<PAGE> PAGE 1
000 B000000 10/31/1999
000 C000000 0000107606
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000 I000000 6.1
000 J000000 U
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007 C010500 5
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010 B00AA01 801-11953
010 C01AA01 MALVERN
010 C02AA01 PA
010 C03AA01 19355
012 A00AA01 THE VANGUARD GROUP, INC.
012 B00AA01 84-772
012 C01AA01 MALVERN
012 C02AA01 PA
012 C03AA01 19355
013 A00AA01 PRICEWATERHOUSECOOPERS LLP
013 B01AA01 PHILADELPHIA
013 B02AA01 PA
013 B03AA01 19103
015 A00AA01 STATE STREET BANK AND TRUST COMPANY
<PAGE> PAGE 2
015 B00AA01 C
015 C01AA01 BOSTON
015 C02AA01 MA
015 C03AA01 02110
015 E01AA01 X
018 00AA00 Y
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019 B00AA00 103
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020 A000001 FRANK RUSSELL SECURITIES, INC.
020 B000001 91-0604934
020 C000001 7340
020 A000002 GOLDMAN SACHS & CO.
020 B000002 13-5108880
020 C000002 2911
020 A000003 SALOMON SMITH BARNEY HOLDINGS INC.
020 B000003 11-2418191
020 C000003 2031
020 A000004 LEHMAN BROTHERS INC.
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020 C000004 1892
020 A000005 DONALDSON,LUFKIN & JENRETTE SECURITIES CORP.
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020 C000005 1756
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020 C000009 1360
020 A000010 INVESTMENT TECHNOLOGY GROUP, INC.
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020 C000010 1015
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<PAGE> PAGE 3
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<PAGE> PAGE 4
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<PAGE> PAGE 5
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<PAGE> PAGE 6
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<PAGE> PAGE 10
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<PAGE> PAGE 11
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SIGNATURE SUSAN A. TRONEL
TITLE MANAGER
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To the Shareholders and
Trustees of Vanguard Windsor Funds
In planning and performing our audit of the financial statements of
Vanguard Windsor Funds (the "Fund") for the year ended October 31,
1999, we considered its internal control, including control activities for
safeguarding securities, in order to determine our auditing procedures for
the purpose of expressing our opinion on the financial statements and to
comply with the requirements of Form N-SAR, not to provide assurance
on internal control.
The management of the Fund is responsible for establishing and
maintaining internal control. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and
related costs of controls. Generally, controls that are relevant to an audit
pertain to the entity's objective of preparing financial statements for
external purposes that are fairly presented in conformity with generally
accepted accounting principles. Those controls include the safeguarding
of assets against unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or fraud may
occur and not be detected. Also, projection of any evaluation of internal
control to future periods is subject to the risk that it may become
inadequate because of changes in conditions or that the effectiveness of the
design and operation may deteriorate.
Our consideration of internal control would not necessarily disclose all
matters in internal control that might be material weaknesses under
standards established by the American Institute of Certified Public
Accountants. A material weakness is a condition in which the design or
operation of one or more of the internal control components does not
reduce to a relatively low level the risk that misstatements caused by error
or fraud in amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a timely
period by employees in the normal course of performing their assigned
functions. However, we noted no matters involving internal control and its
operation, including controls for safeguarding securities, that we consider
to be material weaknesses as defined above as of October 31, 1999.
This report is intended solely for the information and use of management
and the Board of Trustees of the Fund and the Securities and Exchange
Commission and is not intended to be and should not be used by anyone
other than these specified parties.
November 30, 1999
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made as of this __ day of _____, 1999,
between VANGUARD WINDSOR FUNDS, a Delaware
business trust (the "Company"),
and Sanford C. Bernstein & Co., Inc., a New York
corporation ("Adviser").
WHEREAS, the Company is an open-end, diversified
management investment company registered under the
Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Company offers a series of shares known as
Vanguard Windsor Fund (the "Fund"); and
WHEREAS, the Company desires to retain Adviser to
render investment advisory services to certain assets of the
Fund which the Board of Trustees of the Company
determines to assign to Adviser (referred to in this
Agreement as the "Bernstein Portfolio"), and Adviser is
willing to render such services;
NOW, THEREFORE, this Agreement
W I T N E S S E T H
that in consideration of the premises and mutual promises
hereinafter set forth, the parties hereto agree as follows:
1. Appointment of Adviser. The Company hereby
employs Adviser as investment adviser, on the terms and
conditions set forth herein, for the assets of the Fund which
the Board of Trustees determines to assign to Adviser. The
Board of Trustees may, from time to time, make additions
to, and withdrawals from, the assets of the Fund assigned to
Adviser. Adviser accepts such employment and agrees to
render the services herein set forth, for the compensation
herein provided.
2. Duties of Adviser. The Company employs Adviser
to manage the investment and reinvestment of the assets of
the Bernstein Portfolio, to continuously review, supervise
and administer an investment program for such assets of the
Fund, to determine in its discretion the securities to be
purchased or sold and the portion of such assets to be held
uninvested, to provide the Fund with all records concerning
the activities of Adviser that the Fund is required to
maintain, and to render regular reports to the Fund's officers
and Board of Trustees concerning the discharge of the
foregoing responsibilities. Adviser will discharge the
foregoing responsibilities subject to the control of the
officers and the Board of Trustees of the Company, and in
compliance with the objectives, policies and limitations set
forth in the Fund's prospectus and applicable laws and
regulations. Adviser agrees to provide, at its own expense,
the office space, furnishings and equipment and the
personnel required by it to perform the services on the terms
and for the compensation provided herein.
3. Securities Transactions. Adviser is authorized to
select the brokers or dealers that will execute the purchases
and sales of securities for the Bernstein Portfolio, and is
directed to use its best efforts to obtain the best available
price and most favorable execution, except as prescribed
herein. Subject to policies established by the Board of
Trustees of the Company, Adviser may also be authorized to
effect individual securities transactions at commission rates
in excess of the minimum commission rates available, if
Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the
brokerage or research services provided by such broker or
dealer, viewed in terms of either that particular transaction
or overall responsibilities of Adviser with respect to its
portion of the Fund. The execution of such transactions will
not be deemed to represent an unlawful act or breach of any
duty created by this Agreement or otherwise. Adviser will
promptly communicate to the officers and Trustees of the
Company such information relating to portfolio transactions
as they may reasonably request.
4. Compensation of Adviser. For the services to be
rendered by Adviser as provided in this Agreement, the
Fund will pay to Adviser at the end of each of the Fund's
fiscal quarters, a Basic Fee calculated by applying a
quarterly rate, based on the following annual percentage
rates, to the average month-end net assets of the Bernstein
Portfolio for the quarter:
.15% on the first $1 billion of net
assets;
.14% on the next $2 billion of net
assets;
.12% on the next $2 billion of net
assets;
.10% on net assets in excess of $5
billion.
Subject to the transition rule described in Section 4.1 of this
Agreement, the Basic Fee, as provided above, will be
increased or decreased by the amount of a Performance Fee
Adjustment ("Adjustment"). The Adjustment will
calculated as a percentage of the Basic Fee and will change
proportionately with the investment performance of the
Fund relative to the investment performance of the Russell
1000 Value Index (the "Index") for the thirty-six month
period ending with the applicable quarter. The Adjustment
apply as follows:
Cumulative 36-Month
Performance of Bernstein Portfolio
Performance Fee Adjustment
Versus the Index as a
Percentage of Basic Fee*
Trails by more than 9% -
50%
Trails by 0 to 9%
Linear decrease from 0 to -50%
Exceeds by 0 to 9%
Linear increase from 0 to +50%
Exceeds by more than 9%
+50%
___________________________
*The Adjustment represents a percentage increase or
decrease to the Basic Fee payable to the Adviser for the
quarter.
4.1. Transition Rule for Calculating Adviser's
Compensation. The Performance Fee Adjustment will not
be fully operable until June 1, 2002. Until that time, the
following transition rules will apply:
(a) June 1, 1999 through May 31, 2000. The Adviser's
compensation will be the Basic Fee. No Performance Fee
Adjustment will apply during this period.
(b) June 1, 2000 through May 31, 2002. Beginning June
1, 2000, the Performance Fee Adjustment will take effect on
a progressive basis with regards to the number of months
elapsed between June, 1999 and the quarter for which the
Adviser's fee is being computed. During this period, the
Performance Fee Adjustment that has been determined
under Section will be multiplied by a fraction. The fraction
will equal the number of months elapsed since June 1, 1999
divided by thirty-six.
(c) On and After June 1, 2002. Beginning June 1, 2002,
the Performance Fee Adjustment will be fully operable.
4.2. Other Special Rules Relating to Adviser's
Compensation. The following special rules will also apply
to the Adviser's compensation:
(a) Bernstein Portfolio Performance. The investment
performance of the Bernstein Portfolio for any period,
expressed as a percentage of the "Bernstein Portfolio unit
value" at the beginning of such period, will be the sum of:
(i) the change in the Bernstein Portfolio unit value during
such period; (ii) the unit value of the Fund's cash
distributions from the Bernstein Portfolio's net investment
income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within
such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by the Fund for
undistributed realized long-term capital gains realized from
the Bernstein Portfolio. For this purpose, the unit value of
distributions per share of realized capital gains, of dividends
per share paid from investment income and of capital gains
taxes per share reinvested in the Bernstein Portfolio at the
unit value in effect at the close of business on the record
date for the payment of such distributions and dividends and
the date on which provision is made for such taxes, after
giving effect to such distributions, dividends and taxes.
(b) "Bernstein Portfolio Unit Value." The "Bernstein
Portfolio unit value" will be determined by dividing the total
net assets of the Bernstein Portfolio by a given number of
units. The number of units in the Bernstein Portfolio
initially will equal to the total shares outstanding of the
Fund on June 1, 1999. Subsequently, as assets are added to
or withdrawn from the Bernstein Portfolio, the number of
units of the Bernstein Portfolio will be adjusted based on the
unit value of the Bernstein Portfolio on the day such changes
are executed.
(c) Index Performance. The investment record of the
Index for any period, expressed as a percentage of the Index
at the beginning of such period, will be the sum of: (i) the
change in the level of the Index during such period, and (ii)
the value, computed consistently with the Index of cash
distributions having an ex-dividend date occurring within
such period made by companies whose securities comprise
the Index. For this purpose, cash distributions on the
securities which comprise the Index will be treated as
reinvested in the Index at least as frequently as the end of
each calendar quarter following the payment of the dividend.
(d) Effect of Termination. In the event of termination of
this Agreement, the fees provided in Sections 4 and 4.1 will
be computed on the basis of the period ending on the last
business day on which this Agreement is in effect, subject to
a pro rata adjustment based on the number of days elapsed in
the current fiscal quarter as a percentage of the total number
of days in such quarter.
5. Reports. The Company and Adviser agree to
furnish to each other with current prospectuses, proxy
statements, reports to shareholders, certified copies of their
financial statements, and such other information with regard
to their affairs as each may reasonably request.
6. Status of Adviser. The services of Adviser to the
Fund are not to be deemed exclusive, and Adviser will be
free to render similar services to others so long as its
services to the Fund are not impaired thereby. Adviser will
be deemed to be an independent contractor and will, unless
otherwise expressly provided or authorized, have no
authority to act for or represent the Company or the Fund in
any way or otherwise be deemed an agent of the Company
or the Fund.
7. Liability of Adviser. No provision of this
Agreement will be deemed to protect Adviser against any
liability to the Company, the Fund or their shareholders to
which it might otherwise be subject by reason of any willful
misfeasance, bad faith or gross negligence in the
performance of its duties or the reckless disregard of its
obligations under this Agreement.
8. Duration and Termination. This Agreement will
become effective on June 1, 1999, and will continue in
effect until May 31, 2001, and thereafter, only so long as
such continuance is approved at least annually by votes of
the Company's Board of Trustees who are not parties to
such Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on
such approval. In addition, the question of continuance of
the Agreement may be presented to the shareholders of the
Fund; in such event, such continuance will be effected only
if approved by the affirmative vote of a majority of the
outstanding voting securities of the Fund.
Provided, however, that (i) this Agreement may at any time
be terminated without payment of any penalty either by vote
of the Board of Trustees of the Company or by vote of a
majority of the outstanding voting securities of the Fund, on
sixty days' written notice to Adviser, (ii) this Agreement
will automatically terminate in the event of its assignment,
and (iii) this Agreement may be terminated by Adviser on
ninety days' written notice to the Company. Any notice
under this Agreement will be given in writing, addressed
and delivered, or mailed postpaid, to the other party at any
office of such party.
As used in this Section 8, the terms "assignment,"
"interested persons," a "vote of a majority of the outstanding
voting securities" will have the respective meanings set forth
in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of
the Investment Company Act of 1940.
9. Severability. If any provision of this Agreement
will be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement will not be
affected thereby.
10. Proxy Policy. With regard to the solicitation of
shareholder votes, the Fund will vote the shares of all
securities held by the Fund.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed this ___ day of _______,
1999.
ATTEST: VANGUARD WINDSOR FUNDS
By _________________ By _________________
Secretary Chairman, CEO and
President
ATTEST: SANFORD C. BERNSTEIN & CO., INC.
By ____________________ By_____________
7
26340-1 3/29/1999
