesty, and dignity.
We must all remain vigilant in protecting the interests of our clients before our own, as reflected in our guiding principle: "client, firm, self." If our standards slip or our focus wanes, we risk the loss of everything we have worked so hard to build together over the years.
Please take the time to read this Code of Ethics, learn the rules, and determine what you need to do to comply with them and continue to build on our clients' trust and confidence in Wellington Management.
Sincerely,
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Perry M. Traquina
President and Chief Executive Officer
"The reputation of a thousand years may be determined by the conduct of
one hour."
- Ancient proverb
Table of Contents
Standards of Conduct 4
Who Is Subject to the Code of Ethics? 4
Personal Investing 5
Which Types of Investments and Related Activities Are Prohibited? 5
Which Investment Accounts Must Be Reported? 5
What Are the Reporting Responsibilities for All Personnel? 7
What Are the Preclearance Responsibilities for All Personnel? 8
What Are the Additional Requirements for Investment Professionals? 9
Gifts and Entertainment 10
Outside Activities 11
Client Confidentiality 12
How We Enforce Our Code of Ethics 12
Closing 12
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Before You Get Started: Accessing the Code of Ethics System The Code of Ethics System is accessible through the Intranet under Applications. Please note that your User ID is your Wellington network ID (the same one you use to log on to your computer).
Standards of Conduct
Our standards of conduct are straightforward and essential. Any transaction or
activity that violates either of the standards of conduct below is prohibited,
regardless of whether it meets the technical rules found elsewhere in the Code
of Ethics.
1
We act as fiduciaries to our clients. Each of us must put our clients' interests
above our own and must not take advantage of our management of clients' assets
for our own benefit. Our firm's policies and procedures implement these
principles with respect to our conduct of the firm's business. This Code of
Ethics implements the same principles with respect to our personal conduct. The
procedures set forth in the Code govern specific transactions, but each of us
must be mindful at all times that our behavior, including our personal investing
activity, must meet our fiduciary obligations to our clients.
2
We act with integrity and in accordance with both the letter and the spirit of
the law. Our business is highly regulated, and we are committed as a firm to
compliance with those regulations. Each of us must also recognize our
obligations as individuals to understand and obey the laws that apply to us in
the conduct of our duties. They include laws and regulations that apply
specifically to investment advisors, as well as more broadly applicable laws
ranging from the prohibition against trading on material nonpublic information
and other forms of market abuse to anticorruption statutes such as the US
Foreign Corrupt Practices Act and the Council of Europe's Criminal Law
Convention on Corruption. The firm provides training on their requirements. Each
of us must take advantage of these resources to ensure that our own conduct
complies with the law.
Who Is Subject to the Code of Ethics?
Our Code of Ethics applies to all partners and employees of Wellington
Management Company, LLP, and its affiliates around the world. Its restrictions
on personal investing also apply to temporary personnel (including co-ops and
interns) and consultants whose tenure with Wellington Management exceeds 90 days
and who are deemed by our Chief Compliance Officer to have access to nonpublic
investment research, client holdings, or trade information.
All Wellington Management personnel receive a copy of the Code of Ethics (and any amendments) and must certify, upon joining the firm and annually thereafter, that they have read and understood it and have complied with its requirements.
Adherence to the Code of Ethics is a basic condition of employment. Failure to adhere to our Code of Ethics may result in disciplinary action, including termination of employment.
If you have any doubt as to the appropriateness of any activity, believe that you have violated the Code, or become aware of a violation of the Code by another individual, you should consult the Director of Regulatory Compliance, Chief Compliance Officer, General Counsel, or Chair of the Ethics Committee.
General questions regarding our Code of Ethics may be directed to the Code of Ethics Team via email at #Code of Ethics Team or through the Code of Ethics hotline, 617-790-8330 (x68330).
Personal Investing
As fiduciaries, each of us must avoid taking personal advantage of our knowledge
of investment activity in client accounts. Although our Code of Ethics sets out
a number of specific restrictions on personal investing designed to reflect this
principle, no set of rules can anticipate every situation. Each of us must
adhere to the spirit, and not just the letter, of our Code in meeting this
fiduciary obligation to our clients.
Which Types of Investments and Related Activities Are Prohibited?
Our Code of Ethics prohibits the following personal investments and
investment-related activities: o Purchasing or selling the following:
- Initial public offerings (IPOs) of any securities
- Securities of an issuer being bought or sold on behalf of clients until
one trading day after such buying or selling is completed or canceled
- Securities of an issuer that is the subject of a new, changed, or reissued
but unchanged action recommendation from a global industry research or fixed
income credit analyst until two business days following issuance or reissuance
of the recommendation
- Securities of an issuer that is mentioned at the Morning Meeting until two
business daysfollowing the meeting
- Securities that are the subject of a firmwide restriction
- Single-stock futures
- Options with an expiration date that is within 60 calendar days of the
transaction date - HOLDRS (HOLding Company Depositary ReceiptS)
- Securities of broker/dealers (or their affiliates) that the firm has
approved for execution of client trades - Securities of any securities market
or exchange on which the firm trades on behalf of clients
o Taking a profit from any trading activity within a 60 calendar day window (see
box for more detail) o Using a derivative instrument to circumvent a restriction
in the Code of Ethics
Short-Term Trading
You are prohibited from profiting from the purchase and sale (or sale and
purchase) of the same or equivalent securities within 60 calendar days. For
example, if you buy shares of stock (or options on such shares) and then sell
those shares within 60 days at a profit, an exception will be identified and any
gain from the transactions must be surrendered. Gains are calculated based on a
last in, first out (LIFO) method for purposes of this restriction. This
short-term trading rule does not apply to securities exempt from the Code's
preclearance requirements.
Which Investment Accounts Must Be Reported?
You are required to report any investment account over which you exercise
investment discretion or from which any of the following individuals enjoy
economic benefits: (i) your spouse, domestic partner, or minor children, and
(ii) any other dependents living in your household, and that holds or is capable
of holding any of the following covered investments: o Shares of stocks, ADRs,
or other equity securities (including any security convertible into equity
securities) o Bonds or notes (other than sovereign government bonds issued by
Canada, France, Germany, Italy, Japan, the United Kingdom, or the United States,
as well as bankers' acceptances, CDs, commercial paper, and high-quality,
short-term debt instruments) o Interest in a variable annuity product in which
the underlying assets are held in a subaccount managed by Wellington Management
o Shares of exchange-traded funds (ETFs) o Shares of closed-end funds o Options
on securities o Securities futures o Interest in private placement securities
(other than Wellington Management Sponsored Products) o Shares of funds managed
by Wellington Management (other than money market funds)
Please see Appendix A for a detailed summary of reporting requirements by security type.
Web Resource: Wellington-Managed Fund List An up-to-date list of funds managed by Wellington Management is available through the Code of Ethics System under Documents. Please note that any transactions in Wellington-Managed funds must comply with the funds' rules on short-term trading of fund shares.
For purposes of the Code of Ethics, these investment accounts are referred to as reportable accounts. Examples of common account types include brokerage accounts, retirement accounts, employee stock compensation plans, and transfer agent accounts. Reportable accounts also include those from which you or an immediate family member may benefit indirectly, such as a family trust or family partnership, and accounts in which you have a joint ownership interest, such as a joint brokerage account.
Please contact the Code of Ethics Team for guidance if you hold any securities in physical certificate form.
Still Not Sure? Contact Us
If you are not sure if a particular account is required to be reported, contact
the Code of Ethics Team by email at #Code of Ethics Team or through the Code of
Ethics hotline, 617-790-8330 (x68330).
Accounts Not Requiring Reporting
You do not need to report the following accounts via the Code of Ethics System
since the administrator will provide the Code of Ethics Team with access to
relevant holdings and transaction information: o Accounts maintained within the
Wellington Retirement and Pension Plan or similar firm- sponsored retirement or
benefit plans identified by the Ethics Committee o Accounts maintained directly
with Wellington Trust Company or other Wellington Management Sponsored Products
Although these accounts do not need to be reported, your investment activities in these accounts must comply with the standards of conduct embodied in our Code of Ethics.
Managed Account Exemptions
An account from which you or immediate family members could benefit financially,
but over which neither you nor they have any investment discretion or influence
(a managed account), may be exempted from the Code of Ethics' personal investing
requirements upon written request and approval. An example of a managed account
would be a professionally advised account about which you will not be consulted
or have any input on specific transactions placed by the investment manager
prior to their execution. To request a managed account exemption, you must
complete a Managed Account Letter (available online via the Code of Ethics
System) and return it the Code of Ethics Team.
Web Resource: Managed Account Letter
To request a managed account exemption, complete the Managed Account Letter
available through the Code of Ethics System under Documents.
What Are the Reporting Responsibilities for All Personnel?
Initial and Annual Holdings Reports
You must disclose all reportable accounts and all covered investments you hold
within 10 calendar days after you begin employment at or association with
Wellington Management. You will be required to review and update your holdings
and securities account information annually thereafter.
For initial holdings reports, holdings information must be current as of a date no more than 45 days prior to the date you became covered by the Code of Ethics. Please note that you cannot make personal trades until you have filed an initial holdings report via the Code of Ethics System on the Intranet.
For subsequent annual reports, holdings information must be current as of a date no more than 45 days prior to the date the report is submitted. Please note that your annual holdings report must account for both volitional and non-volitional transactions.
At the time you file your initial and annual reports, you will be asked to confirm that you have read and understood the Code of Ethics and any amendments.
Non-volitional transactions include:
o Investments made through automatic dividend reinvestment or rebalancing plans
and stock purchase plan acquisitions o Transactions that result from corporate
actions applicable to all similar security holders (such as splits, tender
offers, mergers, and stock dividends)
Duplicate Statements and Trade Confirmations For each of your reportable accounts, you are required to provide duplicate statements and duplicate trade confirmations to Wellington Management. To arrange for the delivery of duplicate statements and trade confirmations, please contact the Code of Ethics Team for the appropriate form. Return the completed form to the Code of Ethics Team, which will submit it to the brokerage firm on your behalf. If the brokerage firm or other firm from which you currently receive statements is not able to send statements and confirmations directly to Wellington Management, you will be required to submit copies promptly after you receive them, unless you receive an exemption from this requirement under the procedures outlined on page 9.
Web Resource: How to File Reports on the Code of Ethics System Required reports must be filed electronically via the Code of Ethics System. Please see the Code of Ethics System's homepage for more details.
Quarterly Transactions Reports
You must submit a quarterly transaction report no later than 30 calendar days
after quarter-end via the Code of Ethics System on the Intranet, even if you did
not make any personal trades during that quarter. In the reports, you must
either confirm that you did not make any personal trades (except for those
resulting from non-volitional events) or provide information regarding all
volitional transactions in covered investments.
What Are the Preclearance Responsibilities for All Personnel?
Preclearance of Publicly Traded Securities You must receive clearance before buying or selling stocks, bonds, options, and most other publicly traded securities in any reportable account. A full list of the categories of publicly traded securities requiring preclearance, and of certain exceptions to this requirement, is included in Appendix A. Transactions in accounts that are not reportable accounts do not require preclearance or reporting.
Preclearance requests must be submitted online via the Code of Ethics System, which is accessible through the Intranet. If clearance is granted, the approval will be effective for a period of 24 hours. If you preclear a transaction and then place a limit order with your broker, that limit order must either be executed or expire at the end of the 24-hour period. If you want to execute the order after the 24-hour period expires, you must resubmit your preclearance request.
If you have questions regarding the preclearance requirements, please refer to the FAQs available on the Code of Ethics System or contact the Code of Ethics Team.
Please note that preclearance approval does not alter your responsibility to ensure that each personal securities transaction complies with the general standards of conduct, the reporting requirements, the restrictions on short-term trading, or the special rules for investment professionals set out in our Code of Ethics.
Web Resource: How to File a Preclearance Request Preclearance must be obtained using the Code of Ethics System. Once the necessary information is submitted, your preclearance request will be approved or denied within seconds.
Caution on Short Sales, Margin Transactions, and Options You may engage in short sales and margin transactions and may purchase or sell options provided you receive preclearance and meet all other applicable requirements under our Code of Ethics (including the additional rules for investment professionals described on page 8). Please note, however, that these types of transactions can have unintended consequences. For example, any sale by your broker to cover a margin call or a short position will be in violation of the Code unless precleared. Likewise, any volitional sale of securities acquired at the expiration of a long call option will be in violation of the Code unless precleared. You are responsible for ensuring any subsequent volitional actions relating to these types of transactions meet the requirements of the Code.
Preclearance of Private Placement Securities You cannot invest in securities offered to potential investors in a private placement without first obtaining prior approval. Approval may be granted after a review of the facts and circumstances, including whether: o an investment in the securities is likely to result in future conflicts with client accounts (e.g., upon a future public offering), and o you are being offered the opportunity due to your employment at or association with Wellington Management.
If you have questions regarding whether an investment would be deemed a private placement security under the Code, please refer to the FAQs about private placements available on the Code of Ethics System, or contact the Code of Ethics Team.
To request approval, you must submit a Private Placement Approval Form (available online via the Code of Ethics System) to the Code of Ethics Team. Investments in our own privately offered investment vehicles (our Sponsored Products), including collective investment funds and common trust funds maintained by Wellington Trust Company, NA, our hedge funds, and our non-US domiciled funds (Wellington Management Portfolios), have been approved under the Code and therefore do not require the submission of a Private Placement Approval Form.
Web Resource: Private Placement Approval Form To request approval for a private placement, complete the Private Placement Approval Form available through the Code of Ethics System under Documents.
Requests for Exceptions to Preclearance Denial, Other Trading Restrictions, and
Certain Reporting Requirements
The Chief Compliance Officer may grant an exception from preclearance, other
trading restrictions, and certain reporting requirements on a case-by-case basis
if it is determined that the proposed conduct involves no opportunity for abuse
and does not conflict with client interests. Exceptions are expected to be rare.
If you wish to seek an exception to these restrictions, you must submit a
written request to the Code of Ethics Team describing the nature of the
exception and the reason(s) it is being sought.
What Are the Additional Requirements for Investment Professionals?
If you are a portfolio manager, research analyst, or other investment
professional who has portfolio management responsibilities for a client account
(e.g., designated portfolio managers, backup portfolio managers, investment team
members), or who otherwise has direct authority to make decisions to buy or sell
securities in a client account (referred to here as an investment professional),
you are required to adhere to additional rules and restrictions on your personal
securities transactions. However, as no set of rules can anticipate every
situation, you must remember to place our clients' interests first whenever you
transact in securities that are also held in client accounts you manage.
o Investment Professional Blackout Periods - You cannot buy or sell a security
for a period of seven calendar days before or after any transaction in the
same issuer by a client account forwhich you serve as an investment
professional. If you anticipate receiving a cash flow or
redemption request in a client portfolio that will result in the purchase or
sale of securities that you also hold in your personal account, you should
take care to avoid transactions in those securities in your personal account
in the days leading up to the client transactions. However, unanticipated
cash flows and redemptions in client accounts and unexpected market events do
occur from time to time, and a personal trade made in the prior seven days
should never prevent you from buying or selling a security in a client
account if the trade would be in the client's best interest. If you find
yourself in that situation and need to buy or sell a security in a client
account within the seven calendar days following your personal transaction in
a security of the same issuer, you should attempt to notify the Code of
Ethics Team (by email at #Code of Ethics Team or through the Code of Ethics
hotline, 617-790-8330 [x68330]) or your local Compliance Officer in advance
of placing the trade. If you are unable to reach any of those individuals and
the trade is time sensitive, you should proceed with the client trade and
notify the Code of Ethics Team promptly after submitting it.
o Short Sales by an Investment Professional - An investment professional may
not personally
take a short position in a security of an issuer in which he or she holds a
long position in a client account.
Gifts and Entertainment
Our guiding principle of "client, firm, self" also governs the receipt of gifts
and entertainment from clients, consultants, brokers, vendors, companies in
which we may invest, and others with whom the firm does business. As fiduciaries
to our clients, we must always place our clients' interests first and cannot
allow gifts or entertainment opportunities to influence the actions we take on
behalf of our clients. In keeping with this standard, you must follow several
specific requirements:
Accepting Gifts - You may only accept gifts of nominal value, which include promotional items, flower arrangements, gift baskets, and food, as well as other gifts with an approximate value of less than US$100 or the local equivalent. You may not accept a gift of cash, including a cash equivalent such as a gift certificate or a security, regardless of the amount. If you receive a gift that violates the Code, you must return the gift or consult with the Chief Compliance Officer to determine appropriate action under the circumstances.
Accepting Entertainment Opportunities - The firm recognizes that participation in entertainment opportunities with representatives from organizations with which the firm does business, such as consultants, brokers, vendors, and companies in which we may invest, can help to further legitimate business interests. However, participation in such entertainment opportunities should be infrequent, and you may participate only if:
1
a representative of the hosting organization is present,
2
the primary purpose of the event is to discuss business or to build a business
relationship, and
3
the opportunity meets the additional requirements below.
Lodging and Air Travel - You may not accept a gift of lodging or air travel in connection with any entertainment opportunity. If you participate in an entertainment opportunity for which lodging or air travel is paid for by the host, you must reimburse the host for the equivalent cost, as determined by Wellington Management's travel manager.
Additional Reimbursement Requirements - You must receive prior approval from your business manager and reimburse the host for the full face value of any entertainment ticket(s) if: o the entertainment opportunity requires a ticket with a face value of more than US$200 or the local equivalent, or is a high-profile event (e.g., a major sporting event), o you wish to accept more than one ticket, or o the host has invited numerous Wellington Management representatives.
Business managers must clear their own participation under the circumstances described above with the Chief Compliance Officer or Chair of the Ethics Committee.
Please note that even if you pay for the full face value of a ticket, you may attend the event only if the host is present. Whenever possible, you should arrange for any required reimbursement prior to attending an entertainment event.
Soliciting Gifts, Entertainment Opportunities, or Contributions - In your capacity as a partner or employee of the firm, you may not solicit gifts, entertainment opportunities, or charitable or political contributions for yourself, or on behalf of clients, prospects, or others, from brokers, vendors, clients, or consultants with whom the firm conducts business or from companies in which the firm may invest.
Sourcing Entertainment Opportunities - You may not request tickets to entertainment events from the firm's Trading department or any other Wellington Management department, partner, or employee, nor from any broker, vendor, company in which we may invest, or other organization with which the firm conducts business.
Outside Activities
While the firm recognizes that you may engage in business or charitable
activities in your personal time, you must take steps to avoid conflicts of
interest between your private interests and our clients' interests. As a result,
all significant outside business or charitable activities (e.g., directorships
or officerships) must be approved by your business manager and by the Chief
Compliance Officer, General Counsel, or Chair of the Ethics Committee prior to
the acceptance of such a position (or if you are new, upon joining the firm).
Approval will be granted only if it is determined that the activity does not
present a significant conflict of interest. Directorships in public companies
(or companies reasonably expected to become public companies) will generally not
be authorized, while service with charitable organizations generally will be
permitted.
Officers of the firm can only seek additional employment outside of Wellington Management with the prior written approval of the Human Resources department. All new employees are required to disclose any outside employment to the Human Resources department upon joining the firm.
Client Confidentiality
Any nonpublic information concerning our clients that you acquire in connection
with your employment at the firm is confidential. This includes information
regarding actual or contemplated investment decisions, portfolio composition,
research recommendations, and client interests. You should not discuss client
business, including the existence of a client relationship, with outsiders
unless it is a necessary part of your job responsibilities.
How We Enforce Our Code of Ethics
Global Compliance is responsible for monitoring compliance with the Code of
Ethics. Members of Global Compliance will periodically request certifications
and review holdings and transaction reports for potential violations. They may
also request additional information or reports.
It is our collective responsibility to uphold the Code of Ethics. In addition to the formal reporting requirements described in this Code of Ethics, you have a responsibility to report any violations of the Code. If you have any doubt as to the appropriateness of any activity, believe that you have violated the Code, or become aware of a violation of the Code by another individual, you should consult the Director of Regulatory Compliance, Chief Compliance Officer, General Counsel, or Chair of the Ethics Committee.
Potential violations of the Code of Ethics will be investigated and considered by representatives of Global Compliance, Legal Services, and/or the Ethics Committee. All violations of the Code of Ethics will be reported to the Chief Compliance Officer. Violations are taken seriously and may result in sanctions or other consequences, including: o a warning o referral to your business manager, senior management, and/or the Managing Partners o reversal of a trade or the return of a gift o disgorgement of profits or of the value of a gift o a limitation or restriction on personal investing o a fine o termination of employment o referral to civil or criminal authorities
If you become aware of any potential conflicts of interest that you believe are not addressed by our Code of Ethics or other policies, please contact the Chief Compliance Officer, the General Counsel, or the Director of Regulatory Compliance.
Closing
As a firm, we seek excellence in the people we employ, the products and services
we offer, the way we meet our ethical and fiduciary responsibilities, and the
working environment we create for ourselves. Our Code of Ethics embodies that
commitment. Accordingly, each of us must take care that our actions fully meet
the high standards of conduct and professional behavior we have adopted. Most
importantly, we must all remember "client, firm, self" is our most fundamental
guiding principle.
Appendix A - Part 1
No Preclearance or Reporting Required:
o Open-end investment funds not managed by Wellington Management(1)
o Interests in a variable annuity product in which the underlying assets are
held in a fund not managed by Wellington Management
o Direct obligations of the US government (including obligations issued by GNMA
and PEFCO) or the governments of Canada, France, Germany, Italy, Japan, or the
United Kingdom o Cash o Money market instruments or other short-term debt
instruments rated P-1 or P-2, A-1 or A-2, or their equivalents(2) o Bankers'
acceptances, CDs, commercial paper o Wellington Trust Company Pools o Wellington
Sponsored Hedge Funds o Securities futures and options on direct obligations of
the US government or the governments of Canada, France, Germany, Italy, Japan,
or the United Kingdom, and associated derivatives o Options, forwards, and
futures on commodities and foreign exchanges, and associated derivatives o
Transactions in approved managed accounts
Reporting of Securities Transactions Required (no need to preclear and not
subject to the 60-day holding period): o Open-end investment funds managed by
Wellington Management(1) (other than money market funds) o Interests in a
variable annuity or insurance product in which the underlying assets are held in
a fund managed by Wellington Management o Futures and options on securities
indices o ETFs listed in Appendix A - Part 2 and derivatives on these securities
o Gifts of securities to you or a reportable account o Gifts of securities from
you or a reportable account o Non-volitional transactions (splits, tender
offers, mergers, stock dividends, dividend reinvestments, etc.)
Preclearance and Reporting of Securities Transactions Required:
o Bonds and notes (other than direct obligations of the US government or the
governments of Canada, France, Germany, Italy, Japan, or the United Kingdom, as
well as bankers' acceptances, CDs, commercial paper, and high-quality,
short-term debt instruments) o Stock (common and preferred) or other equity
securities, including any security convertible into equity securities o
Closed-end funds o ETFs not listed in Appendix A - Part 2 o American Depositary
Receipts o Options on securities (but not their non-volitional exercise or
expiration) o Warrants o Rights o Unit investment trusts
Prohibited Investments and Activities: o Initial public offerings (IPOs) of any securities o HOLDRS (HOLding Company Depositary ReceiptS) o Single-stock futures(1) o Options expiring within 60 days of purchase o Securities being bought or sold on behalf of clients until one trading day after such buying or selling is completed or canceled o Securities of an issuer that is the subject of a new, changed, or reissued but unchanged action recommendation from a global industry research or fixed income credit analyst until two business days following issuance or reissuance of the recommendation o Securities of an issuer that is mentioned at the Morning Meeting until two business days following the meeting o Securities on the firmwide restricted list o Profiting from any short-term (i.e., within 60 days) trading activity o Securities of broker/dealers or their affiliates with which the firm conducts business o Securities of any securities market or exchange on which the firm trades o Using a derivative instrument to circumvent the requirements of the Code of Ethics
Appendix A - Part 2
ETFs Approved for Personal Trading Without Preclearance
(but Requiring Reporting)
This is a partial list. The complete and up-to-date list is available on the
Code of Ethics System on the Intranet.
Ticker Name United States AGG iShares Lehman AGG BOND FUND BND Vanguard TOTAL BOND MARKET COW iPath DJ-AIG Livestock TR Sub-Index DBA Powershares DB Agriculture Fund DBB Powershares DB Base Metals Fund DBC Powershares DB Commodity Index DBE Powershares DB Energy Fund DBO Powershares DB Oil Fund DBP Powershares DB Precious Metals Fund DBV Powershares DB G10 Currency Harvest Fund DIA DIAMONDS Trust SERIES I DVY iShares DJ Select Dividend EEB Claymore/BNY BRIC ETF EEM iShares MSCI EMERGING MKT IN EFA iShares MSCI EAFE INDEX FUND EFG iShares MSCI EAFE GROWTH INX EFV iShares MSCI EAFE VALUE INX EPP iShares MSCI PACIFIC EX JPN EWA iShares MSCI AUSTRALIA INDEX EWC iShares MSCI CANADA EWG iShares MSCI GERMANY INDEX EWH iShares MSCI HONG KONG INDEX EWJ iShares MSCI JAPAN INDEX FD EWM iShares MSCI MALAYSIA EWS iShares MSCI SINGAPORE EWT iShares MSCI TAIWAN INDEX FD EWU iShares MSCI UNITED KINGDOM EWY iShares MSCI SOUTH KOREA IND EZU iShares MSCI EMU FXA Australian Dollar FXB British Pound FXC Canadian Dollar FXE Euro FXF Swiss Franc FXI iShares FTSE/XINHUA CHINA 25 FXM Mexican Peso FXS Swedish Krona FXY Japanese Yen GAZ iPath DJ-AIG Natural Gas TR Sub-Index GDX Market Vectors GOLD MINERS GLD StreetTRACKS Gold Fund IBB iShares NASDAQ BIOTECH INDX ICF iShares COHEN & STEERS RLTY IEF iShares Lehman 7-10YR TREAS IEV iShares S&P EUROPE 350 IGE iShares GOLDMAN SACHS NAT RE IJH iShares S&P Midcap 400 IJJ iShares S&P Midcap 400/VALUE IJK iShares S&P Midcap 400/GRWTH IJR iShares S&P SmallCap 600 IJS iShares S&P SmallCap 600/VAL IJT iShares S&P SmallCap 600/GRO IOO iShares S&P GLOBAL 100 IVE iShares S&P 500 VALUE INDEX IVV iShares S&P 500 INDEX FUND IVW iShares S&P 500 GROWTH INDEX IWB iShares Russell 1000 INDEX IWD iShares Russell 1000 VALUE IWF iShares Russell 1000 GROWTH IWM iShares Russell 2000 IWN iShares Russell 2000 VALUE IWO iShares Russell 2000 GROWTH IWP iShares Russell Midcap GRWTH IWR iShares Russell Midcap INDEX IWS iShares Russell Midcap VALUE IWV iShares Russell 3000 INDEX IXC iShares S&P GLBL ENERGY SECT IYR iShares DJ US REAL ESTATE IYW iShares DJ US TECHNOLOGY SEC JJA iPath DJ-AIG Agriculture TR Sub-Index JJC iPath DJ-AIG Copper TR Sub-Index JJE iPath DJ-AIG Energy TR Sub-Index JJG iPath DJ-AIG Grains TR Sub-Index JJM iPath DJ-AIG Industrial Metals TR Sub-Index JJN iPath DJ-AIG Nickel TR Sub-Index LQD iShares GS$ INVESTOP CORP BD MDY Midcap SPDR Trust SERIES 1 MOO MARKET VECTORS AGRIBUSINESS OEF iShares S&P 100 INDEX FUND PBW PowerSharesWILDERH CLEAN EN PHO PowerSharesGLOBAL WATER PT QID UltraShort QQQ ProShares QLD Ultra QQQ ProShares QQQQ POWERSHARES QQQ RSP Rydex S&P EQUAL WEIGHT ETF RSX Market Vectors RUSSIA ETF RWR DJ Wilshire REIT ETF RWX SPDR DJ WILS INTL RE SDS UltraShort S&P500 ProShares SHY iShares Lehman 1-3YR TRS BD SKF UltraShort FINANCIALS ProShares SLV iShares Silver Trust SPY SPDR Trust SERIES 1 SSO Ultra S&P500 ProShares TIP iShares Lehman TRES INF PR S TLT iShares Lehman 20+ YR TREAS TBT UltraShort Lehman 20+ Year Treasury ProShares TWM UltraShort Russell2000 ProShares UDN Powershares DB US Dollar Bearish Fund UGA United States Gasoline Fund UHN United States Heating Oil Fund UNG United States Natural Gas Fund USO United States Oil Fund UUP Powershares DB US Dollar Bullish Fund UWM Ultra Russell2000 ProShares UYG Ultra FINANCIALS ProShares VB Vanguard SMALL-CAP ETF VBK Vanguard SMALL-CAP GRWTH ETF VBR Vanguard SMALL-CAP VALUE ETF VEA Vanguard EUROPE PACIFIC ETF VEU Vanguard FTSE ALL-WORLD EX-U VGK Vanguard EUROPEAN ETF VNQ Vanguard REIT ETF VO Vanguard MID-CAP ETF VPL Vanguard PACIFIC ETF VTI Vanguard TOTAL STOCK MKT ETF VTV Vanguard VALUE ETF VUG Vanguard GROWTH ETF VV Vanguard LARGE-CAP ETF VWO Vanguard EMERGING MARKET ETF XLB MATERIALS Select SECTOR SPDR XLE ENERGY Select SECTOR SPDR XLF FINANCIAL Select SECTOR SPDR XLI INDUSTRIAL Select SECT SPDR XLK TECHNOLOGY Select SECT SPDR XLP CONSUMER STAPLES SPDR XLU UTILITIES Select SECTOR SPDR XLV HEALTH CARE Select SECTOR XLY CONSUMER DISCRETIONARY Select SPDR England EUN LN iShares DJ STOXX 50 IEEM LN iShares MSCI EMERGING MKTS IJPN LN iShares MSCI JAPAN FUND ISF LN iShares PLC-ISHARES FTSE 100 IUSA LN iShares S&P 500 INDEX FUND IWRD LN iShares MSCI WORLD Hong Kong 2800 HK TRACKER FUND OF HONG KONG 2821 HK ABF PAN ASIA BOND INDEX FUND 2823 HK iShares A50 CHINA TRACKER 2828 HK HANG SENG H-SHARE IDX ETF 2833 HK HANG SENG INDEX ETF Japan 1305 JP DAIWA ETF - TOPIX 1306 JP NOMURA ETF - TOPIX 1308 JP NIKKO ETF - TOPIX 1320 JP DAIWA ETF - NIKKEI 225 1321 JP NOMURA ETF - NIKKEI 225 1330 JP NIKKO ETF - 225 |
This appendix is current as of October 1, 2008, and may be amended at the
discretion of the Ethics Committee.
(1) A list of funds advised or subadvised by Wellington Management
("Wellington-Managed Funds") is available online via the Code of Ethics System.
However, you remain responsible for confirming whether any particular investment
represents a Wellington-Managed Fund. (2) If the instrument is unrated, it must
be of equivalent duration and comparable quality.
This appendix is current as of October 1, 2008, and may be amended at the discretion of the Ethics Committee.