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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-29601) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 53
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 54
VANGUARD MORGAN GROWTH 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
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 21, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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VANGUARD
MORGAN(TM) GROWTH
FUND
Prospectus
April 21, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
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VANGUARD(R) MORGAN(TM) GROWTH FUND
Prospectus
April 21, 2000
A Growth Stock Mutual Fund
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CONTENTS
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1 FUND PROFILE
3 ADDITIONAL INFORMATION 15 INVESTING WITH VANGUARD
3 A WORD ABOUT RISK 15 Services and Account Features
3 WHO SHOULD INVEST 16 Types of Accounts
4 PRIMARY INVESTMENT STRATEGIES 17 Buying Shares
9 THE FUND AND VANGUARD 19 Redeeming Shares
9 INVESTMENT ADVISERS 23 Transferring Registration
10 DIVIDENDS, CAPITAL GAINS, AND TAXES 23 Fund and Account Updates
12 SHARE PRICE GLOSSARY (inside back cover)
13 FINANCIAL HIGHLIGHTS
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Morgan Growth 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 to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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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.
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1
FUND PROFILE
The following profile summarizes key features of Vanguard Morgan Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests primarily in the stocks of large- and medium-size domestic
companies whose revenues and/or earnings are expected to grow faster than those
of the average company in the market. The Fund also invests in stocks of smaller
companies with similar characteristics.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- or
mid-capitalization growth stocks will trail returns from other asset
classes or the overall stock market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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1990 -1.51%
1991 29.33%
1992 9.54%
1993 7.32%
1994 -1.67%
1995 35.98%
1996 23.30%
1997 30.81%
1998 22.26%
1999 34.10%
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During the period shown in the bar chart, the highest return for a calendar
quarter was 25.88% (quarter ended December 31, 1998) and the lowest return for a
quarter was -16.41% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Morgan Growth Fund 34.10% 29.17% 18.14%
S&P 500 Index 21.04 28.56 18.21
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2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31,1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.40%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.42%
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Morgan Growth Fund's expense ratio in fiscal year 1999 was
0.42%, or $4.20 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1999 of 1.53%, or $15.30 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
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The following example is intended to help you compare the cost of investing
in the Fund 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. This example assumes that the Fund provides 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 each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$43 $135 $235 $530
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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.
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3
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF DECEMBER 31, 1999
Distributed annually in December $5.1 billion
INVESTMENT ADVISERS SUITABLE FOR IRAS
Vanguard Morgan Growth Fund uses Yes
three advisers:
MINIMUM INITIAL INVESTMENT
- - Wellington Management Company, $3,000; $1,000 for IRAs and custodial
LLP, Boston, Mass., since accounts for minors
inception
- - Franklin Portfolio Associates, NEWSPAPER ABBREVIATION
LLC, Boston, Mass., since 1990 Morg
- - The Vanguard Group Inc., Valley
Forge, Pa., since 1993 VANGUARD FUND NUMBER
026
INCEPTION DATE CUSIP NUMBER
December 31, 1968 921928107
TICKER SYMBOL
VMRGX
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard Morgan
Growth Fund. 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 the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for current income.
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4
- - You are seeking a fund that invests in growth companies representing a wide
variety of industries.
- - You characterize your investment temperament as "relatively aggressive."
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges that shareholders may make.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund, and may change the investment strategies in the interest of
shareholders.
MARKET EXPOSURE
The Fund is a growth fund that invests mainly in large- and mid-capitalization
domestic common stocks. The Fund also includes stocks of smaller companies that
may not have a long history of growth but are found attractive by one of the
Fund's advisers. Stocks are primarily chosen on the basis of the advisers'
expectations that revenues and/or earnings will grow faster than average. The
Fund may also invest in securities that are convertible to common stocks.
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5
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. 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 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. Note, also, that the gap between best and worst tends to narrow
over the long term.
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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
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Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
Growth stocks, which are the Fund's primary investments, are likely to be
even more volatile in price than the stock market as a whole. Historically,
growth funds have tended to outperform in bull markets and underperform in
declining markets. Of course, there is no guarantee that this pattern will
continue in the future. The Fund also holds a significant number of mid-cap
stocks, which tend to be more volatile than the large-cap stocks that dominate
the S&P 500 Index.
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6
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM LARGE-OR MID-CAPITALIZATION GROWTH STOCKS WILL TRAIL RETURNS
FROM THE OVERALL STOCK MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION
GROWTH STOCKS EACH TEND TO GO THROUGH CYCLES OF DOING BETTER--OR
WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
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PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, the prices of such stocks are
typically above-average in relation to such measures as revenue, earnings, book
value, and dividends. Value funds generally emphasize stocks of companies from
which the market does not expect strong growth. The prices of value stocks
typically are below-average in comparison to such factors as earnings and book
value, and these stocks typically pay above-average dividend yields. Growth and
value stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hopes of a greater
increase in share price. Growth funds also may appeal to investors with taxable
accounts who want a higher proportion of returns to come as capital gains
(which may be taxed at lower rates than dividend income). Value funds, by
contrast, are appropriate for investors who want some dividend income and the
potential for capital gains, but are less tolerant of share-price fluctuations.
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SECURITY SELECTION
Vanguard Morgan Growth Fund has three investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The three investment advisers employ active investment management methods,
which means that securities are bought and sold according to the advisers'
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
Wellington Management Company, LLP (Wellington Management), which is
currently responsible for about 42% of the Fund's assets, uses traditional
methods of stock selection-research and analysis-to identify companies that it
believes have above-average growth prospects, particularly those in industries
undergoing change. Research is focused on companies with a proven record of
sales and earnings growth, profitability, and cash flow generation. Securities
are sold when an investment has achieved its intended purpose, or because it is
no longer considered attractive.
The other two advisers, Franklin Portfolio Associates, LLC and The Vanguard
Group (Vanguard), employ a "quantitative" investment approach. In other words,
they use computerized models for portfolio construction and stock selection to
outperform, if possible, a specific market standard. For Vanguard Morgan Growth
Fund, this market standard is the Growth Fund Stock Index, which is made up of
the stocks held by the nation's 50 largest growth funds.
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7
Franklin Portfolio Associates' investment strategy focuses on stock
selection and fund structure. The stock selection process is driven by a series
of more than 40 computer models that value a universe of 3,500 stocks. These
models cover a broad range of publicly available data and focus on four areas:
fundamental momentum (based on the trends of reported and forecasted earnings),
relative value, future cash flow, and economic cycles. The individual models
rank each security in the universe. Using these rankings, a separate program
builds a fund consistent with the Growth Fund Stock Index's characteristics.
Franklin Portfolio Associates currently manages about 39% of the Fund's assets.
Vanguard ranks a universe of approximately 2,000 stocks using a variety of
computer models. These models focus on investment characteristics such as
earnings, fundamental momentum, share price momentum, relative value, and cash
flow. A separate program then selects the stocks for the Fund, consistent with
the Growth Fund Stock Index's characteristics, from among the stocks rated
highly by the investment models. Vanguard currently manages about 14% of the
Fund's assets.
The balance of Vanguard Morgan Growth Fund's assets (about 4%) is held in
cash reserves, also managed by Vanguard, which may invest in stock futures to
give the cash reserves the performance of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while retaining
cash on hand to meet liquidity needs.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT ONE OR MORE
OF THE FUND'S ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 74.2%.
(A turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
income subject to taxes. As of December 31, 1999, the average turnover rate for
all growth stock funds was approximately 99%, according to Morningstar, Inc.
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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund reserves the
right to invest up to 20% of its assets in foreign securities. These securities
may be traded in U.S. or foreign
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8
markets. To the extent that it owns foreign stocks, the Fund is subject to: (1)
country risk, which is the chance that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money, and (2) currency risk, which is the chance that Americans
investing abroad could lose money because of a rise in the value of the U.S.
dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some
futures and options have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as
leveraged investments, derivatives can carry considerable risks.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $540 billion.
All of the Vanguard funds share in the expenses associated with 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
pays its allocated share of The Vanguard Group's marketing costs.
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9
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
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INVESTMENT ADVISERS
The Fund employs three investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Trustees and officers of the Fund.
WELLINGTON MANAGEMENT COMPANY, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, and its predecessors have provided investment advisory
services since 1928. The firm currently manages more than $235 billion in stock
and bond portfolios, including 15 Vanguard funds.
Wellington Management's advisory fee is paid quarterly. This fee is based
on certain annual percentages applied to the Fund's average month-end assets
managed by Wellington Management. The advisory fee may be adjusted based on the
36-month cumulative total return performance of Wellington Management's portion
of the Fund as compared to the cumulative total return of the Growth Fund Stock
Index.
FRANKLIN PORTFOLIO ASSOCIATES, LLC, Two International Place, Boston, MA
02110, is a professional advisory firm founded in 1982. Franklin Portfolio
Associates is a wholly owned, indirect subsidiary of Mellon Bank, and has no
affiliation with the Franklin/Templeton Group of Funds or Franklin Resources,
Inc. Franklin Portfolio Associates currently manages approximately $21.4 billion
in assets, including $. billion in Vanguard funds.
Franklin Portfolio Associates' advisory fee is paid quarterly. This fee is
based on the average month-end assets managed by Franklin Portfolio Associates.
The advisory fee may be adjusted based on the 36-month cumulative total return
performance of Franklin Portfolio Associates' portion of the Fund as compared to
the cumulative total return of the Growth Fund Stock Index.
THE VANGUARD GROUP, (Vanguard) P.O. Box 2600, Valley Forge, PA 19482,
founded in 1975, is a wholly-owned subsidiary of the Vanguard funds. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. The Fund receives advisory services from Vanguard on an at cost basis.
The Fund's most recent Statement of Additional Information provides
complete details of how Wellington Management and Franklin Portfolio Associates
are compensated. For the year ended December 31, 1999, the aggregate investment
advisory fee represented an effective annual basic rate of 0.11% of average net
assets of the Fund before an increase of less than 0.01% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are
<PAGE>
10
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Morgan Growth Fund are:
ROBERT D. RANDS, CFA, Senior Vice President of Wellington Management Company,
LLP; has worked in investment management since 1966, with Wellington Management
since 1978; adviser to the Fund since 1994; B.A., Yale University; M.B.A.,
University of Pennsylvania.
JOHN J. NAGORNIAK, CFA, President of Franklin Portfolio Associates, LLC; has
worked in investment management since 1970, with Franklin Portfolio Associates
since 1982; adviser to the Fund since 1990; B.A., Princeton University;
M.S., The Sloan School of Management, Massachusetts Institute of Technology.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985: primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
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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 capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income dividends 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, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes 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 for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
<PAGE>
11
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, 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 federal income tax return.
- - 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 31% 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 from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. 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 adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
- --------------------------------------------------------------------------------
<PAGE>
12
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds". Different newspapers
use different abbreviations of the Fund's name, but the most common is MORG.
<PAGE>
13
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund 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 Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $19.72 $17.54 $15.63 $14.09 $11.36
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .18 .160 .14 .15
Net Realized and
Unrealized Gain (Loss)
on Investments 6.29 3.61 4.435 3.07 3.89
-------------------------------------------------------
Total from Investment
Operations 6.43 3.79 4.595 3.21 4.04
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.15) (.18) (.160) (.14) (.15)
Distributions from
Realized Capital Gains (3.08) (1.43) (2.525) (1.53) (1.16)
-------------------------------------------------------
Total Distributions (3.23) (1.61) (2.685) (1.67) (1.31)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $22.92 $19.72 $17.54 $15.63 $14.09
================================================================================
TOTAL RETURN 34.10% 22.26% 30.81% 23.30% 35.98%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $5,066 $3,555 $2,795 $2,054 $1,471
Ratio of Total
Expenses to Average
Net Assets 0.42% 0.44% 0.48% 0.51% 0.49%
Ratio of Net
Investment Income to
Average Net Assets 0.71% 0.96% 0.93% 0.97% 1.10%
Turnover Rate 65% 81% 76% 73% 76%
================================================================================
<PAGE>
14
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $19.72 per share.
During the year, the Fund earned $0.14 per share from investment income
(interest and dividends) and $6.29 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $3.23 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 earnings ($6.43 per share) minus the distributions ($3.23 per share)
resulted in a share price of $22.92 at the end of the year. This was an
increase of $3.20 per share (from $19.72 at the beginning of the year to $22.92
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was 34.10% for the
year.
As of December 31, 1999, the Fund had $5.1 billion in net assets. For the year,
its expense ratio was 0.42% ($4.20 per $1,000 of net assets); and net
investment income amounted to 0.71% of its average net assets. It sold and
replaced securities valued at 65% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
15
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
Note: Limitations do apply; see page 21.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [BOOK]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
16
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
17
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-26
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [PHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
18
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Morgan Growth Fund-26
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES It is important that you call Vanguard before you
invest a large dollar amount. It is our responsibility to consider the interests
of all Fund shareholders, and so we reserve the right to refuse any purchase
that may disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
19
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 22.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
<PAGE>
20
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
21
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express Redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your prelinked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
<PAGE>
22
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
<PAGE>
23
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
<PAGE>
24
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
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 RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, 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 INCOME
Payment to 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. The
expense ratio includes management fees, administrative fees, and any
12b-1distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
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.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other interests in investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Morgan Growth 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.
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 contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA
19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
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 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-1685
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P026N-04/21/2000
<PAGE>
VANGUARD
MORGAN(TM) GROWTH
FUND
Participant Prospectus
April 21, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD(R) MORGAN(TM) GROWTH FUND
Participant Prospectus
April 21, 2000
A Growth Stock Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 10 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 11 SHARE PRICE
3 A WORD ABOUT RISK 12 FINANCIAL HIGHLIGHTS
3 WHO SHOULD INVEST 14 INVESTING WITH VANGUARD
4 PRIMARY INVESTMENT STRATEGIES 15 ACCESSING FUND INFORMATION BY COMPUTER
8 THE FUND AND VANGUARD GLOSSARY (inside back cover)
9 INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Morgan Growth 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 to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus 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 1-800-662-
7447.
- --------------------------------------------------------------------------------
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.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Morgan Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests primarily in the stocks of large- and medium-size domestic
companies whose revenues and/or earnings are expected to grow faster than those
of the average company in the market. The Fund also invests in stocks of smaller
companies with similar characteristics.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- or
mid-capitalization growth stocks will trail returns from other asset
classes or the overall stock market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -1.51%
1991 29.33%
1992 9.54%
1993 7.32%
1994 -1.67%
1995 35.98%
1996 23.30%
1997 30.81%
1998 22.26%
1999 34.10%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 25.88% (quarter ended December 31, 1998) and the lowest return for a
quarter was -16.41% (quarter ended September 30, 1998).
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Morgan Growth Fund 34.10% 29.17% 18.14%
S&P 500 Index 21.04 28.56 18.21
--------------------------------------------------------------------
<PAGE>
2
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31,1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.40%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.42%
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Morgan Growth Fund's expense ratio in fiscal year 1999 was
0.42%, or $4.20 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1999 of 1.53%, or $15.30 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
- --------------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing
in the Fund 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. This example assumes that the Fund provides 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 each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$43 $135 $235 $530
- -------------------------------------------------
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.
<PAGE>
3
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF DECEMBER 31, 1999
Distributed annually in December $5.1 billion
INVESTMENT ADVISERS NEWSPAPER ABBREVIATION
Vanguard Morgan Growth Fund uses Morg
three advisers:
VANGUARD FUND NUMBER
- - Wellington Management Company, 026
LLP, Boston, Mass., since
inception CUSIP NUMBER
- - Franklin Portfolio Associates, 921928107
LLC, Boston, Mass., since 1990
- - The Vanguard Group Inc., Valley TICKER SYMBOL
Forge, Pa., since 1993 VMRGX
INCEPTION DATE
December 31, 1968
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard Morgan
Growth Fund. 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 the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for current income.
- - You are seeking a fund that invests in growth companies representing a wide
variety of industries.
- - You characterize your investment temperament as "relatively aggressive."
<PAGE>
4
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges that shareholders may make.
- --------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objective, long-term growth in capital. It also explains how the
advisers implement these strategies. In addition, this section discusses several
important risks--market risk, investment style risk, and manager risk--faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund, and may change the investment strategies in the interest of
shareholders.
MARKET EXPOSURE
The Fund is a growth fund that invests mainly in large- and mid-capitalization
domestic common stocks. The Fund also includes stocks of smaller companies that
may not have a long history of growth but are found attractive by one of the
Fund's advisers. Stocks are primarily chosen on the basis of the advisers'
expectations that revenues and/or earnings will grow faster than average. The
Fund may also invest in securities that are convertible to common stocks.
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. 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 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. Note, also, that the gap between best and worst tends to narrow
over the long term.
- ------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- ------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- ------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
Growth stocks, which are the Fund's primary investments, are likely to be
even more volatile in price than the stock market as a whole. Historically,
growth funds have tended to outperform in bull markets and underperform in
declining markets. Of course, there is no guarantee that this pattern will
continue in the future. The Fund also holds a significant number of mid-cap
stocks, which tend to be more volatile than the large-cap stocks that dominate
the S&P 500 Index.
<PAGE>
6
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM LARGE-OR MID-CAPITALIZATION GROWTH STOCKS WILL TRAIL RETURNS
FROM THE OVERALL STOCK MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION
GROWTH STOCKS EACH TEND TO GO THROUGH CYCLES OF DOING BETTER--OR
WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, the prices of such stocks are
typically above-average in relation to such measures as revenue, earnings, book
value, and dividends. Value funds generally emphasize stocks of companies from
which the market does not expect strong growth. The prices of value stocks
typically are below-average in comparison to such factors as earnings and book
value, and these stocks typically pay above-average dividend yields. Growth and
value stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hopes of a greater
increase in share price. Growth funds also may appeal to investors with taxable
accounts who want a higher proportion of returns to come as capital gains
(which may be taxed at lower rates than dividend income). Value funds, by
contrast, are appropriate for investors who want some dividend income and the
potential for capital gains, but are less tolerant of share-price fluctuations.
- --------------------------------------------------------------------------------
SECURITY SELECTION
Vanguard Morgan Growth Fund has three investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
The three investment advisers employ active investment management methods,
which means that securities are bought and sold according to the advisers'
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
Wellington Management Company, LLP (Wellington Management), which is
currently responsible for about 42% of the Fund's assets, uses traditional
methods of stock selection-research and analysis-to identify companies that it
believes have above-average growth prospects, particularly those in industries
undergoing change. Research is focused on companies with a proven record of
sales and earnings growth, profitability, and cash flow generation. Securities
are sold when an investment has achieved its intended purpose, or because it is
no longer considered attractive.
The other two advisers, Franklin Portfolio Associates, LLC and The Vanguard
Group (Vanguard), employ a "quantitative" investment approach. In other words,
they use computerized models for portfolio construction and stock selection to
outperform, if possible, a specific market standard. For Vanguard Morgan Growth
Fund, this market standard is the Growth Fund Stock Index, which is made up of
the stocks held by the nation's 50 largest growth funds.
<PAGE>
7
Franklin Portfolio Associates' investment strategy focuses on stock
selection and fund structure. The stock selection process is driven by a series
of more than 40 computer models that value a universe of 3,500 stocks. These
models cover a broad range of publicly available data and focus on four areas:
fundamental momentum (based on the trends of reported and forecasted earnings),
relative value, future cash flow, and economic cycles. The individual models
rank each security in the universe. Using these rankings, a separate program
builds a fund consistent with the Growth Fund Stock Index's characteristics.
Franklin Portfolio Associates currently manages about 39% of the Fund's assets.
Vanguard ranks a universe of approximately 2,000 stocks using a variety of
computer models. These models focus on investment characteristics such as
earnings, fundamental momentum, share price momentum, relative value, and cash
flow. A separate program then selects the stocks for the Fund, consistent with
the Growth Fund Stock Index's characteristics, from among the stocks rated
highly by the investment models. Vanguard currently manages about 14% of the
Fund's assets.
The balance of Vanguard Morgan Growth Fund's assets (about 4%) is held in
cash reserves, also managed by Vanguard, which may invest in stock futures to
give the cash reserves the performance of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while retaining
cash on hand to meet liquidity needs.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT ONE OR MORE
OF THE FUND'S ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 74.2%.
(A turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more
likely to generate capital gains that must be distributed to shareholders as
income subject to taxes. As of December 31, 1999, the average turnover rate for
all growth stock funds was approximately 99%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund reserves the
right to invest up to 20% of its assets in foreign securities. These securities
may be traded in U.S. or foreign
<PAGE>
8
markets. To the extent that it owns foreign stocks, the Fund is subject to: (1)
country risk, which is the chance that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money, and (2) currency risk, which is the chance that Americans
investing abroad could lose money because of a rise in the value of the U.S.
dollar versus foreign currencies.
The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some
futures and options have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as
leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $540 billion.
All of the Vanguard funds share in the expenses associated with 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
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
9
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund employs three investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Trustees and officers of the Fund.
WELLINGTON MANAGEMENT COMPANY, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, and its predecessors have provided investment advisory
services since 1928. The firm currently manages more than $235 billion in stock
and bond portfolios, including 15 Vanguard funds.
Wellington Management's advisory fee is paid quarterly. This fee is based
on certain annual percentages applied to the Fund's average month-end assets
managed by Wellington Management. The advisory fee may be adjusted based on the
36-month cumulative total return performance of Wellington Management's portion
of the Fund as compared to the cumulative total return of the Growth Fund Stock
Index.
FRANKLIN PORTFOLIO ASSOCIATES, LLC, Two International Place, Boston, MA
02110, is a professional advisory firm founded in 1982. Franklin Portfolio
Associates is a wholly owned, indirect subsidiary of Mellon Bank, and has no
affiliation with the Franklin/Templeton Group of Funds or Franklin Resources,
Inc. Franklin Portfolio Associates currently manages approximately $21.4 billion
in assets, including $. billion in Vanguard funds.
Franklin Portfolio Associates' advisory fee is paid quarterly. This fee is
based on the average month-end assets managed by Franklin Portfolio Associates.
The advisory fee may be adjusted based on the 36-month cumulative total return
performance of Franklin Portfolio Associates' portion of the Fund as compared to
the cumulative total return of the Growth Fund Stock Index.
THE VANGUARD GROUP, (Vanguard) P.O. Box 2600, Valley Forge, PA 19482,
founded in 1975, is a wholly-owned subsidiary of the Vanguard funds. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. The Fund receives advisory services from Vanguard on an at cost basis.
The Fund's most recent Statement of Additional Information provides
complete details of how Wellington Management and Franklin Portfolio Associates
are compensated. For the year ended December 31, 1999, the aggregate investment
advisory fee represented an effective annual basic rate of 0.11% of average net
assets of the Fund before an increase of less than 0.01% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are
<PAGE>
10
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The individuals primarily responsible for Vanguard Morgan Growth Fund are:
ROBERT D. RANDS, CFA, Senior Vice President of Wellington Management Company,
LLP; has worked in investment management since 1966, with Wellington Management
since 1978; adviser to the Fund since 1994; B.A., Yale University; M.B.A.,
University of Pennsylvania.
JOHN J. NAGORNIAK, CFA, President of Franklin Portfolio Associates, LLC; has
worked in investment management since 1970, with Franklin Portfolio Associates
since 1982; adviser to the Fund since 1990; B.A., Princeton University;
M.S., The Sloan School of Management, Massachusetts Institute of Technology.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
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 capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Your dividend and capital gains 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 adviser about the tax consequences of plan withdrawals.
<PAGE>
11
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds". Different newspapers
use different abbreviations of the Fund's name, but the most common is MORG.
<PAGE>
12
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund 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 Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $19.72 $17.54 $15.63 $14.09 $11.36
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .18 .160 .14 .15
Net Realized and
Unrealized Gain (Loss)
on Investments 6.29 3.61 4.435 3.07 3.89
-------------------------------------------------------
Total from Investment
Operations 6.43 3.79 4.595 3.21 4.04
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.15) (.18) (.160) (.14) (.15)
Distributions from
Realized Capital Gains (3.08) (1.43) (2.525) (1.53) (1.16)
-------------------------------------------------------
Total Distributions (3.23) (1.61) (2.685) (1.67) (1.31)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $22.92 $19.72 $17.54 $15.63 $14.09
================================================================================
TOTAL RETURN 34.10% 22.26% 30.81% 23.30% 35.98%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $5,066 $3,555 $2,795 $2,054 $1,471
Ratio of Total
Expenses to Average
Net Assets 0.42% 0.44% 0.48% 0.51% 0.49%
Ratio of Net
Investment Income to
Average Net Assets 0.71% 0.96% 0.93% 0.97% 1.10%
Turnover Rate 65% 81% 76% 73% 76%
================================================================================
<PAGE>
13
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $19.72 per share.
During the year, the Fund earned $0.14 per share from investment income
(interest and dividends) and $6.29 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $3.23 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 earnings ($6.43 per share) minus the distributions ($3.23 per share)
resulted in a share price of $22.92 at the end of the year. This was an
increase of $3.20 per share (from $19.72 at the beginning of the year to $22.92
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was 34.10% for the
year.
As of December 31, 1999, the Fund had $5.1 billion in net assets. For the year,
its expense ratio was 0.42% ($4.20 per $1,000 of net assets); and net
investment income amounted to 0.71% of its average net assets. It sold and
replaced securities valued at 65% of its net assets.
- --------------------------------------------------------------------------------
"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.
<PAGE>
14
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's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
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
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard 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 Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next- determined net asset value 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, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
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 potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
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.
- - Make sure to read that fund's prospectus. Contact Vanguard Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
15
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; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
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 RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, 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 INCOME
Payment to 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. The
expense ratio includes management fees, administrative fees, and any
12b-1distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
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.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other interests in investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Morgan Growth 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.
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 contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
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 1-800-SEC-0330. Reports
and other information about the
Fund are also available on the
SEC's website (www.sec.gov),
or you can receive copies of this
information, for a fee, by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-1685
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I026N-04/21/2000
<PAGE>
<PAGE>
PART B
VANGUARD MORGAN GROWTH FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 21, 2000
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated April 21, 2000). To obtain, without charge, the
Prospectus or the most recent Annual Report to Shareholders, which contains the
Fund's financial statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447
TABLE OF CONTENTS
DESCRIPTION OF THE FUND......................................................B-1
INVESTMENT POLICIES..........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-8
PURCHASE OF SHARES...........................................................B-9
REDEMPTION OF SHARES........................................................B-10
SHARE PRICE.................................................................B-10
MANAGEMENT OF THE FUND......................................................B-11
INVESTMENT ADVISORY SERVICES................................................B-14
PORTFOLIO TRANSACTIONS......................................................B-18
YIELD AND TOTAL RETURN......................................................B-18
PERFORMANCE MEASURES........................................................B-20
COMPARATIVE INDEXES.........................................................B-21
FINANCIAL STATEMENTS........................................................B-23
DESCRIPTION OF THE FUND
ORGANIZATION
The Fund was organized as a Delaware corporation in 1968, merged into a Maryland
corporation in 1973, and then reorganized as a Delaware business trust in June
1998. Prior to its reorganization as a Delaware business trust, the Fund was
known as Vanguard/Morgan Growth Fund, Inc. The Fund is registered with the
United States Securities and Exchange Commission (the Commission) under the
Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified
management investment company. It currently offers the following investor share
class fund: Vanguard Morgan Growth Fund (the Fund). The Fund has the ability to
offer additional funds or classes of shares. There is no limit on the number of
full and fractional shares that the Fund may issue for a single fund or class of
shares.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as the Fund's custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
B-1
<PAGE>
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 the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected fund. Unless terminated by reorganization or
liquidation, the Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon 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: (i) a
shareholder vote is required under the 1940 Act; (ii) 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 any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. 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, and to change any fundamental
policy of the Fund. 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 affected by a particular matter are entitled to vote on that
matter. Voting rights are noncumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with the
Fund's shares.
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 intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. 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
B-2
<PAGE>
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies set forth in
the Prospectus.
TURNOVER RATE. While the rate of turnover is not a limiting factor when
management deems changes appropriate, it is anticipated that the annual turnover
rate will not normally exceed 100%. A rate of turnover of 100% could occur, for
example, if the Fund sold and replaced securities valued at 100% of its total
assets. The Fund's turnover rate for each of its last five fiscal years is set
forth under "Financial Highlights" in the Fund's Prospectus.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the 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, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Fund's Board of Trustees will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker, or
dealer party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying instrument at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the Fund
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. While the advisers
acknowledge these risks, it is expected that they will be controlled through
careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities on a short-term or
long-term basis to qualified institutional investors (typically brokers,
dealers, banks, or other financial institutions) who 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 portfolio securities, the Fund attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Fund. The terms, the structure, and the
aggregate amount of such loans must be consistent with the 1940 Act, and the
Rules or interpretations of the Commission thereunder. These provisions limit
the amount of securities the Fund may lend to 33 1/3% of the Fund's total
assets, and require that (a) the borrower pledge and maintain with the Fund
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the U.S. Government
having a value at all times not less than 100% of the value of the securities
loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the
Fund's investing any cash
B-3
<PAGE>
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value. Loan arrangements made
by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange (the Exchange), which rules
presently require the borrower, after notice, to redeliver the securities within
the normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer, or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
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 loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. 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 other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
FOREIGN INVESTMENTS. As indicated in the Prospectus, the Fund may invest up
to 20% of its assets in foreign securities and may engage in currency
transactions with respect to these investments. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
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Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of 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: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) 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 nonequity 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 which 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 Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
Fund which 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 the Fund may make or enter into will
be subject to the special currency rules described above.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not 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 the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held for a number of years, they may be considered illiquid
securities-- meaning that they could be difficult for the Fund to convert to
cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This will generally include
securities that are restricted but which may be sold to qualified institutional
buyers under Rule 144A of the Securities Act of 1933 (the 1933 Act). While the
Fund's investment advisers determine the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the Board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.
FUTURES CONTRACTS AND OPTIONS. The Fund may enter into futures contracts,
options, and options on futures contracts for the purpose of remaining fully
invested and reducing transactions costs. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security at a specified future time and at a specified price. Futures
contracts which are standardized as to maturity date and underlying financial
instrument are traded
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on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government agency. Assets committed to futures contracts will be segregated
to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold", or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators". Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed", that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no
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assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the 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 at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The principal stock index futures exchanges in the U.S. are the Board of Trade
of the City of Chicago and the Chicago Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to the low margin deposits required. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as 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 may result in losses in
excess of the amount invested in the contract. The Fund is not subject to
extreme losses from futures because 100% of the contract obligation is held
separately in cash or other liquid portfolio securities. The Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options involve the
risk that the investment advisers will incorrectly predict stock market and
interest rate trends.
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.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for
federal income tax purposes to recognize as income 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 which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities
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<PAGE>
upon disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the 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. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which 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.
TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political, or other conditions. Such measures could include investments in: (a)
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 deposits; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.
FUNDAMENTAL 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: (i) 67% or more of the votes cast to approve
a change, so long as shares representing more than 50% of the Fund's net asset
value are present or represented by proxy; or (ii) more that 50% of the Fund's
net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, 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 and options. No more that 5% of the Fund
assets may be used as initial margin deposit for futures contracts, and no more
that 20% of the Fund's assets may be invested in stock futures contracts or
options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) 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 United States Government, its
agencies, or instrumentalities.
ILLIQUID OR RESTRICTED 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 that 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for the purpose
of controlling its management.
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INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed-income securities or by entering into repurchase agreements, or through
Vanguard's interfund lending program by lending its portfolio securities.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Trust's investment policies relating to
commodities.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
that 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, or interests
therein.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents the Fund from participating in The
Vanguard Group. As a member of The Vanguard Group, 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.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offerings
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund, and (iii) to reduce or waive
the minimum investment for or any other restrictions on initial and subsequent
investments for certain fiduciary accounts or under circumstances where certain
economies can be achieved in sales of the Fund's shares.
TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business
day, will be sent to Vanguard that day and your share price will be based
on the Fund's net asset value calculated at the close of trading that day.
Orders received by Schwab after 3 p.m. Eastern time, will be sent to
Vanguard on the following business day and your share price will be based
on the Fund's net asset value calculated at the close of trading that day.
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REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange (the Exchange) is closed, or
trading on the Exchange is restricted as determined by the Commission, (ii)
during any period when an emergency exists as defined by the Commission as a
result of which it is not reasonably practicable for the Fund to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission 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.
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.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
Exchange (generally 4:00 p.m. Eastern time) on each day that the Exchange is
open for trading.
Portfolio securities for which market quotations are readily available
(which include those securities listed on national securities exchanges, as well
as those quoted on the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securities which are not
traded on the valuation date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is taken from the exchange where
the security is primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
Short term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of the Fund's investment
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect the fair value.
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MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton,
and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/Coal/ Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries, Inc. (Machinery/Coal/Appliances), and Newfield
Exploration Co. (Energy); formerly, Director and Senior Partner of McKinsey &
Co., and President of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), The Mead Corp. (Paper Products), and AmeriSource Health
Corp.; and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
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ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
*Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Trust and the other Trusts in The Vanguard
Group 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 certain 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. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard and the Fund's advisers have adopted Codes of Ethics designed to
prevent employees who may have access to nonpublic information about the trading
activities of the Fund (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 the Fund, but place substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons receive advance approval for every securities trade
to ensure that there is no conflict with the trading activities of the Fund.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested are adjusted from time to time
in order to maintain the proportionate relationship between each funds' relative
net assets and its contribution to Vanguard's capital. The Amended and Restated
Funds' Service Agreement provides as follows: (a) each Vanguard fund may be
called upon to invest up to 0.40% of its current assets in Vanguard, and (b)
there is no other limitation on the dollar amount that each Vanguard fund may
contribute to Vanguard's capitalization. At December 31, 1999, the Morgan Growth
Fund had contributed capital of $931,000 to Vanguard, representing 0.02% of the
Fund's net assets and 0.9% 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, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of Vanguard. The Trustees and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard funds based upon relative net assets. The
remaining one 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 funds aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of
B-12
<PAGE>
average distribution expense rate for Vanguard, and that no fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency) distribution, and marketing expenses: $7,362,000,
$9,220,000, and $12,351,000, respectively.
INVESTMENT ADVISORY SERVICES
Vanguard also provides the fund with investment advisory services. These
services are provided on an at-cost basis from a money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the funds utilizing these services.
TRUSTEES COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-14), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.
INDEPENDENT TRUSTEE. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the Fund--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, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
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.
B-13
<PAGE>
VANGUARD MORGAN GROWTH FUND
TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL VANGUARD
COMPENSATION AS PART OF THIS BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FROM THIS FUND(1) FUND'S EXPENSES(1) RETIREMENT TRUSTEES(2)
- ------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $778 $43 $15,000 $80,000
Bruce K. MacLaury $808 $72 $12,000 $75,000
Burton G. Malkiel $784 $71 $15,000 $80,000
Alfred M. Rankin, Jr. $778 $52 $15,000 $80,000
John C. Sawhill $778 $66 $15,000 $80,000
James O. Welch, Jr. $778 $76 $15,000 $80,000
J. Lawrence Wilson $778 $55 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Fund's fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 funds (102 in the
case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999 calendar
year.
(3) Mr. Bogle retired from the funds' Board, effective December 31, 1999.
INVESTMENT ADVISORY SERVICES
The Fund currently uses three separate investment advisers, each of whom manages
the investment and reinvestment of a portion of the Vanguard Morgan Growth
Fund's assets. Prior to April 24, 1990, Wellington Management Company served as
the Fund's sole investment adviser.
WELLINGTON MANAGEMENT COMPANY, LLP. The Fund employs Wellington Management
Company, LLP (Wellington Management) under an investment advisory agreement to
manage the investment and reinvestment of a portion of the Fund's assets, and to
continuously review, supervise, and administer the Fund's investment program.
Wellington Management discharges its responsibilities subject to the control of
the officers and Trustees of the Fund. Wellington Management is a Massachusetts
limited liability partnership, and the following persons serve as managing
partners of Wellington Management: Laurie A. Gabriel, Duncan M. McFarland, and
John R. Ryan. Wellington Management and its predecessor organizations have
provided investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Robert D. Rands, Senior Vice President
of Wellington Management, has served as portfolio manager of the Fund since
1994.
The Fund pays Wellington Management a Basic Fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Trust's average month-end net assets managed by
Wellington Management for the quarter:
NET ASSETS ANNUAL RATE
- ---------- -----------
First $100 million................... 0.175%
Next $500 million.................... 0.100%
Over $1 billion...................... 0.075%
The Basic Fee may be increased or decreased by applying an adjustment based
on the investment performance of the assets of the Fund managed by Wellington
Management relative to the investment record of The Growth Fund Stock Index (the
Index), which is described on page B-21.
B-14
<PAGE>
The following table sets forth the adjustment rates payable by the Fund to
Wellington Management under the investment advisory agreement:
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE GROWTH FUND STOCK INDEX ADJUSTMENT
- ---------------------------------- ----------
Less than -12%.................... -0.50 x Basic Fee
Between -12% and -6%.............. -0.25 x Basic Fee
Between -6% and 6%................ 0.00 x Basic Fee
Between 6% and 12%................ +0.25 x Basic Fee
More than 12%..................... +0.50 x Basic Fee
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the Wellington Management
Portfolio shall be averaged over the same period as the investment performance
of the Wellington Management Portfolio and the investment record of the Growth
Fund Stock Index are computed. The investment performance of the Wellington
Management Portfolio for such period, expressed as a percentage of the
Wellington Management Portfolio's net asset value per share at the beginning of
such period, shall be the sum of: (i) the change in the Wellington Management
Portfolio's net asset value per share during such period; (ii) the value of the
Wellington Management Portfolio's cash distributions per share having an
ex-dividend date occurring within such period; and (iii) the per share amount of
capital gains taxes paid or accrued during such period by the Wellington
Management Portfolio for undistributed realized long-term capital gains.
The investment record of the Growth Fund Stock Index for any period,
expressed as a percentage of the Growth Fund Stock Index level at the beginning
of such period, shall be the sum of (i) the change in the level of the Growth
Fund Stock Index during such period and (ii) the value, computed consistently
with the Growth Fund Stock Index, of cash distributions having an ex-dividend
date occurring within such period made by companies whose securities comprise
the Growth Fund Stock Index. The foregoing notwithstanding, any computation of
the investment performance of the Wellington Management Portfolio and the
investment record of the Growth Fund Stock Index shall be in accordance with any
then applicable rules of the Commission.
DURATION AND TERMINATION. The current agreement with Wellington Management
is renewable for successive one-year periods only so long as such renewal is
approved at least annually by a vote of the Trust's Board of Trustees, including
the affirmative votes of a majority of the Trustees who are not parties to the
contract 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.
The 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
Trust on sixty (60) days' written notice to Wellington Management, or (2) by
Wellington Management upon ninety (90) days' written notice to the Trust.
RELATED INFORMATION CONCERNING WELLINGTON MANAGEMENT COMPANY, LLP.
Wellington Management, 75 State Street, Boston, MA 02109, is a professional
investment counseling firm which provides investment services to investment
companies, other institutions and individuals. Among the clients of Wellington
Management are more than fifteen of the investment companies of The Vanguard
Group. Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960.
B-15
<PAGE>
During the last three fiscal years, the Fund paid the following advisory fees,
to Wellington Management:
1997 1998 1999
---- ---- ----
Basic Fee.......................... $1,292,417 $1,541,922 $1,830,546
Increase or Decrease for Performance
Adjustment........................ (63,493) 76,371 378,563
---------- ---------- ----------
Total.............................. $1,228,924 $1,618,293 $2,209,110
FRANKLIN PORTFOLIO ASSOCIATES, LLC. The Fund employs Franklin Portfolio
Associates, LLC under an investment advisory agreement to manage the investment
and reinvestment of a portion of the Fund's assets. Franklin Portfolio
Associates discharges its responsibilities subject to the control of the
officers and Trustees of the Fund.
The Fund pays Franklin Portfolio Associates a Basic Fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the average month-end net assets managed by Franklin
Portfolio Associates for the quarter:
NET ASSETS ANNUAL RATE
- ---------- -----------
First $100 million................ 0.25%
Next $200 million................. 0.20%
Next $200 million................. 0.15%
Next $200 million................. 0.10%
Next $4 billion................... 0.08%
Over $5 billion................... 0.06%
The Basic Fee may be increased or decreased by applying an Adjustment based on
the investment performance of the assets of the Fund managed by Franklin
Portfolio Associates (the "Franklin Portfolio") relative to the investment
record of the Index. The Adjustment is calculated as follows:
CUMULATIVE 36-MONTH
PERFORMANCE VS. THE INDEX ADJUSTMENT
- ------------------------- ----------
+6% or more........................ +80% of Basic Fee
+3% to +6%......................... +40% of Basic Fee
- -3% to +3.......................... 0
- -3% to -6%......................... -40% of Basic Fee
Less than -6%...................... -80% of Basic Fee
For purposes of determining the Adjustment, the net assets of the Franklin
Portfolio will be averaged over the same period used to compute the investment
performance of the Franklin Portfolio and the investment record of the Index. In
addition, the investment performance of the Franklin Portfolio, the unit value
of the Franklin Portfolio, and the investment record of the Index will be
calculated in the same manner as set forth in the discussion of Wellington
Management's advisory fees.
B-16
<PAGE>
TRANSITION RULE. The Adjustment schedule set forth above will not be fully
operable until April 30, 2001. Until that date, a transition schedule consisting
of varying percentages of the above Adjustment schedule and a prior schedule
will be used. For each fiscal quarter included in the 36 months beginning May 1,
1998, the incentive/penalty fee will be calculated as the sum of a and b,
whereby:
a = # of months elapsed since 5/1/1998 X the Adjustment calculated
---------------------------------- under the current schedule
36 months
b = # of months remaining until 5/30/2001 X the Adjustment calculated
------------------------------------- under the prior schedule
36 months
The current agreement with Franklin Portfolio Associates is renewable for
successive one year periods only so long as such renewal is approved at least
annually 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 contract 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. The
agreement may be terminated without penalty at any time either (1) by vote of
the Board of Trustees of the Fund on 60 days' written notice to Franklin
Portfolio Associates, or (2) by Franklin Portfolio Associates upon 90 days'
written notice to the Fund.
During the last three fiscal years, the Fund paid Franklin Portfolio
Associates the following advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee............................ $1,310,220 $1,701,152 $1,981,731
Increase or Decrease for Performance
Adjustment.......................... 571,862 383,794 (212,101)
---------- ---------- ----------
Total................................ $1,882,082 $2,084,946 $1,769,630
RELATED INFORMATION CONCERNING FRANKLIN PORTFOLIO ASSOCIATES, LLC. Franklin
Portfolio Associates, Two International Place, Boston, MA 02110. Franklin
Portfolio Associates is a Massachusetts limited liability company, which is an
indirect, wholly-owned subsidiary of MBC Investments Corporation, which is
itself a wholly-owned subsidiary of Mellon Bank Corporation. Franklin Portfolio
Associates is a professional investment counseling firm which specializes in the
management of common stock funds through the use of quantitative investment
models. As of December 31, 1999, Franklin Portfolio Associates provided
investment advisory services with respect to approximately $21.4 billion of
client assets, including approximately $8.8 billion for Vanguard Growth and
Income Fund, another mutual fund member of The Vanguard Group.
THE VANGUARD GROUP. The Vanguard Group provides investment advisory
services on an at cost basis with respect to 14% of Vanguard Morgan Growth
Fund's assets as of December 31, 1999. The remaining 5% of the Fund's assets are
held in cash reserves and are also managed by Vanguard. Vanguard employs a
quantitative investment approach that uses computer techniques to track--and, if
possible, outperform--a specific market standard. For Morgan Growth Fund, this
market standard is the Growth Fund Stock Index, which is made up of the stocks
held by the nation's 50 largest growth funds.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Fund
incurred advisory fees owed to Vanguard of $219,000, $317,000, and $500,000,
respectively.
B-17
<PAGE>
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the advisers (with the approval of
the Fund's Board of Trustees) to select the brokers or dealers that will execute
the purchases and sales of securities for the Fund and direct the Advisers to
use their best efforts to obtain the best available price and most favorable
execution as to all transactions for the Fund. The Advisers have undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances. During the fiscal years ended December 31, 1997, 1998, and 1999,
the Fund paid $3,104,030, $4,313,385, and $3,752,229 respectively, in brokerage
commissions.
In placing portfolio transactions, the Advisers will use their best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the best available price and most favorable execution. The
full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
Fund and/or the Advisers. The Advisers consider such information useful in the
performance of their obligations under the agreement but are unable to determine
the amount by which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Trust's Board of Trustees, the Advisers may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Advisers to the Fund and the other Trusts in the Group.
Currently, it is the Fund's policy that the Advisers may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Advisers will only pay such higher
commissions if they believe this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Advisers and/ or the Fund. However, the
Advisers have informed the Trust that they generally will not pay higher
commission rates specifically for the purpose of obtaining research services.
Some securities considered for investment by the Fund may also be
appropriate for other funds and/or clients served by the Advisers. If purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these other funds or clients serviced by the Advisers are
considered at or about the same time, transactions in such securities will be
allocated among the several funds and clients in a manner deemed equitable by
the Advisers.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1999 was 0.60%.
The average annual total return of the Fund for the one-, five-, and
ten-year periods ending December 31, 1999 was 34.10%, 29.17%, and 18.14%,
respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years, or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and
B-18
<PAGE>
assume that all dividends and capital gains distributions during the respective
periods were reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)1/N - 1
Where:
T = average annual total return.
P = a hypothetical initial investment of $1,000.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P (1+T)N = ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions.
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
B-19
<PAGE>
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
PERFORMANCE MEASURES
There are a number of different ways to measure the performance of a mutual
fund. One of these methods is to calculate the current yield of a fund. This is
done by dividing the total amount of dividends per share paid by a fund during
the past twelve months by a current offering price (including the sales charge,
if any). Under certain circumstances, such as when there has been a fundamental
change in investment or dividend policies, it might be appropriate to annualize
the dividends paid over the period such policies were in effect, rather than
using the dividends paid during the past twelve months. An alternate method is
to calculate a compound yield. This is derived by computing the total compounded
dividends paid by a fund during the past twelve months on the assumption that
all dividends were reinvested in additional shares (and giving no effect to
capital gains distributions or taxes) and dividing this by a current offering
price. Another method is to calculate the total return by dividing the change in
value of an investment in shares over a period of time (generally ten years or
more), assuming the reinvestment of all dividends and capital gains
distributions, by the original net asset value of the shares. Regardless of the
method used, past performance is not necessarily indicative of future results,
but is an indication of the return to shareholders only for the limited
historical period used.
From time to time, advertisements, reports and promotional literature
regarding the Fund may compare its yield or total return (as calculated above)
to yields or returns reported by other investments and to various indexes and
averages to assist an investor's calculation of how an investment in the Fund
might satisfy his investment objectives.
B-20
<PAGE>
COMPARATIVE INDEXES
Each of the investment company members of The Vanguard Group, including Vanguard
Morgan Growth Fund, may, from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.
GROWTH FUND STOCK INDEX--The Index is composed of the various common stocks that
are held in the 50 largest growth stock mutual funds, using year-end net assets,
monitored by Morningstar, Inc. Under an agreement with the Fund, Morningstar,
Inc. develops the composition of the Index and its total return each quarter.
Neither The Vanguard Group, Inc., Wellington Management, nor Franklin Portfolio
Associates are affiliated with Morningstar in any way.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--contains the stocks of 500 of
the largest domestic companies.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--includes stocks selected by Standard &
Poor's Index Committee to include leading companies in leading industries and to
reflect the U.S. stock market.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard & Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is composed of all bonds covered
by the Shearson Lehman Hutton Treasury Bond Index with maturities of ten years
or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN BROTHERS CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $25 million outstanding. This index
includes over 1,000 issues.
B-21
<PAGE>
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Brothers Corporate Bond Index covering all corporate, publicly issued,
fixed-rate, nonconvertible U.S. debt issues rated at least Baa, with at least
$50 million principal outstanding and maturity greater than ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX --70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Long-Term Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS LONG--TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded stocks in the U.S.
RUSSELL 2000 STOCK INDEX-- consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
RUSSELL 2000 (REGISTERED) VALUE INDEX--contains stocks from the Russell 2000
Index with a less-than-average growth orientation.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
LIPPER SMALLCAP FUND AVERAGE--the average performance of small company growth
funds as defined by Lipper Inc. Lipper defines a small company growth fund as a
fund that by prospectus or portfolio practice, limits its investments to
companies on the basis of the size of the company. From time to time, Vanguard
may advertise using the average performance and/or the average expense ratio of
the small company growth funds. (This fund category was first established in
1982. For years prior to 1982, the results of the Lipper Small Company Growth
category were estimated using the returns of the Funds that constituted the
Group at its inception.)
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
B-22
<PAGE>
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between
one and five years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market weighted
index that contains individually priced U.S. Treasury, agency and corporate
securities rated BBB- or better with maturities greater than ten years. The
index has a market value of over $900 billion.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
AGGRESSIVE GROWTH FUND STOCK INDEX--The Index is composed of the various common
stocks that are held in the 50 largest aggressive growth stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc.
Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's financial statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Morgan Growth Fund 1999 Annual Report to Shareholders,
and the report thereon of PricewaterhouseCoopers LLP, independent accountants,
also appearing therein, are incorporated by reference in this Statement of
Additional Information. For a more complete discussion of the performance,
please see the Fund's Annual Report to Shareholders, which may be obtained
without charge.
B-23
<PAGE>
SAI026-MORGAN GROWTH
B-24
<PAGE>
PART C
VANGUARD MORGAN GROWTH FUND
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contracts**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Fund" in the
Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Codes of Ethics*
- ------------
* Filed herewith
** Filed previously
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 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. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. 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.
C-1
<PAGE>
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).
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered
under the Advisers Act. 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).
Franklin Portfolio Associates, LLC is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Franklin Portfolio Associates, 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 Franklin
Portfolio Associates pursuant to the Advisers Act (SEC File No. 801-17057).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(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 Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and
the Registrant's Custodian, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
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 Post-Effective
Amendment to 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 31st day of March, 2000.
VANGUARD MORGAN GROWTH FUND
BY:_________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
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:
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief March 31, 2000
--------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee March 31, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee March 31, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee March 31, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee March 31, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee March 31, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee March 31, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee March 31, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal March 31, 2000
--------------------------- Financial Officer and
(Heidi Stam) Principal Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Consent of Independent Accountants..................................... Ex-99.BJ
Codes of Ethics........................................................ Ex-99.BP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional information constituting parts of this Post-Effective
Amendment No. 53 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 2, 2000, relating to the financial
statements and financial highlights appearing in the 1999 Annual Report to
Shareholders of Vanguard Morgan Growth Fund, which are 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
Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 30, 2000
THE VANGUARD GROUP, INC.
------------------------
CODE OF ETHICS
--------------
SECTION 1: BACKGROUND
This Code of Ethics has been approved and adopted by the Board of Directors of
The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the
Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of
1940. The Code has been amended and restated effective as of May 1, 1999. Except
as otherwise provided, the Code applies to all "Vanguard personnel," which term
includes all employees, officers, Directors and Trustees of Vanguard and the
Vanguard funds. The Code also contains provisions which apply to the investment
advisers to the Vanguard funds (see section 11).
SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS
This Code of Ethics is based on the overriding principle that Vanguard personnel
act as fiduciaries for shareholders' investments in the Vanguard funds.
Accordingly, Vanguard personnel must conduct their activities at all times in
accordance with the following standards:
a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their
duties and responsibilities to Vanguard fund shareholders, Vanguard personnel
must at all times place the interests of Vanguard fund shareholders first. In
particular, Vanguard personnel must avoid serving their own personal interests
ahead of the interests of Vanguard fund shareholders.
b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid
any situation involving an actual or potential conflict of interest or possible
impropriety with respect to their duties and responsibilities to Vanguard fund
shareholders.
c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not
take advantage of their position of trust and responsibility at Vanguard.
Vanguard personnel must avoid any situation that might compromise or call into
question their exercise of full independent judgment in the best interests of
Vanguard fund shareholders.
<PAGE>
All activities of Vanguard personnel should be guided by and adhere to these
fiduciary standards. The remainder of this Code sets forth specific rules and
procedures which are consistent with these fiduciary standards. However, all
activities by Vanguard personnel are required to conform with these fiduciary
standards regardless of whether the activity is specifically covered in this
Code.
SECTION 3: DUTY OF CONFIDENTIALITY
Vanguard personnel must keep confidential at all times any nonpublic information
they may obtain in the course of their employment at Vanguard. This information
includes but is not limited to:
1) information on the vanguard funds, including recent or impending
securities transactions by the funds, activities of the
funds'advisers, offerings of new funds, and closings of funds;
2) information on Vanguard fund shareholders and prospective
shareholders, including their identities, investments, and account
transactions;
3) information on other vanguard personnel, including their pay,
benefits, position level, and performance ratings; and
4) information on Vanguard business activities, including new services,
products, technologies, and business initiatives.
Vanguard personnel have the highest fiduciary obligation not to reveal
confidential Vanguard information to any party that does not have a clear and
compelling need to know such information.
SECTION 4: GIFT POLICY
Vanguard personnel are prohibited from seeking or accepting gifts of material
value from any person or entity, including any Vanguard fund shareholder or
Vanguard client, when such gift is in relation to doing business with Vanguard.
In certain cases, Vanguard PERSONNEL MAY ACCEPT GIFTS OF DE MINIMIS value (as
determined in accordance with guidelines set forth in Vanguard's Human Resources
Policy Manual) but only if they obtain the approval of a Vanguard officer.
<PAGE>
SECTION 5: OUTSIDE ACTIVITIES
a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are
prohibited from working for any business or enterprise in the financial services
industry that competes with Vanguard. In addition, Vanguard employees are
prohibited from working for any organization that could possibly benefit from
the employee's knowledge of confidential Vanguard information, such as new
Vanguard services and technologies. Beyond these prohibitions, Vanguard
employees may accept secondary employment, but only with prior approval from the
Vanguard Compliance Department. Vanguard officers are prohibited from accepting
or serving in any form of secondary employment unless they have received
approval from a Vanguard Managing Director or the Vanguard Chairman and Chief
Executive Officer.
b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard
officers and employees are prohibited from serving on the board of directors of
any publicly traded company or in an official capacity for any federal, state,
or local government (or governmental agency or instrumentality) without prior
approval from the Vanguard Compliance Department.
c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel
are prohibited from using Vanguard time, equipment, services, personnel or
property for any purposes other than the performance of their duties and
responsibilities at Vanguard.
SECTION 6: GENERAL PROHIBITIONS ON TRADING
a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard
personnel are prohibited from taking personal advantage of their knowledge of
recent or impending securities activities of the Vanguard funds or the funds'
investment advisers. In particular, Vanguard personnel are prohibited from
purchasing or selling, directly or indirectly, any security when they have
actual knowledge that the security is being purchased or sold, or considered for
purchase or sale, by a Vanguard fund. This prohibition applies to all securities
in which the person has acquired or will acquire "beneficial ownership." For
these purposes, a person is considered to have beneficial ownership in all
securities over which the person enjoys economic benefits substantially
equivalent to ownership (for example, securities held in trust for the person's
benefit), regardless of who is the registered owner. Under this Code of Ethics,
Vanguard personnel are considered to have beneficial ownership of all securities
owned by their spouse or minor children.
<PAGE>
b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject
to Vanguard's Insider Trading Policy, which is considered an integral part of
this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard
personnel from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits Vanguard personnel from communicating to third parties any material
nonpublic information about any security or issuer of securities. Any violation
of Vanguard's Insider Trading Policy may result in penalties which could include
termination of employment with Vanguard.
SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS
a) APPLICATION. The restrictions of this section 7 apply to all Vanguard
access persons. For purposes of the Code of Ethics, "access persons" include:
1) any Director or Trustee of Vanguard or a Vanguard fund, excluding
disinterested Directors and Trustees (i.e., any Director or Trustee
who is not an "interested person" of a Vanguard fund within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940);
2) any officer of Vanguard or a Vanguard fund; and
3) any employee of Vanguard or a Vanguard fund who in the course of his
or her regular duties participates in the selection of a Vanguard
fund's securities or who works in a Vanguard department or unit that
has access to information regarding a Vanguard fund's impending
purchases or sales of securities.
The Vanguard Compliance Department will notify all Vanguard personnel who
qualify as access persons of their duties and responsibilities under this Code
of Ethics. The restrictions of this section 7 apply to all transactions in which
a Vanguard access person has or will acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions involving: (i) direct obligations
of the Government of the United States; (ii) high quality short-term debt
instruments, including bankers' acceptances, bank certificates of deposit,
commercial paper, and repurchase agreements; and (iii) shares of registered
open-end investment companies (including shares of
<PAGE>
any Vanguard fund). In addition, the restrictions do not apply to transactions
in accounts over which the access person has no direct or indirect control or
influence.
b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are
subject to the following restrictions with respect to their securities
transactions:
1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must
receive approval from the Vanguard Compliance Department before
purchasing or selling any securities. The Vanguard Compliance
Department will notify Vanguard access persons if their proposed
securities transactions are permitted under this Code of Ethics.
2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons
must conduct all their securities transactions through Vanguard
Brokerage Services. Vanguard Brokerage Services will send a
confirmation notice of any purchase or sale of securities by a
Vanguard access person to the Vanguard Compliance Department.
3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are
prohibited from acquiring securities in an initial public offering.
4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are
prohibited from acquiring securities in a private placement without
prior approval from the Vanguard Compliance Department. In the event
an access person receives approval to purchase securities in a private
placement, the access person must disclose that investment if he or
she plays any part in a Vanguard fund's later consideration of an
investment in the issuer.
5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from
acquiring or selling any option on any security.
6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited
from selling any security that the access person does not own or
otherwise engaging in "short-selling" activities.
7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are
prohibited from profiting in the purchase and sale, or sale and
purchase, of the same (or related) securities within 60 calendar days.
In the event that an access person realizes profits on
<PAGE>
such short-term trades, the access person must relinquish such profits
to The Vanguard Group Foundation.
c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons
are subject to the following restrictions when their purchases and sales of
securities coincide with trades by the Vanguard funds:
1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard
access persons are prohibited from purchasing or selling any security
within three calendar days after a Vanguard fund has traded in the
same (or a related) security. In the event that an access person makes
a prohibited purchase or sale within the three-day period, the access
person must unwind the transaction and relinquish any gain from the
transaction to The Vanguard Group Foundation.
2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access
person who purchases a security within seven calendar days before a
Vanguard fund purchases the same (or a related) security is prohibited
from selling the security for a period of six months following the
fund's trade. In the event that an access person makes a prohibited
sale within the six-month period, the access person must relinquish to
The Vanguard Group Foundation any gain from the transaction.
3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person
who sells a security within seven days before a Vanguard fund sells
the same (or a related) security must relinquish to The Vanguard Group
Foundation the difference between the access person's sale price and
the Vanguard fund's sale price (assuming the access person's sale
price is higher).
4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The
restrictions of this section 7c do not apply to purchases and sales of
securities by Vanguard access persons which would otherwise violate
section 7c solely because the transactions coincide with trades by any
Vanguard index funds.
SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS
<PAGE>
a) APPLICATION. The restrictions of this section 8 apply to all Vanguard
Institutional client contacts. For purposes of the Code of Ethics, an
"Institutional client contact" includes any Vanguard employee who works in a
department or unit at Vanguard that has significant levels of interaction or
dealings with the management of clients of Vanguard's Institutional Investor
Group. The Vanguard Compliance Department will notify Vanguard employees who
qualify as Institutional client contacts of the restrictions of this Section 8.
b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard
Institutional client contacts are prohibited from acquiring securities issued by
clients of the Vanguard Institutional Investor Group (including any options or
futures contracts based on such securities). In the event that any individual
who becomes subject to this prohibition already owns securities issued by
Institutional clients, the individual will be prohibited from disposing of those
securities without prior approval from the Vanguard Compliance Department. The
restrictions of this section 8 apply to all transactions in which Institutional
client contacts have acquired or would acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions in any account over which an
individual does not possess any direct or indirect control or influence. The
Vanguard Compliance Department will maintain a list of the Institutional clients
to which the prohibitions of this section 8 apply. The Vanguard Compliance
Department may waive the prohibition on acquiring securities of Institutional
clients in appropriate cases (including, for example, cases in which an
individual acquires securities as part of an inheritance or through an
employer-sponsored employee benefits or compensation program).
SECTION 9: COMPLIANCE PROCEDURES
a) APPLICATION. The requirements of this section 9 apply to all Vanguard
personnel other than disinterested Directors and Trustees (see section 7a). The
requirements apply to all transactions in which Vanguard personnel have acquired
or would acquire beneficial ownership (see section 6a) of a security, including
transactions by a spouse or minor child. However, the requirements do not apply
to transactions involving: (i) direct obligations of the Government of the
United States; (ii) high quality short-term debt instruments, including bankers'
acceptances, bank certificates of deposit, commercial paper, and repurchase
agreements; and (iii) shares of registered open-end investment companies
(including shares of any Vanguard fund). In addition, the requirements do not
apply to securities acquired for accounts over which the person has no direct or
indirect control or influence.
<PAGE>
b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose
their personal securities holdings to the Vanguard Compliance Department upon
commencement of employment with Vanguard. These disclosures must identify the
title, number of shares, and principal amount with respect to each security
holding.
c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify
the Vanguard Compliance Department if they have opened or intend to open a
brokerage account. Vanguard personnel must direct their brokers to supply the
Vanguard Compliance Department with duplicate confirmation statements of their
securities transactions and copies of all periodic statements for their
brokerage accounts.
d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify
annually to the Vanguard Compliance Department that: (i) they have read and
understand this Code of Ethics; (ii) they have complied with all requirements of
the Code of Ethics; and (3) they have reported all transactions required to be
reported under the Code of Ethics.
SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES
Disinterested Directors and Trustees (see section 7a) are required to report
their securities transactions to the Vanguard Compliance Department only in
cases where the Director or Trustee knew or should have known during the 15-day
period immediately preceding or following the date of the transaction that the
security had been purchased or sold, or was being considered for purchase or
sale, by a Vanguard fund.
SECTION 11: APPLICATION TO INVESTMENT ADVISERS
a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund
must adopt a code of ethics in compliance with Rule 17j-1 and provide the
Vanguard Compliance Department with a copy of the code of ethics and any
subsequent amendments. Each investment adviser is responsible for enforcing its
code of ethics and reporting to the Vanguard Compliance Department on a timely
basis any violations of the code of ethics and resulting sanctions.
<PAGE>
b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard
fund must prepare an annual report on its code of ethics for review by the Board
of Trustees of the Vanguard fund. This report must contain the following:
1) a description of any issues arising under the adviser's code of ethics
including, but not limited to, information about any violations of the
code, sanctions imposed in response to such violations, changes made
to the code's provisions or procedures, and any recommended changes to
the code; and
2) a certification that the investment adviser has adopted such
procedures as are reasonably necessary to prevent access persons from
violating the code of ethics.
SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES
a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the
services of any investment adviser for a Vanguard fund, the Board of Trustees of
the Vanguard fund must review the code of ethics adopted by the investment
adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The
Board of Trustees must receive a certification from the investment adviser that
the adviser has adopted such procedures as are reasonably necessary to prevent
access persons from violating the adviser's code of ethics. A majority of the
Trustees of the Vanguard fund, including a majority of the disinterested
Trustees of the Fund, must determine whether the adviser's code of ethics
contains such provisions as are reasonably necessary to prevent access persons
from engaging in any act, practice, or course of conduct prohibited by the
anti-fraud provisions of Rule 17j-1.
b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department
must prepare an annual report on this Code of Ethics for review by the Board of
Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The
report must contain the following:
1) a description of issues arising under the Code of Ethics since the
last report including, but not limited to, information about any
violations of the Code, sanctions imposed in response to such
violations, changes made to the Code's provisions or procedures, and
any recommended changes to the Code; and
<PAGE>
2) a certification that Vanguard and the Vanguard Funds have adopted such
procedures as are reasonably necessary to prevent access persons from
violating the Code of Ethics.
SECTION 13: SANCTIONS
In the event of any violation of this Code of Ethics, Vanguard senior management
will impose such sanctions as deemed necessary and appropriate under the
circumstances and in the best interests of Vanguard fund shareholders. In the
case of any violations by Vanguard employees, the range of sanctions could
include a letter of censure, suspension of employment without pay, or permanent
termination of employment.
SECTION 14: RETENTION OF RECORDS
Vanguard must maintain all records required by Rule 17j-1 including: (i) copies
of this Code of Ethics and the codes of ethics of all investment advisers to the
Vanguard funds; (ii) records of any violations of the codes of ethics and
actions taken as a result of the violations; (iii) copies of all certifications
made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard
personnel who are, or within the past five years have been, access persons
subject to the trading restrictions of section 8 and lists of the Vanguard
compliance personnel responsible for monitoring compliance with those trading
restrictions; and (v) copies of the annual reports to the Boards of Directors
and Trustees pursuant to section 12.
<PAGE>
WELLINGTON MANAGEMENT COMPANY, LLP
WELLINGTON TRUST COMPANY, NA
WELLINGTON MANAGEMENT INTERNATIONAL
WELLINGTON INTERNATIONAL MANAGEMENT COMPANY PTE LTD.
CODE OF ETHICS
- --------------------------------------------------------------------------------
Summary
Wellington Management Company, llp and its affiliates have a fiduciary duty to
investment company and investment counseling clients which requires each
employee to act solely for the benefit of clients. Also, each employee has a
duty to act in the best interest of the firm. In addition to the various laws
and regulations covering the firm's activities, it is clearly in the firm's best
interest as a professional investment advisory organization to avoid potential
conflicts of interest or even the appearance of such conflicts with respect to
the conduct of the firm's employees. Wellington Management's personal trading
and conduct must recognize that the firm's clients always come first, that the
firm must avoid any actual or potential abuse of our positions of trust and
responsibility, and that the firm must never take inappropriate advantage of its
positions. While it is not possible to anticipate all instances of potential
conflict, the standard is clear.
In light of the firm's professional and legal responsibilities, we believe it is
appropriate to restate and periodically distribute the firm's Code of Ethics to
all employees. It is Wellington Management's aim to be as flexible as possible
in its internal procedures, while simultaneously protecting the organization and
its clients from the damage that could arise from a situation involving a real
or apparent conflict of interest. While it is not possible to specifically
define and prescribe rules regarding all possible cases in which conflicts might
arise, this Code of Ethics is designed to set forth the policy regarding
employee conduct in those situations in which conflicts are most likely to
develop. If an employee has any doubt as to the propriety of any activity, he or
she should consult the President or Regulatory Affairs Department.
The Code reflects the requirements of United States law, Rule 17j-1 of the
Investment Company Act of 1940, as amended on October 29, 1999, as well as the
recommendations issued by an industry study group in 1994, which were strongly
supported by the SEC. The term "Employee" includes all employees and Partners.
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Policy on Personal
Securities
Transactions
Essentially, this policy requires that all personal securities transactions
(including acquisitions or dispositions other than through a purchase or sale)
by all Employees must be cleared prior to execution. The only exceptions to this
policy of prior clearance are noted below.
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Definition of
"Personal Securities
Transactions"
The following transactions by Employees are considered "personal" under
applicable SEC rules and therefore subject to this statement of policy:
1. Transactions for an Employee's own account, including IRA's.
2. Transactions for an account in which an Employee has indirect beneficial
ownership, unless the Employee has no direct or indirect influence or
control over the account. Accounts involving family (including husband,
wife, minor children or other dependent relatives), or accounts in which an
Employee has a beneficial interest (such as a trust of which the Employee
is an income or principal beneficiary) are included within the meaning of
"indirect beneficial interest".
If an Employee has a substantial measure of influence or control over an
account, but neither the Employee nor the Employee's family has any direct or
indirect beneficial interest (e.g., a trust for which the Employee is a trustee
but not a direct or indirect beneficiary), the rules relating to personal
securities transactions are not considered to be directly applicable. Therefore,
prior clearance and subsequent reporting of such transactions are not required.
In all transactions involving such an account an Employee should, however,
conform to the spirit of these rules and avoid any activity which might appear
to conflict with the investment company or counseling clients or with respect to
the Employee's position within Wellington Management. In this regard, please
note "Other Conflicts of Interest", found later in this Code of Ethics, which
does apply to such situations.
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<PAGE>
Preclearance
Required
EXCEPT AS SPECIFICALLY EXEMPTED IN THIS SECTION, ALL EMPLOYEES MUST CLEAR
PERSONAL SECURITIES TRANSACTIONS PRIOR TO EXECUTION. This includes bonds, stocks
(including closed end funds), convertibles, preferreds, options on securities,
warrants, rights, etc. for domestic and foreign securities, whether publicly
traded or privately placed. The only exceptions to this requirement are
automatic dividend reinvestment and stock purchase plan acquisitions,
broad-based stock index and U.S. government securities futures and options on
such futures, transactions in open-end mutual funds, U.S. Government securities,
commercial paper, or non-volitional transactions. Non-volitional transactions
include gifts to an Employee over which the Employee has no control of the
timing or transactions which result from corporate action applicable to all
similar security holders (such as splits, tender offers, mergers, stock
dividends, etc.). Please note, however, that most of these transactions must be
reported even though they do not have to be precleared. See the following
section on reporting obligations.
Clearance for transactions must be obtained by contacting the Director of Global
Equity Trading or those personnel designated by him for this purpose. Requests
for clearance and approval for transactions may be communicated orally or via
email. The Trading Department will maintain a log of all requests for approval
as coded confidential records of the firm. Private placements (including both
securities and partnership interests) are subject to special clearance by the
Director of Regulatory Affairs, Director of Enterprise Risk Management or the
General Counsel, and the clearance will remain in effect for a reasonable period
thereafter, not to exceed 90 days.
CLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS FOR PUBLICLY TRADED SECURITIES
WILL BE IN EFFECT FOR ONE TRADING DAY ONLY. THIS "ONE TRADING DAY" POLICY IS
INTERPRETED AS FOLLOWS:
O IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL MARKET IN WHICH THE
SECURITY TRADES IS OPEN, CLEARANCE IS EFFECTIVE FOR THE REMAINDER OF THAT
TRADING DAY UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING DAY.
O IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL MARKET IN WHICH THE
SECURITY TRADES IS CLOSED, CLEARANCE IS EFFECTIVE FOR THE NEXT TRADING DAY
UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING DAY.
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Filing of Reports
Records of personal securities transactions by Employees will be maintained. All
Employees are subject to the following reporting requirements:
1
Duplicate Brokerage
Confirmations
All Employees must require their securities brokers to send duplicate
confirmations of their securities transactions to the Regulatory Affairs
Department. Brokerage firms are accustomed to providing this service. Please
contact Regulatory Affairs to obtain a form letter to request this service. Each
employee must return to the Regulatory Affairs Department a completed form for
each brokerage account that is used for PERSONAL SECURITIES TRANSACTIONS OF THE
EMPLOYEE. EMPLOYEES SHOULD NOT send the completed forms to their brokers
directly. The form must be completed and returned to the Regulatory Affairs
Department prior to any transactions being placed with the broker. The
Regulatory Affairs Department will process the request in order to assure
delivery of the confirms directly to the Department and to preserve the
confidentiality of this information. When possible, the transaction confirmation
filing requirement will be satisfied by electronic filings from securities
depositories.
2
Filing of Quarterly
Report of all
"Personal Securities
Transactions"
SEC rules require that a quarterly record of all personal securities
transactions submitted by each person subject to the Code's requirements and
that this record be available for inspection. To comply with these rules, every
Employee must file a quarterly personal securities transaction report within 10
calendar days after the end of each calendar quarter. Reports are filed
electronically utilizing the firm's proprietary Personal Securities Transaction
Reporting System (PSTRS) accessible to all Employees via the Wellington
Management Intranet.
At the end of each calendar quarter, Employees will be notified of the filing
requirement. Employees are responsible for submitting the quarterly report
within the deadline established in the notice.
Transactions during the quarter indicated on brokerage confirmations or
electronic filings are displayed on the Employee's reporting screen and must be
affirmed if they are accurate. Holdings not acquired through a broker submitting
confirmations must be entered manually. All Employees are required to submit a
quarterly report, even if there were no reportable transactions during the
quarter.
Employees must also provide information on any new brokerage account established
during the quarter including the name of the broker, dealer or bank and the date
the account was established.
IMPORTANT NOTE: The quarterly report must include the required information for
all "personal securities transactions" as defined above, except transactions in
open-end mutual funds, money market securities, U.S. Government securities, and
futures and options on futures on U.S. government securities. Non-volitional
transactions and those resulting from corporate actions must also be reported
even though preclearance is not required and the nature of the transaction must
be clearly specified in the report.
3
Certification of Compliance
As part of the quarterly reporting process on PSTRS, Employees are required to
confirm their compliance with the provisions of this Code of Ethics.
4
Filing of Personal
Annually, all Employees must file a schedule indicating their personal
securities holdings as of December 31 of each year by the following January 30.
SEC Rules require that this report include the title, number of shares and
principal amount of each security held in an Employee's personal account, and
the name of any broker, dealer or bank with whom the Employee maintains an
account. "Securities" for purposes of this report are those which must be
reported as indicated in the prior paragraph. Newly hired Employees are required
to file a holding report within ten (10) days of joining the firm. Employees may
indicate securities held in a brokerage account by attaching an account
statement, but are not required to do so, since these statements contain
additional information not required by the holding report.
5
Review of Reports
All reports filed in accordance with this section will be maintained and kept
confidential by the Regulatory Affairs Department. Reports will be reviewed by
the Director of Regulatory Affairs or personnel designated by her for this
purpose.
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Restrictions on
"Personal Securities
Transactions"
While all personal securities transactions must be cleared prior to execution,
the following guidelines indicate which transactions will be prohibited,
discouraged, or subject to nearly automatic clearance. The clearance of personal
securities transactions may also depend upon other circumstances, including the
timing of the proposed transaction relative to transactions by our investment
counseling or investment company clients; the nature of the securities and the
parties involved in the transaction; and the percentage of securities involved
in the transaction relative to ownership by clients. The word "clients" refers
collectively to investment company clients and counseling clients. Employees are
expected to be particularly sensitive to meeting the spirit as well as the
letter of these restrictions.
Please note that these restrictions apply in the case of debt securities to the
specific issue and in the case of common stock, not only to the common stock,
but to any equity-related security of the same issuer including preferred stock,
options, warrants, and convertible bonds. Also, a gift or transfer from you (an
Employee) to a third party shall be subject to these restrictions, unless the
donee or transferee represents that he or she has no present intention of
selling the donated security.
1
No Employee may engage in personal transactions involving any securities which
are:
o being bought or sold on behalf of clients until one trading day after such
buying or selling is completed or canceled. In addition, no Portfolio
Manager may engage in a personal transaction involving any security for 7
days prior to, and 7 days following, a transaction in the same security for
a client account managed by that Portfolio Manager without a special
exemption. See "Exemptive Procedures" below. Portfolio Managers include all
designated portfolio managers and others who have direct authority to make
investment decisions to buy or sell securities, such as investment team
members and analysts involved in Research Equity portfolios. All Employees
who are considered Portfolio Managers will be so notified by the Regulatory
Affairs Department.
o the subject of a new or changed action recommendation from a research
analyst until 10 business days following the issuance of such
recommendation;
o the subject of a reiterated but unchanged recommendation from a research
analyst until 2 business days following reissuance of the recommendation
o actively contemplated for transactions on behalf of clients, even though no
buy or sell orders have been placed. This restriction applies from the
moment that an Employee has been informed in any fashion that any Portfolio
Manager intends to purchase or sell a specific security. This is a
particularly sensitive area and one in which each Employee must exercise
caution to avoid actions which, to his or her knowledge, are in conflict or
in competition with the interests of clients.
2
The Code of Ethics strongly discourages short term trading by Employees. In
addition, no Employee may take a "short term trading" profit in a security,
which means the sale of a security at a gain (or closing of a short position at
a gain) within 60 days of its purchase, without a special exemption. See
"Exemptive Procedures". The 60 day prohibition does not apply to transactions
resulting in a loss, nor to futures or options on futures on broad-based
securities indexes or U.S. government securities.
3
No Employee engaged in equity or bond trading may engage in personal
transactions involving any equity securities of any company whose primary
business is that of a broker/dealer.
4
Subject to preclearance, Employees may engage in short sales, options, and
margin transactions, but such transactions are strongly discouraged,
particularly due to the 60 day short term profit-taking prohibition. Any
Employee engaging in such transactions should also recognize the danger of being
"frozen" or subject to a forced close out because of the general restrictions
which apply to personal transactions as noted above. In specific case of
hardship an exception may be granted by the Director of Regulatory Affairs or
her designee upon approval of the Ethics Committee with respect to an otherwise
"frozen" transaction.
5
No Employee may engage in personal transactions involving the purchase of any
security on an initial public offering. This restriction also includes new
issues resulting from spin-offs, municipal securities and thrift conversions,
although in limited cases the purchase of such securities in an offering may be
approved by the Director of Regulatory Affairs or her designee upon determining
that approval would not violate any policy reflected in this Code. This
restriction does not apply to open-end mutual funds, U. S. government issues or
money market investments.
6
EMPLOYEES MAY NOT PURCHASE SECURITIES IN PRIVATE PLACEMENTS UNLESS APPROVAL OF
THE DIRECTOR OF REGULATORY AFFAIRS, DIRECTOR OF ENTERPRISE RISK MANAGEMENT OR
THE GENERAL COUNSEL HAS BEEN OBTAINED. This approval will be based upon a
determination that the investment opportunity need not be reserved for clients,
that the Employee is not being offered the investment opportunity due to his or
her employment with Wellington Management and other relevant factors on a
case-by-case basis. If the Employee has portfolio management or securities
analysis responsibilities and is granted approval to purchase a private
placement, he or she must disclose the privately placed holding later if asked
to evaluate the issuer of the security. An independent review of the Employee's
analytical work or decision to purchase the security for a client account will
then be performed by another investment professional with no personal interest
in the transaction.
Gifts and Other
Sensitive Payments
Employees should not seek, accept or offer any gifts or favors of more than
minimal value or any preferential treatment in dealings with any client,
broker/dealer, portfolio company, financial institution or any other
organization WITH WHOM THE FIRM TRANSACTS business. Occasional participation in
lunches, dinners, cocktail parties, sporting activities or similar gatherings
conducted for business purposes are not prohibited. However, for both the
Employee's protection and that of the firm it is extremely important that even
the appearance of a possible conflict of interest be avoided. Extreme caution is
to be exercised in any instance in which business related travel and lodgings
are paid for other than by Wellington Management, and prior approval must be
obtained from the Regulatory Affairs Department.
Any question as to the propriety of such situations should be discussed with the
Regulatory Affairs Department and any incident in which an Employee is
encouraged to violate these provisions should be reported immediately. An
explanation of all extraordinary travel, lodging and related meals and
entertainment is to be reported in a brief memorandum to the Director of
Regulatory Affairs.
Employees must not participate individually or on behalf of the firm, a
subsidiary, or any client, directly or indirectly, in any of the following
transactions:
1
Use of the firm's funds for political purposes.
2
Payment or receipt of bribes, kickbacks, or payment or receipt of any other
amount with an understanding that part or all of such amount will be refunded or
delivered to a third party in violation of any law applicable to the
transaction.
3
Payments to government officials or employees (other than disbursements in the
ordinary course of business for such legal purposes as payment of taxes).
4
Payment of compensation or fees in a manner the purpose of which is to assist
the recipient to evade taxes, federal or state law, or other valid charges or
restrictions applicable to such payment.
5
Use of the funds or assets of the firm or any subsidiary for any other unlawful
or improper purpose.
- --------------------------------------------------------------------------------
Other Conflicts of
Interest
Employees should also be aware that areas other than personal securities
transactions or gifts and sensitive payments may involve conflicts of interest.
The following should be regarded as examples of situations involving real or
potential conflicts rather than a complete list of situations to avoid.
"Inside Information"
Specific reference is made to the firm's policy on the use of "inside
information" which applies to personal securities transactions as well as to
client transactions.
Use of Information
Information acquired in connection with employment by the organization may not
be used in any way which might be contrary to or in competition with the
interests of clients. Employees are reminded that certain clients have
specifically required their relationship with us to be treated confidentially.
Disclosure of
Information
Information regarding actual or contemplated investment decisions, research
priorities or client interests should not be disclosed to persons outside our
organization and in no way can be used for personal gain.
Outside
Activities
All outside relationships such as directorships or trusteeships of any kind or
membership in investment organizations (e.g., an investment club) must be
cleared by the Director of Regulatory Affairs prior to the acceptance of such a
position. As a general matter, directorships in unaffiliated public companies or
companies which may reasonably be expected to become public companies will not
be authorized because of the potential for conflicts which may impede our
freedom to act in the best interests of clients. Service with charitable
organizations generally will be authorized, subject to considerations related to
time required during working hours and use of proprietary information.
Exemptive Procedure
The Director of Regulatory Affairs, the Director of Enterprise Risk Management,
the General Counsel or the Ethics Committee can grant exemptions from the
personal trading restrictions in this Code upon determining that the transaction
for which an exemption is requested would not result in a conflict of interest
or violate any other policy embodied in this Code. Factors to be considered may
include: the size and holding period of the Employee's position in the security,
the market capitalization of the issuer, the liquidity of the security, the
reason for the Employee's requested transaction, the amount and timing of client
trading in the same or a related security, and other relevant factors.
Any Employee wishing an exemption should submit a written request to the
Director of Regulatory Affairs setting forth the pertinent facts and reasons why
the employee believes that the exemption should be granted. Employees are
cautioned that exemptions are intended to be exceptions, and repetitive
exemptive applications by an Employee will not be well received.
Records of the approval of exemptions and the reasons for granting exemptions
will be maintained by the Regulatory Affairs Department.
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Compliance with
The Code of Ethics
Adherence to the Code of Ethics is considered a basic condition of employment
with our organization. The Ethics Committee monitors compliance with the Code
and reviews violations of the Code to determine what action or sanctions are
appropriate.
Violations of the provisions regarding personal trading will presumptively be
subject to being reversed in the case of a violative purchase, and to
disgorgement of any profit realized from the position (net of transaction costs
and capital gains taxes payable with respect to the transaction) by payment of
the profit to any client disadvantaged by the transaction, or to a charitable
organization, as determined by the Ethics Committee, unless the Employee
establishes to the satisfaction of the Ethics Committee that under the
particular circumstances disgorgement would be an unreasonable remedy for the
violation.
Violations of the Code of Ethics may also adversely affect an Employee's career
with Wellington Management with respect to such matters as compensation and
advancement.
Employees must recognize that a serious violation of the Code of Ethics or
related policies may result, at a minimum, in immediate dismissal. Since many
provisions of the Code of Ethics also reflect provisions of the U.S. securities
laws, Employees should be aware that violations could also lead to regulatory
enforcement action resulting in suspension or expulsion from the securities
business, fines and penalties, and imprisonment.
Again, Wellington Management would like to emphasize the importance of obtaining
prior clearance of all personal securities transactions, avoiding prohibited
transactions, filing all required reports promptly and avoiding other situations
which might involve even an apparent conflict of interest. Questions regarding
interpretation of this policy or questions related to specific situations should
be directed to the Regulatory Affairs Department or Ethics Committee.
Revised: March 1, 2000
<PAGE>
FRANKLIN PORTFOLIO ASSOCIATES
CORPORATE POLICIES & PROCEDURES MANUAL
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Chapter Document Number
CORPORATE OBJECTIVES AND STANDARDS CPP-102-1
- --------------------------------------------------------------------------------
Section Revised Date
CODE OF CONDUCT 12/8/95
- --------------------------------------------------------------------------------
Subject Page Number
Introduction and Responsibilities 1 of 3
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
INTRODUCTION:
Today's financial services marketplace is filled with a host of new challenges,
changes and opportunities. Amidst these changes, one constant guides Mellon Bank
Corporation and will continue to be central to all that we do: the mandate for
integrity.
Only by conducting ourselves and our business in accordance with the highest
standards of legal, ethical and moral integrity can we achieve our vision of
excellence and our goals for the future.
This Code of Conduct will familiarize you with the general guidelines of
professional conduct expected from associates in their interactions with
customers, prospective customers, competitors, suppliers, the communities we
serve, and one another. As Mellon associates, we can settle for nothing less
than full adherence to the Code.
Please read the Code carefully and retain it for your records. From time to
time, you may be asked to certify in writing that you have followed the Code, so
be sure you understand it. Appropriate officers should periodically reinforce
the importance of the Code to their associates, pointing out provisions of
particular relevance.
The penalty for violating any provision of this Code may be disciplinary action
up to and including dismissal. In addition, all violations of criminal laws
applicable to Mellon's business will be reported to the appropriate authorities
for prosecution.
Certain topics addressed in this Code of Conduct are addressed in greater detail
in Mellon's Confidential Information and Securities Trading Policies (CPP-903,
1-5). These topics include the treatment of confidential information,
restrictions on securities trading by associates and the "Chinese Wall" policy.
If you have any questions about this Code, ask your supervisor or consult with
Legal Affairs. If you suspect a violation of the Code of Conduct, contact the
General Counsel or Chief Compliance Officer.
All communications will be handled in a confidential manner.
Terms frequently used in the Code are defined as follows:
o appropriate officer - head of the affected group, department or subsidiary
o approval - formal written consent
o employee - any employee of Mellon Bank Corporation or any of its subsidiaries
o Bank - any bank or savings and loan association subsidiary, direct or
indirect, of Mellon Bank Corporation
o Chief Compliance Officer - Chief Compliance Officer of Mellon Bank Corporation
o Confidential Information and Securities Trading Policy - Mellon Bank
Corporation's Confidential Information and Securities Trading Policies
(CPP-903)
o Corporation - Mellon Bank Corporation
o General Counsel - General Counsel of Mellon Bank Corporation
o Mellon - Mellon Bank Corporation and all its subsidiaries and affiliates
<PAGE>
YOUR RESPONSIBILITIES:
As an associate, your personal conduct should reflect the highest professional
standards of behavior. You are obliged to monitor your personal and professional
affairs so as not to discredit yourself or Mellon. Your behavior at work
reflects Mellon's ethics, so you are expected to:
o obey all laws and regulations that apply to Mellon's business
o avoid activities that could create conflicts of interest or even the
appearance of conflicts of interest with Mellon; and
o respect the confidentiality of Mellon business information and information
about those with whom Mellon has business relationships.
Details of the above obligations are presented in the remainder of this Code of
Conduct. Remember, these standards and examples serve as guidelines.
Mellon has established the Questionable Activities Hotline (800-234-MELN, Ext.
4-8477) so associates may call to report suspected violations of the Code or
criminal activity involving Mellon. Calls may be made anonymously.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
LEGAL AND REGULATORY CPP-903-1
- --------------------------------------------------------------------------------
Section Revised Date
CONFIDENTIAL INFORMATION AND SECURITIES TRADING 10/2/95
- --------------------------------------------------------------------------------
Subject Page Number
Introduction and Definitions 1 of 7
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
INTRODUCTION :
Mellon Bank Corporation ("Mellon") and its associates, and the registered
investment companies for which The Dreyfus Corporation ("Dreyfus") and/or Mellon
serves as investment adviser, sub-investment adviser or administrator, are
subject to certain laws and regulations governing the use of confidential
information and personal securities trading. Mellon has developed Corporate
Policies CPP-903, 1-5, to establish specific standards to promote compliance
with applicable laws. Further, the Policies are intended to protect Mellon's
business secrets and proprietary information as well as that of its customers
and any entity for which it acts in a fiduciary capacity.
Corporate Policies CPP-903, 1-5, set forth procedures and limitations which
govern the personal securities transactions of every Mellon associate and
certain other individuals associated with the registered investment companies
for which Dreyfus and/or Mellon serves as investment adviser, sub-investment
adviser or administrator. The Policies are designed to reinforce Mellon's
reputation for integrity by avoiding even the appearance of impropriety in the
conduct of Mellon's business.
Associates should be aware that they may be held personally liable for any
improper or illegal acts committed during the course of their employment, and
that "ignorance of the law" is not a defense. Associates may be subject to civil
penalties such as fines, regulatory sanctions including suspensions, as well as
criminal penalties.
Associates outside the United States are also subject to applicable laws of
foreign jurisdictions, which may differ substantially from U.S. law and which
may subject such associates to additional requirements. Such associates must
comply with applicable requirements of pertinent foreign laws as well as with
the provisions of the Corporate Policies. To the extent any particular portion
of the Policies are inconsistent with foreign law, associates should consult the
General Counsel or the Manager of Corporate Compliance.
Any provision of the Policies may be waived or exempted at the discretion of the
Manager of Corporate Compliance. Any such waiver or exemption will be evidenced
in writing and maintained in the Risk Management and Compliance Department.
Associates must read the Policies and must comply with them. Failure to comply
with the provisions of the Policies may result in the imposition of serious
sanctions, including but not limited to disgorgement of profits, dismissal,
substantial personal liability and referral to law enforcement agencies or other
regulatory agencies. Associates should retain the Policies in their records for
future reference. Any questions regarding the Policies should be referred to the
Manager of Corporate Compliance or his/her designee.
DEFINITIONS:
Terms frequently used in the Policies are defined as follows:
Approval - written consent or written notice of nonobjection.
Associate - any employee of Mellon Bank Corporation or its direct or indirect
subsidiaries; does not include outside consultants or temporary help.
Beneficial Ownership - securities owned of record or held in the associate's
name are generally considered to be beneficially owned by the associate.
Securities held in the name of any other person are deemed to be beneficially
owned by the associate if by reason of any contract, understanding,
relationship, agreement or other arrangement, the associate obtains therefrom
benefits substantially equivalent to those of ownership, including the power to
vote, or to direct the disposition of, such securities. Beneficial ownership
includes securities held by others for the associate's benefit (regardless of
record ownership), e.g. securities held for the associate or members of the
associate's immediate family, defined below, by agents, custodians, brokers,
trustees, executors or other administrators; securities owned by the associate,
but which have not been transferred into the associate's name on the books of
the company; securities which the associate has pledged; or securities owned by
a corporation that should be regarded as the associate's personal holding
corporation. As a natural person, beneficial ownership is deemed to include
securities held in the name or for the benefit of the associate's immediate
family, which includes the associate's spouse, the associate's minor children
and stepchildren and the associate's relatives or the relatives of the
associate's spouse who are sharing the associate's home, unless because of
countervailing circumstances, the associate does not enjoy benefits
substantially equivalent to those of ownership. Benefits substantially
equivalent to ownership include, for example, application of the income derived
from such securities to maintain a common home, meeting expenses that such
person otherwise would meet from other sources, and the ability to exercise a
controlling influence over the purchase, sale or voting of such securities. An
associate is also deemed the beneficial owner of securities held in the name of
some other person, even though the associate does not obtain benefits of
ownership, if the associate can vest or revest title in himself at once, or at
some future time.
In addition, a person will be deemed the beneficial owner of a security if he
has the right to acquire beneficial ownership of such security at any time
(within 60 days) including but not limited to any right to acquire: (1) through
the exercise of any option, warrant or right; (2) through the conversion of a
security; or (3) pursuant to the power to revoke a trust, nondiscretionary
account or similar arrangement.
With respect to ownership of securities held in trust, beneficial ownership
includes ownership of securities as a trustee in instances where either the
associate as trustee or a member of the associate's "immediate family" has a
vested interest in the income or corpus of the trust, the ownership by the
associate of a vested beneficial interest in the trust and the ownership of
securities as a settlor of a trust in which the associate as the settlor has the
power to revoke the trust without obtaining the consent of the beneficiaries.
Certain exemptions to these trust beneficial ownership rules exist, including an
exemption for instances where beneficial ownership is imposed solely by reason
of the associate being settlor or beneficiary of the securities held in trust
and the ownership, acquisition and disposition of such securities by the trust
is made without the associate's prior approval as settlor or beneficiary.
"Immediate family" of an associate as trustee means the associate's son or
daughter (including any legally adopted children) or any descendant of either,
the associate's stepson or stepdaughter, the associate's father or mother or any
ancestor of either, the associate's stepfather or stepmother and his spouse.
To the extent that stockholders of a company use it as a personal trading or
investment medium and the company has no other substantial business,
stockholders are regarded as beneficial owners, to the extent of their
respective interests, of the stock thus invested or traded in. A general partner
in a partnership is considered to have indirect beneficial ownership in the
securities held by the partnership to the extent of his pro rata interest in the
partnership. Indirect beneficial ownership is not, however, considered to exist
solely by reason of an indirect interest in portfolio securities held by any
holding company registered under the Public Utility Holding Company Act of 1935,
a pension or retirement plan holding securities of an issuer whose employees
generally are beneficiaries of the plan and a business trust with over 25
beneficiaries.
Any person who, directly or indirectly, creates or uses a trust, proxy, power of
attorney, pooling arrangement or any other contract, arrangement or device with
the purpose or effect of divesting such person of beneficial ownership as part
of a plan or scheme to evade the reporting requirements of the Securities
Exchange Act of 1934 shall be deemed the beneficial owner of such security.
The final determination of beneficial ownership is a question to be determined
in light of the facts of a particular case. Thus, while the associate may
include security holdings of other members of his family, the associate may
nonetheless disclaim beneficial ownership of such securities.
"Chinese Wall" Policy - procedures designed to restrict the flow of information
within Mellon from units or individuals who are likely to receive material
nonpublic information to units or individuals who trade in securities or provide
investment advice. See CPP-903-2, Confidential Information and the Chinese Wall,
for more information.
Corporation - Mellon Bank Corporation.
Dreyfus - The Dreyfus Corporation and its subsidiaries.
Dreyfus Associate - any employee of Dreyfus; does not include outside
consultants or temporary help.
Exempt Securities - Exempt Securities are defined as:
o securities issued or guaranteed by the United States government or agencies or
instrumentalities;
o bankers' acceptances;
o bank certificates of deposit and time deposits;
o commercial paper;
o repurchase agreements; and
o securities issued by open-end investment companies.
General Counsel - General Counsel of Mellon Bank Corporation or any person to
whom relevant authority is delegated by the General Counsel.
Index Fund - an investment company which seeks to mirror the performance of the
general market by investing in the same stocks (and in the same proportion) as
a broad-based market index.
Initial Public Offering (IPO) - the first offering of a company's securities to
the public.
DEFINITIONS:
Investment Company - a company that issues securities that represent an
undivided interest in the net assets held by the company. Mutual funds are
investment companies that issue and sell redeemable securities representing an
undivided interest in the net assets of the company.
Manager of Corporate Compliance - the associate within the Risk Management and
Compliance Department of Mellon Bank Corporation who is responsible for
administering the Confidential Information and Securities Trading Policy, or
any person to whom relevant authority is delegated by the Manager of Corporate
Compliance.
Mellon - Mellon Bank Corporation and all of its direct and indirect
subsidiaries.
Naked Option - an option sold by the investor which obligates him or her to sell
a security which he or she does not own.
Nondiscretionary Trading Account - an account over which the associated person
has no direct or indirect control over the investment decision-making process.
Option - a security which gives the investor the right but not the obligation to
buy or sell a specific security at a specified price within a specified time.
Preclearance Compliance Officer - a person designated by the Manager of
Corporate Compliance, to administer, among other things, associates'
preclearance request for a specific business unit.
Private Placement - an offering of securities that is exempt from registration
under the Securities Act of 1933 because it does not constitute a public
offering.
Senior Management Committee - the Senior Management Committee of Mellon Bank
Corporation.
Short Sale - the sale of a security that is not owned by the seller at the time
of the trade.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
LEGAL AND REGULATORY CPP-903-3
- --------------------------------------------------------------------------------
Section Revised Date
CONFIDENTIAL INFORMATION AND SECURITIES TRADING 6/14/99
- --------------------------------------------------------------------------------
Subject Page Number
Security Transactions by Employees 1 of 6
- --------------------------------------------------------------------------------
Issuing Department
Legal
- --------------------------------------------------------------------------------
POLICY:
Employees who engage in transactions involving Mellon securities should be aware
of their unique responsibilities with respect to such transactions arising from
the employment relationship and should be sensitive to even the appearance of
impropriety.
Purchases or sales by an employee of the securities of issuers with which Mellon
does business, or other third party issuers, could result in liability on the
part of such employee. Employees should be sensitive to even the appearance of
impropriety in connection with their personal securities transactions. Employees
should refer to the provisions under "Beneficial Ownership" below, which are
equally applicable to the restrictions on transactions in other securities.
The Mellon Code of Conduct contains certain restrictions on investments in
parties that do business with Mellon. Employees should refer to the Code of
Conduct and comply with such restrictions in addition to the restrictions and
reporting requirements set forth below.
MELLON
SECURITIES: The following restrictions apply to all transactions in Mellon's
publicly traded securities occurring in the employee's own account and in all
other accounts over which the employee could be expected to exercise influence
or control (see provisions under "Beneficial Ownership" below for more complete
discussion of the accounts to which these restrictions apply). These
restrictions are to be followed in addition to any restrictions that apply to
particular officers or directors (such as restrictions under Section 16 of the
Securities Exchange Act of 1934).
Short Sales - Short sales of Mellon securities by employees are prohibited.
Short Term Trading - Purchasing and selling, or selling and purchasing the same
(equivalent) Mellon securities within 60 days is prohibited. For purposes of
the 60-day holding period, securities will be equivalent if one is convertible
into the other, if one entails a right to purchase or sell the other, or if
the value of one is expressly dependent on the value of the other (e.g.,
derivative securities).
In cases of extreme hardship, employees (other than senior management) may
obtain permission to dispose of Mellon securities acquired within 60 days of the
proposed transaction, provided the transaction is pre-cleared with the Manager
of Corporate Compliance and any profits earned are disgorged in accordance with
procedures established by senior management. The Manager of Corporate Compliance
reserves the right to suspend the 60-day holding period restriction in the event
of severe market disruption.
Margin Transactions - Purchasing on margin of Mellon's publicly traded
securities by employees is prohibited. Margining Mellon securities in connect-
ion with a cashless exercise of an employee stock option through the Human
Resources Department is exempt from this restriction. Further, Mellon securi-
ties may be used to collateralize loans or the acquisition of securities other
than those issued by Mellon.
Option Transactions - Option transactions involving Mellon's publicly traded
securities are prohibited.Transactions under Mellon's Long-Term Incentive Plan
or other employee option plans are exempt from this restriction.
Major Mellon Events - Employees who have knowledge of major Mellon events that
have not yet been announced are prohibited from buying and selling Mellon's
publicly traded securities before such public announcements, even if the
employee believes the event does not constitute material nonpublic
information.
Mellon Blackout Period - Employees are prohibited from buying or selling
Mellon's publicly traded securities during a blackout period, which begins the
16th day of the last month of each calendar quarter and ends three business
days after Mellon publicly announces the financial results for that quarter.
In cases of extreme hardship, employees (other than senior management) may
request permission from the Manager of Corporate Compliance to dispose of
Mellon securities during the blackout period.
PLAN: For purposes of the blackout period and the short-term trading rule,
changing the investment in Mellon Common Stock accumulated pre-tax balance in
the Mellon 401(k) plan will be treated as a purchase or sale of Mellon Stock.
This means:
o Employees are prohibited from increasing or decreasing their accumulated
pre-tax balance in Mellon Common Stock during the blackout period.
o Employees are prohibited from increasing their accumulated pre-tax balance in
Mellon Common Stock and then decreasing it within 60 days.
o Employees are prohibited from decreasing their accumulated pre-tax balance in
Mellon Common Stock and then increasing it within 60 days. However, changes
to investments in Mellon Common Stock in the 401(k) plan will not be compared
to transactions in Mellon securities outside the 401(k) for purposes of the
60-day rule (Note: This does not apply to members of the Executive Management
Group, who should consult with the Legal Department.)
Except for the above there are no other restrictions applicable to the 401(k)
plan. This means, for example:
o Insider Risk and Investment Employees are not required to pre-clear any
elections or changes made in their 401(k) account.
o There is no restriction on employees' changing their salary deferral
contribution percentages with regard to either the blackout period or the
60-day rule.
o The regular salary deferral contribution to Mellon Common Stock in the 401(k)
that takes place with each pay will not be considered a purchase for the
purposes of either the blackout or the 60-day rule.
BENEFICIAL
OWNERSHIP:
The provisions discussed above apply to transactions in the employee's own name
and to all other accounts over which the employee could be expected to exercise
influence or control, including:
o accounts of a spouse, minor children or relatives to whom substantial support
is contributed;
o accounts of any other member of the employee's household (e.g., a relative
living in the same home);
o trust accounts for which the employee acts as trustee or otherwise exercises
any type of guidance or influence;
o Corporate accounts controlled, directly or indirectly, by the employee;
o arrangements similar to trust accounts that are established for bona fide
financial purposes and benefit the employee; and
o any other account for which the employee is the beneficial owner (see
CPP-903-1, Introduction and Definitions, for a complete legal definition of
Beneficial Ownership).
OTHER
SECURITIES:
The following restrictions apply to all securities transactions by employees:
Credit or Advisory Relationship - Employees may not buy or sell securities of a
company if they are considering granting, renewing or denying any credit
facility to that company or acting as an adviser to that company with respect
to its securities. In addition, lending employees who have assigned
responsibilities in a specific industry group are not permitted to trade
securities in that industry. This prohibition does not apply to transactions
in securities issued by open-end investment companies.
Customer Transactions - Trading for customers and Mellon accounts should always
take precedence over employees' transactions for their own or related
accounts.
OTHER
SECURITIES:
Front Running - Employees may not engage in "front running," that is, the
purchase or sale of securities for their own accounts on the basis of their
knowledge of Mellon's trading positions or plans.
Initial Public Offerings - Mellon prohibits its employees from acquiring any
securities in an initial public offering ("IPO").
Margin Transactions - Margin trading is a highly leveraged and relatively risky
method of investing that can create particular problems for financial services
employees. For this reason, all employees are urged to avoid margin trading.
Prior to establishing a margin account, the employee must obtain the written
permission of the Manager of Corporate Compliance. Any employee having a margin
account prior to the effective date of these Policies must notify the Manager of
Corporate Compliance of the existence of such account.
All employees having margin accounts, other than described below, must designate
the Manager of Corporate Compliance as an interested party on that account.
Employees must ensure that the Manager of Corporate Compliance promptly receives
copies of all trade confirmations and statements relating to the account
directly from the broker. If requested by a brokerage firm, please contact the
Manager of Corporate Compliance to obtain a letter (sometimes referred to as a
"407 letter") granting permission to maintain a margin account. Trade
confirmations and statements are not required on margin accounts established at
Dreyfus Investment Services Corporation for the sole purpose of cashless
exercises of employee stock options. In addition, products may be offered by a
broker/dealer that, because of their characteristics, are considered margin
accounts but have been determined by the Manager of Corporate Compliance to be
outside the scope of these Policies (e.g., a Cash Management Account that
provides overdraft protection for the customer). Any questions regarding the
establishment, use and reporting of margin accounts should be directed to the
Manager of Corporate Compliance (Refer to Exhibits B1 and B2 in the Confidential
Information and Securities Trading Policy booklet for an example of an
instruction letter to a broker).
OTHER
SECURITIES:
Material Nonpublic Information - Employees possessing material nonpublic
information regarding any issuer of securities must refrain from purchasing or
selling securities of that issuer until the information becomes public or is
no longer considered material.
Naked Options, Excessive Trading - Mellon discourages all employees from
engaging in short-term or speculative trading, in trading naked options, in
trading that could be deemed excessive or in trading that could interfere with
an employee's job responsibilities.
Private Placements - Employees are prohibited from acquiring any security in a
private placement unless they obtain the prior written approval of the
Pre-clearance Compliance Officer (applicable only to Investment Employees as
defined in PP-903-4, Classification of Employees), Manager of Corporate
Compliance and the employee's department head. Approval must be given by all
appropriate aforementioned persons for the acquisition to be considered
approved. After receipt of the necessary approvals and the acquisition,
employees are required to disclose that investment when they participate in
any subsequent consideration of an investment in the issuer for an advised
account. Final decision to acquire such securities for an advised account will
be subject to independent review.
Scalping - Employees may not engage in "scalping," that is, the purchase or sale
of securities for their own or Mellon's accounts on the basis of knowledge of
customers' trading positions or plans or Mellon's forthcoming investment
recommendations.
Short-Term Trading - Employees are discouraged from purchasing and selling, or
from selling and purchasing, the same (or equivalent) securities within 60
calendar days. With respect to Investment Employees only as defined in
CPP-903-4 (Classification of Employees), any profits realized on such short-
term trades must be disgorged in accordance with procedures established by
senior management.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
LEGAL AND REGULATORY CPP-903-4 (A)
- --------------------------------------------------------------------------------
Section Revised Date
CONFIDENTIAL INFORMATION AND SECURITIES TRADING 10/2/95
- --------------------------------------------------------------------------------
Subject Page Number
Requirements Applicable to Insider Risk Associates Only 8 of 8
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
POLICY:
No Insider Risk Associate may engage in or recommend any securities transaction
that places, or appears to place, his or her own interests above those of any
customer to whom investment services are rendered, including mutual funds and
managed accounts, or above the interests of Mellon.
EFFECTIVE
DATE:
The following restrictions will be effective upon adoption of Corporate Policies
CPP-903, 1-5. Securities of financial services organizations properly acquired
before the later of the effective date of these Policies or the date of hire may
be maintained or disposed of at the owner's discretion.
Additional securities of a financial services organization acquired through the
reinvestment of the dividends paid by such financial services organization
through a dividend reinvestment program (DRIP) are not subject to this
prohibition, provided your election to participate in the DRIP predates the
later of the effective date of these Policies or date of hire. Optional cash
purchases through a DRIP are subject to this prohibition.
Within 30 days of the later of the effective date of these Policies or date of
becoming subject to this prohibition, all holdings of securities of financial
services organizations must be disclosed in writing to the Manager of Corporate
Compliance. Periodically, you will be asked to file an updated disclosure of all
your holdings of securities of financial services organizations.
DEFINITIONS:
Security Issued by a Financial Services Organization - any security issued by:
o o
*COMMERCIAL BANKS (OTHER THAN MELLON) BANK HOLDING COMPANIES (OTHER THAN
MELLON)
o o
*THRIFTS SAVINGS AND LOAN ASSOCIATIONS
o o
*INSURANCE COMPANIES BROKER/DEALERS
o o
*INVESTMENT ADVISORY COMPANIES TRANSFER AGENTS
o o
*SHAREHOLDER SERVICING COMPANIES OTHER DEPOSITORY INSTITUTIONS
DEFINITIONS:
The term "securities issued by a financial services organization" does not
include securities issued by mutual funds, variable annuities or insurance
policies. Further, for purposes of determining whether a company is a financial
services organization, subsidiaries and parent companies are treated as separate
issuers.
RESTRICTIONS:
You are prohibited from acquiring any security issued by a financial services
organization if you are:
o a member of the Mellon Senior Management Committee. For purposes of this
restriction only, this prohibition also applies to those members of the Mellon
Senior Management Committee who are considered Investment Associates.
o employed in any of the following departments of a Mellon entity other than
Dreyfus (see CPP-903-1, Introduction and Definitions, for definition of
"Dreyfus"):
o o
* STRATEGIC PLANNING FINANCE
o o
* INSTITUTIONAL BANKING LEGAL
o an associate specifically designated by the Manager of Corporate Compliance
and informed that this prohibition is applicable to you.
PRECLEARANCE
REQUIREMENT:
All Insider Risk Associates must notify the Manager of Corporate Compliance in
writing and receive preclearance before they engage in any purchase or sale of a
security. Insider Risk Associates should refer to the provisions under
"Beneficial Ownership" (See CPP-903-3), which are equally applicable to these
provisions.
Exemptions from Requirement to Preclear - Preclearance is not required for the
following transactions:
o purchases or sales of Exempt Securities (see CPP-903-1,
Introduction and Definitions);
o purchases or sales of municipal bonds;
o purchases or sales effected in any account over which an associate has no
direct or indirect control over the investment decision-making process (e.g.,
nondiscretionary trading accounts). Nondiscretionary trading accounts may only
be maintained, without being subject to preclearance procedures, when the
Manager of Corporate Compliance, after a thorough review, is satisfied that
the account is truly nondiscretionary;
o transactions that are non-volitional on the part of an associate (such as
stock dividends);
o the sale of stock received upon the exercise of an associate stock option if
the sale is part of a "netting of shares" or "cashless exercise" administered
by the Human Resources Department (for which the Human Resources Department
will forward information to the Manager of Corporate Compliance);
o the automatic reinvestment of dividends under a DRIP (preclearance is required
for optional cash purchases under a DRIP);
o purchases effected upon the exercise of rights issued by an issuer pro rata to
all holders of a class of securities, to the extent such rights were acquired
from such issuer;
o sales of rights acquired from an issuer, as described above; and/or
PRECLEARANCE
REQUIREMENT:
o those situations where the Manager of Corporate Compliance determines, after
taking into consideration the particular facts and circumstances, that prior
approval is not necessary.
REQUESTS FOR
PRECLEARANCE:
All requests for preclearance for a securities transaction shall be submitted to
the Manager of Corporate Compliance by completing a Preclearance Request Form
(refer to Exhibit C1 in the Confidential Information and Securities Trading
Policy booklet).
The Manager of Corporate Compliance will notify the Insider Risk Associate
whether the request is approved or denied, without disclosing the reason for
such approval or denial.
Notifications may be given in writing or verbally by the Manager of Corporate
Compliance to the Insider Risk Associate. A record of such notification will be
maintained by the Manager of Corporate Compliance. However, it shall be the
responsibility of the Insider Risk Associate to obtain a written record of the
Manager of Corporate Compliance's notification within 24 hours of such
notification. The Insider Risk Associate should retain a copy of this written
record.
As there could be many reasons for preclearance being granted or denied, Insider
Risk Associates should not infer from the preclearance response anything
regarding the security for which preclearance was requested.
Although making a preclearance request does not obligate an Insider Risk
Associate to do the transaction, it should be noted that:
o preclearance authorization will expire at the end of the third business day
after it is received (the day authorization is granted is considered the first
business day);
o preclearance requests should not be made for a transaction that the Insider
Risk Associate does not intend to make; and
o Insider Risk Associates should not discuss with anyone else, inside or outside
Mellon, the response they received to a preclearance request. Every Insider
Risk Associate must follow these procedures or risk serious sanctions,
including dismissal. If you have any questions about these procedures you
should consult the Manager of Corporate Compliance. Interpretive issues that
arise under these procedures shall be decided by, and are subject to the
discretion of, the Manager of Corporate Compliance.
RESTRICTED
LIST:
The Manager of Corporate Compliance will maintain a list (the "Restricted List")
of companies whose securities are deemed appropriate for implementation of
trading restrictions for Insider Risk Associates. Restricted List(s) will not be
distributed outside of the Risk Management and Compliance Department. From time
to time, such trading restrictions may be appropriate to protect Mellon and its
Insider Risk Associates from potential violations, or the appearance of
violations, of securities laws.
The inclusion of a company on the Restricted List provides no indication of the
advisability of an investment in the company's securities or the existence of
material nonpublic information on the company. Nevertheless, the contents of the
Restricted List will be treated as confidential information to avoid unwarranted
inferences.
To assist the Manager of Corporate Compliance in identifying companies that may
be appropriate for inclusion on the Restricted List, the department heads of
sections in which Insider Risk Associates are employed will inform the Manager
of Corporate Compliance in writing of any companies they believe should be
included on the Restricted List, based upon facts known or readily available to
such department heads. Although the reasons for inclusion on the Restricted List
may vary, they could typically include the following:
o Mellon is involved as a lender, investor or adviser in a merger, acquisition
or financial restructuring involving the company;
o Mellon is involved as a selling shareholder in a public distribution of the
company's securities;
o Mellon is involved as an agent in the distribution of the company's
securities;
o Mellon has received material nonpublic information on the company;
o Mellon is considering the exercise of significant creditors' rights against
the company; or
o The company is a Mellon borrower in Credit Recovery. Department heads of
sections in which Insider Risk Associates are employed are also responsible
for notifying the Manager of Corporate Compliance in writing of any change in
circumstances making it appropriate to remove a company from the Restricted
List.
REQUIRED
REPORTING:
The following reports must be filed for personal securities transactions:
o Brokerage Accounts - All Insider Risk Associates are required to instruct
their brokers to submit directly to the Manager of Corporate Compliance copies
of all trade confirmations and statements relating to their account (refer to
Exhibit B1 in the Confidential Information and Securities Trading Policy
booklet).
o Report of Transactions in Mellon Securities - Insider Risk Associates must
also report in writing to the Manager of Corporate Compliance within ten
calendar days whenever they purchase or sell Mellon securities if the
transaction was not through a brokerage account as described above. Purchases
and sales of Mellon securities include the following:
o DRIP Optional Cash Purchases - Optional cash purchases under Mellon's
Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP").
o Stock Options - The sale of stock received upon the exercise of an associate
stock option unless the sale is part of a "netting of shares" or "cashless
exercise" administered by the Human Resources Department (for which the Human
Resources Department will forward information to the Manager of Corporate
Compliance).
It should be noted that the reinvestment of dividends under the DRIP, changes in
elections under Mellon's Retirement Savings Plan, the receipt of stock under
Mellon's Restricted Stock Award Plan and the receipt or exercise of options
under Mellon's Long-Term Profit Incentive Plan are not considered purchases or
sales for the purpose of this reporting requirement (refer to Exhibit A in the
Confidential Information and Securities Trading booklet).
CONFIDENTIAL
TREATMENT:
The Manager of Corporate Compliance will use his or her best efforts to assure
that all requests for preclearance, all personal securities transaction reports
and all reports of securities holdings are treated as "Personal and
Confidential." However, such documents will be available for inspection by
appropriate regulatory agencies and by other parties within and outside Mellon
as are necessary to evaluate compliance with or sanctions under this Policy.
<PAGE>
[OBJECT OMITTED]
- --------------------------------------------------------------------------------
Chapter Document Number
LEGAL AND REGULATORY CPP-903-4 (B)
- --------------------------------------------------------------------------------
Section Revised Date
CONFIDENTIAL INFORMATION AND SECURITIES TRADING 10/2/95
- --------------------------------------------------------------------------------
Subject Page Number
Requirements Applicable to Investment Associates Only 9 of 9
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
POLICY:
Because of their particular responsibilities, Investment Associates are subject
to different preclearance and personal securities reporting requirements as
discussed below. No Investment Associate may recommend a securities transaction
for a Mellon customer to whom a fiduciary duty is owed, or for Mellon, without
disclosing any interest he or she has in such securities or issuer (other than
an interest in publicly traded securities where the total investment is equal to
or less than $25,000), including:
o any direct or indirect beneficial ownership of any securities of such issuer;
o any contemplated transaction by the Investment Associate in such securities;
o any position with such issuer or its affiliates; and
o any present or proposed business relationship between such issuer or its
affiliates and the Investment Associate or any party in which the Investment
Associate has a beneficial ownership interest (see "Beneficial Ownership" in
CPP-903-3).
RESTRICTIONS:
The following restrictions apply to all Investment Associates:
o Portfolio Information - No Investment Associate may divulge the current
portfolio positions, or current or anticipated portfolio transactions,programs
or studies, of Mellon or any Mellon customer to anyone unless it is properly
within his or her job responsibilities to do so.
o Material Nonpublic Information - No Investment Associate may engage in or
recommend a securities transaction, for his or her own benefit or for the
benefit of others, including Mellon or its customers, while in possession of
material nonpublic information regarding such securities. No Investment
Associate may communicate material nonpublic information to others unless it
is properly within his or her job responsibilities to do so.
o Short-Term Trading - Any Investment Associate who purchases and sells, or
sells and purchases, the same (or equivalent) securities within any
60-calendar-day period is required to disgorge all profits realized on such
transaction in accordance with procedures established by senior management.
For this purpose, securities will be deemed to be equivalent if one is
convertible into the other, if one entails a right to purchase or sell the
other, or if the value of one is expressly dependent on the value of the other
(e.g., derivative securities).
In addition to the previous restrictions, the following restrictions apply only
to Dreyfus Associates and Associates of Mellon Entities Registered Under The
Investment Advisers Act of 1940 (i.e.,"40 Act Associates"):
o Outside Activities - No 40 Act associate may serve on the board of
directors/trustees or as a general partner of any publicly traded company
(Other than Mellon) without the prior approval
o the Manager of Corporate Compliance.
o Gifts - All 40 Act associates are prohibited from accepting gifts from outside
companies, or their representatives, with an exception for gifts of (1) a de
minimis value and (2) an occasional meal, a ticket to a sporting event or the
theater, or comparable entertainment for the 40 Act associate and, if
appropriate, a guest, which is neither so frequent nor extensive as to raise
any question of impropriety. A gift shall be considered de minimis if it does
not exceed an annual amount per person fixed periodically by the National
Association of Securities Dealers, which is currently $100 per person.
o Blackout Period - 40 Act associates will not be given clearance to execute a
transaction in any security that is being considered for purchase or sale by
an affiliated investment company, managed account or trust, for which a pend-
ing buy or sell order for such affiliated account is pending, and for two
business days after the transaction in such security for such affiliated
account has been effected. This provision does not apply to transactions
effected or contemplated by index funds.
In addition, portfolio managers for the investment companies are prohibited from
buying or selling a security within seven calendar days before and after such
investment company trades in that security. Any violation of the foregoing will
require the violator to disgorge all profit realized with respect to such
transaction.
PRECLEARANCE
REQUIREMENT:
All Investment Associates must notify the Preclearance Compliance Officer in
writing and receive preclearance before they engage in any purchase or sale of a
security. Exemptions from Requirement to Preclear - Preclearance is not required
for the following transactions:
o purchases or sales of "Exempt Securities" (see CPP-903-1, Definitions);
o purchases or sales effected in any account over which an associate has no
direct or indirect control over the investment decision-making process (i.e.,
nondiscretionary trading accounts). Nondiscretionary trading accounts may only
be maintained, without being subject to preclearance procedures, when the
Preclearance Compliance Officer, after a thorough review, is satisfied that
the account is truly nondiscretionary;
o transactions which are non-volitional on the part of an associate (such as
stock dividends);
o the sale of stock received upon the exercise of an associate stock option if
the sale is part of a "netting of shares" or "cashless exercise" administered
by the Human Resources Department (for which the Human Resources Department
will forward information to the manager of Corporate Compliance);
o purchases which are part of an automatic reinvestment of dividends under a
DRIP (Preclearance is required for optional cash purchases under a DRIP);
o purchases effected upon the exercise of rights issued by an issuer pro rata to
all holders of a class of securities, to the extent such rights were acquired
from such issuer;
o sales of rights acquired from an issuer, as described above; and/or
o those situations where the Preclearance Compliance Officer determines, after
taking into consideration the particular facts and circumstances, that prior
approval is not necessary.
REQUESTS FOR PRECLEARANCE:
All requests for preclearance for a securities transaction shall be submitted to
the Preclearance Compliance Officer by completing a Preclearance Request Form
(refer to the Confidential Information and Securities Trading Policy booklet for
the following Exhibits: Investment Associates other than Dreyfus associates are
to use the Preclearance Request Form shown in Exhibit C1. Dreyfus associates are
to use the Preclearance Request Form shown in Exhibit C2).
The Preclearance Compliance Officer will notify the Investment Associate whether
the request is approved or denied without disclosing the reason for such
approval or denial.
Notifications may be given in writing or verbally by the Preclearance Compliance
Officer to the Investment Associate. A record of such notification will be
maintained by the Preclearance Compliance Officer. However, it shall be the
responsibility of the Investment Associate to obtain a written record of the
Preclearance Compliance Officer's notification within 24 hours of such
notification. The Investment Associate should retain a copy of this written
record.
As there could be many reasons for preclearance being granted or denied,
Investment Associates should not infer from the preclearance response anything
regarding the security for which preclearance was requested.
Although making a preclearance request does not obligate an Investment Associate
to do the transaction, it should be noted that:
o preclearance authorization will expire at the end of the day on which
preclearance is given;
o preclearance requests should not be made for a transaction that the Investment
Associate does not intend to make; and
o Investment Associates should not discuss with anyone else, inside or outside
Mellon, the response the Investment Associate received to a preclearance
request.
Every Investment Associate must follow these procedures or risk serious
sanctions, including dismissal. If you have any questions about these
procedures, consult the Preclearance Compliance Officer. Interpretive issues
that arise under these procedures shall be decided by, and are subject to the
discretion of, the Manager of Corporate Compliance.
RESTRICTED LIST:
Each Preclearance Compliance Officer will maintain a list (the "Restricted
List") of companies whose securities are deemed appropriate for implementation
of trading restrictions for Investment Associates in their area. From time to
time, such trading restrictions may be appropriate to protect Mellon and its
Investment Associates from potential violations, or the appearance of
violations, of securities laws. The inclusion of a company on the Restricted
List provides no indication of the advisability of an investment in the
company's securities or the existence of material nonpublic information on the
company. Nevertheless, the contents of the Restricted List will be treated as
confidential information in order to avoid unwarranted inferences.
In order to assist the Preclearance Compliance Officer in identifying companies
that may be appropriate for inclusion on the Restricted List, the head of the
entity/department/area in which Investment Associates are employed will inform
the appropriate Preclearance Compliance Officer in writing of any companies that
they believe should be included on the Restricted List based upon facts known or
readily available to such department heads.
REQUIRED
REPORTING:
The following reports must be filed for personal securities transactions:
o Brokerage Accounts - All Investment Associates are required to instruct their
brokers to submit directly to the Manager of Corporate Compliance copies of
all trade confirmations and statements relating to their account (refer to
Exhibits B1 and B2 in the Confidential Information and Securities Trading
Policy booklet).
o Report of Transactions in Mellon Securities - Investment Associates must also
report in writing to the Manager of Corporate Compliance within ten calendar
days whenever they purchase or sell Mellon securities if the transaction was
not through a brokerage account as described above. Purchases and sales of
Mellon securities include the following:
o DRIP Optional Cash Purchases - Optional cash purchases under Mellon's
Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP").
o Stock Options - The sale of stock received upon the exercise of an associate
stock option unless the sale is part of a "netting of shares" or "cashless
exercise" administered by the Human Resources Department (for which the Human
Resources Department will forward information to the Manager of Corporate
Compliance).
It should be noted that the reinvestment of dividends under the DRIP, changes in
elections under Mellon's Retirement Savings Plan, the receipt of stock under
Mellon's Restricted Stock Award Plan, and the receipt or exercise of options
under Mellon's Long-Term Profit Incentive Plan are not considered purchases or
sales for the purpose of this reporting requirement (refer to Exhibit A in the
Confidential Information and Securities Trading Policy booklet).
o Statement of Securities Holdings - Within ten days of becoming an Investment
Associate and on an annual basis thereafter, all Investment Associates must
submit to the Manager of Corporate Compliance a statement of all securities in
which they presently have any direct or indirect beneficial ownership other
than Exempt Securities, as defined in the CPP-903-1, Definitions.
o Investment Associates should refer to "Beneficial Ownership" (CPP-903-3) which
is also applicable to Investment Associates (refer to Exhibit D in the
Confidential Information and Securities Trading Policy booklet for Statement
Format). The annual report must be submitted by January 31 and must report all
securities holdings other than Exempt Securities. The annual statement of
securities holdings contains an acknowledgment that the Investment Associate
has read and complied with this Policy.
o Special Requirement with Respect to Affiliated Investment Companies - The
portfolio managers, research analysts and other Investment Associates
specifically designated by the Manager of Corporate Compliance are required
within ten calendar days of becoming an Investment Associate (and by no later
than ten calendar days after the end of each calendar quarter) to report every
transaction in the securities issued by an affiliated investment company
occurring in an account in which the Investment Associate has a beneficial
ownership interest. The quarterly reporting requirement may be satisfied by
notifying the Manager of Corporate Compliance of the name of the investment
company, account name and account number for which such quarterly reports must
be submitted.
CONFIDENTIAL
TREATMENT:
The Preclearance Compliance Officer will use his or her best efforts to assure
that all requests for preclearance, all personal securities transaction reports
and all reports of securities holdings are treated as "Personal and
Confidential." However, such documents will be available for inspection by
appropriate regulatory agencies, and by other parties within and outside Mellon
as are necessary to evaluate compliance with or sanctions under this Policy.
Documents received from Dreyfus associates are also available for inspection by
the boards of directors of Dreyfus and by the boards of directors(or trustees or
managing general partners, as applicable) of the investment companies managed or
administered by Dreyfus.
<PAGE>
[OBJECT OMITTED]
- --------------------------------------------------------------------------------
Chapter Document Number
LEGAL AND REGULATORY CPP-903-4 (C)
- --------------------------------------------------------------------------------
Section Revised Date
CONFIDENTIAL INFORMATION AND SECURITIES TRADING 10/2/95
- --------------------------------------------------------------------------------
Subject Page Number
Requirements Applicable to Other Associates Only 4 of 4
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
POLICY:
Except for private placements, Other Associates are permitted to engage in
personal securities transactions without obtaining prior approval from the
Manager of Corporate Compliance. Other Associates are not required to report
their personal securities transactions other than margin transactions and
transactions involving Mellon securities as discussed herein.
RESTRICTIONS:
The following restrictions apply to all Other Associates:
o Margin Transactions - Prior to establishing a margin account, Other Associates
must obtain the written permission of the Manager of Corporate Compliance.
Other Associates having a margin account prior to the effective date of this
Policy must notify the Manager of Corporate Compliance of the existence of
such account.
All associates having margin accounts, other than described below, must
designate the Manager of Corporate Compliance as an interested party on each
account. Associates must ensure that the Manager of Corporate Compliance
promptly receives copies of all trade confirmations and statements relating to
the accounts directly from the broker. If requested by a brokerage firm, please
contact the Manager of Corporate Compliance to obtain a letter (sometimes
referred to as a "407 letter") granting permission to maintain a margin account.
Trade confirmations and statements are not required on margin accounts
established at Dreyfus Investment Services Corporation for the sole purpose of
cashless exercises of Mellon employee stock options. In addition, products may
be offered by a broker/dealer that, because of their characteristics, are
considered margin accounts but have been determined by the Manager of Corporate
Compliance to be outside the scope of this Policy (e.g., a Cash Management
account which provides overdraft protection for the customer). Any questions
regarding the establishment, use and reporting of margin accounts should be
directed to the Manager of Corporate Compliance (refer to Exhibit B1 in the
Confidential Information and Trading
<PAGE>
RESTRICTIONS:
(Cont.)
Securities booklet for an example of an instruction letter to a broker).
o Private Placements - Other Associates are prohibited from acquiring any
security in a private placement unless they obtain the prior written approval
of the Manager of Corporate Compliance and the Associate's department head.
Approval must be given by both of the aforementioned persons for the
acquisition to be considered approved.
As there could be many reasons for preclearance being granted or denied,
Other Associates should not infer from the preclearance response anything
regarding the security for which preclearance was requested.
Although making a preclearance request does not obligate an Other Associate
to do the transaction, it should be noted that:
o preclearance authorization will expire at the end of the third business day
after it is received (the day authorization is granted is considered the first
business day);
o preclearance requests should not be made for a transaction that the Other
Associate does not intend to make; and
o Other Associates should not discuss with anyone else, inside or outside
Mellon, the response the Investment Associate received to a preclearance
request. Every Other Associate must follow these procedures or risk serious
sanctions, including dismissal. If you have any questions about these
procedures you should consult the Manager of Corporate Compliance.Interpretive
issues that arise under these procedures shall be decided by, and are subject
to the discretion of, the Manager of Corporate Compliance.
PRECLEARANCE
REQUIREMENT:
Except for private placements, Other Associates are permitted to engage in
personal securities transactions without obtaining prior approval from the
Manager of Corporate Compliance (for preclearance of private placements, use the
Preclearance Request Form shown in Exhibit C1of the Confidential Infromation and
Securities Trading Policy booklet).
REQUIRED
REPORTING:
Other Associates are not required to report their personal securities
transactions other than margin transactions and transactions involving Mellon
securities as discussed below. Other Associates are required to instruct their
brokers to submit directly to the Manager of Corporate Compliance copies of all
confirmations and statements pertaining to margin accounts (refer to Exhibit B1
in the Confidential Information and Trading Securities booklet for an example of
an instruction letter to a broker) :
o Report of Transactions in Mellon Securities - Other Associates must report in
writing to the Manager of Corporate Compliance within ten calendar days
whenever they purchase or sell Mellon securities. Purchases and sales of
Mellon securities include the following:
o DRIP Optional Cash Purchases - Optional cash purchases under Mellon's
Dividend Reinvestment and Common Stock Purchase Plan (the "Mellon DRIP").
o Stock Options - The sale of stock received upon the exercise of an associate
stock option unless the sale is part of a "netting of shares" or "cashless
exercise" administered by the Human Resources Department (for which the Human
Resources Department will forward information to the Manager of Corporate
Compliance).
It should be noted that the reinvestment of dividends under the DRIP, changes in
elections under Mellon's Retirement Savings Plan, the receipt of stock under
Mellon's Restricted Stock Award Plan and the receipt or exercise of options
under Mellon's Long-Term Profit Incentive Plan are not considered purchases or
sales for the purpose of this reporting requirement (refer to Exhibit A in the
Confidential Information and Securities Trading Policy booklet for an example of
the written report to the Manager of Corporate Compliance).
CONFIDENTIAL
TREATMENT:
The Manager of Corporate Compliance will use his or her best efforts to assure
that all requests for preclearance, all personal securities transaction reports
and all reports of securities holdings are treated as "Personal and
Confidential." However, such documents will be available for inspection by
appropriate regulatory agencies and other parties within and outside Mellon as
are necessary to evaluate compliance with or sanctions under this Policy.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
CORPORATE OBJECTIVES AND STANDARDS CPP-102-1
- --------------------------------------------------------------------------------
Section Revised Date
CODE OF CONDUCT 12/8/95
- --------------------------------------------------------------------------------
Subject Page Number
Introduction and Responsibilities 3 of 3
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
INTRODUCTION:
Today's financial services marketplace is filled with a host of new challenges,
changes and opportunities. Amidst these changes, one constant guides Mellon Bank
Corporation and will continue to be central to all that we do: the mandate for
integrity.
Only by conducting ourselves and our business in accordance with the highest
standards of legal, ethical and moral integrity can we achieve our vision of
excellence and our goals for the future.
This Code of Conduct will familiarize you with the general guidelines of
professional conduct expected from associates in their interactions with
customers, prospective customers, competitors, suppliers, the communities we
serve, and one another. As Mellon associates, we can settle for nothing less
than full adherence to the Code.
Please read the Code carefully and retain it for your records. From time to
time, you may be asked to certify in writing that you have followed the Code, so
be sure you understand it. Appropriate officers should periodically reinforce
the importance of the Code to their associates, pointing out provisions of
particular relevance.
The penalty for violating any provision of this Code may be disciplinary action
up to and including dismissal. In addition, all violations of criminal laws
applicable to Mellon's business will be reported to the appropriate authorities
for prosecution.
Certain topics addressed in this Code of Conduct are addressed in greater detail
in Mellon's Confidential Information and Securities Trading Policies (CPP-903,
1-5). These topics include the treatment of confidential information,
restrictions on securities trading by associates and the "Chinese Wall" policy.
If you have any questions about this Code, ask your supervisor or consult with
Legal Affairs. If you suspect a violation of the Code of Conduct, contact the
General Counsel or Chief Compliance Officer. All communications will be handled
in a confidential manner.
INTRODUCTION
Terms frequently used in the Code are defined as follows:
o appropriate officer - head of the affected group, department or subsidiary o
approval - formal written consent
o employee - any employee of Mellon Bank Corporation or any of its subsidiaries
o Bank - any bank or savings and loan association subsidiary, direct or
indirect, of Mellon Bank Corporation
o Chief Compliance Officer - Chief Compliance Officer of Mellon Bank Corporation
o Confidential Information and Securities Trading Policy - Mellon Bank
Corporation's Confidential Information and Securities Trading Policies
(CPP-903)
o Corporation - Mellon Bank Corporation
o General Counsel - General Counsel of Mellon Bank Corporation
o Mellon - Mellon Bank Corporation and all its subsidiaries and affiliates
YOUR
RESPONSIBILITIES:
As an associate, your personal conduct should reflect the highest professional
standards of behavior. You are obliged to monitor your personal and professional
affairs so as not to discredit yourself or Mellon. Your behavior at work
reflects Mellon's ethics, so you are expected to:
o obey all laws and regulations that apply to Mellon's business
o avoid activities that could create conflicts of interest or even the
appearance of conflicts of interest with Mellon; and
o respect the confidentiality of Mellon business information and information
about those with whom Mellon has business relationships.
YOUR
RESPONSIBILITIES:
Details of the above obligations are presented in the remainder of this Code of
Conduct. Remember, these standards and examples serve as guidelines.
Mellon has established the Questionable Activities Hotline (800-234-MELN, Ext.
4-8477) so associates may call to report suspected violations of the Code or
criminal activity involving Mellon. Calls may be made anonymously.
<PAGE>
[OBJECT OMITTED]
- --------------------------------------------------------------------------------
Chapter Document Number
FINANCE AND ACCOUNTING CPP-607-1
- --------------------------------------------------------------------------------
Section Revised Date
PROCUREMENT 5/4/98
- --------------------------------------------------------------------------------
Subject Page Number
Policy 1 of 2
- --------------------------------------------------------------------------------
Issuing Department
Corporate Services
- --------------------------------------------------------------------------------
APPROVAL: To serve as a director, officer or general partner of an outside
entity, obtain or renew approval as follows:
Responsibility
Employee Requesting
Approval Action
1. Complete an Outside Directorships and Offices Approval Form that can be
obtained as follows:
o Send an e-mail request via MS Mail to Outside Directorships/Policy or via the
Internet to [email protected]. An MS Word version of the form will be
returned via e-mail.
o If e-mail is unavailable, contact Corporate Compliance at (412) 234-1676 or
(412) 236-1597. A form will be sent via interoffice mail.
2. As needed, obtain the following additional information:
o If the outside entity has, or is seeking a credit facility with Mellon, attach
a copy of the current exposure summary sheet and credit approval form. If the
"Customer Risk Rating" is greater than 5, complete the "Justification for
Approval" section (question number 22) of the Outside Directorships and
Offices Approval Form.
o If Indemnification is being requested, complete the "Indemnification Request"
section (question number 23) of the Outside Directorship and Offices Approval
Form, documenting the benefits to Mellon for approval of the indemnification
request.
NOTE: Missing information will cause the form to be returned to the
employee requesting approval.
3. Send the original completed approval form and any required attachments to
Corporate Compliance in Pittsburgh (151-4340) for further processing and
retain a copy.
Responsibility
Corporate Compliance
Action
4. Review the form and obtain approval signatures, when required.
Approvals are generally required for new applications to certain outside
entities as follows:
Chief Executive Office approval when the applicant is a member of the
Senior Management Committee, and the outside entity:
o debtor of Mellon Bank Corporation or any of its subidiaries
o one for which the employee is seeking Indemnification
Senior Management Committee member approval for:
o for-profit organization
o issue-oriented organization
o local government (including appointed offices)
o debtor of Mellon Bank Corporation or any of its subsidiaries
o one for which the employee is seeking Indemnification
Chief Risk Officer approval for:
o debtor of Mellon Bank Corporation or any of its subsidiaries
o one for which the employee is seeking Indemnification
Responsibility Action
Corporate Compliance
Corporate Affairs approval for:
o issue oriented organization
o local government (including appointed offices)
o high profile charitable organization
o national or high-visibility religious organization
o chamber of commerce or economic development authority
o school board (elementary, high school, college, and university)
o hospital or health care facility
o cultural organization (the arts, museums, historical societies, theaters,
etc.)
5. When processing is complete, send a copy of the form to the employee.
This approval process does not constitute a request for, nor does it carry
with it, indemnification. An employee will, however, have any protection,
including indemnification and insurance, provided by the outside entity.
Employees are encouraged to secure an understanding of the level of such
protection provided by such entity. An employee will also be protected by
any applicable limitations on the liability of a director or officer.
Records - All original approved request forms are retained by Corporate
Compliance in Pittsburgh.
Annual Renewal - Annually, all employees serving as a director, officer, or
general partner of an outside entity must renew their approvals. Renewals
must be documented on an Outside Directorship and Offices Approval Form and
submitted to Corporate Compliance.
APPROVAL:
Annual Certification - Annually, as part of the year-end Code of Conduct
certification, officers will be asked to certify that they have obtained
all approvals required by this procedure and are otherwise in compliance
with Corporate Policy and Procedure.
CHANGES:
If at any time there are any material changes to the information
represented on the original approval form, the employee must complete a new
approval form, send the original to the Corporate Compliance in Pittsburgh,
and retain a copy. If an employee is no longer serving as a director,
officer or general partner of an outside entity, indicate so on a copy of
the original approval form and send it to Corporate Compliance in
Pittsburgh.
QUESTIONS:
Direct questions concerning directorships or indemnification to the Chief
Litigation Counsel at 412-234-1566.
<PAGE>
[OBJECT OMITTED]
- --------------------------------------------------------------------------------
Chapter Document Number
EXTERNAL AFFAIRS AND COMMUNICATIONS CPP-806-1
- --------------------------------------------------------------------------------
Section Revised Date
CUSTOMER INFORMATION 8/30/99
- --------------------------------------------------------------------------------
Subject Page Number
Confidentiality of Customers' Accounts 1 of 1
- --------------------------------------------------------------------------------
Issuing Department
Legal
- --------------------------------------------------------------------------------
POLICY:
Employees who engage in transactions involving Mellon securities should be
aware of their unique responsibilities with respect to such transactions
arising from the employment relationship and should be sensitive to even
the appearance of impropriety.
Purchases or sales by an employee of the securities of issuers with which
Mellon does business, or other third party issuers, could result in
liability on the part of such employee. Employees should be sensitive to
even the appearance of impropriety in connection with their personal
securities transactions. Employees should refer to the provisions under
"Beneficial Ownership" below, which are equally applicable to the
restrictions on transactions in other securities.
The Mellon Code of Conduct contains certain restrictions on investments in
parties that do business with Mellon. Employees should refer to the Code of
Conduct and comply with such restrictions in addition to the restrictions
and reporting requirements set forth below.
MELLON
SECURITIES:
The following restrictions apply to all transactions in Mellon's publicly
traded securities occurring in the employee's own account and in all other
accounts over which the employee could be expected to exercise influence or
control (see provisions under "Beneficial Ownership" below for more
complete discussion of the accounts to which these restrictions apply).
These restrictions are to be followed in addition to any restrictions that
apply to particular officers or directors (such as restrictions under
Section 16 of the Securities Exchange Act of 1934).
Short Sales - Short sales of Mellon securities by employees are prohibited.
Short Term Trading - Purchasing and selling, or selling and purchasing the
same (equivalent) Mellon securities within 60 days is prohibited. For
purposes of the 60-day holding period, securities will be equivalent if one
is convertible into the other, if one entails a right to purchase or sell
the other, or if the value of one is expressly dependent on the value of
the other (e.g., derivative securities).
In cases of extreme hardship, employees (other than senior management) may
obtain permission to dispose of Mellon securities acquired within 60 days
of the proposed transaction, provided the transaction is pre-cleared with
the Manager of Corporate Compliance and any profits earned are disgorged in
accordance with procedures established by senior management. The Manager of
Corporate Compliance reserves the right to suspend the 60-day holding
period restriction in the event of severe market disruption.
Margin Transactions - Purchasing on margin of Mellon's publicly traded
securities by employees is prohibited. Margining Mellon securities in
connection with a cashless exercise of an employee stock option through the
Human Resources Department is exempt from this restriction. Further, Mellon
securities may be used to collateralize loans or the acquisition of
securities other than those issued by Mellon.
Option Transactions - Option transactions involving Mellon's publicly
traded securities are prohibited. Transactions under Mellon's Long-Term
Incentive Plan or other employee option plans are exempt from this
restriction.
Major Mellon Events - Employees who have knowledge of major Mellon events
that have not yet been announced are prohibited from buying and selling
Mellon's publicly traded securities before such public announcements, even
if the employee believes the event does not constitute material nonpublic
information.
Mellon Blackout Period - Employees are prohibited from buying or selling
Mellon's publicly traded securities during a blackout period, which begins
the 16th day of the last month of each calendar quarter and ends three
business days after Mellon publicly announces the financial results for
that quarter. In cases of extreme hardship, employees (other than senior
management) may request permission from the Manager of Corporate Compliance
to dispose of Mellon securities during the blackout period.
MELLON 401(k)
PLAN:
For purposes of the blackout period and the short-term trading rule,
changing the investment in Mellon Common Stock accumulated pre-tax balance
in the Mellon 401(k) plan will be treated as a purchase or sale of Mellon
Stock. This means:
o Employees are prohibited from increasing or decreasing their accumulated
pre-tax balance in Mellon Common Stock during the blackout period.
o Employees are prohibited from increasing their accumulated pre-tax balance in
Mellon Common Stock and then decreasing it within 60 days.
o Employees are prohibited from decreasing their accumulated pre-tax balance in
Mellon Common Stock and then increasing it within 60 days. However, changes to
investments in Mellon Common Stock in the 401(k) plan will not be compared to
transactions in Mellon securities outside the 401(k) for purposes of the
60-day rule (Note: This does not apply to members of the Executive Management
Group, who should consult with the Legal Department.)
Except for the above there are no other restrictions applicable to the
401(k) plan. This means, for example:
o Insider Risk and Investment Employees are not required to pre-clear any
elections or changes made in their 401(k) account.
o There is no restriction on employees' changing their salary deferral
contribution percentages with regard to either the blackout period or the
60-day rule.
o The regular salary deferral contribution to Mellon Common Stock in the 401(k)
that takes place with each pay will not be considered a purchase for the
purposes of either the blackout or the 60-day rule.
BENEFICIAL
OWNERSHIP:
The provisions discussed above apply to transactions in the employee's own name
and to all other accounts over which the employee could be expected to exercise
influence or control, including:
o accounts of a spouse, minor children or relatives to whom substantial support
is contributed;
o accounts of any other member of the employee's household (e.g., a relative
living in the same home);
o trust accounts for which the employee acts as trustee or otherwise exercises
any type of guidance or influence;
o Corporate accounts controlled, directly or indirectly, by the employee;
o arrangements similar to trust accounts that are established for bona fide
financial purposes and benefit the employee; and
o any other account for which the employee is the beneficial owner (see
CPP-903-1, Introduction and Definitions, for a complete legal definition of
Beneficial Ownership).
OTHER
SECURITIES:
The following restrictions apply to all securities transactions by employees:
Credit or Advisory Relationship - Employees may not buy or sell securities of a
company if they are considering granting, renewing or denying any credit
facility to that company or acting as an adviser to that company with respect to
its securities. In addition, lending employees who have assigned
responsibilities in a specific industry group are not permitted to trade
securities in that industry. This prohibition does not apply to transactions in
securities issued by open-end investment companies.
Customer Transactions - Trading for customers and Mellon accounts should always
take precedence over employees' transactions for their own or related accounts.
OTHER
SECURITIES:
Front Running - Employees may not engage in "front running," that is, the
purchase or sale of securities for their own accounts on the basis of their
knowledge of Mellon's trading positions or plans.
Initial Public Offerings - Mellon prohibits its employees from acquiring any
securities in an initial public offering ("IPO").
Margin Transactions - Margin trading is a highly leveraged and relatively risky
method of investing that can create particular problems for financial services
employees. For this reason, all employees are urged to avoid margin trading.
Prior to establishing a margin account, the employee must obtain the written
permission of the Manager of Corporate Compliance. Any employee having a margin
account prior to the effective date of these Policies must notify the Manager of
Corporate Compliance of the existence of such account.
All employees having margin accounts, other than described below, must designate
the Manager of Corporate Compliance as an interested party on that account.
Employees must ensure that the Manager of Corporate Compliance promptly receives
copies of all trade confirmations and statements relating to the account
directly from the broker. If requested by a brokerage firm, please contact the
Manager of Corporate Compliance to obtain a letter (sometimes referred to as a
"407 letter") granting permission to maintain a margin account. Trade
confirmations and statements are not required on margin accounts established at
Dreyfus Investment Services Corporation for the sole purpose of cashless
exercises of employee stock options. In addition, products may be offered by a
broker/dealer that, because of their characteristics, are considered margin
accounts but have been determined by the Manager of Corporate Compliance to be
outside the scope of these Policies (e.g., a Cash Management Account that
provides overdraft protection for the customer). Any questions regarding the
establishment, use and reporting of margin accounts should be directed to the
Manager of Corporate Compliance (Refer to Exhibits B1 and B2 in the Confidential
Information and Securities Trading Policy booklet for an example of an
instruction letter to a broker).
Material Nonpublic Information - Employees possessing material nonpublic
information regarding any issuer of securities must refrain from purchasing or
selling securities of that issuer until the information becomes public or is no
longer considered material.
Naked Options, Excessive Trading - Mellon discourages all employees from
engaging in short-term or speculative trading, in trading naked options, in
trading that could be deemed excessive or in trading that could interfere with
an employee's job responsibilities.
Private Placements - Employees are prohibited from acquiring any security in a
private placement unless they obtain the prior written approval of the
Pre-clearance Compliance Officer (applicable only to Investment Employees as
defined in CPP-903-4, Classification of Employees), Manager of Corporate
Compliance and the employee's department head. Approval must be given by all
appropriate aforementioned persons for the acquisition to be considered
approved. After receipt of the necessary approvals and the acquisition,
employees are required to disclose that investment when they participate in any
subsequent consideration of an investment in the issuer for an advised account.
Final decision to acquire such securities for an advised account will be subject
to independent review.
Scalping - Employees may not engage in "scalping," that is, the purchase or sale
of securities for their own or Mellon's accounts on the basis of knowledge of
customers' trading positions or plans or Mellon's forthcoming investment
recommendations.
Short-Term Trading - Employees are discouraged from purchasing and selling, or
from selling and purchasing, the same (or equivalent) securities within 60
calendar days. With respect to Investment Employees only as defined in CPP-903-4
(Classification of Employees), any profits realized on such short-term trades
must be disgorged in accordance with procedures established by senior
management.
<PAGE>
[OBJECT OMITTED]
- --------------------------------------------------------------------------------
Chapter Document Number
SECURITY AND PROTECTION CPP-1003-1
- --------------------------------------------------------------------------------
Section Revised Date
FRAUD 8/10/98
- --------------------------------------------------------------------------------
Subject Page Number
Policy For Reporting Known or Suspected Internal/ 1 of 1
External Crimes/Incidents
- --------------------------------------------------------------------------------
Issuing Department
Audit and Risk Review
- --------------------------------------------------------------------------------
POLICY:
RESPONSIBILITIES:
It is the Corporation's policy that all known or suspected internal/external
crimes/incidents or Code of Conduct violations must be reported and thoroughly
investigated. All Employees are responsible for immediately reporting any known
or suspected internal/external crimes/incidents or Code of Conduct violations to
the Audit and Risk Review Department.
Audit and Risk Review Department is responsible for investigating all reported
incidents of internal/external crime or Code of Conduct violations throughout
the Corporation (with the exception of consumer credit card fraud). Also, the
Audit and Risk Review Department is responsible for issuing required written
reports to regulatory and law enforcement agencies, and to the appropriate
managers.
Legal Department is responsible for reviewing all written reports to regulatory
and law enforcement agencies prior to issuance.
Corporate Policies & Procedures Manual
<PAGE>
[OBJECT OMITTED]
- --------------------------------------------------------------------------------
Chapter Document Number
SECURITY AND PROTECTION CPP-1003-1(A)
- --------------------------------------------------------------------------------
Section Revised Date
FRAUD 8/10/98
- --------------------------------------------------------------------------------
Subject Page Number
Procedure For Reporting Known or Suspected Internal/ 3 of 2
External Crimes/Incidents
- --------------------------------------------------------------------------------
Issuing Department
Audit and Risk Review
- --------------------------------------------------------------------------------
REPORTABLE
CRIMES/INCIDENTS:
Any known or suspected internal/external crimes/incidents or Code of Conduct
violations must be reported to the Audit and Risk Review Department. These
crimes/incidents include:
o any known or suspected dishonesty (e.g. theft, embezzlement, check-kite, loan
fraud, computer fraud, misappropriation)
o any mysterious disappearance or unexplained shortage of corporate funds or
other assets
o any known or suspected criminal activity or pattern of activity in violation
of any section of U.S. Code, State Code, or applicable regulation, regardless
of amount, where the Corporation is an actual or potential victim
o any known or suspected criminal activity or pattern of criminal activity
involving financial transactions conducted through the Corporation or where
the Corporation is used to facilitate a criminal transaction, even if the
Corporation is not an actual or potential victim (e.g., Bank Secrecy Act
violations)
NOTE: Incidents involving robbery, burglary, vandalism, mischief, bomb threats,
extortion, and kidnapping are not covered by this procedure. These incidents
must be reported directly to the entity's Corporate Security representative.
Also, credit card fraud incidents which do not involve employees are not covered
by this procedure. These incidents must be reported to the Security Unit, Credit
Card Department, Mellon Bank (DE).
REPORTING
PROCESS:
Report by telephone known or suspected internal/external crimes/incidents to the
following Audit and Risk Review Department locations:
o Mellon Bank (DE), Commonwealth and Northeast PA banking regions and
Mellon/PSFS - Report to the Audit and Risk Review Department, Investigations,
Mellon/PSFS (215-553-4278).
o Mellon Bank (MD) and Western, Central and Northern PA banking regions - Report
to the Audit and Risk Review Department, Investigations, Western Region
(412-234-7426).
o The Boston Company and The Dreyfus Corporation - Report to the Audit and Risk
Review Department, Investigations, The Boston Company (617-722-7454).
o All other entities - Report to the Audit and Risk Review Department,
Investigations, Western Region (412-234-7426).
Anonymously Reporting - If an employee has knowledge of known or suspected
internal/external crimes/incidents or Code of Conduct violations but wishes to
remain anonymous, they can contact the "Questionable Activities Hot Line" at
1-800-234-MELN, extension 4-8477.
The Audit and Risk Review Department's Corporate Investigation Section monitors
all calls made on the Hot Line and will conduct thorough investigations as
appropriate based on the information provided. If the call involves a routine
grievance or other Human Resources related issue, the caller will be encouraged
to contact his/her supervisor or Human Resources representative.
RESTITUTION:
Restitution terms agreed upon in the course of an investigation will be turned
over to the appropriate collections area within the entity. Monitoring of these
obligations will be performed in accordance with established procedures at that
entity.
INCIDENT
DOCUMENTATION:
Audit and Risk Review Department is responsible for documentation of incidents
that are reported. Because of the confidentiality of such matters, documentation
should not be prepared or maintained outside the Audit and Risk Review
Department except on the instructions of Audit and Risk Review or the Legal
Department.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
CORPORATE OBJECTIVES AND STANDARDS CPP-102-2
- --------------------------------------------------------------------------------
Section Revised Date
CODE OF CONDUCT 12/8/95
- --------------------------------------------------------------------------------
Subject Page Number
Obeying Laws and Regulations 5 of 4
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Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
<PAGE>
OVERVIEW:
In business, a conflict of interest is generally defined as a single person or
entity having two or more interests that are inconsistent. You should not cause
Mellon or yourself to have a conflict of interest. You should be particularly
sensitive to situations involving family or household members. In your case, a
conflict of interest occurs when you allow any interest, activity or influence
outside of Mellon to:
o influence your judgment when acting on behalf of Mellon
o compete against Mellon in any business activity
o divert business from Mellon
o diminish the efficiency with which you perform your regular duties
o harm or impair Mellon's financial or professional reputation; or
o benefit you at the expense of Mellon
As an associate, you are not permitted to participate in any activity that
causes a conflict of interest or gives the appearance of a conflict of interest.
Areas frequently involved in conflicts of interest and examples of prohibited
activities are described below.
If you believe that you have, or may be perceived to have, a conflict of
interest, you must disclose that conflict in writing to the Chief Compliance
Officer. The Chief Compliance Officer must keep copies of all such disclosures.
INVESTMENTS
THAT REQUIRE
APPROVAL:
In addition to the requirements contained in the Confidential Information And
Securities Trading Policies (CPP-903, 1-5), you are required to obtain approval
from the Chief Compliance Officer
o before you invest in a business enterprise if you have responsibilities for
providing services to, or purchasing goods and services from, that business
enterprise on behalf of Mellon; or
o to hold an investment in a business enterprise if you are assigned
responsibility for providing services to, or purchasing goods and services
from, that business enterprise on Mellon's behalf after you have made your
investment.
SELF-DEALING:
To further avoid conflicts of interest, you are restricted from becoming
involved in certain business dealings with Mellon. As an associate, you are
prohibited from:
o directly or indirectly buying assets from (other than assets being offered to
the public or associates generally), or selling assets to, Mellon or any
account for which Mellon acts as a fiduciary unless you have prior consent
from the appropriate officer or you have court or regulatory approval as
required
o representing Mellon in any activity (whether an internal Mellon activity or a
transaction between Mellon and a third party) requiring your judgment or
discretion which affects a person or organization in which you have a material
interest, financial or otherwise. For example, you are prohibited from
representing Mellon in lending money to a relative or close personal friend
because it might impair or appear to impair your professional judgment or the
performance of your duties, or from giving credit approval to loans made by an
associate who is your spouse because it might impact your spouse's incentive
compensation or performance appraisal
o representing any non-Mellon company in any transaction with Mellon that
involves the exercise of discretion by either party
MONITORING
OUTSIDE
ACTIVITIES:
As an associate, you are expected to avoid any outside interest or activity that
will interfere with your duties. Generally, your outside interests or activities
should not:
o significantly encroach on time or attention you devote to your duties
o adversely affect the quality of your work
o compete with Mellon's activities
o involve any significant use of Mellon's equipment, facilities or supplies
o imply Mellon's sponsorship or support (for example, through the use of Mellon
stationery for personal purposes)
o adversely affect the reputation of Mellon
LIMITING
OUTSIDE
EMPLOYMENT:
While an associate, you may not accept outside employment as a representative
who prepares, audits, or certifies statements or documents pertinent to Mellon's
business.
In addition, you must obtain approval from the Chief Compliance Officer before
you accept employment as a broker, contractor or agent who engages in real
estate transactions such as negotiating and selling mortgages for others,
appraising property or collecting rents; or as an attorney, tax or investment
counselor or insurance broker or agent
If you are a Bank associate, you may be prohibited by federal law from
participating in "interlocking affiliations," that is, dual service as an
associate of an organization that is primarily engaged in the issue, flotation,
underwriting, public sale or distribution of stocks, bonds or other securities;
as a director, officer or employee of any commercial bank, banking association,
trust company, savings and loan or savings bank not owned by Mellon; or as a
director or officer of a registered public utility holding company or
subsidiary.
PURCHASING
REAL ESTATE:
Because certain subsidiaries of the Corporation are engaged in real estate
activities, any real estate transaction you make must be scrutinized to make
certain it is not competitive with Mellon activities.
Unless you receive prior approval from the Chief Compliance Officer, or the
purchase is made in a public auction in which Mellon is not competing, you
should not directly or indirectly:
o purchase commercial real estate from, or sell it to, a current or known
potential Mellon customer
o purchase any real estate with a mortgage on which Mellon is foreclosing or on
which you know Mellon is planning to foreclose
o bid on or purchase any real estate that you know Mellon is considering or is
likely to consider purchasing
ACCEPTING
HONORARIA:
Neither you nor any member of your immediate family may accept cash honoraria
for your public speaking or writing services on Mellon's behalf. If a cash
honorarium is tendered you should donate it to the Mellon Bank Foundation,
request that it be donated to a charity of your choice, or turn it over to the
Finance Department. You may accept noncash honoraria of modest value (not to
exceed $100). You also may accept reimbursement of related expenses subject to
the approval of the Chief Compliance Officer. You should check with the Tax
Group to ensure proper tax treatment.
ACCEPTING
FIDUCIARY
APPOINTMENTS:
A fiduciary appointment is an appointment as an administrator, executor,
guardian, custodian for a minor, trustee or managing agent. Unless you are
acting on behalf of a member of your family or you have obtained approval from
the Chief Compliance Officer, you may not accept a fiduciary or co-fiduciary
appointment. You also may not act as deputy or co-tenant of a safe deposit box,
or act as agent or attorney-in-fact (including signer or co-owner) on a
customer's account.
Even if you are acting on behalf of a family member or receive approval to act
as fiduciary or co-fiduciary, you are expected to follow these guidelines:
o Avoid any representations that you are performing (or have access to) the same
professional services that are performed by a bank.
o Do not accept a fee for acting as co-fiduciary with a bank unless you receive
approval from the board of directors of that bank.
o Do not permit your appointment to interfere with the time and attention you
devote to your job responsibilities.
PARTICIPATING IN
CIVIC AFFAIRS:
You are encouraged to take part in charitable, educational, fraternal or other
civic affairs, as long as such affairs do not interfere or conflict with your
responsibilities at Mellon. However, you should review the requirements of
"SERVING AS OUTSIDE DIRECTOR OR OFFICER" below as they may apply to your
participation in civic affairs. You should not imply Mellon's sponsorship or
support of any outside event or organization without the approval of the Chief
Executive Officer of your entity or the Chief Executive Officer's delegate.
SERVING AS
OUTSIDE DIRECTOR
OR OFFICER:
In view of the potential conflicts of interest and the possible liability for
both Mellon and you, you are urged to be cautious when considering service as an
officer, general partner or director of any non-Mellon entity. Before agreeing
to such service you should review and comply with the Corporate Policy,
CPP-805-1, Serving As A Director/Officer Of An Outside Entity, which requires
approval to hold certain outside offices and directorships. Approvals granted
under this Policy do not constitute requests by Mellon to serve, nor do they
carry with them indemnification. This Policy may be obtained from your
department head or the Finance department.
While you are serving as an officer, general partner or director of an outside
entity, you should:
o not attempt to influence or take part in any vote or decision that may lead to
the use of a Mellon product or service by the outside entity, or result in the
conferring of some special benefit to Mellon by the outside entity and see
that the outside entity's records reflect your abstention
o relinquish any responsibility you may have for any Mellon relationship with
the outside entity
o be satisfied that the outside entity conducts its affairs lawfully, ethically
and in accordance with prudent management and financial practices
o comply with the annual approval requirements as detailed in CPP-805-1, Serving
As A Director/Officer Of An Outside Entity.
Any employee serving as a treasurer of a public organization such as a school
district, borough or other similar governmental entity, must consult Legal
Affairs for further guidelines.
PARTICIPATING
IN POLITICAL
ACTIVITIES:
Mellon encourages you to keep informed concerning political issues and
candidates and to take an active interest in political affairs. If you do
participate in any political activity, however, you may not act as a
representative of Mellon unless you are specifically authorized in writing to do
so by the Chief Executive Officer of the Corporation.
PARTICIPATING
IN POLITICAL
ACTIVITIES:
As explained in CPP-102-2, Obeying Laws and Regulations, it is unlawful to use
Corporate funds or assets in connection with federal elections and many states
also restrict the use of corporate funds or assets in connection with state
elections. In accordance with applicable laws, however, Mellon may establish
political action committees for lawful participation in the political process.
The use of Corporate funds or assets in connection with state elections may not
be made without prior approval of Legal Affairs.
DEALING WITH
CUSTOMERS AND
SUPPLIERS:
In your dealings with customers and suppliers, situations sometimes occur that
may create a conflict of interest or the appearance of a conflict of interest.
To avoid such conflicts, Corporate Policies were developed in the areas listed
below:
Gifts and Entertainment - Under the Bank Bribery Act, you may not offer or
accept gifts or other items of value under circumstances intended to influence
you, a customer or supplier in conducting business. Items of value include
money, securities, business opportunities, goods, services, discounts on goods
or services, entertainment, food or drink. (See CPP-102-2, Obeying Laws and
Regulations.) Employees of NASD members should check NASD rules, which in some
instances are more restrictive. Under the Bank Bribery Act, you may not:
o solicit for yourself or for a third party (other than Mellon) anything of
value from anyone in return for any Mellon business, service or confidential
information
o give cash gifts to, or accept cash gifts from, a customer, supplier or person
to who you refer business o use your position at Mellon to obtain anything of
value from a customer, supplier or person to whom you refer business
o accept gifts under a will or trust instrument of a customer unless you have
the prior approval of the Chief Compliance Officer; or
o except as provided below, accept anything of value (other than earned salary,
wages and fees) from anyone in connection with Mellon business.
DEALING WITH
CUSTOMERS AND
SUPPLIERS:
The business practices listed below do not create the risk of corruption or
breach of trust to Mellon and are permissible. Accordingly, you may accept:
o gifts, gratuities, amenities or favors based on obvious family or personal
relationships (such as those between an associate's parents, children or
spouse) where the circumstances make it clear that those relationships--rather
than Mellon business--are the motivating factors
o meals, refreshments, travel arrangements or accommodations, or entertainment
of reasonable value and in the course of a meeting or other occasion held for
business discussions, provided that the expenses would be paid by Mellon as a
reasonable business expense
o loans from other banks or financial institutions on customary terms to finance
proper and usual associate activities (such as home mortgage loans) except
where prohibited by law
o advertising or promotional material, such as pens, pencils, note pads, key
chains, calendars and similar items having a value of less than $100
o discounts or rebates on merchandise or services that do not exceed those
available to other customers o gifts which have a value of less than $100 and
are related to commonly recognized events or occasions, such as a promotion,
conference, sports outing, new job, wedding, retirement or holiday
o charitable, educational or religious organization awards for recognition of
service and accomplishment
DEALING WITH
CUSTOMERS AND
SUPPLIERS:
If you receive or anticipate receiving something of value from a supplier,
customer or person to whom you refer business in a situation that is not
specifically permitted by this Code, you must notify the Chief Compliance
Officer in writing of the circumstances. You may not accept the item (or must
return it if you have already received it) unless you receive approval from the
Chief Compliance Officer. The Chief Compliance Officer will approve or deny
requests based upon the reasonableness of the circumstances and whether the
circumstances pose a threat to Mellon's integrity. The Chief Compliance Officer
will maintain copies or records of all requests and responses.
Entertainment, gifts or prizes given to customers or suppliers by associates
should be appropriate for the circumstances and constitute necessary and
incidental Mellon business expenses, it is your responsibility to see that your
expense diary is accurate and reflects only appropriate business expenses. In
dealing with employees of other banks or bank holding companies, you should be
aware that gifts or prizes given to those employees are subject to the Bank
Bribery Law and that the Bank Bribery Law applies to both givers and recipients.
Borrowing from Customers - You are not permitted to borrow from or lend your
personal funds to Mellon customers, brokers or suppliers. Credit transactions in
customers' normal course of business and on regular terms (for example,
transacting business with a recognized lending institution or charging items at
a department store) are not included in this restriction.
Giving Advice to Customers - Unless your regular Corporate duties specifically
permit, you may not give legal, tax or investment advice to customers.
Legal Advice - You may be asked by a customer to make a statement regarding the
legal implications of a proposed transaction. You cannot give legal advice to
customers. Be sure, therefore, that nothing you say might be interpreted as
legal advice.
DEALING WITH
CUSTOMERS AND
SUPPLIERS:
Tax And Investment Advice - You may not advise customers on matters concerning
tax problems, tax return preparation or investment decisions.
Recommending Professional Services - Customers and others may ask your help to
find qualified professional people or firms. Unless you name several candidates
without indicating favoritism, you may not recommend attorneys, accountants,
insurance brokers or agents, stock brokers, real estate agents, etc., to
customers, associates or others. Under no circumstances may you make a
recommendation if you expect to benefit.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
CORPORATE OBJECTIVES AND STANDARDS CPP-102-4
- --------------------------------------------------------------------------------
Section Revised Date
CODE OF CONDUCT 12/8/95
- --------------------------------------------------------------------------------
Subject Page Number
Respecting Confidential Information 5 of 4
- --------------------------------------------------------------------------------
Issuing Department
Legal Affairs
- --------------------------------------------------------------------------------
OVERVIEW:
The Confidential Information and Securities Trading Policies (CPP-903, 1-5)
establishes guidelines to protect confidential information about Mellon, its
customers and others with whom it does business. These guidelines are summarized
below.
As an associate, you may have knowledge, reports or statements about Mellon's
business or possess confidential information about the private and business
affairs of Mellon's customers and suppliers. Such information is privileged and
must be held in the strictest confidence.
Confidential information is to be used only for Corporate purposes. Under no
circumstances may you use such information for personal gain or pass it on to
any person outside Mellon, including family or friends, or even to other
associates who do not need such information to perform their jobs or to provide
services to or for Mellon.
NEWS MEDIA
COMMUNICATIONS:
Any communications or disclosures of information to the news media must be done
by or with the approval of the Mellon Media Relations/Corporate Affairs area.
All media inquiries should be directed to the Media Relations/Corporate Affairs
area.
INFORMATION
OBTAINED
FROM BUSINESS
RELATIONS:
You may possess confidential information about those with whom Mellon has
business relations. If released, such information could have a significant
effect on their operations, their business reputations or the market price of
their securities. Disclosing such information could expose both you and Mellon
to liability for damages.
MELLON FINAN
INFORMATION:
Financial information about Mellon is confidential unless it has been published
in reports to shareholders or has been made otherwise available to the public.
It is the policy of the Corporation to disclose all material corporate
information to the public in such a manner that all those who are interested in
the Corporation and its securities have equal access to the information. Except
as required by law or approved by the Finance Department, financial information
is not to be released to any person or organization. If you have any questions
about disclosing financial information, contact the head of the Finance
Department.
MELLON
EXAMINATION
INFORMATION:
Banks and some other subsidiaries are periodically reviewed by regulatory
examiners. Certain reports made by those regulatory agencies are the property of
those agencies and are strictly confidential. Giving information from those
reports to anyone not officially connected with Mellon is a criminal offense.
MELLON
PROPRIETARY
INFORMATION:
Certain nonfinancial information developed by Mellon, such as business plans,
customer lists, methods of doing business, computer software, source codes,
databases and related documentation, is valuable information that is proprietary
and confidential. You are not to disclose it to anyone outside or inside Mellon
who does not have a need to know such information. This obligation survives your
employment with Mellon. Associates are prohibited from using Corporate time,
resources and assets (including Mellon proprietary information) for personal
gain. Mellon has proprietary rights in any materials, products or services that
you create which relates to your work at Mellon, that use Mellon resources
(equipment, etc.) or that are created during your regular work hours. You must
disclose such materials, products or services to Mellon.
ELECTRONIC
INFORMATION:
E-mail, voice mail and communications systems are intended for Mellon business
use only. Files created on these systems are subject to review and inspection by
management. You should not expect messages sent on these systems to be treated
as private or confidential. You should limit the transmission of highly
sensitive information on those systems. Messages created in these systems should
be in compliance with the Corporate Policy on Document Creation and Retention
(CPP-111-2). For more detailed information on use of these systems, see the
Corporate Policy on E-Mail Creation and Retention (CPP-111-3).
INFORMATION
SECURIT
SYSTEMS:
If you have access to Mellon information systems, you are responsible for taking
precautions necessary to prohibit unauthorized entry to the system. You should
safeguard your passwords or other means of entry.
COMPUTER
SOFTWARE:
Computer software is to be used on Mellon business only and must be used in
accordance with the terms of the licensing agreement. No copying of software is
permitted except in accordance with the licensing agreement.
INSIDER
INFORMATION:
Insider information is material, nonpublic information relating to securities
issued by any corporation. Information is considered "material" if it is
important enough to affect the judgment of investors about whether to buy, sell,
or hold stock or to influence the markets price of the stock.
The courts have ruled that insider information about securities must be made
public before anyone possessing it can trade or recommend the purchase or sale
of the securities concerned. Under federal and state securities laws, you,
Mellon, and the person who receives the information could be held legally
responsible for misusing insider information.
Obviously, the insider information rule is very difficult to apply in given
circumstances. Associates must be extremely cautious in discussing Corporate
information with any person outside of Mellon or in using information obtained
at Mellon in making personal investment decisions. If you have any doubts about
whether an item is insider information or whether it has been or should be
revealed, consult Legal Affairs.
"CHINESE WALL"
POLICY:
To facilitate compliance with the prohibition on trading in securities while in
possession of insider information, diversified financial services organizations,
including Mellon, have adopted "Chinese Wall" policies. The Chinese Wall
separates the business units or associates likely to receive insider information
from the business units or associates that trade in securities or provide
investment advice.
Mellon's "Chinese Wall" policy is contained in the Confidential Information and
Securities Trading Policies (CPP-903, 1-5) and establishes rules restricting the
flow of information within Mellon to investment personnel; procedures to be used
by investment personnel to obtain information from other departments or division
of Mellon Banks or from other Mellon subsidiaries; and procedures for reporting
the receipt of material nonpublic information by investment personnel
You must know this policy, particularly if you work in an area that handles
investment decisions or if you supply or might be asked to supply information to
associates in such areas. Under no circumstances should you receive or pass on
information that may create a conflict of interest or interfere with a fiduciary
obligation of Mellon.
<PAGE>
[OBJECT OMITTED]
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Chapter Document Number
CORPORATE OBJECTIVES AND STANDARDS CPP-110-2
- --------------------------------------------------------------------------------
Section Revised Date
SERVICE AGREEMENTS 2/16/99
- --------------------------------------------------------------------------------
Subject Page Number
Agreements with Vendors and Service Providers 1 of 7
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Issuing Department
Human Resources
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