-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fyq3eDForjgipzKBDpSsYMwf969zQEkprNslkGgGgjZUQEwJPG2PvvCUle3HQD3y WQFjAI1OVs7gd40lM4OisA== 0000932471-05-001773.txt : 20091023 0000932471-05-001773.hdr.sgml : 20091023 20051219163204 ACCESSION NUMBER: 0000932471-05-001773 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20051219 DATE AS OF CHANGE: 20060309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WINDSOR FUNDS/ CENTRAL INDEX KEY: 0000107606 IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-14336 FILM NUMBER: 051272853 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD WINDSOR FUNDS/ DATE OF NAME CHANGE: 20011121 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WINDSOR FUNDS/ CENTRAL INDEX KEY: 0000107606 IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00834 FILM NUMBER: 051272854 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD WINDSOR FUNDS/ DATE OF NAME CHANGE: 20011121 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 485APOS 1 windsor485a122005.txt WINDSOR FUNDS N-1A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT (NO. 2-14336) UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. POST-EFFECTIVE AMENDMENT NO. 105 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 108 VANGUARD WINDSOR FUNDS (EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST) P.O. BOX 2600, VALLEY FORGE, PA 19482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER (610) 669-1000 HEIDI STAM, ESQUIRE P.O. BOX 876 VALLEY FORGE, PA 19482 IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE ON FEBRUARY 28, 2006, PURSUANT TO PARAGRAPH (A) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VANGUARD(R) WINDSOR(TM) FUND Investor Shares & Admiral(TM) Shares . February 28, 2006 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2005. [STOCK] [prospectus] [graphic appears here] 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. [THE VANGUARD GROUP (R) LOGO] VANGUARD WINDSOR FUND Investor Shares and Admiral Shares Prospectus February 28, 2006 A Value Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS 1 FUND PROFILE 4 ADDITIONAL INFORMATION 4 MORE ON THE FUND 9 THE FUND AND VANGUARD 9 INVESTMENT ADVISORS 11 DIVIDENDS, CAPITAL GAINS, AND TAXES 12 SHARE PRICE 13 FINANCIAL HIGHLIGHTS 16 INVESTING WITH VANGUARD 16 Buying Shares 19 Converting Shares 20 Redeeming Shares 23 Exchanging Shares 23 Frequent-Trading Limits 25 Other Rules You Should Know 28 Fund and Account Updates 29 Contacting Vanguard GLOSSARY OF INVESTMENT TERMS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW The Fund offers two separate classes of shares: Investor Shares and Admiral Shares. Please note that Admiral Shares are NOT available for: n SIMPLE IRAs and 403(b)(7) custodial accounts; -Other retirement plan accounts receiving special administrative services from Vanguard; or -Accounts maintained by financial intermediaries, except in limited circumstances. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation and income. PRIMARY INVESTMENT STRATEGIES The Fund invests mainly in mid- and large-capitalization companies whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The Fund uses multiple investment advisors. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - -Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - -Investment style risk, which is the chance that returns from mid- and large-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. - -Manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share class presented compare with those of a relevant market index. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how the Fund will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was x.xx% (quarter ended month dd, yyyy), and the lowest return for a quarter was -x.xx% (quarter ended month dd, yyyy). 2
- -------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2005 - -------------------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------------------- VANGUARD WINDSOR FUND INVESTOR SHARES Return Before Taxes xx.xx% xx.xx% xx.xx% Return After Taxes on Distributions xx.xx xx.xx xx.xx Return After Taxes on Distributions and Sale of Fund Shares xx.xx xx.xx xx.xx - -------------------------------------------------------------------------------------------- VANGUARD WINDSOR FUND ADMIRAL SHARES* Return Before Taxes xx.xx% -- -- - -------------------------------------------------------------------------------------------- RUSSELL 1000 VALUE INDEX (reflects no deduction for fees, expenses, or taxes) xx.xx% xx.xx% xx.xx% - -------------------------------------------------------------------------------------------- *From the inception of the Fund's Admiral Shares on November 12, 2001, through December 31, 2005, the average annual total returns were x.xx% for the Admiral Shares and x.xx% for the Russell 1000 Value Index. - --------------------------------------------------------------------------------------------
NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for Investor Shares and that actual after-tax returns will vary for a fund's separate share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, although such costs are reflected in the investment performance figures included in the prospectus. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2005.
INVESTOR ADMIRAL SHARES SHARES ------ ------ SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None None Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee: None None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.xx% 0.xx% 12b-1 Distribution Fee: None None Other Expenses: 0.xx% 0.xx% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.xx% 0.xx%
3 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the 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 the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $xx $xxx $xxx $xxx Admiral Shares xx xxx xxx xxx - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES 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. We expect Vanguard Windsor Fund's expense ratios for the current fiscal year to be as follows: for Investor Shares, 0.xx%, or $x.x0 per $1,000 of average net assets; for Admiral Shares, 0.xx%, or $x.x0 per $1,000 of average net assets. The average multi-cap value mutual fund had expenses in 2004 of x.xx%, or $xx.x0 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT 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 incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Dividends are distributed Investor Shares--May be converted to semiannually in June and December; Admiral Shares if you meet eligibility capital gains, if any, are requirements distributed annually in December. Admiral Shares--May be converted to Investor Shares if you are no longer INVESTMENT ADVISORS eligible for Admiral Shares. - -Wellington Management Company, LLP, Boston, Mass., since NEWSPAPER ABBREVIATION inception Investor Shares--Wndsr - -Sanford C. Bernstein & Co., LLC, Admiral Shares--WndsrAdml New York City, N.Y., since 1999 VANGUARD FUND NUMBER INCEPTION DATE Investor Shares--22 Investor Shares--October 23, 1958 Admiral Shares--5022 Admiral Shares--November 12, 2001 CUSIP NUMBER NET ASSETS (ALL SHARE CLASSES) AS Investor Shares--922018106 OF Admiral Shares--922018403 OCTOBER 31, 2005 $xx billion TICKER SYMBOL Investor Shares--VWNDX SUITABLE FOR IRAS Admiral Shares--VWNEX Yes MINIMUM INITIAL INVESTMENT Investor Shares--$3,000 Admiral Shares--$100,000 - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. MARKET EXPOSURE The Fund invests mainly in mid- and large-cap companies (although the advisors will occasionally select stocks with lower market capitalization) whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. 5 Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2005, was $xx.x billion. [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2004) ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.4 10.6 11.2 11.4 ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2004. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.6%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or the Fund in particular. - -------------------------------------------------------------------------------- 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 stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below average in relation to those measures; these stocks often have above-average dividend yields. Growth and value stocks have historically produced similar long-term returns, though each category has periods when it outperforms the other. - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM MID- AND LARGE-CAPITALIZATION VALUE STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. HISTORICALLY, MID-CAP STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN THE LARGE-CAP STOCKS THAT DOMINATE THE OVERALL MARKET, AND THEY OFTEN PERFORM QUITE DIFFERENTLY. 6 SECURITY SELECTION The Fund uses multiple investment advisors, each of which is responsible for managing a portion of the Fund's assets. Each advisor independently chooses and maintains a portfolio of common stock for the Fund. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects and about the stock market and economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. While each advisor uses a different process to select securities, each is committed to investing in mid- and large-cap stocks that, in its opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Wellington Management Company, LLP (Wellington Management), which manages approximately xx% of the Fund's assets, invests in stocks, relying on the depth and experience of its investment team and supporting global industry analysts to identify stocks that are meaningfully undervalued by the market. The portfolio, in aggregate, typically offers prospective growth of earnings plus a dividend yield comparable with the those of broad market averages, while at the same time being undervalued relative to the market. Sanford C. Bernstein & Co., LLC (Bernstein), which manages approximately xx% of the Fund's assets, uses a fundamental approach, seeking to identify companies that are undervalued relative to their long-term earnings potential or asset values. The firm's primary valuation tool is a proprietary dividend discount model. The team applies strict quantitative controls to produce a portfolio with specific risk and return expectations compared with the Russell 1000 Value Index. The Vanguard Group (Vanguard) manages a small portion (approximately xx%) of the Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard typically invests its portion of the Fund's assets in stock futures and/or shares of exchange-traded funds. For more details, see "Other Investment Policies and Risks." The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT POOR SECURITY SELECTION WILL CAUSE THE FUND TO UNDERPERFORM RELEVANT BENCHMARKS OR OTHER FUNDS WITH A SIMILAR INVESTMENT OBJECTIVE. OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make other kinds of investments to achieve its objective. The Fund typically invests a limited portion, up to 30% of its assets, in foreign securities. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given 7 date. Managers of funds that invest in foreign securities use these contracts to guard against sudden, unfavorable changes in the U.S. dollar/foreign currency exchange rates. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its assets in restricted securities with limited marketability or in other illiquid securities. Vanguard typically invests a small portion of the Fund's assets in stock index futures and/ or shares of exchange-traded funds (ETFs), including VIPER Shares issued by Vanguard stock index funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in VIPER Shares of other Vanguard funds. Fund assets invested in VIPER Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a traditional security (such as a stock or bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES Derivatives can take many different forms. Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. - -------------------------------------------------------------------------------- CASH MANAGEMENT Vanguard may invest the Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. The Fund is permitted to invest in the CMT Funds under the terms of an exemption granted by the Securities and Exchange Commission (SEC). When investing in a CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the Vanguard CMT Fund in which it invests. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses, but may otherwise fail to achieve its investment objective. 8 FREQUENT TRADING OR MARKET-TIMING Background Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds that hold investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. Frequent trading may also interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading The Vanguard funds (other than money market funds, short-term bond funds, and VIPER(R) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may disrupt a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and VIPER Shares) generally limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the SHARE PRICE section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for mid-cap value funds was approximately xx%, as reported by Morningstar, Inc., on October 31, 2005. 9 - -------------------------------------------------------------------------------- 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, which are not included in the fund's expense ratio, 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 taxable income. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 130 funds holding assets in excess of $xxx billion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- 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. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- INVESTMENT ADVISORS The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the board of trustees. - -Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is an investment advisory firm founded in 1928. As of October 31, 2005, Wellington Management managed approximately $500 billion in assets. - -Sanford C. Bernstein & Co., LLC, 1345 Avenue of the Americas, New York, NY 10105, is a registered investment advisor and a subsidiary of Alliance Capital Management L.P. (Alliance Capital). As of October 31, 2005, Alliance Capital managed approximately $xxx billion in assets. Bernstein provides that day-to-day management may be delegated by Bernstein to Alliance. 10 The Fund pays Wellington Management and Bernstein on a quarterly basis. For each advisor, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the advisor over the period. In addition, the quarterly fees paid to each advisor are increased or decreased based on the advisor's performance in comparison with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund over a trailing 36-month period is compared with that of the S&P 500 Index (for Wellington Management) and the Russell 1000 Value Index (for Bernstein) over the same period. For the fiscal year ended October 31, 2005, the advisory fees and expenses represented an effective annual rate of 0.xx% of the Fund's average net assets before a performance-based increase of 0.0x%. Under the terms of an SEC exemption, the Fund's board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. 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. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised. For a discussion of why the board of trustees approved the Fund's investment advisory agreements, see the Fund's reports to shareholders covering the periods ending October 31, 2005, and April 30, 2006. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS The managers primarily responsible for the day-to-day management of the Fund are: DAVID R. FASSNACHT, CFA, Senior Vice President and Partner of Wellington Management. He has worked in investment management since 1988; has been with Wellington Management since 1991; and has been Fund Manager since 2004 and was Assistant Fund Manager from 2001-2004. Education: B.S., The Wharton School of the University of Pennsylvania. MARILYN G. FEDAK, CFA, Chief Investment Officer and Chairman of the Bernstein U.S. Equity Investment Policy Group and an officer of Alliance Capital Management L.P. She has worked in investment management since 1972; has managed investment portfolios for Bernstein and its predecessor since 1984; and has managed the Fund since 1999. Education: B.A., Smith College; M.B.A., Harvard Business School. JOHN D. PHILLIPS, JR., CFA, Senior Portfolio Manager at Bernstein and an officer of Alliance Capital Management L.P. He has worked in investment management since 1972; has been with Bernstein and its predecessor since 1994; and has managed the Fund since 2003. Education: B.A., Hamilton College; M.B.A., Harvard Business School. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. 11 DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic 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 dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - -Any distributions of net long-term capital gains are taxable to you as long-term capital gains 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. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 12 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund 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 will 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. - -------------------------------------------------------------------------------- GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not: - -Provide us with your correct taxpayer identification number; - -Certify that the taxpayer identification number is correct; and - -Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of 13 the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as VIPERs(R)). When reliable market quotations are not readily available, securities are priced at their fair value; a security's fair value is the amount that the owner might reasonably expect to receive upon the current sale of the security. A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Although rare, fair-value pricing also may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the fund's NAV. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. 14 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES This explanation uses the Fund's Investor Shares as an example. The Investor Shares began fiscal year 2005 with a net asset value (price) of $xx.xx per share. During the year, each Investor Share earned $x.xx from investment income (interest and dividends) and $x.xx from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $x.xx per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $x.xx, reflecting earnings of $x.xx per share and distributions of $x.xx per share. This was an increase of $x.xx per share (from $xx.xx at the beginning of the year to $x.xx at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was xx% for the year. As of October 31, 2005, the Investor Shares had approximately $x.xx billion in net assets. For the year, the expense ratio was xx% ($x.xx per $1,000 of net assets), and the net investment income amounted to xx% of average net assets. The Fund sold and replaced securities valued at xx% of its net assets. - --------------------------------------------------------------------------------
WINDSOR FUND INVESTOR SHARES - ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, ----------------------------------------------------------------- 2005 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $16.75 $15.23 $11.81 $14.27 $16.44 - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS Net Investment Income .xxx .214 .17 .164 .22 Net Realized and Unrealized Gain (Loss) on Investments x.xx 1.501 3.42 (2.143) (.29) - ------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations x.xx 1.715 3.59 (1.979) (.07) - ------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income (.xxx) (.195) (0.17) (.169) (.25) Distributions from Realized Capital Gains -- -- -- (.312) (1.85) - ------------------------------------------------------------------------------------------------------------------------------ Total Distributions (.xxx) (.195) (0.17) (.481) (2.10) - ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $XX.XX $16.75 $15.23 $11.81 $14.27 ============================================================================================================================== TOTAL RETURN XX.XX% 11.30% 30.66% -14.55% -0.37% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $xx,xxx $15,130 $13,733 $11,012 $15,761 Ratio of Total Expenses to Average Net Assets* x.xx% 0.39% 0.48% 0.45% 0.41% Ratio of Net Investment Income to Average Net Assets x.xx% 1.32% 1.27% 1.16% 1.37% Turnover Rate xx% 28% 23% 30% 33% ============================================================================================================================== *Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.08%, 0.08%, 0.03%, and (0.08%).
15
WINDSOR FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------------------------- NOV. 12, 2001* TO YEAR ENDED OCT. 31, OCT. 31, --------------------------------------- 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $56.56 $51.41 $39.88 $50.00 - ----------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .xxx .787 .605 .556 Net Realized and Unrealized Gain (Loss) on Investments .xxx 5.082 11.537 (9.030) - ----------------------------------------------------------------------------------------------------------- Total from Investment Operations .xxx 5.869 12.142 (8.474) - ----------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.xxx) (.719) (.612) (.592) Distributions from Realized Capital Gains -- -- -- (1.054) - ----------------------------------------------------------------------------------------------------------- Total Distributions (.xxx) (.719) (.612) (1.646) - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $XX.XX $56.56 $51.41 $39.88 =========================================================================================================== TOTAL RETURN XX.XX% 11.46% 30.72% -17.61% =========================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $x,xxx $4,195 $3,321 $2,214 Ratio of Total Expenses to Average Net Assets** x.xx% 0.28% 0.37% 0.40%+ Ratio of Net Investment Income to Average Net Assets x.xx% 1.43% 1.36% 1.22%+ Turnover Rate xx% 28% 23% 30% =========================================================================================================== *Inception. **Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.08%, and 0.08%. +Annualized.
16 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change these policies, without prior notice to shareholders. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES FREQUENT-TRADING LIMITS OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS FOR INVESTOR SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $3,000. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain an account, or to add to an existing account. Investment minimums may differ for certain categories of investors. ACCOUNT MINIMUMS FOR ADMIRAL SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $100,000 for new investors. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in that Fund account are eligible to convert their Investor Shares into Admiral Shares. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain an account, or to add to an existing account. Investment minimums may differ for certain categories of investors. HOW TO BUY SHARES ONLINE TRANSACTIONS. You may open certain types of accounts, request electronic bank transfers, and exchange the proceeds of a redemption from one fund to purchase shares in a new or existing fund account through our website at www.vanguard.com. 17 BY TELEPHONE. You may call Vanguard to request a purchase of shares by wire or by an exchange (using the proceeds from the sale of shares in another Vanguard fund). You may also request the forms needed to open a new account. BY MAIL. You may send your check and account registration form to open a new account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online under "Buy, by check"), or you may send written purchase instructions. All must be in good order. BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must designate a bank account online, or by completing a special form or the appropriate section of your account registration form. You can then make purchases on a regular schedule (Automatic Investment Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your purchase request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. TYPES OF PURCHASES BY CHECK. You may mail your check and a completed account registration form to Vanguard to open a new account. When adding to an existing account, send your check with an Invest-by-Mail form, written purchase instructions, or a printed deposit slip. Make your check payable to: Vanguard--"Fund Number. " For a list of Fund numbers and addresses, see Contacting Vanguard. BY EXCHANGE. You may purchase shares with the proceeds of a redemption from another Vanguard fund. See Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know. BY AUTOMATIC INVESTMENT PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make purchases on a regular schedule (Automatic Investment Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. BY WIRE. Call Vanguard to purchase shares by wire. See Contacting Vanguard. 18 YOUR PURCHASE PRICE BY CHECK (TO PURCHASE ALL FUNDS OTHER THAN MONEY MARKET FUNDS), BY EXCHANGE, OR BY WIRE. You buy shares at a fund's NAV determined as of your trade date. A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) receives a trade date of the same day, and a purchase request received after that time receives a trade date of the first business day following the date of receipt. BY CHECK (TO PURCHASE MONEY MARKET FUNDS ONLY). For a check purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the trade date is the first business day following the date of receipt. For a purchase request received after that time, the trade date is the second business day following the date of receipt. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date is always one day later than for other funds. BY ELECTRONIC BANK TRANSFER (OTHER THAN AUTOMATIC INVESTMENT PLAN). For all Vanguard funds, a purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will receive a trade date of the following business day. BY ELECTRONIC BANK TRANSFER (WITH AUTOMATIC INVESTMENT PLAN). Your Vanguard account's trade date will be one business day before the date you designated for withdrawal from your bank account. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. PURCHASE RULES YOU SHOULD KNOW ^ADMIRAL SHARES. Please note that Admiral Shares are NOT available for: - -SIMPLE IRAs and 403(b)(7) custodial accounts; - -Other retirement plan accounts receiving special administrative services from Vanguard; or - -Accounts maintained by financial intermediaries, except in limited circumstances. ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from fraud, Vanguard may refuse "starter checks" and checks that are not made payable to Vanguard. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your 19 identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. ^FUTURE PURCHASES. Vanguard reserves the right to reject any purchase request at any time and without notice, including purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may disrupt a fund's operation or performance. In addition, all Vanguard funds reserve the right to stop selling shares. ^LARGE PURCHASES. Please call Vanguard before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written transaction requests, Vanguard will not cancel any transaction once it has been processed. CONVERTING SHARES A CONVERSION BETWEEN SHARE CLASSES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. CONVERSIONS FROM INVESTOR SHARES INTO ADMIRAL SHARES Shares purchased before the issuance of Admiral Shares are considered Investor Shares. SELF-DIRECTED CONVERSIONS. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $100,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online, or you may contact Vanguard by telephone or by mail to request this transaction. See Contacting Vanguard. 20 TENURE CONVERSIONS. You are eligible for a self-directed conversion from Investor Shares into Admiral Shares if you have had an account in the Fund for ten years, that account balance is at least $50,000, and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online, or you may contact Vanguard by telephone or by mail to request this transaction. AUTOMATIC CONVERSIONS. The Fund conducts periodic reviews of account balances and may convert an eligible investor's Investor Shares into Admiral Shares. The Fund will notify the investor in writing before any automatic conversion into Admiral Shares. You may instruct the Fund if you do not wish to convert to the lower-cost Admiral Shares. Automatic conversions do not apply to accounts that qualify for Admiral Shares on the basis of tenure in the Fund. MANDATORY CONVERSIONS INTO INVESTOR SHARES If an investor no longer meets the requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE TRANSACTIONS. You may redeem shares, initiate electronic bank transfers, and exchange the proceeds of a redemption from one fund to purchase shares of another fund through our website at www.vanguard.com. BY TELEPHONE. You may call Vanguard to request a redemption. See Contacting Vanguard. BY MAIL. You may send your written redemption instructions in good order to Vanguard. See Contacting Vanguard. BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must designate a bank account online, or by completing a special form or the appropriate section of your account registration form. You can then make redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your redemption request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. 21 TYPES OF REDEMPTIONS BY CHECK. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. BY EXCHANGE. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares, Frequent- Trading Limits, and Other Rules You Should Know. BY AUTOMATIC WITHDRAWAL PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you wish by electronic bank transfer. Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. The minimum electronic redemption is $100. BY WIRE. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it either online or by completing a special form or the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. Money Market Funds: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received by Vanguard before 4 p.m, Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. For example, if your request is received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your trade date. The trade date for Automatic Withdrawal Plan redemptions is two business days prior to the date you designated for the proceeds to be in your bank account. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. 22 ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would disrupt the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. ^RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient balance. ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^ADDRESS CHANGE. If you change your address online or by telephone, there may be a 15-day hold on online and telephone redemptions. Address-change confirmations are sent to both the old and new addresses. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. At your request, we can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners and may require a signature guarantee. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written transaction requests, Vanguard will not cancel any transaction once it has been processed. ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the SEC. 23 EXCHANGING SHARES An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in another Vanguard fund. All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. FREQUENT-TRADING LIMITS Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and VIPER Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. The policy does not apply to the following: - -Purchases of shares with reinvested dividend or capital gains distributions. - -Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online(R). - -Redemptions of shares to pay fund or account fees. - -Transaction requests submitted by mail to Vanguard from shareholders who hold their accounts directly with Vanguard. (Transactions submitted by fax or wire are not mail transactions and are subject to the policy.) - -Transfers and re-registrations of shares within the same fund. - -Purchases of shares by asset transfer or direct rollover. - -Conversions of shares from one share class to another in the same fund. - -Checkwriting redemptions. - -Section 529 college savings plans. - -Certain approved institutional portfolios and asset allocation programs, as well as Vanguard mutual funds that invest in other Vanguard mutual funds. 24 For participants in employer-sponsored defined contribution plans (other than those served by the Vanguard Small Business Services Department), the frequent- trading policy does not apply to: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. ACCOUNTS HELD BY INSTITUTIONS (OTHER THAN DEFINED CONTRIBUTION PLANS) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. ACCOUNTS HELD BY INTERMEDIARIES When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will seek to investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary or by certain of the intermediary's clients. Intermediaries may also monitor their clients' trading activities in the Vanguard funds. For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase or redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase or redemption fees or administer frequent-trading policies. 25 For funds to which fees apply, intermediaries will be expected to begin to assess purchase and redemption fees within the next year. Intermediaries may be provided additional time if needed to address systems issues. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. If you are a registered user of Vanguard.com, you can use your personal computer to review your account holdings; to buy, sell, or exchange shares of most Vanguard funds; and to perform most other transactions. To establish this service, you must register online. ^ELECTRONIC DELIVERY. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. TELEPHONE TRANSACTIONS ^AUTOMATIC. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the account. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service for any or all shareholders at any time, without notice. 26 GOOD ORDER We reserve the right to reject any transaction instructions that are not in "good order." The requirements vary among types of accounts and transactions. Good order means that your instructions must include: - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percent). Written instructions also must include: - -Authorized signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. *Call Vanguard for specific signature-guarantee requirements. FUTURE TRADE DATE REQUESTS Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Buying Shares, Converting Shares, and Redeeming Shares. Vanguard reserves the right to return future-dated checks. ACCOUNTS WITH MORE THAN ONE OWNER If an account has more than one owner or authorized person, Vanguard will accept telephone or online instructions from any one owner or authorized person. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements that we send to you. It is important that you contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell Investor Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment advisor. HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED, AND AUTOMATIC CONVERSIONS BETWEEN INVESTOR SHARES AND ADMIRAL SHARES GENERALLY ARE NOT AVAILABLE TO ACCOUNTS 27 HELD THROUGH INTERMEDIARIES. PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM AND TO LEARN ABOUT OTHER RULES THAT MAY APPLY. Please see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees and monitoring of frequent trading for accounts held by intermediaries. CUSTODIAL FEES Vanguard charges a custodial fee of $10 a year for each IRA fund account with a balance of less than $5,000. The fee can be waived if you have assets totaling $50,000 or more at Vanguard in any combination of accounts under your taxpayer identification number, including IRAs, employer-sponsored retirement plans, brokerage accounts, annuities, and non-IRA accounts. LOW-BALANCE ACCOUNTS All Vanguard funds reserve the right to liquidate any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. If a fund has a redemption fee, that fee will apply to shares redeemed upon closure of the account. For most nonretirement accounts, Vanguard deducts a $10 fee in June if the fund account balance is below $2,500. This fee can be waived if the total Vanguard account assets under your taxpayer identification number are $50,000 or more. RIGHT TO CHANGE POLICIES In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase, redemption, service, or privilege at any time without notice; (2) accept initial purchases by telephone; (3) freeze any account and suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption fee, low-balance account fee, account maintenance fee, or other fees charged to a group of shareholders; and (5) redeem an account, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect all investors or only those in certain classes or groups. These actions will be taken when, in the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. 28 FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send (or provide online, whichever you prefer) a confirmation statement to verify your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send such statements if they reflect only money market checkwriting or the reinvestment of dividends or capital gains distributions. Promptly review each confirmation statement that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the confirmation statement. PORTFOLIO SUMMARIES We will send (or provide online, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar year. Promptly review each summary that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary. TAX STATEMENTS For most taxable accounts, we will send annual tax statements to assist you in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs and other retirement plans.These statements can be viewed online. AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany annual 1099B tax statements. These statements show the average cost of shares that you redeemed during the previous calendar year, using the average-cost single- category method, which is one of the methods established by the IRS. ANNUAL AND SEMIANNUAL REPORTS We will send (or provide online, whichever you prefer) financial reports about Vanguard Windsor Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Reports from the advisors. - -Financial statements with detailed listings of the Fund's holdings. Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by sending just one report when two or 29 more shareholders have the same last name and address. You may request individual reports by contacting our Client Services Department in writing, by telephone, or by e-mail. PORTFOLIO HOLDINGS We generally post on our website at www.vanguard.com, in the HOLDINGS section of the Fund's Profile page, a detailed list of the securities held by the Fund (under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the 10 largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. These postings generally remain until replaced by new postings as previously described. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings. CONTACTING VANGUARD ONLINE VANGUARD.COM - -For the most complete source of Vanguard news - -For fund, account, and service information - -For most account transactions - -For literature requests - -24 hours a day, 7 days a week VANGUARD TELE-ACCOUNT(R) 800-662-6273 (ON-BOARD) - -For automated fund and account information - -For redemptions by check, exchange (subject to certain limitations), or wire - -Toll-free, 24 hours a day, 7 days a week INVESTOR INFORMATION 800-662-7447 (SHIP) (Text telephone at 800-952-3335) - -For fund and service information - -For literature requests - -Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time CLIENT SERVICES 800-662-2739 (CREW) (Text telephone at 800-749-7273) - -For account information - -For most account transactions - -Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time 30 ADMIRAL SERVICE CENTER 888-237-9949 - -For Admiral account information - -For most Admiral transactions - -Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time INSTITUTIONAL DIVISION 888-809-8102 - -For information and services for large institutional investors - -Business hours only INTERMEDIARY SALES SUPPORT 800-997-2798 - -For information and services for financial intermediaries including broker-dealers, trust institutions, insurance companies, and financial advisors - -Business hours only: Monday-Friday, 8:30 a.m. to 8 p.m., Eastern time VANGUARD ADDRESSES Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGISTERED, EXPRESS, OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBERS Please use the specific fund number when contacting us: Vanguard Windsor Fund--22 (Investor Shares) or 5022 (Admiral Shares). The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Tele-Account, Tele-Account, VIPER, VIPERs, Windsor, Vanguard Small Business Online, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INVESTMENT ADVISOR An organization that makes the day-to-day decisions regarding a fund's investments. MEDIAN MARKET CAP An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. 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 also 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). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The face value of a debt instrument or the amount of money put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that emphasizes stocks whose prices typically are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP LOGO] [THE VANGUARD GROUP (R) LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you would like more information about Vanguard Windsor Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 800-662-7447 (SHIP) TEXT TELEPHONE: 800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 800-662-2739 (CREW) TEXT TELEPHONE: 800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2006 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P022 022006 VANGUARD(R) WINDSOR(TM) II FUND Investor Shares & Admiral(TM) Shares . February 28, 2006 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2005. [STOCK] [prospectus] [graphic appears here] 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. [THE VANGUARD GROUP (R) LOGO] VANGUARD WINDSOR II FUND Investor Shares and Admiral Shares Prospectus February 28, 2006 A Value Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS 1 FUND PROFILE 4 ADDITIONAL INFORMATION 4 MORE ON THE FUND 10 THE FUND AND VANGUARD 10 INVESTMENT ADVISORS 13 DIVIDENDS, CAPITAL GAINS, AND TAXES 14 SHARE PRICE 15 FINANCIAL HIGHLIGHTS 18 INVESTING WITH VANGUARD 18 Buying Shares 21 Converting Shares 22 Redeeming Shares 25 Exchanging Shares 25 Frequent-Trading Limits 27 Other Rules You Should Know 29 Fund and Account Updates 31 Contacting Vanguard GLOSSARY OF INVESTMENT TERMS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW The Fund offers two separate classes of shares: Investor Shares and Admiral Shares. Please note that Admiral Shares are NOT available for: n SIMPLE IRAs and 403(b)(7) custodial accounts; -Other retirement plan accounts receiving special administrative services from Vanguard; or -Accounts maintained by financial intermediaries, except in limited circumstances. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation and income. PRIMARY INVESTMENT STRATEGIES The Fund invests mainly in large- and mid-capitalization companies whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The Fund uses multiple investment advisors. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - -Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - -Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. - -Manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of relevent market indexes. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how the Fund will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was x.xx% (quarter ended month dd, yyyy), and the lowest return for a quarter was -x.xx% (quarter ended month dd, yyyy). 2
- -------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2005 - -------------------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------------------- VANGUARD WINDSOR II FUND INVESTOR SHARES Return Before Taxes xx.xx% xx.xx% xx.xx% Return After Taxes on Distributions xx.xx xx.xx xx.xx Return After Taxes on Distributions and Sale of Fund Shares xx.xx xx.xx xx.xx - -------------------------------------------------------------------------------------------- VANGUARD WINDSOR II FUND ADMIRAL SHARES* Return Before Taxes xx.xx% xx.xx xx.xx - -------------------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes) Russell 1000 Value Index xx.xx% xx.xx% xx.xx% Standard & Poor's 500 Index xx.xx xx.xx xx.xx ------------------------------------------------------------------------------------------- *From the inception of the Fund's Admiral Shares on May 14, 2001, through December 31, 2005, the average annual total returns were x.xx% for the Admiral Shares; x.xx% for the Russell 1000 Value Index, and x.xx% for the Standard & Poor's 500 Index. - --------------------------------------------------------------------------------------------
NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for Investor Shares and that actual after-tax returns will vary for a fund's separate share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, although such costs are reflected in the investment performance figures included in this prospectus. The expenses shown under Annual Fund Operating Expenses are based estimated amounts for the current fiscal year, adjusted to account for new advisory fee schedules effective December 19, 2005.
INVESTOR ADMIRAL SHARES SHARES ------ ------ SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None None Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee: None None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.34% 0.22% 12b-1 Distribution Fee: None None Other Expenses: 0.02% 0.01% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.36% 0.23%
3 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses match our estimates. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $xx $xxx $xxx $xxx Admiral Shares xx xxx xxx xxx - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES 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 Windsor II Fund's expense ratios in fiscal year 2005 were as follows: for Investor Shares, 0.xx%, or $x.x0 per $1,000 of average net assets; for Admiral Shares, 0.xx%, or $x.x0 per $1,000 of average net assets. The average large-cap value mutual fund had expenses in 2004 of x.xx%, or $xx.x0 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT 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 incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT Dividends are distributed Investor Shares--$3,000 semiannually in June and December; Admiral Shares--$100,000 capital gains, if any, are distributed annually in December. CONVERSION FEATURES Investor Shares--May be converted to INVESTMENT ADVISORS Admiral Shares if you meet certain - -Barrow, Hanley, Mewhinney & eligibility requirements Strauss, Inc., Dallas, Tex., since Admiral Shares--May be converted to inception Investor Shares if you are no longer - -Equinox Capital Management, LLC, eligible for Admiral Shares New York City, N.Y., since 1991 - -Hotchkis and Wiley Capital NEWSPAPER ABBREVIATION Management, LLC, Los Angeles, Investor Shares--WndsrII Calif., since 2003 Admiral Shares--WndsrIIAdml - -Tukman Capital Management, Inc., Larkspur, Calif., since 1991 VANGUARD FUND NUMBER - -The Vanguard Group, Valley Forge, Investor Shares--73 Pa., since 1991 Admiral Shares--573 CUSIP NUMBER INCEPTION DATE Investor Shares--922018205 Investor Shares--June 24, 1985 Admiral Shares--922018304 Admiral Shares--May 14, 2001 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS Investor Shares--VWNFX OF OCTOBER 31, 2005 Admiral Shares--VWNAX $xx.x billion SUITABLE FOR IRAS Yes - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. MARKET EXPOSURE The Fund invests mainly in the common stocks of large- and mid-cap companies (although the advisors will occasionally select stocks with lower market capitalization) whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Typically, the Fund spreads its assets over a broadly diversified group of companies. 5 Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2005, was $xx.x billion. [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2004) ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.4 10.6 11.2 11.4 ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2004. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.6%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or the Fund in particular. - -------------------------------------------------------------------------------- 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 stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below average in relation to those measures; these stocks often have above-average dividend yields. Growth and value stocks have historically produced similar long-term returns, though each category has periods when it outperforms the other. - -------------------------------------------------------------------------------- 6 [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. HISTORICALLY, MID-CAP STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN THE LARGE-CAP STOCKS THAT DOMINATE THE OVERALL MARKET, AND THEY OFTEN PERFORM QUITE DIFFERENTLY. SECURITY SELECTION The Fund uses multiple investment advisors, each of which independently chooses and maintains a portfolio of common stocks for the Fund. Each advisor is responsible for a portion of the Fund's assets. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations about companies and their financial prospects and about the stock market and economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. While each advisor uses a different process to select securities, each is committed to investing in large- and mid-cap stocks that, in their opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which manages approximately xx% of the Fund's assets, uses traditional methods of stock selection--research and analysis--to identify undervalued securities. A security will be sold when, in the advisor's opinion, its share price accurately reflects the security's overall worth. At that point, another undervalued security will be chosen. Barrow, Hanley looks for individual stocks that reflect these value characteristics: price/earnings and price/book below the market and price/ dividend above the market. Equinox Capital Management, LLC (Equinox), which manages approximately xx% of the Fund's assets, uses its own fundamental research and proprietary software to identify undervalued securities with attractive growth and dividend prospects. Equinox ranks securities based on a variety of factors such as cash flow, price-to-earnings ratio relative to historical levels and relative to the market, and earnings momentum. Hotchkis and Wiley Capital Management, LLC (Hotchkis & Wiley), which manages approximately xx% of the Fund's assets, invests mainly in mid- to large-cap common stocks with value-oriented characteristics. The advisor follows a disciplined investment approach, focusing on such investment parameters as a company's tangible assets, sustainable cash flow, and potential for improving business performance. Tukman Capital Management, Inc. (Tukman), which managed approximately xx% of the Fund's assets as of October 31, 2005, uses traditional research methods to assess securities. Tukman focuses its research on stocks of financially sound companies and seeks to purchase them when they have reasonable price/earnings ratios. The Vanguard Group (Vanguard), which manages approximately x% of the Fund's assets, constructs a portfolio of large- and mid-cap domestic value stocks based on its assessment of the stocks' relative return potential. The advisor selects stocks that it believes offer a good balance between reasonable valuations and attractive growth prospects relative to their peers. Vanguard implements its stock-selection process through the use of proprietary software programs that compare thousands of securities at a time. Vanguard also manages a separate portion of the Fund's assets (approximately x%), by investing in stock futures and/or shares of exchange-traded funds. For more details, see "Other Investment Policies and Risks." 7 The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT POOR SECURITY SELECTION WILL CAUSE THE FUND TO UNDERPERFORM RELEVANT BENCHMARKS OR OTHER FUNDS WITH A SIMILAR INVESTMENT OBJECTIVE. OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 25% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities use these contracts to guard against sudden, unfavorable changes in the U.S. dollar/foreign currency exchange rates. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its net assets in restricted securities with limited marketability or in other illiquid securities. Vanguard typically invests a small portion of the Fund's assets in stock index futures and/ or shares of exchange-traded funds (ETFs), including VIPER Shares issued by Vanguard stock index funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in VIPER Shares of other Vanguard funds. Fund assets invested in VIPER Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a traditional security (such as a stock or bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. 8 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES Derivatives can take many different forms. Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. - -------------------------------------------------------------------------------- CASH MANAGEMENT Vanguard may invest the Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. The Fund is permitted to invest in the CMT Funds under the terms of an exemption granted by the Securities and Exchange Commission (SEC). When investing in a CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the Vanguard CMT Fund in which it invests. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses, but may otherwise fail to achieve its investment objective. FREQUENT TRADING OR MARKET-TIMING Background Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds that hold investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. Frequent trading may also interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading The Vanguard funds (other than money market funds, short-term bond funds, and VIPER(R) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may disrupt a fund's operation or performance or because of a history of frequent trading by the investor. 9 - -Each Vanguard fund (other than money market funds, short-term bond funds, and VIPER Shares) generally limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the SHARE PRICE section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for large-cap value funds was approximately xx%, as reported by Morningstar, Inc., on October 31, 2005. - -------------------------------------------------------------------------------- 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, which are not included in the fund's expense ratio, 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 taxable income. - -------------------------------------------------------------------------------- 10 THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 130 funds holding assets in excess of $xxx billion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- 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. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- INVESTMENT ADVISORS The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the board of trustees. - -Barrow, Hanley, Mewhinney & Strauss, Inc., 2200 Ross Avenue, 31st Floor, Dallas, TX 75201, is an investment advisory firm founded in 1979. As of October 31, 2005, the firm managed approximately $54 billion in assets. - -Equinox Capital Management, LLC, 590 Madision Avenue, 8th Floor, New York, NY 10022, is an investment advisory firm founded in 1989. As of October 31, 2005, Equinox managed approximately $6.2 billion in assets. - -Hotchkis and Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor, Los Angeles, CA 90017, is an investment advisory firm founded in 1980. As of October 31, 2005, Hotchkis & Wiley managed approximately $27 billion in assets. - -Tukman Capital Management, Inc., 60 East Sir Francis Drake Boulevard, Larkspur, CA 94939, is an investment advisory firm founded in 1980. As of October 31, 2005, Tukman managed approximately $10 billion in assets. - -The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2005, Vanguard served as advisor for approximately $640 billion in assets. The Fund pays the following investment advisors--Barrow, Hanley; Equinox; Hotchkis & Wiley; and Tukman--on a quarterly basis. For each advisor, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the advisor over the period. In addition, the quarterly fees paid to each advisor are increased or decreased based on the advisor's performance in comparison with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund 11 over a trailing 36-month period (a 60-month period in the case of Hotchkis & Wiley) is compared with that of the Standard & Poor's 500/Barra Value Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), the Morgan Stanley Capital International (MSCI) US Investable Market 2500 Index (for Hotchkis & Wiley), and the S&P 500 Index (for Tukman) over the same period. Vanguard provides advisory services to the Fund on an at-cost basis. Vanguard's performance is evaluated against the MSCI US Prime Market Value Index. For the fiscal year ended October 31, 2005, the advisory fees and expenses represented an effective annual rate of 0.xx% of the Fund's average net assets before a performance-based increase of x.xx%. Under the terms of an SEC exemption, the Fund's board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. As the Fund's sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised. For a discussion of why the board of trustees approved the Fund's investment advisory arrangements, see the Fund's reports to shareholders for the periods ended April 30, 2005, and October 31, 2005. GEORGE U. SAUTER is Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguard's Quantitative Equity and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the development of Vanguard's stock indexing and active quantitative equity investment strategies. He received his A.B. in Economics from Dartmouth College and an M.B.A. in Finance from the University of Chicago. 12 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUNDS' PORTFOLIO MANAGERS The managers primarily responsible for the day-to-day management of the Fund are: JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed investment portfolios since 1963; has been with Barrow, Hanley since 1979; and has managed the Fund since 1985. Education: B.S., University of South Carolina. RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He has worked in investment management since 1973; has been with Equinox since 1989; and has managed the Fund since 1991. Education: B.S., Lehigh University; M.B.A., New York University. GEORGE H. DAVIS, JR., Chief Executive Officer and Portfolio Manager of Hotchkis & Wiley. He has worked in investment management since 1983; has been with Hotchkis & Wiley since 1988; and has managed the Fund since 2003. Education: B.A. and M.B.A., Stanford University. SHELDON LIEBERMAN, Principal and Portfolio Manager of Hotchkis & Wiley. He has worked in investment management since 1986; has been with Hotchkis & Wiley since 1994; and has managed the Fund since 2003. Education: B.A., University of California Los Angeles; M.B.A., California State University, Northridge. MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in investment management since 1971; has been with Tukman since 1980; and has managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard Business School. DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has worked in investment management since 1978; has been with Tukman since 1982; and has managed the Fund since 1991. Education: B.A., Yale University; M.B.A., Stanford University. JOEL M. DICKSON, Principal of Vanguard. He has worked in investment management for Vanguard since 1996 and has managed the Fund since 2003. Education: A.B., Washington University in St. Louis; Ph.D., Stanford University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. 13 DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic 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 dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - -Any distributions of net long-term capital gains are taxable to you as long-term capital gains 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. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 14 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund 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 will 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. - -------------------------------------------------------------------------------- GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not: - -Provide us with your correct taxpayer identification number; - -Certify that the taxpayer identification number is correct; and - -Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as VIPERs/(R)/). 15 When reliable market quotations are not readily available, securities are priced at their fair value; a security's fair value is the amount that the owner might reasonably expect to receive upon the current sale of the security. A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Although rare, fair-value pricing also may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the fund's NAV. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. 16 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES This explanation uses the Fund's Investor Shares as an example. The Investor Shares began fiscal year 2005 with a net asset value (price) of $xx.xx per share. During the year, each Investor Share earned $x.xx from investment income (interest and dividends) and $x.xx from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $x.xx per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $x.xx, reflecting earnings of $x.xx per share and distributions of $x.xx per share. This was an increase of $x.xx per share (from $xx.xx at the beginning of the year to $x.xx at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was xx% for the year. As of October 31, 2005, the Investor Shares had approximately $x.xx billion in net assets. For the year, the expense ratio was xx% ($x.xx per $1,000 of net assets), and the net investment income amounted to xx% of average net assets. The Fund sold and replaced securities valued at xx% of its net assets. - --------------------------------------------------------------------------------
WINDSOR II FUND INVESTOR SHARES - ---------------------------------------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, ------------------------------------------------------------- 2005 2004 2003 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $28.49 $24.61 $20.87 $24.50 $27.58 - ---------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income xxx .56 .51 .51 .564 Net Realized and Unrealized Gain (Loss) on Investments xxx 3.87 3.75 (3.47) (1.819) - ---------------------------------------------------------------------------------------------------------------------- Total from Investment Operations xxx 4.43 4.26 (2.96) (1.255) - ---------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (xxx) (.55) (.52) (.52) (.585) Distributions from Realized Capital Gains (xxx) -- -- (.15) (1.240) - ---------------------------------------------------------------------------------------------------------------------- Total Distributions (xxx) (.55) (.52) (.67) (1.825) - ---------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $XX.XX $28.49 $24.61 $20.87 $24.50 ====================================================================================================================== TOTAL RETURN X.XX% 18.15% 20.68% -12.51% -4.89% ====================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $xxx $26,232 $20,843 $17,735 $21,495 Ratio of Total Expenses to Average Net Assets* x.xx% 0.37% 0.43% 0.42% 0.40% Ratio of Net Investment Income to Average Net Assets x.xx% 2.07% 2.31% 2.12% 2.10% Turnover Rate xx% 22% 29% 41% 33% ====================================================================================================================== *Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.03%, 0.02%, 0.00%, and (0.03%).
17
WINDSOR II FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------------------------- YEAR ENDED OCT. 31, MAY 14* ---------------------------------------------- TO OCT. 31, 2005 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $50.59 $43.69 $37.05 $43.50 $50.00 - ------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income xxx 1.043 .95 .944 .408 Net Realized and Unrealized Gain (Loss) xxx 6.885 6.65 (6.167) (6.433) on Investments - ------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations xxx 7.928 7.60 (5.223) (6.025) - ------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (xxx) (1.028) (.96) (.962) (.475) Distributions from Realized Capital Gains (xxx ) -- -- (.265) -- - ------------------------------------------------------------------------------------------------------------------------------- Total Distributions (xxx) (1.028) (.96) (1.227) (.475) - ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $XX.XX $50.59 $43.69 $37.05 $43.50 =============================================================================================================================== TOTAL RETURN XX.XX% 18.30% 20.79% -12.44% -12.16% =============================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $xxx $4,849 $3,412 $2,484 $2,039 Ratio of Total Expenses to Average Net Assets** x.xx% 0.26% 0.32% 0.35% 0.35%+ Ratio of Net Investment Income to Average Net Assets x.xx% 2.17% 2.41% 2.18% 1.83%+ Turnover Rate xx% 22% 29% 41% 33% =============================================================================================================================== *Inception. **Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.03%, 0.02%, and 0.00%. +Annualized.
18 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change these policies, without prior notice to shareholders. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES FREQUENT-TRADING LIMITS OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS FOR INVESTOR SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $3,000. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain an account, or to add to an existing account. Investment minimums may differ for certain categories of investors. ACCOUNT MINIMUMS FOR ADMIRAL SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $100,000 for new investors. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in that Fund account are eligible to convert their Investor Shares into Admiral Shares. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain an account, or to add to an existing account. Investment minimums may differ for certain categories of investors. HOW TO BUY SHARES ONLINE TRANSACTIONS. You may open certain types of accounts, request electronic bank transfers, and exchange the proceeds of a redemption from one fund to purchase shares in a new or existing fund account through our website at www.vanguard.com. 19 BY TELEPHONE. You may call Vanguard to request a purchase of shares by wire or by an exchange (using the proceeds from the sale of shares in another Vanguard fund). You may also request the forms needed to open a new account. BY MAIL. You may send your check and account registration form to open a new account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online under "Buy, by check"), or you may send written purchase instructions. All must be in good order. BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must designate a bank account online, or by completing a special form or the appropriate section of your account registration form. You can then make purchases on a regular schedule (Automatic Investment Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your purchase request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. TYPES OF PURCHASES BY CHECK. You may mail your check and a completed account registration form to Vanguard to open a new account. When adding to an existing account, send your check with an Invest-by-Mail form, written purchase instructions, or a printed deposit slip. Make your check payable to: Vanguard--"Fund Number. " For a list of Fund numbers and addresses, see Contacting Vanguard. BY EXCHANGE. You may purchase shares with the proceeds of a redemption from another Vanguard fund. See Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know. BY AUTOMATIC INVESTMENT PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make purchases on a regular schedule (Automatic Investment Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. BY WIRE. Call Vanguard to purchase shares by wire. See Contacting Vanguard. YOUR PURCHASE PRICE BY CHECK (TO PURCHASE ALL FUNDS OTHER THAN MONEY MARKET FUNDS), BY EXCHANGE, OR BY WIRE. You buy shares at a fund's NAV determined as of your trade date. A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) 20 receives a trade date of the same day, and a purchase request received after that time receives a trade date of the first business day following the date of receipt. BY CHECK (TO PURCHASE MONEY MARKET FUNDS ONLY). For a check purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the trade date is the first business day following the date of receipt. For a purchase request received after that time, the trade date is the second business day following the date of receipt. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date is always one day later than for other funds. BY ELECTRONIC BANK TRANSFER (OTHER THAN AUTOMATIC INVESTMENT PLAN). For all Vanguard funds, a purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will receive a trade date of the following business day. BY ELECTRONIC BANK TRANSFER (WITH AUTOMATIC INVESTMENT PLAN). Your Vanguard account's trade date will be one business day before the date you designated for withdrawal from your bank account. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. PURCHASE RULES YOU SHOULD KNOW ^ADMIRAL SHARES. Please note that Admiral Shares are NOT available for: - -SIMPLE IRAs and 403(b)(7) custodial accounts; - -Other retirement plan accounts receiving special administrative services from Vanguard; or - -Accounts maintained by financial intermediaries, except in limited circumstances. ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from fraud, Vanguard may refuse "starter checks" and checks that are not made payable to Vanguard. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. 21 ^FUTURE PURCHASES. Vanguard reserves the right to reject any purchase request at any time and without notice, including purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may disrupt a fund's operation or performance. In addition, all Vanguard funds reserve the right to stop selling shares. ^LARGE PURCHASES. Please call Vanguard before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written transaction requests, Vanguard will not cancel any transaction once it has been processed. CONVERTING SHARES A CONVERSION BETWEEN SHARE CLASSES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. CONVERSIONS FROM INVESTOR SHARES INTO ADMIRAL SHARES Shares purchased before the issuance of Admiral Shares are considered Investor Shares. SELF-DIRECTED CONVERSIONS. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $100,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online, or you may contact Vanguard by telephone or by mail to request this transaction. See Contacting Vanguard. TENURE CONVERSIONS. You are eligible for a self-directed conversion from Investor Shares into Admiral Shares if you have had an account in the Fund for ten years, that account balance is at least $50,000, and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online, or you may contact Vanguard by telephone or by mail to request this transaction. 22 AUTOMATIC CONVERSIONS. The Fund conducts periodic reviews of account balances and may convert an eligible investor's Investor Shares into Admiral Shares. The Fund will notify the investor in writing before any automatic conversion into Admiral Shares. You may instruct the Fund if you do not wish to convert to the lower-cost Admiral Shares. Automatic conversions do not apply to accounts that qualify for Admiral Shares on the basis of tenure in the Fund. MANDATORY CONVERSIONS INTO INVESTOR SHARES If an investor no longer meets the requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE TRANSACTIONS. You may redeem shares, initiate electronic bank transfers, and exchange the proceeds of a redemption from one fund to purchase shares of another fund through our website at www.vanguard.com. BY TELEPHONE. You may call Vanguard to request a redemption. See Contacting Vanguard. BY MAIL. You may send your written redemption instructions in good order to Vanguard. See Contacting Vanguard. BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must designate a bank account online, or by completing a special form or the appropriate section of your account registration form. You can then make redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your redemption request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. TYPES OF REDEMPTIONS BY CHECK. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. 23 BY EXCHANGE. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares, Frequent- Trading Limits, and Other Rules You Should Know. BY AUTOMATIC WITHDRAWAL PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you wish by electronic bank transfer. Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. The minimum electronic redemption is $100. BY WIRE. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it either online or by completing a special form or the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. Money Market Funds: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received by Vanguard before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. For example, if your request is received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your trade date. The trade date for Automatic Withdrawal Plan redemptions is two business days prior to the date you designated for the proceeds to be in your bank account. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would disrupt the fund's operation or performance 24 or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. ^RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient balance. ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^ADDRESS CHANGE. If you change your address online or by telephone, there may be a 15-day hold on online and telephone redemptions. Address-change confirmations are sent to both the old and new addresses. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. At your request, we can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners and may require a signature guarantee. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written transaction requests, Vanguard will not cancel any transaction once it has been processed. ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the SEC. 25 EXCHANGING SHARES An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in another Vanguard fund. All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. FREQUENT-TRADING LIMITS Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and VIPER Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. The policy does not apply to the following: - -Purchases of shares with reinvested dividend or capital gains distributions. - -Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online(R). - -Redemptions of shares to pay fund or account fees. - -Transaction requests submitted by mail to Vanguard from shareholders who hold their accounts directly with Vanguard. (Transactions submitted by fax or wire are not mail transactions and are subject to the policy.) - -Transfers and re-registrations of shares within the same fund. - -Purchases of shares by asset transfer or direct rollover. - -Conversions of shares from one share class to another in the same fund. - -Checkwriting redemptions. - -Section 529 college savings plans. - -Certain approved institutional portfolios and asset allocation programs, as well as Vanguard mutual funds that invest in other Vanguard mutual funds. For participants in employer-sponsored defined contribution plans (other than those served by the Vanguard Small Business Services Department), the frequent- trading policy does not apply to: 26 - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. ACCOUNTS HELD BY INSTITUTIONS (OTHER THAN DEFINED CONTRIBUTION PLANS) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. ACCOUNTS HELD BY INTERMEDIARIES When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will seek to investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary or by certain of the intermediary's clients. Intermediaries may also monitor their clients' trading activities in the Vanguard funds. For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase or redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase or redemption fees or administer frequent-trading policies. For funds to which fees apply, intermediaries will be expected to begin to assess purchase and redemption fees within the next year. Intermediaries may be provided additional time if needed to address systems issues. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. 27 OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. If you are a registered user of Vanguard.com, you can use your personal computer to review your account holdings; to buy, sell, or exchange shares of most Vanguard funds; and to perform most other transactions. To establish this service, you must register online. ^ELECTRONIC DELIVERY. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. TELEPHONE TRANSACTIONS ^AUTOMATIC. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the account. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service for any or all shareholders at any time, without notice. GOOD ORDER We reserve the right to reject any transaction instructions that are not in "good order." The requirements vary among types of accounts and transactions. Good order means that your instructions must include: - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percent). 28 Written instructions also must include: - -Authorized signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. *Call Vanguard for specific signature-guarantee requirements. FUTURE TRADE DATE REQUESTS Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Buying Shares, Converting Shares, and Redeeming Shares. Vanguard reserves the right to return future-dated checks. ACCOUNTS WITH MORE THAN ONE OWNER If an account has more than one owner or authorized person, Vanguard will accept telephone or online instructions from any one owner or authorized person. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private, and immediately review any account statements that we send to you. It is important that you contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell Investor Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment advisor. HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED, AND AUTOMATIC CONVERSIONS BETWEEN INVESTOR SHARES AND ADMIRAL SHARES GENERALLY ARE NOT AVAILABLE TO ACCOUNTS HELD THROUGH INTERMEDIARIES. PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM AND TO LEARN ABOUT OTHER RULES THAT MAY APPLY. Please see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees and monitoring of frequent trading for accounts held by intermediaries. 29 CUSTODIAL FEES Vanguard charges a custodial fee of $10 a year for each IRA fund account with a balance of less than $5,000. The fee can be waived if you have assets totaling $50,000 or more at Vanguard in any combination of accounts under your taxpayer identification number, including IRAs, employer-sponsored retirement plans, brokerage accounts, annuities, and non-IRA accounts. LOW-BALANCE ACCOUNTS All Vanguard funds reserve the right to liquidate any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. If a fund has a redemption fee, that fee will apply to shares redeemed upon closure of the account. For most nonretirement accounts, Vanguard deducts a $10 fee in June if the fund account balance is below $2,500. This fee can be waived if the total Vanguard account assets under your taxpayer identification number are $50,000 or more. RIGHT TO CHANGE POLICIES In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase, redemption, service, or privilege at any time without notice; (2) accept initial purchases by telephone; (3) freeze any account and suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption fee, low-balance account fee, account maintenance fee, or other fees charged to a group of shareholders; and (5) redeem an account, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect all investors or only those in certain classes or groups. These actions will be taken when, in the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send (or provide online, whichever you prefer) a confirmation statement to verify your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send such statements if they reflect only money market checkwriting or the reinvestment of dividends or capital gains distributions. Promptly review each confirmation statement that we send to you. It is 30 important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the confirmation statement. PORTFOLIO SUMMARIES We will send (or provide online, whichever you prefer) quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar year. Promptly review each summary that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary. TAX STATEMENTS For most taxable accounts, we will send annual tax statements to assist you in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs and other retirement plans.These statements can be viewed online. AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany annual 1099B tax statements. These statements show the average cost of shares that you redeemed during the previous calendar year, using the average-cost single- category method, which is one of the methods established by the IRS. ANNUAL AND SEMIANNUAL REPORTS We will send (or provide online, whichever you prefer) financial reports about Vanguard Windsor II Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Reports from the advisors. - -Financial statements with detailed listings of the Fund's holdings. Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by sending just one report when two or more shareholders have the same last name and address. You may request individual reports by contacting our Client Services Department in writing, by telephone, or by e-mail. 31 PORTFOLIO HOLDINGS We generally post on our website at www.vanguard.com, in the HOLDINGS section of the Fund's Profile page, a detailed list of the securities held by the Fund (under PORTFOLIO HOLDINGS), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the 10 largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. These postings generally remain until replaced by new postings as previously described. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings. CONTACTING VANGUARD ONLINE VANGUARD.COM - -For the most complete source of Vanguard news - -For fund, account, and service information - -For most account transactions - -For literature requests - -24 hours a day, 7 days a week VANGUARD TELE-ACCOUNT(R) 800-662-6273 (ON-BOARD) - -For automated fund and account information - -For redemptions by check, exchange (subject to certain limitations), or wire - -Toll-free, 24 hours a day, 7 days a week INVESTOR INFORMATION 800-662-7447 (SHIP) (Text telephone at 800-952-3335) - -For fund and service information - -For literature requests - -Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time CLIENT SERVICES 800-662-2739 (CREW) (Text telephone at 800-749-7273) - -For account information - -For most account transactions - -Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time ADMIRAL SERVICE CENTER 888-237-9949 - -For Admiral account information - -For most Admiral transactions - -Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time 32 INSTITUTIONAL DIVISION 888-809-8102 - -For information and services for large institutional investors - -Business hours only INTERMEDIARY SALES SUPPORT 800-997-2798 - -For information and services for financial intermediaries including broker-dealers, trust institutions, insurance companies, and financial advisors - -Business hours only: Monday-Friday, 8:30 a.m. to 8 p.m., Eastern time VANGUARD ADDRESSES Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGISTERED, EXPRESS, OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBERS Please use the specific fund number when contacting us: Vanguard Windsor II Fund--73 (Investor Shares) or 573 (Admiral Shares). The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Tele-Account, Tele-Account, VIPER, VIPERs, Windsor, Vanguard Small Business Online, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INVESTMENT ADVISOR An organization that makes the day-to-day decisions regarding a fund's investments. MEDIAN MARKET CAP An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. 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 also 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). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The face value of a debt instrument or the amount of money put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that emphasizes stocks whose prices typically are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP LOGO] [THE VANGUARD GROUP (R) LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you would like more information about Vanguard Windsor II Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 800-662-7447 (SHIP) TEXT TELEPHONE: 800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 800-662-2739 (CREW) TEXT TELEPHONE: 800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2006 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P073 022006 PART B VANGUARD(R) WINDSOR(TM) FUNDS STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 28, 2006 This Statement is not a prospectus but should be read in conjunction with the Funds' current prospectuses (dated February 28, 2006). To obtain, without charge, a prospectus or the most recent Annual Report to Shareholders, which contains the Funds' financial statements as hereby incorporated by reference, please call: INVESTOR INFORMATION DEPARTMENT: 800-662-7447 TABLE OF CONTENTS DESCRIPTION OF THE TRUST.....................................................B-1 INVESTMENT POLICIES..........................................................B-3 INVESTMENT LIMITATIONS......................................................B-17 SHARE PRICE.................................................................B-17 PURCHASE AND REDEMPTION OF SHARES...........................................B-18 MANAGEMENT OF THE FUNDS ....................................................B-19 INVESTMENT ADVISORY SERVICES................................................B-27 PORTFOLIO TRANSACTIONS......................................................B-33 PROXY VOTING GUIDELINES.....................................................B-34 FINANCIAL STATEMENTS........................................................B-39 DESCRIPTION OF THE TRUST Vanguard Windsor Funds (the Trust) was organized as Wellington Equity Fund, Inc., a Delaware corporation, in 1958. It was reorganized as a Maryland corporation in 1973 and subsequently was reorganized as a Pennsylvania business trust in 1985. The Trust then was reorganized as a Maryland corporation later in 1985 and, finally, was reorganized as a Delaware statutory trust in May 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company. The Trust currently offers the following funds (and classes thereof): SHARE CLASSES** ------------- FUND INVESTOR ADMIRAL - ---- -------- ------- Vanguard Windsor Fund Yes Yes Vanguard Windsor II Fund Yes Yes *Individually, a Fund; collectively, the Funds **Individually, a class; collectively, the classes The Trust has the ability to offer additional funds, which in turn may issue classes of shares. There is no limit on the number of full and fractional shares that may be issued for a single fund or class of shares. Each Fund described in this Statement of Additional Information is a member fund. There are two types of "Vanguard funds," member funds and non-member funds. Member funds jointly own The Vanguard Group, Inc. (Vanguard), contribute to Vanguard's capital, and receive services at cost from Vanguard pursuant to a Funds' Service Agreement. Non-member funds do not contribute to Vanguard's capital, but they do receive services pursuant to special services agreements. See "Management of the Funds" for more information. B-1 SERVICE PROVIDERS CUSTODIAN. Citibank, N.A., 111 Wall Street, New York, NY 10005, serves as the Funds' custodian. The custodian is responsible for maintaining the Funds' assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign sub-custodians or foreign securities depositories. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA, 19103-7042, serves as the Funds' independent registered public accounting firm. The independent registered public accounting firm audits the Funds' annual financial statements and provides other related services. TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and dividend-paying agent is Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355. CHARACTERISTICS OF THE FUNDS' SHARES RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on the right of shareholders to retain or dispose of the Funds' shares, other than the possible future termination of a Fund or share class. Each Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the Fund or class. Unless terminated by reorganization or liquidation, each Fund and share class will continue indefinitely. SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. Effectively, this means that a shareholder of a 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 as a result 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 by the Fund. No shares of a Fund have priority or preference over any other shares of the Fund with respect to distributions. Distributions will be made from the assets of the Fund and will be paid ratably to all shareholders of the Fund (or class) according to the number of shares of the Fund (or class) held by shareholders on the record date. The amount of dividends per share may vary between separate share classes of the Fund based upon differences in the way that expenses are allocated between share classes pursuant to a multiple class plan. VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (1) a shareholder vote is required under the 1940 Act; (2) 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 a Fund or any class; (3) the trustees determine that it is necessary or desirable to obtain a shareholder vote; or (4) a certain type of merger or consolidation, share conversion, share exchange, or sale of assets is proposed. 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 a Fund's net assets and to change any fundamental policy of a Fund. Unless otherwise required by applicable law, shareholders of a Fund receive one vote for each dollar of net asset value owned on the record date, and a fractional vote for each fractional dollar of net asset value owned on the record date. However, only the shares of the Fund or class affected by a particular matter are entitled to vote on that matter. In addition, each class has exclusive voting rights on any matter submitted to shareholders that relates solely to that class, and each class has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of another. Voting rights are noncumulative and cannot be modified without a majority vote. LIQUIDATION RIGHTS. In the event that a Fund is liquidated, shareholders will be entitled to receive a pro rata share of the Fund's net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to receive a pro rata share of the Fund's net assets that are allocated to that class. Shareholders may receive cash, securities, or a combination of the two. PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds' shares. CONVERSION RIGHTS. Fund shareholders may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements. B-2 REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information. SINKING FUND PROVISIONS. The Funds have no sinking fund provisions. CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and non-assessable. TAX STATUS OF THE FUNDS Each Fund intends to continue to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC). This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, each Fund must comply with certain requirements. If a 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, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company. Dividends received and distributed by each Fund on shares of stock of domestic corporations may be eligible for the dividends-received deduction applicable to corporate shareholders. Corporations must satisfy certain requirements in order to claim the deduction. Capital gains distributed by the Funds are not eligible for the dividends-received deduction. INVESTMENT POLICIES Some of the investment policies described below and in each Fund's prospectus set forth percentage limitations on a Fund's investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these policies will be determined immediately after the acquisition of such securities or assets. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Fund's investment policies and limitations. The following policies and explanations supplement each Fund's investment objective and policies set forth in the prospectus. With respect to the different investments discussed below, a Fund may acquire such investments to the extent consistent with its investment objective and policies. BORROWING. A fund's ability to borrow money is limited by its investment policies and limitations, by the 1940 Act, and by applicable exemptions, no-action letters, interpretations, and other pronouncements by the SEC and its staff, and any other regulatory authority having jurisdiction, from time to time. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund's total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or for other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund for purposes of the 1940 Act. These transactions can include entering into reverse repurchase agreements, engaging in mortgage-dollar-roll transactions, selling securities short (other than short sales "against-the-box"), buying and selling certain derivatives (such as futures contracts), selling (or writing) put and call options, engaging in sale-buybacks, entering into firm-commitment and standby-commitment agreements, engaging in when-issued, delayed-delivery, or forward-commitment transactions, and other trading practices that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing (additional discussion about a number of these transactions can be found below). A borrowing transaction will B-3 not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund (1) maintains an offsetting financial position, (2) segregates liquid assets (with such liquidity determined by the advisor in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the fund's potential economic exposure under the borrowing transaction, or (3) otherwise "covers" the transaction in accordance with applicable SEC guidance (collectively, "covers" the transaction). A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction. In addition, segregated assets may not be available to satisfy redemptions or for other purposes. COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on such stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders, and owners of preferred stock take precedence over the claims of those who own common stock. CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that combine the investment characteristics of bonds and common stocks. Convertible securities typically consist of debt securities or preferred stock that may be converted (on a voluntary or mandatory basis) within a specified period of time (normally for the entire life of the security) into a certain amount of common stock or other equity security of the same or a different issuer at a predetermined price. Convertible securities also include debt securities with warrants or common stock attached and derivatives combining the features of debt securities and equity securities. Other convertible securities with features and risks not specifically referred to herein may become available in the future. Convertible securities involve risks similar to those of both fixed income and equity securities. The market value of a convertible security is a function of its "investment value" and its "conversion value." A security's "investment value" represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer, and the seniority of the security in the issuer's capital structure. A security's "conversion value" is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. In that circumstance, the convertible security takes on the characteristics of a bond, and its price moves in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. In that case, the convertible security's price may be as volatile as that of common stock. Because both interest rate and market movements can influence its value, a convertible security generally is not as sensitive to interest rates as a similar fixed income security, nor is it as sensitive to changes in share price as its underlying equity security. Convertible securities are often rated below investment-grade or are not rated, and are generally subject to a high degree of credit risk. While all markets are prone to change over time, the generally high rate at which convertible securities are retired (through mandatory or scheduled conversions by issuers or voluntary redemptions by holders) and replaced with newly issued convertibles may cause the convertible securities market to change more rapidly than other markets. For example, a concentration of available convertible securities in a few economic sectors could elevate the sensitivity of the convertible securities market to the volatility of the equity markets and to the specific risks of those sectors. Moreover, convertible securities with innovative structures, such as mandatory conversion securities and equity-linked securities, have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities. DEBT SECURITIES. A debt security is a security consisting of a certificate or other evidence of a debt (secured or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest for a specified length of time, and to repay the debt on the specified maturity date. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Debt securities include a variety of fixed income obligations, including, but not limited to, corporate bonds, government securities, municipal securities, convertible securities, mortgage-backed securities, and B-4 asset-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, call/ prepayment risk, inflation risk, credit risk, and (in the case of foreign securities) country risk and currency risk. DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade securities, also referred to as "high-yield securities" or "junk bonds," are debt securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization (for example, lower than Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's) or are determined to be of comparable quality by the fund's advisor. These securities are generally considered to be, on balance, predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk than securities in the investment-grade categories. Investment in these securities generally provides greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of investment-grade securities. Thus, reliance on credit ratings in making investment decisions entails greater risks for high-yield securities than for investment-grade debt securities. The success of a fund's advisor in managing high-yield securities is more dependent upon its own credit analysis than is the case with investment-grade securities. Some high-yield securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition, merger, or leveraged buyout. Companies that issue high-yield securities are often highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with investment-grade securities. Some high-yield securities were once rated as investment-grade but have been downgraded to junk bond status because of financial difficulties experienced by their issuers. The market values of high-yield securities tend to reflect individual issuer developments to a greater extent than do investment-grade securities, which in general react to fluctuations in the general level of interest rates. High-yield securities also tend to be more sensitive to economic conditions than are investment-grade securities. A projection of an economic downturn or of a sustained period of rising interest rates, for example, could cause a decline in junk bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high-yield securities defaults, in addition to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses to seek recovery. The secondary market on which high-yield securities are traded may be less liquid than the market for investment-grade securities. Less liquidity in the secondary trading market could adversely affect the ability of a fund to sell a high-yield security or the price at which a fund could sell a high-yield security, and could adversely affect the daily net asset value of fund shares. When secondary markets for high-yield securities are less liquid than the market for investment-grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. Except as otherwise provided in a fund's prospectus, if a credit-rating agency changes the rating of a portfolio security held by a fund, the fund may retain the portfolio security if the advisor deems it in the best interests of shareholders. DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. Although the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the B-5 deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. For purposes of a fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depository receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers. DERIVATIVES. A derivative is a financial instrument which has a value that is based on--or "derived from"--the values of other assets, reference rates, or indexes. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates, and related indexes. Derivatives include futures contracts and options on futures contracts (see additional discussion below), forward-commitment transactions (see additional discussion below), options on securities (see additional discussion below), caps, floors, collars, swap agreements (see additional discussion below), and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter (OTC) market. The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the securities, assets, or market indexes on which the derivatives are based. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. A fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. There is no assurance that any derivatives strategy used by a fund's advisor will succeed. Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds, and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions. The use of a derivative involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the other party to the contract (usually referred to as a "counterparty") or the failure of the counterparty to make required payments or otherwise comply with the terms of the contract. Additionally, the use of credit derivatives can result in losses if a fund's advisor does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based. Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price. Derivatives may be subject to pricing or "basis" risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain B-6 derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A derivative transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its advisor will incorrectly forecast future market trends or the values of assets, reference rates, indexes, or other financial or economic factors in establishing derivative positions for the fund. If the advisor attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds (ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock or bond market. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage. Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares generally are subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded) that has the same investment objective, strategies, and policies. The price of an ETF can fluctuate within a wide range, and a fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETF's shares may trade at a discount to their net asset value; (2) an active trading market for an ETF's shares may not develop or be maintained; or (3) trading of an ETF's shares may be halted if the listing exchange's officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. VIPER(R) Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard index funds. "VIPER" stands for Vanguard Index Participation Equity Receipts. Any fund that issues VIPER Shares may repurchase those shares on the open market at the current market price if doing so would be advantageous for the fund. A repurchase might be advantageous, for example, because the VIPER Shares are more cost-effective than alternative investments, are selling at a discount to net asset value, will cause the fund to more closely track its index than alternative investments, or some combination of the three. A fund that repurchases its VIPER Shares also may lend those shares to qualified institutional borrowers as part of the fund's securities lending activities. A fund's investments in VIPER Shares are also subject to the descriptions, limitations, and risks described under the heading "Other Investment Companies." FOREIGN SECURITIES. Foreign securities are equity or debt securities issued by entities organized, domiciled, or with a principal place of business outside the United States, such as foreign corporations and governments. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments (depositary receipts) for foreign securities (see discussion above). Depositary receipts are securities that are listed on exchanges or quoted in OTC markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in securities of U.S. companies or governments. Because foreign issuers are not generally subject to uniform accounting, auditing, and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign B-7 countries. As a result, there is a risk that a fund's trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers are generally less liquid than securities of comparable U.S. issuers. In certain countries, there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the U.S. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments which could affect U.S. investments in those countries. Although an advisor will endeavor to achieve most favorable execution costs for a fund's portfolio transactions in foreign securities under the circumstances, commissions (and other transaction costs) are generally higher than those on U.S. securities. In addition, it is expected that the expenses for custodian arrangements of the fund's foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Certain foreign governments levy withholding taxes against dividend and interest income from foreign securities. Although in some countries a portion of these taxes is recoverable by the fund, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies making up a fund. The value of the foreign securities held by a fund that are not U.S. dollar-denominated may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed below, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations, and political and economic developments. FOREIGN SECURITIES -- EMERGING MARKET RISK. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign countries. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. FOREIGN SECURITIES -- FOREIGN CURRENCY TRANSACTIONS. The value in U.S. dollars of a fund's non-dollar-denominated foreign securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To seek to minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange and will enter into foreign currency transactions only to attempt to "hedge" the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss that would result from a decline in the value of the hedged currency, they also may limit any potential gain that might result should the value of such currency increase. Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the B-8 issuance of a "senior security" by a fund for purposes of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against part or all of the possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as "transaction hedging." In addition, when the advisor reasonably believes that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as "portfolio hedging." Similarly, when the advisor reasonably believes that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount. A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency futures, options, and "cross-hedge" transactions. In cross-hedge transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the advisor reasonably believes generally tracks the currency being hedged with regard to price movements). The advisor may select the tracking (or substitute) currency rather than the currency in which the security is denominated for various reasons, including in order to take advantage of pricing or other opportunities presented by the tracking currency or because the market for the tracking currency is more liquid or more efficient. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies. A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its advisor's predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll-over a foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder. FOREIGN SECURITIES -- FOREIGN INVESTMENT COMPANIES. Some of the countries in which a fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Fund investments in such countries may be permitted only through foreign government-approved or authorized investment vehicles, which may include other investment companies. Such investments may be made through registered or unregistered closed-end investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts and options on futures contracts are derivatives (see additional discussion above). A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. B-9 Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies and broad-based securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position. The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market." A futures transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." An option on a futures contract (or futures option) conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a specific price (called the "exercise" or "strike" price) any time before the option expires. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer. A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as described above in the case of futures contracts. A futures option transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission, under which a mutual fund is conditionally excluded from the definition of the term "commodity pool operator." A fund will only enter into futures contracts and futures options that are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss in trading futures contracts and in writing futures options can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In B-10 addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds. A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. Treasury futures are generally not subject to such daily limits. A fund bears the risk that its advisor will incorrectly predict future market trends. If the advisor attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. A fund could lose margin payments it has deposited with its FCM, if, for example, the FCM breaches its agreement with the fund or becomes insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the fund. INTERFUND BORROWING AND LENDING. The SEC has granted an exemption permitting the Vanguard funds to participate in Vanguard's interfund lending program. This program allows the Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including the requirement that no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction. 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 overseeing the interfund lending program. OPTIONS. An option is a derivative (see additional discussion above). An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price prior to the expiration date of the option. The writer of an option on a security has the obligation upon exercise of the option (1) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (2) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the size of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. The buyer (or holder) of an option is said to be "long" the option, while the seller (or writer) of an option is said to be "short" the option. A call option grants to the holder the right to buy (and obligates the writer to sell) the underlying security at the strike price. A put option grants to the holder the right to sell (and obligates the writer to buy) the B-11 underlying security at the strike price. The purchase price of an option is called the "premium." The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." If a trading market in particular options were to become unavailable, investors in those options (such as the funds) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. A fund bears the risk that its advisor will not accurately predict future market trends. If the advisor attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to the extent permitted by applicable law or SEC exemption. Under the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company, as long as the investment does not represent more than 3% of the voting stock of the acquired investment company. The 1940 Act provides an exemption from these restrictions for a fund-of-funds where the acquiring fund and any acquired funds are part of the same group of investment companies and comply with various conditions set forth in the Act. If a fund invests in other investment companies, shareholders will bear not only their proportionate share of the fund's expenses (including operating expenses and the fees of the advisor), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded on the secondary market. PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer. Preferred stock normally pays dividends at a specified rate and has precedence over common stock in the event the issuer is liquidated or declares bankruptcy. However, in the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. Preferred stock is subject to many of the risks to which common stock and debt securities are subject. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of B-12 deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the investment advisor will monitor a fund's repurchase agreement transactions generally and will evaluate the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement. RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a fund's books. Illiquid securities may include a wide variety of investments, such as: (1) repurchase agreements maturing in more than seven days; (2) OTC options contracts and certain other derivatives (including certain swap agreements); (3) fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits); (4) participation interests in loans; (5) municipal lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933 (the 1933 Act); and (7) securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by a fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered, that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act, or that are exempt from registration under the 1933 Act, such as commercial paper. While a fund's advisor monitors the liquidity of restricted securities on a daily basis, the board of trustees oversees and retains ultimate responsibility for the advisor's liquidity determinations. Several factors that the trustees consider in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers, and dealers that trade in the security, and the availability of information about the security's issuer. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund which it is obligated to repurchase. A reverse repurchase agreement may be considered a borrowing transaction for purposes of the 1940 Act. A reverse repurchase agreement transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the advisor. SECURITIES LENDING. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who may need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities, or completing arbitrage operations. By lending its investment securities, a fund attempts to increase its net investment income through the receipt of interest on the securities lent. Any gain or loss in the market price of the securities lent that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the B-13 securities lent, a fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment to market appreciation or depreciation. The terms and the structure and the aggregate amount of securities loans must be consistent with the 1940 Act, and the rules or interpretations of the SEC thereunder. These provisions limit the amount of securities a fund may lend to 33 1/3% of the fund's total assets, and require that (1) the borrower pledge and maintain with the fund collateral consisting of cash, an irrevocable letter of credit or securities issued or guaranteed by the U.S. government having at all times not less than 100% of the value of the securities lent; (2) the borrower add to such collateral whenever the price of the securities lent rises (i.e., the borrower "marks-to-market" on a daily basis); (3) the loan be made subject to termination by the fund at any time; and (4) the fund receive reasonable interest on the loan (which may include the fund's investing any cash collateral in interest bearing short-term investments), any distribution on the lent securities, and any increase in their market value. Loan arrangements made by each fund will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which presently require the borrower, after notice, to redeliver the securities within the normal settlement time of three business days. The advisor will consider the creditworthiness of the borrower, among other things, in making decisions with respect to the lending of securities, subject to oversight by the board of trustees. At the present time, the SEC does not object if an investment company pays reasonable negotiated fees in connection with lent securities, so long as such fees are set forth in a written contract and approved by the investment company's trustees. In addition, voting rights pass with the lent securities, but if a material event occurs affecting an investment on loan, the loan must be called and the securities voted. SWAP AGREEMENTS. A swap agreement is a derivative (see additional discussion above). A swap agreement is an agreement between two parties (counterparties) to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted, and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties. The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, swap transaction may be subject to a fund's limitation on investments in illiquid securities. Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain B-14 market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement. Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. A leveraged swap transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its advisor will not accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in establishing swap positions for the fund. If the advisor attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many swaps, in particular OTC swaps, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. The use of a swap agreement also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund's advisor does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. TAX MATTERS -- FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required for federal income tax purposes to recognize 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 that are intended to hedge against a change in the value of securities held by a fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A fund may be required to defer the recognition of losses on one position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position held by the fund. In order for a fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies, or other income derived with respect to the fund's business of investing in securities or currencies. It is anticipated that any net gain recognized on futures contracts will be considered qualifying income for purposes of the 90% requirement. A fund will distribute to shareholders annually any net capital gains 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. TAX MATTERS -- FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the Federal income tax treatment of certain transactions denominated in a currency other than the U.S. dollar or determined by reference to the value of one or more currencies other than the U.S. dollar. The types of transactions covered by the special rules include the following: (1) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (2) the accruing of certain trade receivables and payables; and (3) the entering into or acquisition of any forward contract, futures contract, option, or similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also treated as a transaction subject to the special currency rules. However, B-15 foreign currency-related regulated futures contracts and non-equity options are generally not subject to the special currency rules if they are or would be treated as sold for their fair market value at year-end under the marking-to-market rules applicable to other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the special rules, foreign currency gain or loss is calculated separately from any gain or loss on the underlying transaction and is normally taxable as ordinary income or loss. A taxpayer may elect to treat as capital gain or loss foreign currency gain or loss arising from certain identified forward contracts, futures contracts, and options that are capital assets in the hands of the taxpayer and 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 IRC and the Treasury regulations) will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the IRC. Any gain or loss attributable to the foreign currency component of a transaction engaged in by a fund 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 a fund may make or enter into will be subject to the special currency rules described above. TAX MATTERS -- FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities held by a fund. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains that were actually distributed by the fund, but will also show the amount of the available offsetting credit or deduction. TEMPORARY INVESTMENTS. A 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 as determined by the advisor. Such measures could include, but are not limited to, investments in (1) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. government and its agencies, commercial paper, and bank certificates of deposit; (2) shares of other investment companies which have investment objectives consistent with those of the fund; (3) repurchase agreements involving any such securities; and (4) 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. WARRANTS. Warrants are instruments that give the holder the right, but not the obligation, to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments. WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. When a fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward-commitment transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed-delivery, and forward-commitment transactions will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." B-16 INVESTMENT LIMITATIONS Each Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the Fund's shares. For these purposes, a "majority" of shares means shares representing the lesser of: (1) 67% or more of the Fund's net assets voted, so long as shares representing more than 50% of the Fund's net assets are present or represented by proxy; or (2) more than 50% of the Fund's net assets. BORROWING. Each Fund may borrow money for temporary or emergency purposes only in an amount not to exceed 15% of the Fund's net assets. The Fund may borrow money through banks, 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. Each Fund may not invest in commodities, except that it may invest in stock futures contracts, stock options, and options on stock futures contracts. No more than 5% of the Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of the Fund's total assets may be invested in futures contracts or options at any time. DIVERSIFICATION. With respect to 75% of its total assets, each Fund may not: (1) purchase more than 10% of the outstanding voting securities of any one issuer; or (2) purchase securities of any issuer if, as a result, more than 5% of the Fund's total assets would be invested in that issuer's securities. This limitation does not apply to obligations of the U.S. government, its agencies, or instrumentalities. ILLIQUID SECURITIES. Each 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. Each Fund may not invest more than 25% of its total assets in any one industry. INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes of controlling its management. INVESTMENT OBJECTIVE. The investment objective of each Fund may not be materially changed without a shareholder vote. LOANS. Each Fund may not lend money to any person except by purchasing fixed income securities that are publicly distributed; by entering into repurchase agreements, provided, however, that repurchase agreements maturing in more than seven days, together with securities which do not have readily available market quotations, will not exceed 15% of the Fund's total assets; by lending its portfolio securities; or through Vanguard's interfund lending program. MARGIN. Each Fund may not purchase securities on margin or sell securities short, except as permitted by the Fund's investment policies relating to commodities. PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more than 15% of its net assets. REAL ESTATE. Each Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate. SENIOR SECURITIES. Each Fund may not issue senior securities, except in compliance with the 1940 Act. UNDERWRITING. Each 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. Compliance with the investment limitations set forth above is measured at the time the securities are purchased. If a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. None of these limitations prevents a Fund from having an ownership interest in Vanguard. As part owner of Vanguard, each 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 Funds" for more information. SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange (the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. B-17 The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although each Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time. PURCHASE AND REDEMPTION OF SHARES PURCHASE OF SHARES The purchase price of shares of each Fund is the NAV per share next determined after the purchase request is received in good order, as defined in the Fund's prospectus. The NAV per share is calculated as of the close of regular trading on the Exchange on each day the Exchange is open for business. A purchase order received before the close of regular trading on the Exchange will be executed at the NAV computed on the date of receipt; a purchase order received after the close of regular trading on the Exchange will be executed at the NAV computed on the first business day following the date of receipt. REDEMPTION OF SHARES Each Fund may suspend redemption privileges or postpone the date of payment for redeemed shares: (1) during any period that the Exchange is closed or trading on the Exchange is restricted as determined by the SEC; (2) during any period when an emergency exists, as defined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of securities it owns or to fairly determine the value of its assets; and (3) for such other periods as the SEC may permit. Each Fund has filed a notice of election with the SEC to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of such period. If Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of each Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions. The Funds do not charge a redemption fee. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Fund. RIGHT TO CHANGE POLICIES Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase, redemption, service, or privilege at any time without notice; (2) accept initial purchases by telephone; (3) freeze any account and suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption fee, low-balance account fee, account maintenance fee, or other fees charged to a group of shareholders; and (5) redeem an account, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect all investors or only those in certain classes or groups. These actions will be taken when, in the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. INVESTING WITH VANGUARD THROUGH OTHER FIRMS Each Fund has authorized certain agents to accept on its behalf purchase and redemption orders, and those agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf (collectively, Authorized Agents). A Fund will be deemed to have received a purchase or redemption order when an Authorized Agent accepts the order in accordance with the Fund's instructions. In most instances, a customer order that is properly transmitted to an Authorized Agent will be priced at the Fund's NAV next determined after the order is received by the Authorized Agent. When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, B-18 we will seek to investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary or by certain of the intermediary's clients. Intermediaries may also monitor their clients' trading activities in the Vanguard funds. For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase or redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase or redemption fees or administer frequent-trading policies. For funds to which fees apply, intermediaries will be expected to begin to assess purchase and redemption fees within the next year. Intermediaries may be provided additional time if needed to address systems issues. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. MANAGEMENT OF THE FUNDS VANGUARD Each Fund is part of the Vanguard group of investment companies, which consists of more than 130 funds. Through their jointly-owned subsidiary, Vanguard, the funds obtain at cost virtually all of their corporate management, administrative, and distribution services. Vanguard also provides investment advisory services on an at-cost basis to several of the Vanguard funds. Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings, and equipment. Each fund pays its share of Vanguard's total expenses, which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing, and custodian fees. The funds' officers are also officers and employees of Vanguard. Vanguard, Vanguard Marketing Corporation, the funds' advisors, and the funds have adopted Codes of Ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by a fund, but place substantive and procedural restrictions on the trading activities of access persons. For example, the Codes require that access persons receive advance approval for most securities trades to ensure that there is no conflict with the trading activities of the funds. The Codes also limit the ability of Vanguard employees to engage in short-term trading of Vanguard funds. Vanguard was established and operates under an Amended and Restated Funds' Service Agreement, which was approved by the shareholders of each of the funds. The Amended and Restated Funds' Service Agreement provides as follows: (1) each Vanguard fund may be called upon to invest up to 0.40% of its current net assets in Vanguard, and (2) there is no other limitation on the dollar amount that each Vanguard fund may contribute to Vanguard's capitalization. The amounts that each fund has invested are adjusted from time to time in order to maintain the proportionate relationship between each fund's relative net assets and its contribution to Vanguard's capital. As of October 31, 2005, the Funds had contributed $xxx,000 to Vanguard, which represented x.xx% of each Fund's net assets and was x.xx% 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 Vanguard, provides all distribution and marketing activities for the funds. 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. The funds' trustees review and approve the amount to be spent annually on distribution activities, as well as the manner and amount to be spent on each fund. The trustees also determine whether to organize new investment companies. B-19 One half of the distribution expenses of a marketing and promotional nature is allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each fund's sales for the preceding 24 months relative to the total sales of the funds as a group, provided, however, that no fund's aggregate quarterly rate of contribution for distribution expenses of a marketing and promotional nature shall exceed 125% of the average distribution expense rate for Vanguard, and that no fund shall incur annual distribution expenses in excess of 0.20 of 1% of its average month-end net assets. During the fiscal years ended October 31, 2003, 2004, and 2005, the Funds incurred the following approximate amounts of Vanguard's management and administrative (including transfer agency), distribution, and marketing expenses: Fund 2003 2004 2005 ---- ---- ---- ---- Vanguard Windsor Fund $35,026,000 $36,379,000 $xx,xxx,000 Vanguard Windsor II Fund 56,062,000 58,905,000 xx,xxx,000 Each Fund has asked its investment advisor to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the Fund part of the commissions generated. Such rebates are used solely to reduce the Fund's management and administrative expenses and are not reflected in these totals. OFFICERS AND TRUSTEES Each Fund is governed by the board of trustees of the Trust and a single set of officers. The officers of the Funds manage the day-to-day operations of the Funds under the direction of the Funds' board of trustees. The trustees set broad policies for the Funds; select investment advisors; monitor fund operations, performance, and costs; nominate and select new trustees; and elect fund officers. Each trustee serves a Fund until its termination; until the trustee's retirement, resignation, or death; or as otherwise specified in the Trust's organizational documents. Any trustee may be removed at a meeting of shareholders by a vote representing two-thirds of the total net asset value of all shares of the Funds. Each trustee also serves as a director of Vanguard. The following chart shows information for each trustee and executive officer of the Funds. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
VANGUARD POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DIRECTORSHIPS DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- INTERESTED TRUSTEE John J. Brennan* Chairman of the May 1987 Chairman of the Board, Chief 133 (1954) Board, Chief Executive Officer, and Director Executive Officer, (Trustee) of Vanguard, and each of and Trustee the investment companies served by Vanguard. - ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES Charles D. Ellis Trustee January 2001 Applecore Partners (pro bono ventures in 133 (1937) education); Senior Advisor to Greenwich Associates (international business strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. Rajiv L. Gupta Trustee December 2001 Chairman and Chief Executive Officer of 133 (1945) Rohm and Haas Co. (chemicals) since October 1999; Board Member of American Chemistry Council; Trustee of Drexel University and Chemical Heritage Foundation. *Officers of the Funds are "interested persons" as defined in the 1940 Act.
B-20
VANGUARD POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DIRECTORSHIPS DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- JoAnn Heffernan Heisen Trustee July 1998 Vice President, Chief Information Officer, 133 (1950) and Member of the Executive Committee of Johnson & Johnson (pharmaceuticals/ consumer products); Director of the University Medical Center at Princeton and Women's Research and Education Institute. Andre F. Perold Trustee December 2004 George Gund Professor of Funance and 133 (1952) Banking, Harvard Business School since 2000; Senior Associate Dean: Director of Faculty Recruiting, and Chair of Finance Faculty, Harvard Business School: Director and Chairman of Unx, Inc. (equities trading firm) since 2003; Director of registered investment companies advised by Merrill Lynch Investment Managers and affiliates (1985-- 2004); Genbel Securities Limited (South African financial services firm)(1999-- 2003), Gensec Bank (1999--2003), Sanlam Investment Management (1999--2001), Sanlam, Ltd,(South African insurance company) (2001--2003), Stockbank, Inc. (credit card firm) (2000--2002), Bulldogresearch.com (investment research) (1999--2001); and Trustee of Commonfund (investment management) (1989--2001). Alfred M. Rankin, Jr. Trustee January 1993 Chairman, President, Chief Executive 133 (1941) Officer, and Director of NACCO Industries, Inc.(forklift trucks/housewares/lignite); Director of Goodrich Corporation (industrial products/aircraft systems and services). Director of Standard Products Company (supplier for automotive industry) until 1998. J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive 133 (1936) Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco Corp. (packaging products), and Amerisource Bergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University and Culver Education Foundation. - ----------------------------------------------------------------------------------------------------------------------------------- EXECUTIVE OFFICERS Heidi Stam* Secretary July 2005 Principal of Vanguard since November 1997; 133 (1956) General Counsel of Vanguard since July 2005; Secretary of Vanguard, and of each of the investment companies served by Vanguard since July 2005. Thomas J. Higgins* Treasurer July 1998 Principal of Vanguard; Treasurer of each 133 (1957) of the investment companies served by Vanguard since July 1998. *Officers of the Fund are "interested persons" as defined in the 1940 Act.
Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on business strategy to professional financial services organizations in markets around the world. A large number of financial service providers, including Vanguard, subscribe to programs of research-based consulting. During 2004 and 2005, Vanguard paid Greenwich subscription fees amounting to less than $XXX,000. Vanguard's subscription rates are similar to those of other subscribers. B-21 Board Committees: The Trust's board has the following committees: - -Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of each Fund and Vanguard. All independent trustees serve as members of the committee. The committee held XXX meetings during each Fund's last fiscal year. - -Compensation Committee: This committee oversees the compensation programs established by each Fund and Vanguard for the benefit of their employees, officers, and trustees/directors. All independent trustees serve as members of the committee. The committee held XXX meetings during each Fund's last fiscal year. - -Nominating Committee: This committee nominates candidates for election to Vanguard's board of directors and the board of trustees of each fund (collectively, the Vanguard boards). The committee also has the authority to recommend the removal of any director or trustee from the Vanguard boards. All independent trustees serve as members of the committee. The committee held XXX meetings during each Fund's last fiscal year. The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Wilson, Chairman of the Committee. TRUSTEES' OWNERSHIP OF FUND SHARES All trustees allocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustee's ownership of shares of each Fund and of all Vanguard funds served by the trustee as of December 31, 2005. As a group, the funds' trustees and officers own less than 1% of the outstanding shares of each class of each fund.
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF FUND SHARES VANGUARD FUND SHARES FUND TRUSTEE OWNED BY TRUSTEE OWNED BY TRUSTEE - ---- ------- ---------------- ---------------- VANGUARD WINDSOR FUND John J. Brennan $xxx,xxx Over $100,000 Charles D. Ellis xxx,xxx Over $100,000 Rajiv L. Gupta xxx,xxx Over $100,000 JoAnn Heffernan Heisen xxx,xxx Over $100,000 Andre F. Perold xxx,xxx Over $100,000 Alfred M. Rankin, Jr. xxx,xxx Over $100,000 J. Lawrence Wilson xxx,xxx Over $100,000 VANGUARD WINDSOR II FUND John J. Brennan $xxx,xxx Over $100,000 Charles D. Ellis xxx,xxx Over $100,000 Rajiv L. Gupta xxx,xxx Over $100,000 JoAnn Heffernan Heisen xxx,xxx Over $100,000 Andre F. Perold xxx,xxx Over $100,000 Alfred M. Rankin, Jr. xxx,xxx Over $100,000 J. Lawrence Wilson xxx,xxx Over $100,000
TRUSTEE COMPENSATION The same individuals serve as trustees of all Vanguard funds and each fund pays a proportionate share of the trustees' compensation. The funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, not the funds. INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways: - -The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings. - -The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings. B-22 - -Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee's separate account was generally equal to the net present value of the benefits he or she had accrued under the trustees' former retirement plan. Each eligible trustee's separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan. "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as officer of Vanguard. COMPENSATION TABLE. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the Funds for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds. VANGUARD WINDSOR FUNDS TRUSTEES' COMPENSATION TABLE
PENSION OR RETIREMENT ACCRUED ANNUAL TOTAL COMPENSATION AGGREGATE BENEFITS ACCRUED RETIREMENT FROM ALL VANGUARD COMPENSATION AS PART OF THESE BENEFIT AT FUNDS PAID TRUSTEE FROM THESE FUNDS(1) FUNDS' EXPENSES(1) JANUARY 1, 2004(2) TO TRUSTEES(3) ------- ------------------- ------------------ ------------------ ----------------- John J. Brennan None None None None Charles D. Ellis $xx,xxx N/A N/A $xxx,xxx Rajiv L. Gupta xx,xxx N/A N/A xxx,xxx JoAnn Heffernan Heisen xx,xxx $xxx $x,xxx xxx,xxx Burton G. Malkiel(4) xx,xxx xxx x,xxx xxx,xxx Andre F. Perold(5) xx,xxx N/A N/A xxx,xxx Alfred M. Rankin, Jr. xx,xxx xxx x,xxx xxx,xxx J. Lawrence Wilson xx,xxx xxx x,xxx xxx,xxx - --------- (1)The amounts shown in this column are based on the Funds' fiscal year ended October 31, 2005. Each Fund within the Trust is responsible for a proportionate share of these amounts. (2)Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month following the trustee's retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees who began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan. (3)The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 132 Vanguard funds (129 in the case of Mr. Malkiel) for the 2005 calendar year. (4) Mr. Malkiel retired from the Funds' board effective June 30, 2005. (5) Mr. Perold became a member of the Funds' board effective December 2004.
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES INTRODUCTION Vanguard and the Boards of Trustees of the Vanguard funds (the Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Polices and Procedures) to govern the disclosure of the portfolio holdings of each Vanguard fund. Vanguard and the Boards considered each of the circumstances under which Vanguard fund portfolio holdings may be disclosed to different categories of persons under the Policies and Procedures. Vanguard and the Boards also considered actual and potential material conflicts that could arise in such circumstances between the interests of Vanguard fund's shareholders, on the one hand, and those of the fund's investment advisor, distributor, or any affiliated person of the fund, its investment advisor, or its distributor, on the other. After giving due consideration to such matters and after the exercise of their fiduciary duties and reasonable business judgment, Vanguard and the Boards determined that the Vanguard funds have a legitimate business purpose for disclosing portfolio holdings to the persons described in each of the circumstances set forth in the Policies and Procedures and that the Policies and Procedures are reasonably designed to ensure that disclosure of portfolio holdings and information about portfolio holdings is in the best interests of fund shareholders and appropriately address the potential for material conflicts of interest. B-23 The Boards exercise continuing oversight of the disclosure of Vanguard fund portfolio holdings by (1) overseeing the implementation and enforcement of the Policies and Procedures, the Code of Ethics, and the Policies and Procedures Designed to Prevent the Misuse of Inside Information (collectively, the portfolio holdings governing policies) by the Chief Compliance Officer of Vanguard and the Vanguard funds; (2) considering reports and recommendations by the Chief Compliance Officer concerning any material compliance matters (as defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings governing policies; and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. Vanguard and the Boards reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice in their sole discretion. For purposes of the Policies and Procedures, the term "portfolio holdings" means the equity and debt securities (e.g., stocks and bonds) held by a Vanguard fund and does not mean the cash investments, derivatives, and other investment positions (collectively, other investment positions) held by the fund. ONLINE DISCLOSURE OF TEN LARGEST STOCK HOLDINGS Each of the Vanguard equity funds and Vanguard balanced funds generally will seek to disclose their ten largest stock portfolio holdings and the percentages that each of these ten largest stock portfolio holdings represent of the fund's total assets (collectively, ten largest stock holdings) as of the most recent calendar-quarter end online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 15 calendar days after the end of the calendar quarter. Online disclosure of the ten largest stock holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons. ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS Each of the Vanguard funds, excluding Vanguard money market funds, will seek to disclose their complete portfolio holdings as of the most recent calendar-quarter end online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 30 calendar days after the end of the calendar quarter. Online disclosure of complete portfolio holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons. A Principal or Senior Analyst in Vanguard's Portfolio Review Department will review complete portfolio holdings before online disclosure is made as described above and, after consultation with a Vanguard fund's investment advisor, may withhold any portion of the fund's complete portfolio holdings from online disclosure as described above when deemed to be in the best interest of the fund. DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS Vanguard, for legitimate business purposes, may disclose the complete portfolio holdings of a Vanguard fund at times it deems necessary and appropriate to rating and ranking organizations, financial printers, proxy voting service providers, pricing information vendors, third-parties that deliver analytical, statistical, or consulting services, and other third parties that provide services (collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider is conditioned on the Service Provider being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which complete portfolio holdings may be disclosed to a Service Provider, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the Service Provider, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to a Service Provider varies and may be as frequent as daily, with no lag. Disclosure of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider must be authorized by a Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal Departments. Any disclosure of Vanguard fund complete portfolio holdings to a Service Provider as described above may also include a list of the other investment positions comprising the fund, such as cash investments and derivatives. As of December 31, 2005, Vanguard fund complete portfolio holdings are disclosed to the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: Alcom Printing Group Inc., Apple Press B-24 Automatic Data Processing, Inc., Intelligencer Printing Company, McMunn Associates Inc., Moore Wallace Inc., Pitney Bowes Management Services, Reuters America Inc., Triune Color Corporation, and Tursack Printing Inc. DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS Vanguard fund complete portfolio holdings may be disclosed between and among the following persons (collectively, (Affiliates and Fiduciaries) for legitimate business purposes within the scope of their official duties and responsibilities, subject to such persons' continuing legal duty of confidentiality and legal duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics, the Policies and Procedures Designed to Prevent the Misuse of Inside Information, by agreement, or under applicable laws, rules, and regulations: (1) persons who are subject to the Code of Ethics or the Policies and Procedures Designed to Prevent the Misuse of Inside Information; (2) an investment advisor, distributor, administrator, transfer agent, or custodian to a Vanguard fund; (3) an accounting firm, an auditing firm, or outside legal counsel retained by Vanguard, a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor to whom complete portfolio holdings are disclosed for due diligence purposes when the advisor is in merger or acquisition talks with a Vanguard fund's current advisor; and (5) a newly hired investment advisor or sub-advisor to whom complete portfolio holdings are disclosed prior to the time it commences its duties. The frequency with which complete portfolio holdings may be disclosed between and among Affiliates and Fiduciaries, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed between and among the Affiliates and Fiduciaries, is determined by such Affiliates and Fiduciaries based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, and the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure between and among Affiliates and Fiduciaries varies and may be as frequent as daily, with no lag. Any disclosure of Vanguard fund complete portfolio holdings to any Affiliates and Fiduciaries as described in the preceding text may also include a list of the other investment positions comprising the fund, such as cash investments and derivatives. Disclosure of Vanguard fund complete portfolio holdings or investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be authorized by a Vanguard fund officer or a Principal of Vanguard. As of December 31, 2005, Vanguard fund complete portfolio holdings are disclosed to the following Affiliates and Fiduciaries as part of ongoing arrangements that serve legitimate business purposes: Vanguard and each investment advisor, custodian, and independent registered public accounting firm identified in this Statement of Additional Information. DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW Vanguard fund portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions comprising a fund shall be disclosed to any person as required by applicable laws, rules, and regulations. Examples of such required disclosure include, but are not limited to, disclosure of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC or another regulatory body, (2) in connection with seeking recovery on defaulted bonds in a federal bankruptcy case, (3) in connection with a lawsuit, or (4) as required by court order. Disclosure of portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as required by applicable laws, rules, and regulations must be authorized by a Vanguard fund officer or a Principal of Vanguard. DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF MANAGING A FUND'S ASSETS An investment advisor, administrator, or custodian for a Vanguard fund may, for legitimate business purposes within the scope of their official duties and responsibilities, disclose portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions comprising the fund to one or more broker-dealers during the course of, or in connection with, normal day-to-day securities and derivatives transactions with or through such broker-dealers subject to the broker-dealer's legal obligation not to use or disclose material nonpublic information concerning the funds' portfolio holdings, other investment positions, securities transactions, or derivatives transactions without the consent of the funds or their agents. The Vanguard funds have not given their consent to any such use or disclosure and no person or agent of Vanguard is authorized to give such consent except as approved in writing by the fund Boards. Disclosure of portfolio holdings or other investment positions by Vanguard to broker-dealers must be authorized by a Vanguard fund officer or a Principal of Vanguard. B-25 DISCLOSURE OF NON-MATERIAL INFORMATION The Policies and Procedures permit Approved Vanguard Representatives to disclose any views, opinions, judgments, advice or commentary, or any analytical, statistical, performance, or other information, in connection with or relating to a Vanguard fund or its portfolio holdings and/or other investment positions (collectively, commentary and analysis) or any changes in the portfolio holdings of a Vanguard fund that occurred after the most recent calendar-quarter end (recent portfolio changes) to any person if (1) such disclosure serves a legitimate business purpose, (2) such disclosure does not effectively result in the disclosure of the complete portfolio holdings of any Vanguard fund (which can be disclosed only in accordance with the Policies and Procedures), and (3) such information does not constitute material nonpublic information. Disclosure of commentary and analysis or recent portfolio changes by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be authorized by a Vanguard fund officer or a Principal of Vanguard. An Approved Vanguard Representative must make a good faith determination whether the information constitutes material nonpublic information, which involves an assessment of the particular facts and circumstances. Vanguard believes that in most cases recent portfolio changes that involve a few or even several securities in a diversified portfolio or commentary and analysis would be immaterial and would not convey any advantage to a recipient in making an investment decision concerning a Vanguard fund. Nonexclusive examples of commentary and analysis about a Vanguard fund include (1) the allocation of the fund's portfolio holdings and other investment positions among various asset classes, sectors, industries, and countries, (2) the characteristics of the stock and bond components of the fund's portfolio holdings and other investment positions, (3) the attribution of fund returns by asset class, sector, industry, and country, and (4) the volatility characteristics of the fund. An Approved Vanguard Representative may in its sole discretion determine whether to deny any request for information made by any person, and may do so for any reason or no reason. "Approved Vanguard Representatives" include Vanguard fund officers, Vanguard fund portfolio managers, and other individuals employed by or associated with Vanguard or a subsidiary of Vanguard who have been authorized by a Principal in Vanguard's Portfolio Review Department to disclose recent portfolio changes and/or commentary and analysis in accordance with the Policies and Procedures. PROHIBITIONS ON DISCLOSURE OF PORTFOLIO HOLDINGS No person is authorized to disclose Vanguard fund portfolio holdings or other investment positions (whether online at www.vanguard.com, in writing, by fax, by e-mail, orally, or by other means) except in accordance with the Policies and Procedures. In addition, no person is authorized to make disclosure pursuant to the Policies and Procedures if such disclosure is otherwise unlawful under the antifraud provisions of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act). Furthermore, Vanguard's management, in its sole discretion, may determine not to disclose portfolio holdings or other investment positions comprising a Vanguard fund to any person who would otherwise be eligible to receive such information under the Policies and Procedures, or may determine to make such disclosures publicly as provided by the Policies and Procedures. PROHIBITIONS ON RECEIPT OF COMPENSATION OR OTHER CONSIDERATION The Policies and Procedures prohibit a Vanguard fund, its investment advisor, and any other person to pay or receive any compensation or other consideration of any type for the purpose of obtaining disclosure of Vanguard fund portfolio holdings or other investment positions. "Consideration" includes any agreement to maintain assets in the fund or in other investment companies or accounts managed by the investment advisor or by any affiliated person of the investment advisor. B-26 INVESTMENT ADVISORY SERVICES The Trust currently has seven investment advisors: - - Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355, founded in 1975, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), founded in 1979, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Equinox Capital Management, LLC (Equinox), founded in 1989, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Hotchkis and Wiley Capital Management, LLC (Hotchkis & Wiley), founded in 1980, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Sanford C. Bernstein & Co., LLC (Bernstein), a subsidiary of Alliance Capital Management, L.P., provides investment advisory services to a portion of the assets in the Windsor Fund. - - Tukman Capital Management, Inc. (Tukman), founded in 1980, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Wellington Management Company, LLP (Wellington Management), founded in 1928, provides investment advisory services to a portion of the assets in the Windsor Fund. For funds that are advised by independent third-party advisory firms unaffiliated with Vanguard, Vanguard hires investment advisory firms, not individual portfolio managers, to provide investment advisory services to such funds. Vanguard negotiates each advisory agreement, which contains advisory fee arrangements, on an arms-length basis with the advisory firm. Each advisory agreement is reviewed annually by each fund's board of trustees, taking into account numerous factors, which include, without limitation, the nature, extent, and quality of the services provided, investment performance, and fair market value of services provided. Each advisory agreement is between the fund and the advisory firm, not between the fund and the portfolio manager. The structure of the advisory fee paid to each unaffiliated investment advisory firm is described in detail in the following sections. In addition, each firm has established policies and procedures designed to address the potential for conflicts of interest. Each firm's compensation structure and management of potential conflicts of interest is summarized by the advisory firm in the following sections for the period ended October 31, 2005. VANGUARD WINDSOR FUND The Fund uses a multimanager approach. The Fund's advisors discharge their responsibilities subject to the supervision and oversight of the trustees and officers of the Fund. For the fiscal years ended October 31, 2003, 2004, and 2005, Vanguard Windsor Fund incurred aggregate investment advisory fees of $xx, $xx, and $xx, respectively. SANFORD C. BERNSTEIN & CO., LLC Bernstein is a registered investment advisor and is an indirect, wholly-owned subsidiary of Alliance Capital Management L.P. (Alliance). Alliance is a Delaware limited partnership of which Alliance Capital Management Corporation (ACMC), an indirect wholly-owned subsidiary of AXA Financial, Inc. (AXA Financial) is the general partner. At October 31, 2005, Alliance Capital Management Holding L.P. (Alliance Holding) owned approximately 30.9% of the outstanding units of limited partnership interest in Alliance (Alliance Units). ACMC is the general partner of Alliance Holding, whose equity interests are traded on the New York Stock Exchange, Inc. in the form of units (Alliance Holding Units). At October 31, 2005, AXA Financial, together with ACMC and certain of its other wholly-owned subsidiaries, beneficially owned approximately 1.9% of the outstanding Alliance Holding Units and 55.1% of the outstanding Alliance Units, representing an approximate 55.6% economic interest in Alliance. AXA Financial is a wholly-owned subsidiary of AXA, a financial service organization. INVESTMENT ADVISORY ARRANGEMENTS Vanguard Windsor Fund has entered into an investment advisory agreement with Sanford C. Bernstein & Co, LLC (Bernstein) to manage a portion of the Fund's assets. Vanguard Windsor Fund pays Bernstein at the end of each fiscal B-27 quarter, calculated by applying a quarterly rate, based on certain annual percentage rates, to the Fund's average month-end net assets managed by Bernstein (the Bernstein Portfolio) for the quarter. OTHER ACCOUNTS MANAGED Marilyn G. Fedak managed the Windsor Fund, which, as of October 31, 2005, held assets of $xx billion. [insert additional text if applicable] MATERIAL CONFLICTS OF INTERESTS [insert text as provided] DESCRIPTION OF COMPENSATION [insert text as provided] WELLINGTON MANAGEMENT COMPANY, LLP Wellington Management is a Massachusetts limited liability partnership of which the following persons are managing partners: Laurie A. Gabriel, John R. Ryan, and Perry Traquina. INVESTMENT ADVISORY ARRANGEMENTS Vanguard Windsor Fund has entered into an investment advisory agreement with Wellington Management Company, LLP to manage a portion of the Fund's assets. Vanguard Windsor Fund pays Wellington Management at the end of each fiscal quarter, calculated by applying a quarterly rate, based on certain annual percentage rates, to the Fund's average month-end net assets managed by Wellington Management (the Wellington Management Portfolio) for the quarter. OTHER ACCOUNTS MANAGED David R. Fassnacht managed the Windsor Fund, which, as of October 31, 2005, held assets of $xx billion. [insert additional text as provided] MATERIAL CONFLICTS OF INTEREST Individual investment professionals at Wellington Management manage multiple portfolios for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, insurance companies, and foundations), bank common trust accounts, and hedge funds. The investment professional primarily responsible for the day-to-day management of the Fund (Portfolio Manager) generally manages portfolios in several different investment styles. These portfolios may have investment objectives, strategies, time horizons, tax considerations, and risk profiles that differ from those of the Fund. The Portfolio Manager makes investment decisions for the Fund based on the investment objectives, policies, practices, benchmarks, cash flows, tax, and other relevant investment considerations applicable to that portfolio. Consequently, the Portfolio Manager may purchase or sell securities, including IPOs, for one portfolio and not another portfolio, and the performance of securities purchased for one portfolio may vary from the performance of securities purchased for other portfolios. The Portfolio Manager or other investment professionals at Wellington Management may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions that are similar to those made for the Fund, both of which have the potential to adversely inpact the Fund depending on market conditions. For example, the Portfolio Manager may purchase a security in one portfolio while appropriately selling that same security in another portfolio. In addition, some of these portfolios have fee structures, including performance fees, that are or have the potential to be higher, in some cases significantly higher, than the fees paid by the Fund to Wellington Management. Because incentive payments are tied to revenues earned by Wellington Management, and where noted, to the performance achieved by the manager in each account, the incentives associated with any given fund may be significantly higher or lower than those associated with other accounts managed by a given Portfolio Manager. Finally, the Fund's Portfolio Manager may hold shares or investments in the other pooled investment vehicles and/or accounts identified above. Wellington Management's goal is to meet its fiduciary obligation to treat all clients fairly and provide high quality investment services to all of its clients. Wellington Management has adopted and implemented policies and procedures, B-28 including brokerage and trade allocation policies and procedures, that it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Wellington Management monitors a variety of areas, including compliance with primary fund guidelines, the allocation of IPOs, and compliance with the firm's Code of Ethics, and places additional investment restrictions on Portfolio Managers who manage hedge funds and certain other accounts. Furthermore, senior investment and business personnel at Wellington Management periodically review the performance of Wellington Management's Portfolio Managers. Although Wellington Management does not track the time a Portfolio Manager spends on a single portfolio, Wellington Management does periodically assess whether a Portfolio Manager has adequate time and resources to effectively manage the Portfolio Manager's various client mandates. DESCRIPTION OF COMPENSATION [insert text as information is provided] VANGUARD WINDSOR II FUND The Fund uses a multimanager approach. The Fund's advisors discharge their responsibilities subject to the supervision and oversight of the officers and trustees of the Fund. Under the investment advisory arrangements, each advisor manages the investment and reinvestment of the designated assets and continuously reviews, supervises, and administers the investment program of Vanguard Windsor II Fund with respect to those assets. For the fiscal years ended October 31, 2003, 2004, and 2005, Vanguard Windsor II Fund incurred aggregate investment advisory fees of $xx, $xx, and $xx, respectively. VANGUARD Vanguard's Quantitative Equity Group provides investment advisory services on an at-cost basis with respect to a portion of Vanguard Windsor II Fund's assets. Vanguard's Quantitative Equity Group is supervised by the officers of the funds. OTHER ACCOUNTS MANAGED Joel M. Dickson managed the Windsor II Fund, which, as of October 31, 2005, held assets of $xx billion. [insert additional text as provided] MATERIAL CONFLICTS OF INTEREST At Vanguard, individual portfolio managers may manage multiple accounts for multiple clients. In addition to mutual funds, these other accounts may include separate accounts, collective trusts, or offshore funds. Vanguard manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal review processes and oversight by directors and independent third parties. Vanguard has developed trade allocation procedures and controls to ensure that no one client, regardless of type, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities. DESCRIPTION OF COMPENSATION As of August 31, 2005, a Vanguard portfolio manager's compensation generally consists of base salary, bonus, and payments under Vanguard's long-term incentive compensation program. In addition, portfolio managers are eligible for the standard retirement benefits and health and welfare benefits available to all Vanguard employees. Also, certain portfolio managers may be eligible for additional retirement benefits under several supplemental retirement plans that Vanguard adopted in the 1980's to restore dollar-for-dollar the benefits of management employees that had cut back solely as a result of tax law changes. These plans are structured to provide the same retirement benefits as the standard retirement plans. In the case of portfolio managers responsible for managing multiple Vanguard funds or accounts, the method used to determine their compensation is the same for all funds and investment accounts. A portfolio manager's base salary is determined by the manager's experience and performance in the role, taking into account the ongoing compensation benchmark analyses performed by the Vanguard Human Resources Department. A portfolio manager's base salary is B-29 generally a fixed amount that may change as a result of an annual review, upon assumption of new duties, or when a market adjustment of the position occurs. A portfolio manager's bonus is determined by a number of factors. One factor is net, pre-tax performance of the fund relative to expectations for how the fund should have performed, given its objectives and policies and the market environment during the measurement period. This performance factor is not based on the value of assets held in the fund's portfolio. For each Fund, the performance factor depends on how successfully the portfolio manager outperforms these expectations and maintains the risk parameters of the Fund over a three-year period. Additional factors include the portfolio manager's contributions to the investment management functions within the sub-asset class, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for the investment group. The target bonus is expressed as a percentage of base salary. The actual bonus paid may be more or less than the target bonus, based on how well the manager satisfies the objectives stated above. The bonus is paid on an annual basis. Under the long-term incentive compensation program, all full-time employees receive a payment from Vanguard's long-term incentive compensation plan based on their years of service, job level, and, if applicable, management responsibilities. Each year, Vanguard's independent directors determine the amount of the long-term incentive compensation award for that year based on the investment performance of the Vanguard funds relative to competitors, and Vanguard's operating efficiencies in providing services to the Vanguard funds. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. Barrow, Hanley, a Nevada Corporation, is an investment management firm founded in 1979 which provides investment advisory services to individuals, employee benefit plans, investment companies, and other institutions. Barrow, Hanley is a subsidiary of Old Mutual Asset Managers (US) LLC, which is a subsidiary of Old Mutual plc, based in London, England. INVESTMENT ADVISORY ARRANGEMENTS Vanguard Windsor II Fund has entered into an investment advisory agreement with Barrow, Hanley, Mewhinney & Strauss, Inc. to manage a portion of the Fund's assets. Vanguard Windsor II Fund pays Barrow, Hanley at the end of each fiscal quarter, calculated by applying a quarterly rate, based on certain annual percentage rates, to the Fund's average month-end net assets managed by Barrow, Hanley (the Barrow, Hanley Portfolio) for the quarter. OTHER ACCOUNTS MANAGED James P. Barrow managed the Windsor II Fund, which, as of October 31, 2005, held assets of $xxx billion. As of October 31, 2005, Mr. Barrow also managed eight other registered investment companies with total assets of $xx billion, including two where the advisory firm's fee was based on account performance with total assets of $xx billion. As of October 31, 2005, Mr. Barrow also managed one other pooled investment vehicle with total assets of $xx billion, and 24 other accounts with total assets of $xx billion. MATERIAL CONFLICTS OF INTEREST Barrow, Hanley seeks to eliminate potential conflicts of interest by managing all client accounts identically, whether the accounts incur an asset-based fee, performance-based fee or a combination. All client accounts are treated equally when traded, being aggregated in all buys and sells. DESCRIPTION OF COMPENSATION In addition to base salary, all Barrow, Hanley portfolio managers and analysts share in a bonus pool that is distributed semiannually. The amount of bonus compensation is based on quantitative and qualitative factors. Analysts and portfolio managers are rated on their value added to the team-oriented investment process. Compensation is not tied to a published or private benchmark. Contributions to the overall investment process may include not recommending securities in an analyst's sector if there are no compelling opportunities in the industries covered by that analyst. In addition, many Barrow, Hanley employees, including all portfolio managers and analysts, have equity ownership in the firm through "phantom stock" in Barrow, Hanley, as well as participation in a long-term incentive plan with Old Mutual Asset Management (US). The named portfolio manager is a partner of the firm and receives, on a quarterly basis, a share of the firm's profits, which are, to a great extent, related to the performance of the entire investment team. B-30 Each individual manager's compensation is tied to the overall profitability of the firm and not to any single account, whether performance-based fee or otherwise. EQUINOX CAPITAL MANAGEMENT, LLC Equinox is a Delaware Limited Liability Company controlled by the following officers of Equinox: Ronald J. Ulrich, Chairman and Chief Investment Officer; and Wendy D. Lee, Chief Executive Officer. INVESTMENT ADVISORY ARRANGEMENTS Vanguard Windsor II Fund has entered into an investment advisory agreement with Equinox Capital Management, LLC to manage a portion of the Fund's assets. Vanguard Windsor II Fund pays Equinox at the end of each fiscal quarter, calculated by applying a quarterly rate, based on certain annual percentage rates, to the Fund's average month-end net assets managed by Equinox (the Equinox Portfolio) for the quarter. OTHER ACCOUNTS MANAGED Ronald J. Ulrich managed the Windsor II Fund, which, as of October 31, 2005, held assets of $xxx billion. Mr. Ulrich also manages 11 institutional accounts with total assets of $777 million as of October 31, 2005. MATERIAL CONFLICTS OF INTERESTS The size of the firm affords Equinox the opportunity to provide a non-bureaucratic environment, which allows for efficient and timely decision making, with no conflicts of interest. All Large-Cap Value portfolios managed by Ronald J. Ulrich are managed identically ensuring no material conflict in strategy or allocation in investment opportunities. Equinox has a technology team dedicated to ensuring state-of-the-art hardware and software systems for their investment and trading professionals. Equinox utilizes a state-of-the-art portfolio accounting system known as ADVENT, which allows them to monitor portfolios daily to ensure portfolio compliance. This is integrated with MOXY, an automated trade/order entry system that ensures no one client is intentionally favored at the expense of another. DESCRIPTION OF COMPENSATION The method of compensation for Equinox' portfolio managers is dependent upon the overall performance of the portfolios under management as well as the level of client service and satisfaction. The portfolio managers are, in part, compensated based on the profitability of the firm, which is correlated with client retention. Research Analysts are compensated based on individual and organizational performance. Current compensation is determined by the investment returns generated in areas under their responsibility as well as by a qualitative assessment of their contribution to the investment process and organization. Compensation includes base salary, variable bonus, profit sharing, and equity participation. Base salaries are competitive, but more than 65% of analyst compensation may be derived from variable bonus, which is heavily skewed to portfolio performance contribution. The traders and client service personnel are compensated through a base salary and a variable cash bonus, which is paid at year-end and is dependent upon the individual's contribution to the firm and overall success of the firm. Currently, two-thirds of employees are owners of the firm and intent is for all employees to become owners over time. Equinox believes this is a distinguishing feature of the firm that aids in attracting and retaining quality professionals because there are so few firms that offer ownership opportunities to their employees. Equinox utilized third-party benchmarking surveys to ensure that their compensation structure is competitive with other firms in the same industry. HOTCHKIS AND WILEY CAPITAL MANAGEMENT, LLC Hotchkis & Wiley is a Delaware limited liability company, the primary members of which are HWCap Holdings, a limited liability company whose members are employees of Hotchkis & Wiley, and Stephens-H&W, a limited liability company whose primary member is Stephens Group Inc., which is a diversified holding company. B-31 INVESTMENT ADVISORY ARRANGEMENTS Vanguard Windsor II Fund has entered into an investment advisory agreement with Hotchkis and Wiley Capital Management, LLC to manage a portion of the Fund's assets. Vanguard Windsor II Fund pays Hotchkis & Wiley at the end of each fiscal quarter, calculated by applying a quarterly rate, based on certain annual percentage rates, to the Fund's average month-end net assets managed by Hotchkis & Wiley (the Hotchkis & Wiley Portfolio) for the quarter. OTHER ACCOUNTS MANAGED George H. Davis, Jr. and Sheldon Lieberman managed the Windsor II Fund, which, as of October 31, 2005, held assets of $xxx billion. [insert additional text as provided] MATERIAL CONFLICTS OF INTERESTS [insert text as provided] DESCRIPTION OF COMPENSATION The Portfolio Managers are compensated in various forms. Portfolio Managers of the Windsor II Fund are supported by the full research team of Hotchkis & Wiley. Compensation is used to reward, attract, and retain high-quality investment professionals. An investment professional, such as a Portfolio Manager, has a base salary and is eligible for an annual bonus. Some Portfolio Managers also are involved in client servicing, marketing, and in the general management of Hotchkis & Wiley and are evaluated and compensated based on these functions as well as their investment management activities. Hotchkis & Wiley believes consistent execution of the proprietary research process results in superior, risk-adjusted portfolio returns. It is the quality of the investment professional's execution of this process rather than the performance of particular securities that is evaluated in determining compensation. Compensation likewise is not tied to performance of the Windsor II Fund or separate accounts, specific industries within the Windsor II Fund or separate accounts, or to any type of asset- or revenue-related objective, other than to the extent that the overall revenues of Hotchkis & Wiley attributable to such factors may affect the size of Hotchkis & Wiley's overall bonus pool. Bonuses and salaries for investment professionals are determined by the Chief Executive Officer of Hotchkis & Wiley using tools which may include, but are not limited to, annual evaluations, compensation surveys, feedback from other employees and advice from members of Hotchkis & Wiley's Executive Committee and Compensation Committee. The amount of the bonus usually is shaped by the total amount of Hotchkis & Wiley's bonus pool available for the year, which is generally a function of net income, but no investment professional receives a bonus that is a pre-determined percentage of net income. Each of the Portfolio Managers owns equity in Hotchkis & Wiley. Hotchkis & Wiley believes that the ownership structure of the firm is a significant factor in ensuring a motivated and stable employee base. TUKMAN CAPITAL MANAGEMENT, INC. Tukman is a Delaware corporation controlled by the following officers of Tukman: Melvin T. Tukman, President and Director; and Daniel L. Grossman, Vice President. INVESTMENT ADVISORY ARRANGEMENTS Vanguard Windsor II Fund has entered into an investment advisory agreement with Tukman Capital Management, Inc. to manage a portion of the Fund's assets. Vanguard Windsor II Fund pays Tukman at the end of each fiscal quarter, calculated by applying a quarterly rate, based on certain annual percentage rates, to the Fund's average month-end net assets managed by Tukman (the Tukman Portfolio) for the quarter. OTHER ACCOUNTS MANAGED Melvin Tukman and Daniel Grossman managed the Windsor II Fund, which, as of October 31, 2005, held assets of $xxx billion. As of October 31, 2005, Mr. Tukman and Mr. Grossman managed institutional and high net worth individual accounts with total assets of $9.9 billion. B-32 MATERIAL CONFLICTS OF INTERESTS Tukman seeks to minimize potential conflicts of interest by managing all client accounts identically using a common strategy. All client accounts are included and aggregated in buys and sells where possible. DESCRIPTION OF COMPENSATION In addition to base salary, Melvin Tukman and Daniel Grossman receive an annual bonus tied to the overall profitability of the firm and not to any single account. They also participate in a retirement plan available to all Tukman employees. OWNERSHIP OF SECURITIES Vanguard employees, including portfolio managers, allocate their invesment needs among the various Vanguard funds based on their own individual investment needs and goals. Vanguard employees as a group invest a sizeable portion of their personal assets in Vanguard funds. As of October 31, 2005, Vanguard employees collectively invested $1.39 billion in Vanguard funds. John J. Brennan, Chairman and Chief Executive Officer of Vanguard and the Vanguard funds, and George U. Sauter, Managing Director and Chief Investment Officer, invest substantially all of their personal financial assets in Vanguard funds. As of October 31, 2005, Mr. Dickson owned shares of the xx Fund within the $xx-$xx range, David R. Fassnacht owned shares of the xx Fund within the $xx-$xx range, Marilyn G. Fedak owned shares of the xx Fund within the $xx-$xx range, James P. Barrow owned shares of the xx Fund within the $xx-$xx range, Ronald J. Ulrich owned shares of the xx Fund within the $xx-$xx range, George H. Davis, Jr. owned share of the xx Fund within the $xx-$xx range, and Sheldon Lieberman owned shares of the xx Fund within the $xx-$xx range. Except as noted in the previous sentence, as of October 31, 2005, the portfolio managers did not own any shares of the Funds they managed. DURATION AND TERMINATION OF INVESTMENT ADVISORY ARRANGEMENTS Each Fund's current agreement with its external advisors is renewable for successive one-year periods (the initial agreement with Hotchkis & Wiley is in effect until December 1, 2006, and renewable for successive one-year periods thereafter), only if (1) each renewal is specifically approved by a vote of the Fund's board of trustees, including the affirmative votes of a majority of the trustees who are not parties to the agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of considering such approval, or (2) each renewal is specifically approved by a vote of a majority of the Fund's outstanding voting securities. An agreement is automatically terminated if assigned, and may be terminated without penalty at any time (1) by vote of the board of trustees of the Fund on sixty (60) days' written notice (thirty (30) days' for Hotchkis & Wiley) to the advisor, (2) by a vote of a majority of the Fund's outstanding voting securities, or (3) by the advisor upon ninety (90) days' written notice to the Fund. PORTFOLIO TRANSACTIONS The advisor decides which securities to buy and sell on behalf of a Fund and then selects the brokers or dealers that will execute the trades on an agency basis or the dealers with whom the trades will be effected on a principal basis. For each trade, the advisor mush select a broker-dealer that it believes will provide "best execution." Best execution does not mean the lowest possible spread or commission rate. In seeking best execution, the SEC has said that an advisor should consider the full range of a broker-dealer's services. The factors considered by the advisor in seeking best execution include, but are not limited to, the broker-dealer's execution capability, clearance and settlement services, commission rate, trading expertise, willingness and ability to commit capital, ability to provide anonymity, financial responsibility, reputation and integrity, responsiveness, access to underwritten offerings and secondary markets, and access to company management, as well as the value of any research provided by the broker-dealer. In assessing which broker-dealer can provide best execution for a particular trade, the advisor also may consider the timing and size of the order and available liquidity and current market conditions. In placing securities transactions, each advisor will use its 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 in which 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 who supply investment B-33 research and statistical information and provide other services in addition to execution services to the Funds and/or the advisor. Each advisor considers the investment services it receives useful in the performance of its obligations under the agreement, but is unable to determine precisely the amount by which such services may reduce its expenses. The 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 Funds' board of trustees, the advisor may cause the Funds 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 advisor to the Funds. Currently, it is each Fund's policy that each advisor 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 advisor will only pay such higher commissions if it believes 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 an advisor and/or a Fund. However, the Funds have informed the advisor not to pay higher commission rates specifically for the purpose of obtaining research services. Some securities that are considered for investment by a Fund may also be appropriate for other Vanguard funds or for other clients served by the advisor. If such securities are compatible with the investment policies of a Fund and one or more of an advisor's other clients, and are considered for purchase or sale at or about the same time, then transactions in such securities will be aggregated by the advisor and the purchased securities or sale proceeds will be allocated among the participating Vanguard funds and the other participating clients of the advisor in a manner deemed equitable by the advisor. Although there may be no specified formula for allocating such transactions, the allocation methods used, and the results of such allocations, will be subject to periodic review by the Funds' board of trustees. During the fiscal years ended October 31, 2003, 2004, and 2005, the Funds paid brokerage commissions in the following amounts: FUND 2003 2004 2005 - ---- ---- ---- ---- Vanguard Windsor Fund $xx,xxx,000 $xx,xxx,000 $xx,xxx,000 Vanguard Windsor II Fund xx,xxx,000 xx,xxx,000 xx,xxx,000 PROXY VOTING GUIDELINES The Board of Trustees (the Board) of each Vanguard fund that invests in stocks has adopted proxy voting procedures and guidelines to govern proxy voting by the fund. The Board has delegated day-to-day oversight of proxy voting to the Proxy Oversight Committee (the Committee), comprised of senior Vanguard officers and subject to the operating procedures and guidelines described below. The Committee reports directly to the Board. Our overarching objective in voting is simple: to support proposals and director nominees that maximize the value of a fund's investments--and those of our fund shareholders--over the long term. While our goal is simple, the proposals we receive are varied and frequently complex. The guidelines adopted by the Board provide a rigorous framework for assessing each proposal. The Board has designed the guidelines to stress Vanguard's role as a fiduciary with responsibility for evaluating each proposal on its merits, based on the particular facts and circumstances as presented. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the funds voting as a block. In some cases, however, funds may vote differently, depending upon the nature and objective of the funds, the composition of their portfolios and other factors. The guidelines do not permit Vanguard to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting if refraining from voting would be in the fund's and its shareholders' best interests. These circumstances may arise, for example, when the expected cost of voting exceeds the expected benefits of voting, or exercising the vote results in the imposition of trading or other restrictions. In evaluating proxy proposals, we consider information from many sources, including the portfolio manager for the fund, management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company's board, absent guidelines or other specific facts B-34 that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Proxy Oversight Committee, who are accountable to the fund's Board. While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the fund's vote in a manner that, in the Committee's view, will maximize the value of the fund's investment. I. THE BOARD OF DIRECTORS A. ELECTION OF DIRECTORS We believe that good governance starts with a majority-independent board, whose key committees are comprised entirely of independent directors. Companies should attest to the independence of directors who serve on the Compensation, Nominating, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained in the proxy statement. While we will generally support the board's nominees, we will take the following factors into account in determining our vote: FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - --------------------- ------------------------ Nominated slate results in board Nominated slate results in board comprised of a majority of comprised of a majority of non- independent directors. independent directors All members of Audit, Audit, Nominating, and/or Nominating, and Compensation committees Compensation committees include are independent of management. non-independent members Incumbent board member failed to attend at least 75% of meetings in the previous year. Actions of committee(s) on which nominee serves are inconsistent with other guidelines (e.g., excessive option grants, substantial non-audit fees, lack of board independence). B. CONTESTED DIRECTOR ELECTIONS In the case of contested board elections, we will evaluate the nominees' qualifications, the performance of the incumbent board, as well as the rationale behind the dissidents' campaign, to determine the outcome that we believe will maximize shareholder value. C. CLASSIFIED BOARDS We will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures, in which only part of the board is elected each year. II. APPROVAL OF INDEPENDENT AUDITORS We believe that the relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. We will generally support management's recommendation for the ratification of the auditor, except in instances where audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether we believe independence has been compromised. III. COMPENSATION ISSUES A. STOCK-BASED COMPENSATION PLANS We believe that appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders and the B-35 interests of management, employees, and directors. Conversely, we oppose plans that substantially dilute our ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features. An independent compensation committee should have significant latitude to deliver varied compensation to motivate the company's employees. However, we will evaluate compensation proposals in the context of several factors (a company's industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the company's other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account. The following factors will be among those considered in evaluating these proposals.
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - --------------------- ------------------------ Company requires senior executives to hold a minimum Total potential dilution (including all stock-based plans) exceeds 15% amount of company stock (frequently expressed as a multiple of share outstanding. of salary). Company requires stock acquired through option exercise to Annual option grants have exceeded 2% of shares outstanding. be held for a certain period of time. Compensation program includes performance-vesting Plan permits repricing or replacement of options without shareholder awards, indexed options or other performance-linked grants. approval. Concentration of option grants to senior executives is Plan provides for the issuance of reload options. cash in delivering market-competitive total pay. Plan contains automatic share replenishment (evergreen) feature.
B. BONUS PLANS Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the IRC, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported. C. EMPLOYEE STOCK PURCHASE PLANS We will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan comprise less than 5% of the outstanding shares. D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES) While we believe that executives' incentives for continued employment should be more significant than severance benefits, there are instances--particularly in the event of a change in control--in which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executive's salary and bonus may generally be approved by the compensation committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonus--or where severance is guaranteed absent a change in control--should be submitted for shareholder approval. IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS We believe the exercise of shareholder rights, in proportion to economic ownership, to be a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders' ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. We believe that, in general, the market for corporate control should be allowed to function without undue interference from these artificial barriers. Our positions on a number of the most commonly presented issues in this area are as follows: A. SHAREHOLDER RIGHTS PLANS (POISON PILLS) A company's adoption of a so-called poison pill effectively limits a potential acquirer's ability to buy a controlling interest without the approval of the target's board of directors. Such a plan, in conjunction with other takeover defenses, may B-36 serve to entrench incumbent management and directors. However, in other cases, a poison pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium. In general, we believe that shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - -------------------- ------------------------ Plan is relatively short-term (3-5years). Plan is long term (>5 years). Plan requires shareholder approval for renewal. Renewal of plan is automatic or does not require shareholder approval. Plan incorporates review by a committee of independent Ownership trigger is less than 15%. directors at least every three years (so-called TIDE provisions). Plan includes permitted bid/qualified offer feature Classified board. (chewable pill) that mandates shareholder vote in certain situations. Ownership trigger is reasonable (15-20%). Board with limited independence. Highly independent, non-classified board.
B. CUMULATIVE VOTING We are generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation. C. SUPERMAJORITY VOTE REQUIREMENTS We support shareholders' ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, we will support proposals to remove supermajority requirements and oppose proposals to impose them. D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT We support shareholders' right to call special meetings of the board (for good cause and with ample representation) and to act by written consent. We will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them. E. CONFIDENTIAL VOTING We believe that the integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. We support proposals to provide confidential voting. F. DUAL CLASSES OF STOCK We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. We will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes. V. CORPORATE AND SOCIAL POLICY ISSUES Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. We generally believe that these are "ordinary business matters" that are primarily the responsibility of management and should be evaluated and approved solely by the corporation's board of directors. Often, proposals may address concerns with which we philosophically agree, but absent a compelling economic impact on shareholder value (e.g., proposals to require expensing of stock options), we will typically abstain from voting on these proposals. This reflects our belief that regardless of our philosophical perspective on the issue, these decisions should be the province of company management unless they have a significant, tangible impact on the value of our investment and, we don't view management as responsive to the matter. B-37 VI. VOTING IN FOREIGN MARKETS Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. We will use our votes, where applicable, to advocate for improvements in governance and disclosure by our portfolio companies. We will evaluate issues presented to shareholders for our foreign holdings in the context with the guidelines described above, as well as local market standards and best practices. We will cast our votes in a manner we believe to be philosophically consistent with our guidelines, while taking into account differing practices by market. In addition, there may be instances in which we elect not to vote, as described below. Many foreign markets require that securities be "blocked" or reregistered to vote at a company's meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements. The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets may be substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances where the issues presented are unlikely to have a material impact on shareholder value. VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund. VIII. THE PROXY VOTING GROUP The Board has delegated the day-to-day function of voting proxies for the funds to the Proxy Voting Group, which the Proxy Oversight Committee oversees. While most votes will be determined through Vanguard's procedures and guidelines, there may be circumstances when the Proxy Voting Group will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, in the Board's or the Committee's discretion, such action is warranted. The Proxy Voting Group performs the following functions: (1) managing proxy voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals using factors described in the guidelines; (4) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and special reports to the Board, and any proposed amendments to the procedures and guidelines. IX. THE PROXY OVERSIGHT COMMITTEE The Board, including a majority of the independent trustees, appoints the members of the Committee who are principals of Vanguard, and who have the requisite expertise to oversee proxy voting for the Vanguard funds. The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse him or herself from the committee meeting at which the matter is addressed, and not participate in the voting decision. The Committee works with the Proxy Voting Group to provide reports and other guidance to the Board regarding proxy voting by the Vanguard funds. The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness and Vanguard's Code of Ethics. The Committee shall authorize proxy votes that the Committee determines, in its sole discretion, to be in the best interests of the funds' shareholders. In determining how to apply the Guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of fund shareholders in maximizing the value of their investments. The Board may review these procedures and guidelines and modify them from time to time. The procedures and guidelines are available on Vanguard's website at www.vanguard.com. B-38 You may obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30 by logging on to Vanguard's internet site, at www.vanguard.com, or the SEC's website at www.sec.gov. FINANCIAL STATEMENTS Each Fund's Financial Statements for the fiscal year ended October 31, 2005, appearing in the Funds' 2005 Annual reports to Shareholders, and the reports thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of each Fund's performance, please see the Funds' Annual and Semiannual Reports to Shareholders, which may be obtained without charge. B-39 SAI022 022006 PART C VANGUARD WINDSOR FUNDS OTHER INFORMATION ITEM 23. EXHIBITS (a) Declaration of Trust, filed on February 6, 2003, Post-Effective Amendment No. 99, is hereby incorporated by reference. (b) By-Laws, filed on December 11, 2003, Post-Effective Amendment No. 100, are hereby incorporated by reference. (c) Reference is made to Articles III and V of the Registrant's Declaration of Trust. (d) Investment Advisory Contract, for Sanford C. Bernstein & Co., Inc., filed on February 9, 2001, Post-Effective Amendment No. 95; for Equinox Capital Management, Inc., Tukman Capital Management, Inc., and Wellington Management Company, filed on February 4, 2004, Post-Effective Amendment No. 101, for Hotchkis and Wiley Capital Management LLC, filed on December 11, 2003, Post-Effective No. 100; are hereby incorporated by reference; for Barrow, Hanley, Mewhinney & Strauss, Inc., and Equinox Capital Management, LLC; are filed herewith. (e) Underwriting Contracts, not applicable. (f) Reference is made to the section entitled "Management of the Funds" in the Registrant's Statement of Additional Information. (g) Custodian Agreement, for Citibank, N.A., is filed herewith. (h) Amended and Restated Funds' Service Agreement, filed on February 6, 2003, Post-Effective Amendment No. 99, is hereby incorporated by reference. (i) Legal Opinion, not Applicable. (j) Consent of Independent Registered Public Accounting Firm, to be filed by amendment. (k) Omitted Financial Statements, not Applicable. (l) Initial Capital Agreements, not Applicable. (m) Rule 12(b)-1 Plan, Not Applicable. (n) Rule 18f-3 Plan, is filed herewith. (o) Reserved, not Applicable. (p) Code of Ethics, for Barrow, Hanley, Mewhinney & Srauss, Inc., Sanford C. Bernstein & Co., and Tukman Capital Management, Inc., filed on February 6, 2003, Post-Effective Amendment No. 99; for Hotchkis & Wiley Capital Management, LLC, filed on December 11, 2003, Post-Effective Amendment No. 100; for Equinox Capital Management, Inc., and Wellington Management Company, filed on December 23, 2004, Post-Effective Amendment No. 103; are hereby incorporated by reference. For The Vanguard Group, Inc., is filed herewith. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 25. INDEMNIFICATION The Registrant's organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacity. Article VII, Section 2 of the 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. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Barrow, Hanley, 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 Barrow, Hanley pursuant to the Advisers Act (SEC File No. 801-31237). Equinox Capital Management LLC (Equinox) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Equinox, 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 Equinox pursuant to the Advisers Act (SEC File No. 801-34524). Hotchkis and Wiley, is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Hotchkis and Wiley, 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 Hotchkis and Wiley pursuant to the Advisers Act (SEC File No. 801-60512). Sanford C. Bernstein & Co., Inc. (Bernstein) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Bernstein, 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 Bernstein pursuant to the Advisers Act (SEC File No. 801-10488). Tukman Capital Management, Inc. (Tukman) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Tukman, 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 Tukman pursuant to the Advisers Act (SEC File No. 801-15279). Wellington Management Company (Wellington Management) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors 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 directors 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 25 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). ITEM 27. PRINCIPAL UNDERWRITERS Not Applicable ITEM 28. LOCATION OF ACCOUNTS AND RECORDS The books, accounts, and other documents required to be maintained by Section 31(a) under the 1940 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, PA 19355; and the Registrant's Custodian, Citibank, N.A., 111 Wall Street, New York, NY 10005. ITEM 29. MANAGEMENT SERVICES Other than as set forth in the section entitled "Management of the Funds" in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract. ITEM 30. UNDERTAKINGS Not Applicable SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant 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 19th day of December, 2005. VANGUARD WINDSOR FUNDS 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 December 19, 2005 ---------------------------- Executive Officer, and Trustee (Heidi Stam) John J. Brennan* By: /S/CHARLES D. ELLIS Trustee December 19, 2005 ---------------------------- (Heidi Stam) Charles D. Ellis* By: /S/ RAJIV L. GUPTA Trustee December 19, 2005 ---------------------------- (Heidi Stam) RAJIV L. GUPTA* By: /S/ JOANN HEFFERNAN HEISEN Trustee December 19, 2005 ---------------------------- (Heidi Stam) JoAnn Heffernan Heisen* By: /S/ANDRE F. PEROLD Trustee December 19, 2005 ---------------------------- (Heidi Stam) ANDRE F. PEROLD* By: /S/ ALFRED M. RANKIN, JR. Trustee December 19, 2005 ---------------------------- (Heidi Stam) Alfred M. Rankin, Jr.* By: /S/ J. LAWRENCE WILSON Trustee December 19, 2005 ---------------------------- (Heidi Stam) J. Lawrence Wilson* By: /S/ THOMAS J. HIGGINS Treasurer and Principal December 19, 2005 ------------------------------ Financial Officer and Principal (Heidi Stam) Accounting Officer Thomas J. Higgins*
*By Power of Attorney. Filed on September 23, 2005, see File Number 33-19446. Incorporated by Reference. INDEX TO EXHIBITS Investment Advisory Contract for Barrow, Hanley . . . . . . . . . . . . .Ex-99.D Investment Advisory Contract for Equinox . . . . . . . . . . . . . . . . Ex-99.D Custodian Agreement for Citibank, N.A. . . . . . . . . . . . . . . . . . Ex-99.G Rule 18f-3 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ex-99.N Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex-99.P EX-99.D 2 equinoxagreement.txt EQUINOX INVESTMENT ADVISORY CONTRACT INVESTMENT ADVISORY AGREEMENT THIS AGREEMENT is made as of this 19th day of December, 2005, between the Vanguard Windsor Funds, a Delaware business trust (the "Trust"), and Equinox Capital Management, LLC, a Delaware limited liability company (the "Advisor"). W I T N E S S E T H WHEREAS the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Trust offers a series of shares known as Vanguard Windsor II Fund (the "Fund"); WHEREAS, the Trust retains the Advisor to render investment advisory services to the Fund under an Investment Advisory Agreement, dated as of August 1, 1996 (the "Prior Agreement"); WHEREAS, the Trust desires to amend and restate such Investment Advisory Agreement in certain respects, and the Advisor is willing to render investment advisory services to the Fund in accordance with such amendments. NOW THEREFORE, in consideration of the mutual promises and undertakings set forth in this "Agreement," the Trust and the Advisor hereby agree as follows: 1. APPOINTMENT OF ADVISOR. The Trust hereby employs the Advisor as investment advisor, on the terms and conditions set forth herein, for the portion of the assets of the Fund that the Trust's Board of Trustees (the "Board of Trustees") determines in its sole discretion to assign to the Advisor from time to time (referred to in this Agreement as the "Equinox Portfolio"). As of the date of this Agreement, the Equinox Portfolio will consist of the portion of the assets of the Fund that the Board of Trustees has determined to assign to the Advisor, as communicated to the Advisor on behalf of the Board of Trustees by The Vanguard Group, Inc. ("Vanguard"), including cash that may be directed to The Vanguard Group, Inc. for cash management purposes. The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to the Advisor. The Advisor accepts such employment and agrees to render the services herein set forth, for the compensation herein provided. 2. DUTIES OF ADVISOR. The Trust employs the Advisor to manage the investment and reinvestment of the assets of the Equinox Portfolio; to continuously review, supervise, and administer an investment program for the Equinox Portfolio; to determine in its discretion the securities to be purchased or sold and the portion of such assets to be held uninvested; to provide the Fund with all records concerning the activities of the Advisor that the Fund is required to maintain; and to render regular reports to the Trust's officers and Board of Trustees concerning the discharge of the foregoing responsibilities. The Advisor will discharge the foregoing responsibilities subject to the supervision and oversight of the Trust's officers and the Board of Trustees, and in compliance with the objectives, policies and limitations set forth in the Fund's prospectus and Statement of Additional Information, any additional operating policies or procedures that the Fund communicates to the Advisor in writing, and applicable laws and regulations. The Advisor agrees to provide, at its own expense, the office space, furnishings and equipment, and personnel required by it to perform the services on the terms and for the compensation provided herein. 3. SECURITIES TRANSACTIONS. The Advisor is authorized to select the brokers or dealers that will execute purchases and sales of securities for the Equinox Portfolio, and is directed to use its best efforts to obtain best execution for such transactions. In selecting brokers or dealers to execute trades for the Equinox Portfolio, the Advisor will comply with all applicable statutes, rules, interpretations by the Securities and Exchange Commission or its staff, other applicable law, and the written policies established by the Fund's Board of Trustees and communicated to the Advisor in writing. 4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor agrees to accept as full compensation therefore, a Basic Fee at the rate specified in Schedule A to this Agreement. The Basic Fee will be calculated based on annual percentage rates applied to the average month-end net assets of the Equinox Portfolio and will be paid to the Advisor quarterly. Notwithstanding the foregoing, for services rendered pursuant to this Agreement, the Fund shall pay to the Advisor, for the first fiscal quarter within which this Agreement is in effect, a Basic Fee calculated as described in Schedule B. The Basic Fee, as provided above, will be increased or decreased by applying a Performance Fee Adjustment (the "Adjustment") as specified in Schedule A. 5. REPORTS. The Fund and the Advisor agree to furnish to each other current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request. 6. COMPLIANCE WITH APPLICABLE LAW AND BOARD REQUIREMENTS. The Advisor agrees to comply with all Applicable Law and all policies, procedures or reporting requirements that the Board of Trustees of the Trust reasonably adopts and communicates to the Advisor in writing, including, without limitation, any such policies, procedures or reporting requirements relating to soft dollar or directed brokerage arrangements. "Applicable Law" means (i) the "federal 2 securities laws" as defined in Rule 38a-1(e)(1) under the 1940 Act, as amended from time to time, as they relate to the services provided by the Advisor to the Trust pursuant to this Agreement, and (ii) any and all other laws, rules, and regulations, whether foreign or domestic, in each case applicable at any time and from time to time to the investment management operations of the Advisor. 7. STATUS OF ADVISOR. The services of the Advisor to the Fund are not to be deemed exclusive, and the Advisor will be free to render similar services to others so long as its services to the Fund are not impaired thereby. The Advisor will be deemed to be an independent contractor and will, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund or the Trust. 8. LIABILITY OF ADVISOR. No provision of this Agreement will be deemed to protect the Advisor against any liability to the Fund or its shareholders to which it might otherwise be subject by reason of any willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations under this Agreement. 9. LIMITATIONS ON CONSULTATIONS. The Advisor is prohibited from consulting with other advisors of the Fund, except Vanguard, concerning transactions for the Fund in securities or other assets. 10. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will become effective on the date hereof and shall continue in effect for successive twelve-month periods, only so long as this Agreement is approved at least annually by votes of the Trust's Board of Trustees who are not parties to such Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. In addition, the question of continuance of the Agreement may be presented to the shareholders of the Fund; in such event, such continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of the Fund. Notwithstanding the foregoing, however, (i) this Agreement may at any time be terminated without payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund, on thirty days' written notice to the Advisor, (ii) this Agreement will automatically terminate in the event of its assignment, and (iii) this Agreement may be terminated by the Advisor on ninety days' written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party as follows: 3 If to the Fund, at: Vanguard Windsor II Fund P.O. Box 2600 Valley Forge, PA 19482 Attention: Joseph P. Brennan Telephone: 610-503-2042 Facsimile: 610-503-5855 If to the Advisor, at: Equinox Capital Management, LLC 590 Madison Avenue, 41st Floor New York, New York Attn: Robert J. Ulrich Phone: Fax: This Agreement may be amended by mutual consent, but the consent of the Trust must be approved (i) by a majority of those members of the Board of Trustees who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such amendment, and (ii) to the extent required by the 1940 Act, by a vote of a majority of the outstanding voting securities of the Fund of the Trust. As used in this Section 10, the terms "assignment," "interested persons," and "vote of a majority of the outstanding voting securities" will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940 Act. 11. SEVERABILITY. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. 12. CONFIDENTIALITY. The Advisor shall keep confidential any and all information obtained in connection with the services rendered hereunder and relating directly or indirectly to the Fund, the Trust, or Vanguard and shall not disclose any such information to any person other than the Trust, the Board of Trustees of the Trust, Vanguard, and any director, officer, or employee of the Trust or Vanguard, except (i) with the prior written consent of the Trust, (ii) as required by law, regulation, court order or the rules or regulations of any self-regulatory organization, governmental body or official having jurisdiction over the Advisor, or (iii) for information that is publicly available other than due to disclosure by the Advisor or its affiliates or becomes known to the Advisor from a source other than the Trust, the Board of Trustees of the Trust, or Vanguard. 13. PROXY POLICY. The Advisor acknowledges that Vanguard will vote the shares of all securities that are held by the Fund unless other mutually acceptable arrangements are made with the Advisor with respect to the Equinox Portfolio. 4 14. GOVERNING LAW. All questions concerning the validity, meaning, and effect of this Agreement shall be determined in accordance with the laws (without giving effect to the conflict-of-law principles thereof) of the State of Delaware applicable to contracts made and to be performed in that state. IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory Agreement to be executed as of the date first set forth herein. Equinox Capital Management, LLC Vanguard Windsor Funds - -------------------------------------------------------------------------------- Signature Date Signature Date - --------------------------- ---------------------------------------- Print Name Print Name EX-99.D 3 barrowhanleyagreement.txt BARROW, HANLEY INVESTMENT ADVISORY CONTRACT INVESTMENT ADVISORY AGREEMENT THIS AGREEMENT is made as of this 19th day of December, 2005, between the Vanguard Windsor Funds, a Delaware business trust (the "Trust"), and Barrow, Hanley, Mewhinney & Strauss, INC., a Nevada corporation (the "Advisor"). W I T N E S S E T H WHEREAS the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Trust offers a series of shares known as Vanguard Windsor II Fund (the "Fund"); WHEREAS, the Trust retains the Advisor to render investment advisory services to the Fund under an Investment Advisory Agreement, dated as of November 1, 2000 (the "Prior Agreement"); WHEREAS, the Trust desires to amend and restate such Investment Advisory Agreement in certain respects, and the Advisor is willing to render investment advisory services to the Fund in accordance with such amendments. NOW THEREFORE, in consideration of the mutual promises and undertakings set forth in this "Agreement," the Trust and the Advisor hereby agree as follows: 1. APPOINTMENT OF ADVISOR. The Trust hereby employs the Advisor as investment advisor, on the terms and conditions set forth herein, for the portion of the assets of the Fund that the Trust's Board of Trustees (the "Board of Trustees") determines in its sole discretion to assign to the Advisor from time to time (referred to in this Agreement as the "BHMS Portfolio"). As of the date of this Agreement, the BHMS Portfolio will consist of the portion of the assets of the Fund that the Board of Trustees has determined to assign to the Advisor, as communicated to the Advisor on behalf of the Board of Trustees by The Vanguard Group, Inc. ("Vanguard"), including cash that may be directed to The Vanguard Group, Inc. for cash management purposes. The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to the Advisor. The Advisor accepts such employment and agrees to render the services herein set forth, for the compensation herein provided. 2. DUTIES OF ADVISOR. The Trust employs the Advisor to manage the investment and reinvestment of the assets of the BHMS Portfolio; to continuously review, supervise, and administer an investment program for the BHMS Portfolio; to determine in its discretion the securities to be purchased or sold and the portion of such assets to be held uninvested; to provide the Fund with all records concerning the activities of the Advisor that the Fund is required to maintain; and to render regular reports to the Trust's officers and Board of Trustees concerning the discharge of the foregoing responsibilities. The Advisor will discharge the foregoing responsibilities subject to the supervision and oversight of the Trust's officers and the Board of Trustees, and in compliance with the objectives, policies and limitations set forth in the Fund's prospectus and Statement of Additional Information, any additional operating policies or procedures that the Fund communicates to the Advisor in writing, and applicable laws and regulations. The Advisor agrees to provide, at its own expense, the office space, furnishings and equipment, and personnel required by it to perform the services on the terms and for the compensation provided herein. 3. SECURITIES TRANSACTIONS. The Advisor is authorized to select the brokers or dealers that will execute purchases and sales of securities for the BHMS Portfolio, and is directed to use its best efforts to obtain best execution for such transactions. In selecting brokers or dealers to execute trades for the BHMS Portfolio, the Advisor will comply with all applicable statutes, rules, interpretations by the Securities and Exchange Commission or its staff, other applicable law, and the written policies established by the Fund's Board of Trustees and communicated to the Advisor in writing. 4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor agrees to accept as full compensation therefore, a Basic Fee at the rate specified in Schedule A to this Agreement. The Basic Fee will be calculated based on annual percentage rates applied to the average month-end net assets of the BHMS Portfolio and will be paid to the Advisor quarterly. Notwithstanding the foregoing, for services rendered pursuant to this Agreement, the Fund shall pay to the Advisor, for the first fiscal quarter within which this Agreement is in effect, a Basic Fee calculated as described in Schedule B. The Basic Fee, as provided above, will be increased or decreased by applying a Performance Fee Adjustment (the "Adjustment") as specified in Schedule A. 5. REPORTS. The Fund and the Advisor agree to furnish to each other current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request. 6. COMPLIANCE WITH APPLICABLE LAW AND BOARD REQUIREMENTS. The Advisor agrees to comply with all Applicable Law and all policies, procedures or reporting requirements that the Board of Trustees of the Trust reasonably adopts and communicates to the Advisor in writing, including, without limitation, any such policies, procedures or reporting requirements relating to soft dollar or directed brokerage arrangements. "Applicable Law" means (i) the "federal securities laws" as defined in Rule 38a-1(e)(1) under the 1940 Act, as 2 amended from time to time, as they relate to the services provided by the Advisor to the Trust pursuant to this Agreement, and (ii) any and all other laws, rules, and regulations, whether foreign or domestic, in each case applicable at any time and from time to time to the investment management operations of the Advisor. 7. STATUS OF ADVISOR. The services of the Advisor to the Fund are not to be deemed exclusive, and the Advisor will be free to render similar services to others so long as its services to the Fund are not impaired thereby. The Advisor will be deemed to be an independent contractor and will, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund or the Trust. 8. LIABILITY OF ADVISOR. No provision of this Agreement will be deemed to protect the Advisor against any liability to the Fund or its shareholders to which it might otherwise be subject by reason of any willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations under this Agreement. 9. LIMITATIONS ON CONSULTATIONS. The Advisor is prohibited from consulting with other advisors of the Fund, except Vanguard, concerning transactions for the Fund in securities or other assets. 10. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will become effective on the date hereof and shall continue in effect for successive twelve-month periods, only so long as this Agreement is approved at least annually by votes of the Trust's Board of Trustees who are not parties to such Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. In addition, the question of continuance of the Agreement may be presented to the shareholders of the Fund; in such event, such continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of the Fund. Notwithstanding the foregoing, however, (i) this Agreement may at any time be terminated without payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund, on thirty days' written notice to the Advisor, (ii) this Agreement will automatically terminate in the event of its assignment, and (iii) this Agreement may be terminated by the Advisor on ninety days' written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party as follows: 3 If to the Fund, at: Vanguard Windsor II Fund P.O. Box 2600 Valley Forge, PA 19482 Attention: Joseph P. Brennan Telephone: 610-503-2042 Facsimile: 610-503-5855 If to the Advisor, at: Barrow, Hanley, Mewhinney & Strauss, Inc. JPMorgan Chase Tower 2200 Ross Tower, 31st Floor Dallas, TX 75201 Attn: James P. Barrow Phone: 214-665-1900 Fax: 214-953-7543 This Agreement may be amended by mutual consent, but the consent of the Trust must be approved (i) by a majority of those members of the Board of Trustees who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such amendment, and (ii) to the extent required by the 1940 Act, by a vote of a majority of the outstanding voting securities of the Fund of the Trust. As used in this Section 10, the terms "assignment," "interested persons," and "vote of a majority of the outstanding voting securities" will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940 Act. 11. SEVERABILITY. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. 12. CONFIDENTIALITY. The Advisor shall keep confidential any and all information obtained in connection with the services rendered hereunder and relating directly or indirectly to the Fund, the Trust, or Vanguard and shall not disclose any such information to any person other than the Trust, the Board of Trustees of the Trust, Vanguard, and any director, officer, or employee of the Trust or Vanguard, except (i) with the prior written consent of the Trust, (ii) as required by law, regulation, court order or the rules or regulations of any self-regulatory organization, governmental body or official having jurisdiction over the Advisor, or (iii) for information that is publicly available other than due to disclosure by the Advisor or its affiliates or becomes known to the Advisor from a source other than the Trust, the Board of Trustees of the Trust, or Vanguard. 4 13. PROXY POLICY. The Advisor acknowledges that Vanguard will vote the shares of all securities that are held by the Fund unless other mutually acceptable arrangements are made with the Advisor with respect to the BHMS Portfolio. 14. GOVERNING LAW. All questions concerning the validity, meaning, and effect of this Agreement shall be determined in accordance with the laws (without giving effect to the conflict-of-law principles thereof) of the State of Delaware applicable to contracts made and to be performed in that state. IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Investment Advisory Agreement to be executed as of the date first set forth herein. Barrow, Hanley, Vanguard Windsor Funds Mewhinney & Strauss, Inc. - -------------------------------------------------------------------------------- Signature Date Signature Date - ------------------------ ------------------------- Print Name Print Name EX-99.G 4 citibankrevised042005.txt CITIBANK, N.A. CUSTODIAN AGREEMENT GLOBAL CUSTODIAL SERVICES AGREEMENT TABLE OF CONTENTS 1. DEFINITIONS...............................................................1 2. APPOINTMENT OF CUSTODIAN..................................................3 3. PROPERTY ACCEPTED.........................................................3 4. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS..............................3 5. INSTRUCTIONS..............................................................5 6. PERFORMANCE BY THE CUSTODIAN..............................................6 7. POOLING, REGISTRATION AND OTHER ACTION....................................7 8. CUSTODY CASH ACCOUNT PAYMENTS.............................................8 9. ASSURED INCOME PAYMENT SERVICE............................................8 10. WITHDRAWAL AND DELIVERY...................................................9 11. ACCESS AND RECORDS........................................................9 12. USE OF AGENTS.............................................................9 13. CITIGROUP ORGANIZATION INVOLVEMENT.......................................10 14. SCOPE OF RESPONSIBILITY..................................................10 15. LITIGATION; INDEMNITY....................................................12 16. LIEN.....................................................................13 17. FEES AND EXPENSES........................................................13 18. TAX STATUS/WITHHOLDING TAXES.............................................13 19. TERMINATION..............................................................14 20. ASSIGNMENT...............................................................14 21. JOINT AND SEVERAL LIABILITY..............................................15 22. DISCLOSURE...............................................................15 23. NOTICES..................................................................15 24. GOVERNING LAW AND JURISDICTION...........................................16 25. MISCELLANEOUS............................................................16 THIS GLOBAL CUSTODIAL SERVICES AGREEMENT is made on the 1st day of June, 2000, by and between each open end management investment company listed on Schedule A hereto as amended from time to time (each such investment company, a "Fund") organized and existing under the laws of the State of Delaware and registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, on behalf of certain of their series, and CITIBANK, N.A., acting as a custodian hereunder through its office located at 111 Wall Street, New York, New York 10005 (the "Custodian"). The Funds' principal place of business is P.O. Box 2600, Valley Forge, Pennsylvania, 19482. 1. DEFINITIONS ----------- "AGREEMENT" means this Global Custodial Services Agreement, as amended from time to time, and any other terms and conditions agreed upon by the Client and the Custodian in writing from time to time in connection with this Agreement. "ASSURED INCOME PAYMENT SERVICE" means the Custodian's services in which interest, dividends or other such periodic income, to which the Client is entitled, on Securities specified by the Custodian from time to time at its absolute discretion, are credited to the Custody Cash Account in respect of such Securities. "ASSURED INCOME PAYMENT STANDARDS" means the terms and conditions governing the Assured Income Payment Service, as such terms and conditions are amended and/or supplemented from time to time by, and at the absolute discretion of, the Custodian. "ASSURED PAYMENT" means, in relation to those Securities specified by the Custodian under the Assured Income Payment Service, an amount equal to the interest, dividends or periodic income that is due to the Client in respect of such Securities less any taxes, duties, levies, charges or any other withholding payments payable in respect of such interest, dividends or periodic income. "ASSURED PAYMENT DATE" means, in relation to the payment of any interest, dividend or periodic income of any particular Securities specified by the Custodian under the Assured Income Payment Service, the date on which such interest, dividend or periodic income is normally payable in respect of such Securities or such other date as may be notified by the Custodian to the Client from time to time. "AUTHORIZED PERSON" means any person who has been authorized by the Client, by notice in writing to the Custodian, to act on its behalf in the performance of any act, discretion or duty under this Agreement. The Custodian may treat any Authorized Person as having full authority of the Client to issue any Instructions hereunder unless the notice of authorization contains explicit limitations as to said authority. "BRANCH" means any branch or office of Citibank, N.A. "CITIGROUP ORGANIZATION" means Citigroup and any company of which Citigroup is, now or hereafter, directly or indirectly a shareholder or owner. For the purposes of this Agreement, each Branch shall be deemed to be a separate member of the Citigroup Organization. "CLEARANCE SYSTEM" means The Federal Reserve Bank of New York, The Depository Trust Company, Participants Trust Company, Cedel Bank, S.A., the Euroclear System operated by Morgan Guaranty Trust Company of New York, the CREST system operated by CREST CO. Limited, the Central Money Markets Office, the Central Gilts Office and such other clearing agency, settlement system or depository as may from time to time be used in connection with transactions relating to Securities, and any nominee, clearing agency, or depository for any of the foregoing, in each case authorized to act as a securities depository, book-entry system, or clearing agency pursuant to regulations, local market practices or exchange requirements. 1 "CUSTODY ACCOUNT" means the custody account or accounts in the name of the Client and/or such other name as the Client may reasonably designate, for the deposit of any Property (other than cash) from time to time received by the Custodian for the account of the Client. "CUSTODY CASH ACCOUNT" means the cash account or accounts, which, at the discretion of the Client, may be either a subaccount(s) of the Custody Account or a demand deposit account(s), in the name of the Client and/or such other name as the Client may reasonably designate, for the deposit of cash in any currency received by the Custodian from time to time for the account of the Client, whether by way of deposit or arising out of or in connection with any Property in the Custody Account. "FEE AGREEMENT" means the agreement between the Custodian and the Client setting forth the fees, costs and expenses to be paid by the Client to the Custodian in connection with the custodial services provided pursuant to this Agreement, as such fee agreement may be amended upon the mutual agreement of the Client and the Custodian from time to time. "INSTRUCTIONS" means any and all instructions received by the Custodian from, or reasonably believed by the Custodian in good faith to be from, any Authorized Person, including any instructions communicated through any manual or electronic medium or system agreed between the Client and the Custodian and on such operational terms and conditions as the Custodian may specify from time to time. "PERSON" means any person, firm, company, corporation, government, state or agency of a state, or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing. "PROPERTY" means, as the context requires, all or any part of any Securities, cash, or any other property from time to time held for the Client under the terms of this Agreement. "RULES" means any rules and regulations (whether of a local regulatory authority, stock exchange or other entity) in any jurisdiction with which the Custodian may from time to time be required to comply in the provision of its services hereunder. "SECURITIES" means bonds, debentures, notes, stocks, shares, securities or other financial assets acceptable to the Custodian and all moneys, rights or property which may at any time accrue or be offered (whether by way of bonus, redemption, preference, option or otherwise) in respect of any of the foregoing and any certificates, receipts, warrants or other instruments (whether in registered or unregistered form) representing rights to receive, purchase or subscribe for any of the foregoing or evidencing or representing any other rights or interests therein (including, without limitation, any of the foregoing not constituted, evidenced or represented by a certificate or other document but by an entry in the books or other permanent records of the issuer, a trustee or other fiduciary thereof, a Clearance System or other person). "SERVICE STANDARDS" means any written service standards governing the day to day operations of the custodial services which shall be provided to the Client or modified by the Custodian by notice to the Client from time to time. "SUBCUSTODIAN" means a "bank" as defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under Section 17(f) of the 1940 Act and the rules and regulations thereunder, appointed by the Custodian for the safe-keeping, administration, clearance and settlement of Securities. "TAXES" means all taxes, levies, imposts, charges, assessments, deductions, withholdings and related liabilities, including additions to tax, penalties and interest imposed on or in respect of the Property, the transactions effected under this Agreement or the Client; PROVIDED THAT Taxes does not include income or franchise taxes imposed on or measured by the net income of the Custodian or its agents. 2 "1940 ACT" means the Investment Company Act of 1940, as amended. 2. APPOINTMENT OF CUSTODIAN ------------------------ (A) The Client hereby appoints the Custodian to act as its custodian in accordance with the terms hereof and authorizes the Custodian to establish on its books, on the terms of this Agreement, the Custody Account, to be designated to show that the Securities belong to the Client and are segregated from the Custodian's assets and the Custody Cash Account and the Custodian hereby accepts such appointment. (B) Subject to the express terms of this Agreement, the Client understands and agrees that the obligations and duties hereunder of the Custodian shall be performed only by the Custodian or its agents, and shall not be deemed obligations or duties of any other member of the Citigroup Organization. The Client agrees that the Custodian may register or record legal title to any Securities in the name of a nominee company or a Subcustodian in the Citigroup Organization and may appoint a member of the Citigroup Organization to be a Subcustodian. (C) The Client agrees to take any such action which may be necessary and to execute further documents and provide such materials and information as may be reasonably requested by the Custodian to enable the Custodian to perform the duties and obligations under this Agreement, including participation in any relevant Clearance System, and will notify the Custodian as soon as it becomes aware of any inaccuracy in such materials or information. (D) All custody services by the Custodian hereunder shall be provided in accordance with the Service Standards, a copy of which the Custodian shall supply to the Client from time to time. In the event of any conflict between any term of this Global Custodial Services Agreement and any term of the Service Standards, the Global Custodial Services Agreement shall prevail with respect to such term. (E) The Client agrees to comply with any relevant security procedures relating to the provision of custody services under this Agreement which may be specified by the Custodian or imposed on the Client by any relevant Clearance System, provided the Client has written notice of any such procedures. 3. PROPERTY ACCEPTED ----------------- (A) Subject to Section 3(C) below, the Custodian agrees to accept for custody in the Custody Account any Securities which are capable of deposit under the terms of this Agreement. (B) Subject to Section 3(C) below, the Custodian agrees to accept for deposit in the Client Cash Account, cash in any currency (which shall, if necessary, be credited by the Custodian to different accounts in the currencies concerned), such cash to be owed to the Client by the Custodian as banker. (C) The Custodian may in its reasonable discretion refuse to accept (in whole or in part) any proposed deposit in either the Custody Account or the Custody Cash Account if the Custodian reasonably believes that the acceptance of such deposit would violate any law, rule, regulation, practice or policy to which the Custodian is subject. The Custodian shall promptly notify the Client of any such refusal. 4. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS -------------------------------------------- (A) The Client hereby represents, warrants and undertakes to the Custodian that: (i) it is duly organized and validly existing under the laws of the jurisdiction of its organization; (ii) during the term of this Agreement it (and any person on whose behalf it may act as agent or otherwise in a representative capacity) has and will continue to have, or will take all action 3 necessary to obtain, full capacity and authority to enter into this Agreement and to carry out the transactions contemplated herein, and has taken and will continue to take all action (including, without limitation, the obtaining of all necessary governmental consents in any applicable jurisdiction) to authorize the execution, delivery and performance of obligations of the Client, and the validity and enforceability of such obligations and the rights of the Custodian, under this Agreement; (iii)it has authority to deposit the Property received in the Custody Account and the Custody Cash Account and there is no claim or encumbrances that adversely effects any delivery or payment of Property made in accordance with this Agreement; and (iv) this Agreement is legal, valid and binding on the Client; (v) on or prior to the execution of this Agreement, the Client has provided to the Custodian certified true copies of evidence of the due authorization for the execution, delivery and performance of this Agreement; (vi) except as provided in Clause 16 of this Agreement, all Property deposited with the Custodian shall, at all times, be free from all charges, mortgages, pledges or other such encumbrances(except as otherwise provided by law); (vii)the Client shall, at all times, be entitled or otherwise duly authorized to deal with, and dispose of, all or any part of the Property, whether through a relevant Clearance System or otherwise; and (viii)the Client is conducting its business in substantial compliance with all applicable laws and requirements, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; there is no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property which would prohibit its execution or performance of this Agreement. The Client agrees to inform the Custodian promptly if any statement set forth in this Section 4(A) ceases to be true and correct as of any date after the date hereof. (B) The Custodian hereby represents, warrants and undertakes to the Client that: (i) it is duly organized and validly existing under the laws of the jurisdiction of its organization; (ii) during the term of this Agreement it has and will continue to have, or will take all action necessary to obtain, full capacity and authority to enter into this Agreement and to carry out the transactions contemplated herein, and has taken and will continue to take all action (including, without limitation, the obtaining of all necessary governmental consents in any applicable jurisdiction) to authorize the execution, delivery and performance of obligations of the Custodian and the validity and enforceability of such obligations and the rights of the Client, under this Agreement; (iii)this Agreement is legal, valid and binding on the Custodian; (iv) the Custodian is conducting its business in substantial compliance with all applicable laws and requirements, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; there is no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or 4 affecting its property which would prohibit its execution or performance of this Agreement; and (v) the Custodian will submit to the Client on an annual basis a copy of its Report on Policies and Procedures Placed in Operation and Tests of Operating Effectiveness" prepared in compliance with the requirements of Statement of Auditing Standards No. 70 issued by the American Institute of Certified Public Accountants, as it may be amended from time to time. The Custodian agrees to inform the Client promptly if any statement set forth in this Section 4(B) ceases to be true and correct as of any date after the date hereof. 5. INSTRUCTIONS ------------ (A) The Custodian may, in its reasonable discretion and without liability on its part, rely and act upon (and the Client shall be bound by) any Instructions received by the Custodian which conform to the security standards and the requirements of this Section 5. Instructions shall continue in full force and effect until canceled or superseded; PROVIDED THAT any Instruction canceling or superseding a prior Instruction must be received by the Custodian at a time and in a manner that accords the Custodian a reasonable opportunity to act upon such Instruction. The Custodian shall be entitled to rely upon the continued authority of any Authorized Person to give Instructions until the Custodian receives notice from the Client to the contrary. (B) Instructions shall be governed by and carried out subject to the prevailing laws, rules, operating procedures and market practice of any relevant stock exchange, Clearance System or market where or through which they are to be executed or carried out, and shall be acted upon only during banking hours (including applicable cut-off times) and on banking days when the applicable financial markets are open for business. (C) Instructions delivered to the Custodian by telephone or facsimile shall be promptly confirmed in writing, by tested telex, SWIFT, letter, the Custodian's proprietary electronic banking system or as provided in the Service Standards, such confirmation shall, where relevant, be made by an Authorized Person. However, the Custodian may, in its absolute discretion, rely and act upon telephone or facsimile Instructions before the written confirmation is received. (D) The Custodian has offered the Client security procedures for the transmission of Instructions to the Custodian (and the Client acknowledges that it has received the same and agrees that the security procedures mutually agreed to by the Client and the Custodian are commercially reasonable). As long as the Custodian acts in compliance with such security procedures and this Section 5, it shall have no further duty to verify the identity or authority of the person giving or confirming, or the genuineness or contents of, any Instruction. (E) The Custodian is authorized to rely upon any Instructions received by any means, provided that the Custodian and the Client have agreed upon the means of transmission and the method of identification for such Instructions. (F) Instructions are to be given in the English language. If the Custodian reasonably determines that an Instruction is either unclear or materially incomplete, the Custodian shall give prompt notice of such determination to the Client, and the Client shall amend or otherwise reform such Instruction. The Custodian may in its reasonable discretion and without any liability on its part, act upon what it reasonably believes in good faith such Instructions to be; notwithstanding any other provision hereof, the Custodian shall have the right, in its reasonable discretion to refuse to execute any such Instruction, in which event the Custodian shall notify the Client of such refusal without undue delay. (G) The Client agrees to be bound by any Instructions, whether or not authorized, given to the Custodian in the Client's name and accepted by the Custodian in accordance with the provisions of the security procedures and this 5 Section 5. 6. PERFORMANCE BY THE CUSTODIAN ---------------------------- (A) CUSTODIAL DUTIES NOT REQUIRING FURTHER INSTRUCTIONS. In the absence of contrary Instructions, the Custodian is authorized by the Client to, and where applicable, the Custodian shall, carry out the following actions in relation to the Property: (i) except as otherwise provided in this Agreement, separately identify the Property on its records as being held for the account of the Client and segregate all Property held on behalf of the Client by the Custodian from the assets of the Custodian; (ii) sign any affidavits, certificates of ownership or other certificates relating to the Property which may be required by any tax or regulatory authority or under the laws of any relevant jurisdiction, whether governmental or otherwise, and whether relating to ownership, or income, capital gains or other tax, duty or levy (and the Client further agrees to ratify and to confirm or to do, or to procure the doing of, such things as may be necessary or appropriate to complete or evidence the Custodian's actions under this Section 6(A)(ii) or otherwise under the terms of this Agreement); (iii) collect and receive, for the account of the Client, all income, payments and distributions in respect of the Property, and credit the same to the Custody Cash Account; (iv) take any action which is necessary and proper in connection with the receipt of income, payments and distributions as are referred to in Section 6(A)(iii) above, including, without limitation, the presentation of coupons and other interest items; (v) collect, receive and hold for the account of the Client any capital arising out of or in connection with the Property whether as a result of it being called or redeemed or otherwise becoming payable and credit the same to the Custody Cash Account; (vi) take any action which is necessary and proper in connection with the receipt of any capital as is referred to in Section 6(A)(v) above, including, without limitation, the presentation for payment of any Property which becomes payable as a result of its being called or redeemed or otherwise becoming payable and the endorsement for collection of checks, drafts and other negotiable instruments; (vii) take any action which is necessary and proper to enable the Custodian to provide services to the Client within, and to observe and perform its obligations in respect of, any relevant Clearance System; (viii) receive and hold for the account of the Client all Securities received by the Custodian as a result of a stock dividend, share sub-division or reorganization, capitalization of reserves or otherwise; (ix) exchange interim or temporary receipts for definitive certificates, and old or overstamped certificates for new certificates and hold such definitive and/or new certificates in the Custody Account; (x) invoice the Client for any expenses incurred in handling the Property and for similar items in connection with the Custodian's duties under this Agreement in accordance with the Fee Agreement; and 6 (xi) promptly after the close of business on each business day, furnish the Client with confirmations and a summary of all transfers to or from the Custody Account and the Custody Cash Account, either hereunder or with any Subcustodian appointed in accordance with this Agreement, during said day, and at least monthly and from time to time, furnish the Client with a detailed statement of the Securities and cash held by the Custodian for the Client. (B) CUSTODIAL DUTIES REQUIRING INSTRUCTIONS. The Custodian is authorized by the Client to, and where applicable, the Custodian shall, carry out the following actions in relation to the Property only upon receipt of and in accordance with specific Instructions: (i) make payment for and receive Property, or deliver or dispose of Property; (ii) (subject to Section 7(D)) deal with subscription, rights, bonus or scrip issues, conversions, options, warrants and other similar interests or any other discretionary right in connection with the Property; and (iii)subject to the agreement of the Custodian, to carry out any action other than those mentioned in Section 6(A) above. 7. POOLING, REGISTRATION AND OTHER ACTION -------------------------------------- (A) Subject to applicable laws, rules and regulations, any Property may be pooled with other property of the Custodian's customers, like with like, and the Client is beneficially entitled to such portion of the Property that has been pooled as shall correspond to the Property deposited with the Custodian by the Client (as increased or diminished by subsequent sales, purchases, income, payments or distributions from time to time PROVIDED THAT Custodian's records shall at all times clearly indicate that portion of such pooled property which constitutes Property of the Client. (B) The Client understands and agrees that, except as may be specified in the Service Standards, Property shall be registered as the Custodian may direct either in the name of the Custodian, Subcustodian or Clearance System, or nominee of any of them, in the jurisdiction where the Property is required to be registered or otherwise held. Where feasible, the Custodian will arrange on written request by the Client for the registration of Property with the issuer or its agent in the name of the Client or its nominee. The Client understands and agrees, however, that the Custodian shall have discretion to determine whether such direct registration is feasible. (C) The Custodian shall, to the extent reasonably possible, notify, make available or deliver to the Client, in a timely manner, all official notices, circulars, reports and announcements that are received by the Custodian in such capacity concerning the Securities held on the Client's behalf that require discretionary action. (D) The Custodian shall provide proxy services to the Client only where there is a separate agreement in relation to proxy services between the Custodian and the Client. (E) Upon receipt of each transaction advice and/or statement of account, the Client shall examine the same and notify the Custodian within thirty (30) days of the date of any such advice or statement of any discrepancy between Instructions given and the situation shown in the transaction advice and/or statement, and/or of any other errors therein. In the event that the Client does not inform the Custodian in writing of any exceptions or objections within thirty (30) days after the date of such transaction advice and/or statement, the Client shall be deemed to have approved such transaction advice and/or statement. 7 8. CUSTODY CASH ACCOUNT PAYMENTS ----------------------------- (A) Except as otherwise provided herein, the Custodian shall make, or cause its agents to make, payments of cash credited to the Custody Cash Account: (i) in connection with the purchase of Property (other than cash) for the account of the Client in accordance with Instructions; (ii) in payment for the account of the Client of all Taxes (iii)for payments to be made in connection with the conversion, exchange or surrender of Property held in the Custody Account; (iv) for other purposes as may be specified by the Client in its Instructions; or (v) upon the termination of this Agreement on the terms hereof; PROVIDED THAT, unless otherwise agreed, the payments referred to above shall not exceed the funds available in the Custody Cash Account at any time. The Client shall promptly reimburse the Custodian for any advance of cash or any such taxes, charges, expenses, assessments, claims or liabilities upon request for payment. Notwithstanding the foregoing, nothing in this Agreement shall obligate the Custodian to extend credit, grant financial accommodation or otherwise advance moneys to the Client or assume financial risk on behalf of the Client for the purpose of meeting any such payments or otherwise carrying out any Instructions. (B) Unless otherwise provided herein, the proceeds from the sale or exchange of Property will be credited to the Custody Cash Account on the date the proceeds are actually received by the Custodian. 9. ASSURED INCOME PAYMENT SERVICE ------------------------------ (A) The Custodian may, at its absolute discretion, offer the Client an Assured Income Payment Service in respect of specific Securities, as may be notified by the Custodian to the Client from time to time. In relation to any such Securities, the Custodian may, at its absolute discretion, cause the Custody Cash Account to be credited with an Assured Payment on the Assured Payment Date relevant thereto; PROVIDED THAT upon 48 hours prior notice to the Client, the Custodian shall be entitled to reverse any credit (in whole or in part) made in respect of that Assured Payment if the Custodian fails to receive the full amount corresponding to such Assured Payment within a reasonable time, as determined by the Custodian in its absolute discretion, after the relevant Assured Payment Date, for any reason whatsoever other than as a result of the negligence or willful default of the Custodian. The Assured Income Payment Service shall be provided by the Custodian in accordance with the Assured Income Payment Standards. (B) Where the Custodian acts as a settlement bank in any relevant Clearance System: (i) upon the Custodian incurring any assured payment obligation, the Client shall reimburse the Custodian for such amount. (ii) the Custodian may without notice set, revise or disable debit caps in respect of the maximum aggregate amount of assured payment obligations it will incur on behalf of the Client; and (iii)if another settlement bank in such Clearance System defaults on an assured payment obligation 8 owed to the Custodian wholly or partially, the Custodian has no liability to make good the loss and will, where appropriate, attribute the loss pro rata between all Clients on whose behalf such payment should have been received by the Custodian. 10. WITHDRAWAL AND DELIVERY ----------------------- Subject to the terms of this Agreement, the Client may at any time demand withdrawal of all or any part of the Property in the Custody Account and/or the Custody Cash Account. Delivery of any Property will be made without undue delay at the expense of the Client at such location as the parties hereto may agree; PROVIDED THAT if the Custodian has effected any transaction on behalf of the Client the settlement of which is likely to occur after a withdrawal pursuant to this Section 10, then the Custodian shall be entitled in its absolute discretion to close out or complete such transaction and to retain sufficient funds from the Property for that purpose. 11. ACCESS AND RECORDS ------------------ (A) ACCESS TO THE CUSTODIAN'S RECORDS. Except as otherwise provided in this Agreement, during the Custodian's regular business hours and upon receipt of reasonable notice from the Client, any officer or employee of the Client, any independent public accountant(s) selected by the Client and any person designated by any regulatory authority having jurisdiction over the Client shall be entitled to examine on the Custodian's premises Property held by the Custodian and the Custodian's records regarding Property deposited with the Custodian and with entities authorized to hold Property in accordance with Section 12 hereof, but only upon the Client's furnishing the Custodian with Instructions to that effect; PROVIDED THAT such examination shall be consistent with the Custodian's obligations of confidentiality to other parties. As such records of the Custodian shall, to the extent applicable, be maintained and preserved in conformity with Section 31 of the 1940 Act and the rules and Rule 31a-1 and 31a-2 thereunder. The Custodian's reasonable costs and expenses in facilitating such examinations, including but not limited to the cost to the Custodian of providing personnel in connection with examinations all as set forth in the Fee Agreement, shall be borne by the Client. (B) ACCESS TO THIRD PARTY RECORDS. The Custodian shall also, subject to restrictions under applicable laws and regulations, seek to obtain from any entity with which the Custodian maintains the physical possession or book-entry record of any of the Property in the Custody Account or the Custody Cash Account such records as may be required by the Client or its agents. 12. USE OF AGENTS (A) The Custodian is authorized subject to any relevant Rules, to appoint agents (each an "agent", which term includes, without limitation, service providers, but not Clearance Systems, and which agents may be a member or members of the Citigroup Organization) and to participate in Clearance Systems, whether in its own name or that of the Client, and whether by participation as a member, sponsor or settlement bank within the Clearance System, to perform any of the duties of the Custodian under this Agreement. The Custodian may delegate to any such agent or Clearance System any of its functions under this Agreement, including, without limitation, the collection of any payment or payments, whether of an income or a capital nature, due on the Property. The Custodian is authorized, subject to any relevant Rules, to appoint Subcustodians only if (i) the Custodian is required to use a Subcustodian to hold Property purchased by the Customer from time to time and (ii) the Custodian provides the Customer with prior written notice of the identity of the Subcustodian and the Property to be deposited therewith. (B) In the selection and use of such agents, the Custodian shall comply with any relevant Rules and shall be responsible for any loss, claim, damage or other liability arising from the failure of an agent to perform any of the duties delegated to it under this Agreement if (i) the Custodian was negligent in selecting such agent, (ii) the Custodian's negligence, fraud or willful default was the direct cause of the failure of the agent, (iii) a transaction or other matter between the Custodian and the agent unrelated to the Customer was the cause of the failure of the agent or 9 (iv) the agent is a member of the Citigroup Organization. In the selection and use of such subcustodians and participation in such Clearance Systems, the Custodian shall comply with any relevant Rules, and shall be responsible only for the negligence in the selection of such subcustodians and Clearance Systems but shall otherwise have no responsibility for the performance by such subcustodians or Clearance System of any of the duties delegated to them under this Agreement; notwithstanding the foregoing, the Custodian shall be responsible for the negligence, fraud or willful default of any Subcustodian that is a Branch or subsidiary of Citibank, N.A., and shall have the same level of responsibility to the Client for any nominee company controlled by the Custodian or by any of the Custodian's affiliated companies as the Custodian has for itself. (C) Subject to paragraph (A) above and any relevant Rules and regulations, the Property may be deposited with any Subcustodian deemed appropriate by the Custodian or in any Clearance System deemed appropriate by the Custodian or a Subcustodian, as the case may be. Property held in any Clearance System shall be subject to the rules or operating procedures of such Clearance System, including rules regarding supervision or termination of membership of such Clearance System, and such further information provided by the Custodian to the Client, or acknowledgments or agreements which may be required from the Client, for the purposes of this Section 12(C) in connection with use of a Clearance System from time to time. The Custodian will direct each Subcustodian and Clearance System to separately identify on its books Securities held by it pursuant to this Agreement as being held for the account of the Custodian's customers. The Custodian will direct each Subcustodian and Clearance System to segregate any such Securities held by such entity from the assets of the Custodian and such entity. The Client is hereby advised that, where the Custodian arranges for any Property to be held overseas, there may be different settlement, legal and regulatory requirements in overseas jurisdictions from those applying in the United States, together with different practices for the separate identification of the Client's Property. 13. CITIGROUP ORGANIZATION INVOLVEMENT ---------------------------------- (A) To the extent permitted by applicable law, the Client hereby authorizes the Custodian without the need for the Custodian to obtain the Client's prior consent: (i) when acting on Instructions, to purchase and/or sell Property (other than cash) from, to or through itself or any other member of the Citigroup Organization and from and/or to any other customer of the Custodian or any other member of the Citigroup Organization; and (ii) to obtain and keep, without being liable to account to the Client, any commission payable by any third party or any other members of the Citigroup Organization in connection with dealings arising out of or in connection with the Custody Account and/or the Custody Cash Account. (B) The Client agrees and understands that if in accordance with Instructions, an investment is made in any property, held, issued or managed by any member of the Citigroup Organization, then such member of the Citigroup Organization may retain a profit arising therefrom (in addition to the charges, commissions and fees payable by the Client under this Agreement) without being liable to account to the Client for such profit. (C) The Client agrees and understands that (i) the Custodian and other members of the Citigroup Organization may have banking or other business relationships with issuers of Securities held in the Custody Account or Securities purchased and sold for the Custody Account, and (ii) the Custodian shall not have any obligations to the Client as a result of such relationships. 10 14. SCOPE OF RESPONSIBILITY ----------------------- (A) Subject to the terms hereof, the Custodian shall use all reasonable care in the performance of its duties under this Agreement and will exercise the due care of a professional custodian for hire with respect to the Property in its possession or control. The Custodian shall not be responsible for any loss or damage suffered by the Client as a result of the Custodian performing such duties unless the same results from an act of fraud, negligence or willful default on the part of the Custodian and as provided in Section 12(B) hereof; in which event the liability of the Custodian in connection with any Property shall not exceed the market value of the Property, to which such loss or damage relates, at the time of such fraud, negligence or willful default plus interest at the rate applicable to the base currency of the Custody Cash Account (as specified on the fee schedule) accruing from the date of such fraud, negligence or willful default until the date of discharge. Notwithstanding the foregoing, in no event shall the Custodian be liable to the Client for indirect, special or consequential damages, even if advised of the possibility of such damages. (B) The Custodian is not obliged to maintain any insurance on the Property held under the terms of this Agreement. (C) The Custodian's performance of this Agreement is subject to the relevant local laws, regulations, decrees, orders and government acts, and the rules, operating procedures and practices of any relevant stock exchange, Clearance System or market where or through which Instructions are to be carried out and to which the Custodian is subject and as exist in the country in which any Securities or cash are held. (D) Neither the Custodian nor any member of the Citigroup Organization shall be responsible for any loss or damage, or failure to comply or delay in complying with any duty or obligation, under or pursuant to this Agreement arising as a direct or indirect result of any reason, cause or contingency beyond its reasonable control, including (without limitation) natural disasters, nationalization, currency restrictions, act of war, act of terrorism, act of God, postal or other strikes or industrial actions, or the failure, suspension or disruption of any relevant stock exchange, Clearance System or market. The Custodian shall notify the Client promptly when it becomes aware of any event described above. The Client shall not be responsible for temporary delays in the performance of its duties and obligations hereunder and correspondingly shall not be liable for any loss or damage attributable to such delay in consequence of any event described above affecting the Client's principal place of business operations or administration. (E) Subject to Section 14(A) above, the Custodian shall not be liable for any loss resulting from, or caused by, the collection of any Property and/or any funds or other property paid or distributed in respect of the Property. (F) The Custodian does not warrant or guarantee the authenticity or validity of any Security or other Property received by the Custodian, or any other entity authorized to hold Property under this Agreement. If the Custodian becomes aware of any defect in title or forgery of any Property, the Custodian shall promptly notify the Client. (G) The Client shall be responsible for all filings, tax returns and reports on any transactions undertaken pursuant to this Agreement, or in respect of the Property or collections relating to the Property as may be requested by any relevant authority, whether governmental or otherwise, and for the payment of all unpaid calls, Taxes (including without limitation any value added tax), imposts, levies or duties due on or with respect to any principal, interest or other collections, or any other liability or payment arising out of or in connection with the Property, and in so far as the Custodian is under any obligation (whether of a governmental nature or otherwise) to pay the same on behalf of the Client it may do so, in which event the Client will reimburse the Custodian for all amounts so paid. (H) The Custodian is not acting under this Agreement as an investment manager, nor as an investment, legal or tax adviser to the Client and the Custodian's duty is solely to act as a custodian in accordance with the terms of this Agreement. 11 (I) The Custodian may at any time suspend or terminate its participation and holding of assets in a Clearance System, and will give reasonable notice to the Client of any such action. In such case, or in the event of suspension as contemplated in Section 14(C) above, the Custodian may arrange for the relevant Securities to be held in certificated form. (J) The Custodian shall not be responsible for the acts or omissions, default or insolvency of any broker, counterparty, issuer of Securities or, except as provided in Section 12(B), Subcustodian, agent or Clearance System. (K) The Custodian will not be liable for any information not prepared by the Custodian or any translation of information provided to the Client. (L) The Custodian shall only have such duties and responsibilities as are specifically set forth or referred to in this Agreement, and no covenant or obligation shall be implied in this Agreement against the Custodian. 15. LITIGATION; INDEMNITY --------------------- (A) The Custodian or any of its agents, as the case may be, may (but without being under any duty or obligation to) institute or defend legal proceedings, or take any other action arising out of or in connection with the Property and the Client shall indemnify the Custodian or agent against any costs and expenses, including without limitation any reasonable attorneys' fees and disbursements, arising from such proceedings or other action. (B) In the event the Custodian does not institute or defend legal proceedings, or take any other action arising out of or in connection with the Property, the Custodian hereby agrees that the Client shall, to the extent of any loss of the Client's interest in the Property and to the extent permitted by applicable law and not prohibited by contract, be subrogated to all of the rights of recovery of the Custodian therefor against any third party person or entity; PROVIDED THAT nothing herein shall be interpreted as granting the Client any rights to bring any direct action under any insurance policy issued in favor of the Custodian or as limiting the Custodian's right to bring any action against any such third party for any damages suffered by the Custodian. Notwithstanding any other provision hereof, in no event shall the Custodian be obliged to bring suit in its own name or be obliged to allow suit to be brought in its name. Subject to the terms of this Section 15(B) and to the extent permitted by law, the Custodian shall execute and deliver any and all such instruments and documents which the Client may reasonably request and take such other actions as reasonably necessary or appropriate to assist the Client in the exercise of such rights of recovery and to enable the Client to recover against any and all such third party persons or entities. The Client shall reimburse the Custodian for any reasonable out-of-pocket costs incurred in connection with the actions contemplated by this Section 15(B). (C) The Client agrees to indemnify the Custodian and to defend and hold the Custodian harmless against all losses, liabilities, claims, expenses and Taxes, including any reasonable legal fees and disbursements, (each referred to as a "LOSS") arising directly or indirectly: (i) from the fact that the Property is registered in the name of or held by the Custodian or any nominee or agent of the Custodian or any Clearance System; (ii) without limiting the generality of Section 15(C)(i), from any act which the Custodian or any nominee or agent performs or permits (including the provision of any overdraft or other financial accommodation which arises on the books of the Custodian, whether on an advised or unadvised basis) in relation to the Property pursuant to this Agreement or any Instructions; (iii)from the Custodian or any such nominee, agent or Clearance System carrying out any Instructions pursuant to the terms of this Agreement, including, without limitation, Instructions transmitted orally, by telephone, telex, facsimile transmission or any other means agreed by the Client and the Custodian from time to time; (iv) from any reclaim or refund of Taxes effected by the Custodian or any agent for the Client; and 12 (v) from the Custodian's reliance or action on any information provided by the Client in connection with this Agreement; PROVIDED THAT the Custodian shall not be indemnified against or held harmless from any liability arising out of the Custodian's negligence, fraud or willful default. (D) The Custodian agrees to indemnify the Client and defend and hold the Client harmless against all Loses arising out of the Custodian's negligence, fraud or willful default; provided however, the Custodian will only be liable for Losses to the extent it is liable for negligence, fraud or willful misconduct under Section 14 of this Agreement. (E) The disclosure by the Client to the Custodian that the Client has entered into this Agreement as the agent or representative of another person shall not prevent the Custodian from being entitled to treat the Client as incurring all obligations as principal under this Agreement. (F) The Custodian or the Client, as the case may be, shall give notice of any Loss in respect of which the Client or the Custodian, respectively, is obliged to provide indemnification pursuant to this Agreement. Such notice shall describe the Loss in reasonable detail, and shall indicate the amount (estimated, if necessary, and to the extent feasible) of the Loss that has been or may be suffered by the Custodian or by the Client, as the case may be. 16. LIEN ---- In addition to any remedies available to the Custodian under applicable law, the Custodian shall have, and the Client hereby grants, a continuing lien, security interest and security entitlement in and to such Securities as shall from time to time have a fair market value equal to the aggregate amount of liabilities (whether actual or contingent) of the Client to the Custodian, including any fees and expenses or credit exposures incurred in the performance of services under this Agreement, such lien, security interest and security entitlement to be effective only as long as such liability remains outstanding. Notwithstanding anything to the contrary in this Agreement and to the extent applicable, no liabilities or obligations the Client has arising out of or constituting Purpose Credit shall be secured by, and the Custodian shall have no lien upon, any Margin Stock, and any such lien or security interest being hereby expressly disclaimed by the Custodian. "Purpose Credit" and "Margin Stock", shall have the same meaning set forth in Regulation U and X of the Board of Governors of the Federal Reserve System of the United States of America. 17. FEES AND EXPENSES ----------------- Without prejudice to any of its liabilities and obligations under this Agreement, the Client agrees to pay to the Custodian from time to time such fees and commissions for its services pursuant to this Agreement as determined in accordance with the terms of the Fee Agreement, together with any applicable taxes or levies, including, without limitation, all those items referred to in Section 8(A)(ii) hereof. The Custodian shall not be authorized to debit (after or before the date of any termination pursuant to Section 19 hereof) any account of the Client with the Custodian, including, without limitation, the Custody Cash Account, for any amount owing to the Custodian from time to time under this Agreement, without the express prior written consent of the Client. 18. TAX STATUS/WITHHOLDING TAXES ---------------------------- (A) The Client will provide the Custodian with information as to its tax status as reasonably requested by the Custodian from time to time. 13 (B) The Client may be required from time to time to file such proof of taxpayer status or residence, to execute such certificates and to make such representations and warranties, or to provide any other information or documents in respect of the Property, as the Custodian or any of its agents may deem necessary or proper to fulfill the obligations of the Custodian or its agents under applicable law. The Client shall provide the Custodian or its agents, as appropriate, in a timely manner, with copies, or originals if necessary and appropriate, of any such proofs of residence, taxpayer status or identity, beneficial ownership of Property and any other information or documents which the Custodian or its agents may reasonably request. (C) If any Taxes shall become payable with respect to any payment due to the Client, such Taxes may be withheld from such payment in accordance with applicable law. The Custodian and any agents may withhold any interest, any dividends or other distributions or securities receivable in respect of Securities, proceeds from the sale or distribution of Securities ("Payments"), or may sell for the account of the Client any part thereof or all of the Securities, and may apply such Payment in satisfaction of such Taxes, the Client remaining liable for any deficiency. If any Taxes shall become payable with respect to any payment made to the Client by the Custodian or its agents in a prior year, the Custodian or its agents may withhold Payments in satisfaction of such prior year's Taxes. (D) In the event the Client requests that the Custodian provide tax relief services and the Custodian agrees to provide such services, the Custodian or any of its agents, shall apply for appropriate tax relief (either by way of reduced tax rates at the time of an income payment or retrospective tax reclaims in certain markets as agreed from time to time); PROVIDED THAT the Client provides to the Custodian such documentation and information as is necessary to secure such tax relief. In no event shall the Custodian or any of its agents be responsible for the difference between the statutory rate of withholding and the treaty rate of withholding if the Custodian or any of its agents are unable to secure tax relief. 19. TERMINATION ----------- (A) Either of the parties hereto may terminate this Agreement by giving not less than 60 days' prior written notice to the other party; PROVIDED THAT within 60 days of such notice, the Client shall provide the Custodian with Instructions specifying the person to whom the Custodian shall deliver the Property in the Custody Account and Custody Cash Accounts; PROVIDED FURTHER THAT if the Custodian has effected any transaction on behalf of the Client the settlement of which is likely to extend beyond the expiration of such notice, then the Custodian shall be entitled in its reasonable discretion to close out or complete such transaction and to retain sufficient funds from the Property for that purpose. If within 60 days following termination, the Client fails to give the Custodian Instructions specifying the person to whom the Custodian shall deliver the Property in the Custody Account and Custody Cash Account, the Custodian shall deliver the Property to the Client at its address set out above. (B) The rights and obligations contained in Sections 15, 16, 17 and 18 of this Agreement shall survive the termination of this Agreement. 20. ASSIGNMENT ---------- This Agreement shall bind and enure for the benefit of the parties hereto and their respective successors and permitted assigns, and the Client shall not assign, transfer or charge all or any rights or benefits hereunder without the written consent of the Custodian. The Custodian may not assign, transfer or charge all or any of its rights or benefits hereunder without the written consent of the Client; PROVIDED HOWEVER that this Agreement may be assigned by the Custodian to another member of the Citigroup Organization with prior written notice to the Client, and such assignee shall, without the execution or filing of any consents or other documents, succeed to and be substituted for the Custodian with like effect as though such assignee had been originally named as the Custodian hereunder. Any purported assignment, transfer or charge made in contravention of this Section shall be null and void and of no effect whatsoever. 14 21. JOINT AND SEVERAL LIABILITY --------------------------- Where the Client comprises two or more persons, all obligations and liabilities under this Agreement shall be deemed to be joint and several, and any notice served on any one of such persons shall be deemed to have been served on such other person or persons, as the case may be. 22. DISCLOSURE ---------- (A) The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party hereto shall be used by the other party solely for the purpose of rendering or obtaining services pursuant to this Agreement and, except as specifically provided below or as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. Not withstanding the foregoing, the Client agrees and understands that the Custodian or its agents may disclose information regarding the Custody Account and/or the Custody Cash Account if required to do so (i) to establish under the laws of any relevant jurisdiction the nominee (or similar) status of the Custodian or its agents with respect to Property in the Custody Account and/or Custody Cash Account for the purpose of performing or discharging its duties and obligations under this Agreement, (ii) to enable auditors to perform auditing services, (iii) to make the required tax certifications in the relevant jurisdictions, (iv) by any applicable law, statute or regulation or court order or similar process in any relevant jurisdiction, (v) by order of an authority having power over the Custodian or its agents within the jurisdiction of such authority, whether of a governmental nature or otherwise, or (vi) where required by the operating rules of any relevant Clearance System. (B) Subject to the confidentiality requirements provided in (A) above, the Client hereby authorizes (i) the collection, storage and processing of any information relating to the Client by the Custodian and the Branches, subsidiaries, affiliates and agents of, or Clearance Systems used by, Citibank, N.A.; and (ii) the transfer of any information relating to the Client to and between the Branches, subsidiaries, affiliates and agents of, or Clearance Systems used by, Citibank, N.A. and third parties selected by any of them, wherever situated, for confidential use in connection with the provision of services to the Client hereunder, and further acknowledges that any such Branch, subsidiary, affiliate, agent, third party or Clearance System shall be entitled to transfer any such information as required by any law, court, legal process or as requested by any authority in accordance with which it is required to act, as it shall reasonably determine. (C) The Client agrees that the terms of this Agreement shall be kept strictly confidential and no printed materials or other matter in any language (including without limitation, prospectuses, statements of additional information, notices to shareholders, annual reports and promotional materials) which mention Citigroup, Citibank, N.A. or the Custodian's name, or the rights, powers or duties of the Custodian, shall be issued by the Client or on the Client's behalf unless Citibank, N.A. and/or the Custodian (as applicable) shall first have given its specific written consent thereto; PROVIDED THAT no prior consent shall be required if the only reference to the Custodian's name is in identifying the Custodian as one of the Client's custodians. (D) The Client agrees that the Custodian or its agents may, upon reasonable request and during regular business hours, review the Client's premises, and security controls and procedures, where necessary for the performance of the Custodian's obligations regarding any relevant Clearance System. 15 23. NOTICES ------- All notices and communications to be given by one party to the other under this Agreement shall be in writing in the English language and (except for notices, reports and information from the Custodian, and Instructions given by electronic means) shall be made either by telex or facsimile, other electronic means agreed to by the parties or by letter addressed to the party concerned at the addresses set out above (or at such other addresses as may be notified in writing by either party to the other from time to time). Any such notice or communication hereunder shall be effective upon actual receipt. 24. GOVERNING LAW AND JURISDICTION ------------------------------ (A) This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws of conflict) of the State of New York. The Client agrees for the benefit of the Custodian and, without prejudice to the right of the Custodian to take any proceedings in relation hereto before any other court of competent jurisdiction, that a federal court situated in New York City, shall have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and, for such purposes, irrevocably submits to the non-exclusive jurisdiction of such court. (B) Each party hereto waives any objection it may have at any time to the laying of venue of any proceedings brought in a federal court situated in New York City, waives any claim that such actions or proceedings have been brought in an inconvenient forum and further waives the right to object that such court does not have jurisdiction over such party. (C) The Client hereby understands and agrees that the opening of, the holding of all or any part of the Property in, and the delivery of any Securities and other Property to or from, the Custody Account and Custody Cash Account and the performance of any activities contemplated in this Agreement by the Custodian, including acting on any Instructions, are subject to the relevant local laws, regulations, decrees, orders, government acts, customs, procedures and practices (i) to which the Custodian, or any Subcustodian or Clearance System, is subject and (ii) as exist in the country in which the Property is held. 25. MISCELLANEOUS ------------- (A) This Agreement shall not be amended except by a written agreement signed by both parties and any purported amendment made in contravention of this Section shall be null and void and of no effect whatsoever. (B) This Agreement shall constitute the entire agreement between the Client and the Custodian and, unless otherwise expressly agreed in writing, shall supersede all prior agreements relating to global custodial services, written or oral, between the parties hereto. (C) The parties hereto agree that (i) the rights, powers, privileges and remedies stated in this Agreement are cumulative and not exclusive of any rights, powers, privileges and remedies provided by law, unless specifically waived, and (ii) any failure or delay in exercising any right power, privilege or remedy will not be deemed to constitute a waiver thereof and a single or partial exercise of any right, power, privilege or remedy will not preclude any subsequent or further exercise of that or any other right, power, privilege or remedy. (D) In the event that any provision of this Agreement, or the application thereof to any person or circumstances, shall be determined by a court of proper jurisdiction to be invalid or unenforceable to any extent, the remaining provisions of this Agreement, and the application of such provisions to persons or circumstances other than those as to which it is held invalid or unenforceable, shall be unaffected thereby and such provisions shall be valid and enforced to the fullest extent permitted by law in such jurisdiction. 16 (E) Titles to Sections of this Agreement are included for convenience of reference only and shall be disregarded in construing the language contained in this Agreement. (F) This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized. CITIBANK, N.A., New York Office EACH FUND LISTED ON SCHEDULE A By: /S/ MICHAEL F. HAYES By: /S/ ROBERT D. SNOWDEN Name: Michael F. Hayes Name: Robert D. Snowden Title: Vice President Title: Principal, Asst. Treasurer SCHEDULE A ---------- FUND(S) OTHER ACCOUNTS - -------------------------------------------------------------------------------- - - VANGUARD U.S. VALUE FUND, A SERIES - VANGUARD CAPITAL STOCK OF VANGUARD MALVERN FUNDS CONCENTRATION ACCOUNT (849355) - VANGUARD SECURITIES LENDING CONCENTRATION ACCOUNT (849356) - VANGUARD POOLED CASH CONCENTRATION ACCOUNT (849357) - VANGUARD GENERAL PURPOSE CONCENTRATION ACCOUNT (849358) SCHEDULE A - AMENDMENT #1 ------------------------- The following is an amendment ("Amendment") to the Global Custodial Services Agreement dated June 1, 2000 (the "Agreement") by and between Citibank, N.A. ("Custodian") and each open-end management investment company listed on Schedule A thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule A. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule A is hereby amended as follows: Funds (and the relevant series) - ------------------------------- Vanguard Explorer Fund (51-0106626) Vanguard Fenway Funds Vanguard Equity Income Fund (23-2491240) Vanguard Index Funds Vanguard Extended Market Index Fund (23-2482430) Vanguard Institutional Index Funds Vanguard Institutional Total Stock Market Index Fund (23-3075564) Vanguard Malvern Funds Vanguard Asset Allocation Fund (23-2520805) Vanguard U.S. Value Fund (23-3035290) Vanguard Morgan Growth Fund (51-0108190) Vanguard Preferred Stock Fund (23-1976122) Vanguard Specialized Funds Vanguard Energy Fund (23-2284351) Vanguard Utilities Income Fund (23-2677693) Vanguard Variable Insurance Funds Equity Income Portfolio (23-2719786) Vanguard Windsor Funds Vanguard Windsor Fund (51-0082711) Vanguard Windsor II Fund (23-2439132) Vanguard World Fund Vanguard U.S. Growth Fund (04-6035483) Other Accounts - -------------- Vanguard Capital Stock Concentration Account (849355) Vanguard Securities Lending Concentration Account (849356) Vanguard Pooled Cash Concentration Account (849357) Vanguard General Purpose Concentration Account (849358) AGREED TO as of May 18, 2001 BY: Citibank, N.A. Each Fund Listed on Schedule A By: /S/ KEVIN J. CONLON By: /S/ ROBERT D. SNOWDEN Name: Kevin J. Conlon Name: Robert D. Snowden Title: Vice President Title: Assistant Treasurer AMENDMENT Reference is made to the Global Custodial Services Agreement dated as of June 1, 2000 (the "Agreement") by and between Citibank, N.A. (the "Custodian") and each open-end management investment company listed on Schedule A to the Agreement as amended from time to time (each such investment company, a "Fund" and all such investment companies collectively, the "Client"). References in this Amendment to Rule 17f-7 or to specific provisions of Rule 17f-7 refer to Rule 17f-7 under the Investment Company Act of 1940, as adopted on or before the date hereof. Any capitalized term used in but not defined in this Amendment shall have the meaning defined in the Agreement. In addition to the duties and obligations of the Custodian under the Agreement, with respect to securities and cash in such jurisdictions as the Custodian provides custody services under the Agreement for the Client, the Client and the Custodian agree as follows: 1. The Custodian may deposit and/or maintain assets of the Client that consist of Foreign Assets (as defined in Rule 17f-5 under the Investment Company Act of 1940) only in a Clearance System located outside of the United States of America that the Custodian has determined satisfies the requirements of Rule 17f-7(b)(1) as an Eligible Securities Depository, as defined therein. In such manner as the Custodian deems reasonable, the Custodian shall give the Client prompt notice of any material change known to the Custodian that would adversely effect the Custodian's determination that a Clearance System is an Eligible Securities Depository. 2. The Custodian shall provide the Client (or its duly-authorized investment manager or investment adviser) with an analysis (in form and substance as reasonably determined by the Custodian) of the custody risks associated with maintaining securities with each Eligible Securities Depository in accordance with Rule 17f-7(a)(1)(i)(A). The Custodian shall monitor such custody risks on a continuing basis and in such manner as the Custodian deems reasonable, shall promptly notify the Client (or is duly-authorized investment manager or investment adviser) of any adverse material changes in such risks in accordance with Rule 17f-7(a)(1)(i)(B). 3. The Custodian agrees to exercise reasonable care, prudence and diligence in performing the duties set forth in this Amendment as the Custodian exercises in performing its other responsibilities under the Agreement. 4. In performing its obligations under this Amendment, the Custodian may obtain information from sources the Custodian believes to be reliable, but the Custodian does not warrant its completeness or accuracy and has no duty to verify or confirm any such information. The Custodian is not obligated to make any determination regarding whether any Eligible Securities Depository provides reasonable care for Foreign Assets or to provide any information or evaluation comparing any Eligible Securities Depository to any other Clearance System or any existing or proposed standards for securities depositories, except to the extent that such investment or evaluation is included in the analysis provided by Custodian under paragraph 2. of this Amendment. 5. Upon the receipt of Instructions, as specified in the Agreement, the Custodian shall withdraw securities from any Clearance System to the extent and as soon as reasonably practicable; provided, however, the Custodian shall have no obligation to obtain, safekeep or provide any services in respect of any certificated or physical security in any jurisdiction where the Custodian does not offer or provide such services generally to customers within that jurisdiction. 6. In the event the Custodian breaches any provision of this Amendment, the Custodian will be responsible for any loss or damage suffered by the Client only to the same extent the Custodian is liable for losses resulting from any breach of the standard of care specified in the Agreement. The parties to the Agreement here by agree to this Amendment as of the 25th day of June, 2001. Citibank, N.A. Client By: /s/ Kevin J. Conlon By: /s/ Robert D. Snowden Name: Kevin J. Conlon Name: Robert D. Snowden Title: Vice President Title: Assistant Treasurer SCHEDULE A - AMENDMENT #2 The following is an amendment ("Amendment") to the Global Custodial Services Agreement dated June 1, 2000 and amended May 18, 2001 (the "Agreement") by and between Citibank, N.A. ("Custodian") and each open-end management investment company listed on Schedule A thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule A. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule A is hereby amended as follows: Funds (and the relevant series) Vanguard Explorer Fund (51-0106626) Vanguard Fenway Funds Vanguard Equity Income Fund (23-2491240) Vanguard Institutional Index Funds Vanguard Institutional Total Stock Market Index Fund (23-3075564) Vanguard Malvern Funds Vanguard Asset Allocation Fund (23-2520805) Vanguard U.S. Value Fund (23-3035290) Vanguard Morgan Growth Fund (51-0108190) Vanguard Preferred Stock Fund (23-1976122) Vanguard Specialized Funds Vanguard Energy Fund (23-2284351) Vanguard Utilities Income Fund (23-2677693) Vanguard Variable Insurance Funds Equity Income Portfolio (23-2719786) Vanguard Windsor Funds Vanguard Windsor Fund (51-0082711) Vanguard Windsor II Fund (23-2439132) Vanguard World Fund Vanguard U.S. Growth Fund (04-6035483) Other Accounts Vanguard Capital Stock Concentration Account -(849355) Vanguard Securities Lending Concentration Account (849356) Vanguard Pooled Cash Concentration Account (849357) Vanguard General Purpose Concentration Account (849358) AGREED TO as of July 23, 2001 BY: Citibank, N.A. Each Fund Listed on Schedule A By: /s/ Kevin J. Conlon By: /s/ Robert D. Snowden Name: Kevin J. Conlon Name: Robert D. Snowden Title: Vice President Title: Assistant Treasurer SCHEDULE A - AMENDMENT #3 The following is an amendment ("Amendment") to the Global Custodial Services Agreement dated June 1, 2000 and amended May 18, 2001 and July 23, 2001 (the "Agreement") by and between Citibank, N.A. ("Custodian") and each open-end management investment company listed on Schedule A thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule A. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule A is hereby amended as follows: Funds (and the relevant series) - ------------------------------- Vanguard Explorer Fund (51-0106626) Vanguard Fenway Funds Vanguard Equity Income Fund (23-2491240) Vanguard Institutional Index Funds Vanguard Institutional Total Stock Market Index Fund (23-3075564) Vanguard Malvern Funds Vanguard Asset Allocation Fund (23-2520805) Vanguard Capital Value Fund (23-3095856) Vanguard U.S. Value Fund (23-3035290) Vanguard Morgan Growth Fund (51-0108190) Vanguard Specialized Funds Vanguard Energy Fund (23-2284351) Vanguard Utilities Income Fund (23-2677693) Vanguard Variable Insurance Funds Equity Income Portfolio (23-2719786) Vanguard Whitehall Funds Vanguard Mid-Cap Growth Fund (95-4573506) Vanguard Windsor Funds Vanguard Windsor Fund (51-0082711) Vanguard Windsor II Fund (23-2439132) Vanguard World Fund Vanguard U.S. Growth Fund (04-6035483) Page 1 of 2 Other Accounts Vanguard Capital Stock Concentration Account -(849355) Vanguard Securities Lending Concentration Account (849356) Vanguard Pooled Cash Concentration Account (849357) Vanguard General Purpose Concentration Account (849358) AGREED TO as of May 20, 2002 BY: Citibank, N.A. Each Fund Listed on Schedule A By: /s Kevin J. Conlon By: /s Thomas J. Higgins Name: Kevin J. Conlon Name: Thomas J. Higgins Title: Vice President Title: Treasurer FOREIGN CUSTODY MANAGER ADDENDUM TO GLOBAL CUSTODIAL SERVICES AGREEMENT, dated as of June 25, 2001, by and between each open-end management investment company listed on Schedule A of the Agreement as amended from time to time (each such investment company, a "Fund" and all such investment companies collectively, the "Client")) and Citibank, N.A. (the "Custodian"). The Client desires to have the Custodian assume and discharge the responsibility of the Client's board of directors (hereinafter the "Board") to select, contract with and monitor certain custodians of non-U.S. assets of the Client held by the Custodian pursuant to the Global Custodial Services Agreement (the "Agreement"). The Custodian agrees to accept the delegation and to perform the responsibility as provided in this Addendum. (A) Foreign Custody Manager: (i) The Board hereby delegates to the Custodian, and the Custodian hereby accepts the delegation to it, of the obligation to serve as the Client's "Foreign Custody Manager" (as defined in Rule 17f-5(a)(3) under the Investment Company Act of 1940, as amended from time to time), in respect to the Client's foreign investments held from time to time by the Custodian with any Subcustodian (as defined in the Agreement) that is an Eligible Foreign Custodian (as defined in Rule 17f-5(a)(1)). Foreign investments are any Property (as defined in the Agreement) for which the primary market is outside the U.S.A. (ii) As Foreign Custody Manager, the Custodian shall: (1) select Eligible Foreign Custodians to serve as foreign custodians and place and maintain the Client's foreign investments with such foreign custodians; (2) in selecting an Eligible Foreign Custodian, first determine that foreign investments placed and maintained in the safekeeping of each Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such investments including, without limitation, those factors set forth in Rule 17f-5(c)(1)(i)- (iv); (3) enter into written agreements with each Eligible Foreign Custodian selected by the Custodian hereunder; (4) determine that the written contract with each Eligible Foreign Custodian (or, in the case of an Eligible Foreign Custodian that is a Clearance System such contract (which may be between the Custodian and the Clearance System or between an Eligible Foreign Custodian selected by the Custodian and the Clearance System), the rules or established practices or procedures of the Clearance System, or any combination of the foregoing) requires that the Eligible Foreign Custodian will provide reasonable care for the foreign investments, based on the standards applicable to custodians in the relevant market, and that all such contracts, rules, practices and procedures satisfy the requirements of Rule 17f-5(c)(2); (5) provide written reports (x) notifying the Board of the placement of foreign investments with each Eligible Foreign Custodian, such reports to be provided at such time as the Board deems reasonable and appropriate, but not less than annually, and (y) promptly notifying the Board of the occurrence of any material change in the arrangements with an Eligible Foreign Custodian; (6) monitor the continued appropriateness of (x) maintaining the foreign investments with Eligible Foreign Custodians selected hereunder and (y) the governing contractual arrangements; it being understood, however, that in the event the Custodian shall determine that any Eligible Foreign Custodian would no longer afford the foreign investments reasonable care, the Custodian shall promptly so advise the Client and shall then act in accordance with Instructions (as defined in the Agreement) with respect to the disposition of the foreign investments; and (7) exercise such reasonable care, prudence and diligence in serving as the Foreign Custody Manager as the Custodian exercises in performing its responsibility under the Agreement for the safekeeping of the Client's Property (as defined in the Agreement). (iii) Nothing in this paragraph shall relieve the Custodian of any responsibility otherwise provided in the Agreement or this Addendum for loss or damage suffered by the Client from an act of negligence or willful misconduct on the part of the Custodian. (iv) Nothing in this Addendum shall require the Custodian to make any selection on behalf of the Client that would entail consideration of any factor reasonably related to the systemic risk of holding assets in a particular country including, but not limited to, such country's financial infrastructure and prevailing settlement practices. The Custodian agrees to provide to the Client such information relating to such risk as the Client shall reasonably request from time to time and such other information as the Custodian generally makes available to customers with regard to such countries and risk. (B) Termination: (i) The Client may terminate this delegation upon written notice to the Custodian. (ii) The Custodian may terminate its acceptance of this delegation upon ninety (90) days written notice to the Client. IN WITNESS WHEREOF, the parties have caused this Addendum to be executed as of the 25th day of June, 2001, by their respective officers thereunto duly authorized. CITIBANK, N.A., NEW YORK OFFICE CLIENT By: /s/ Kevin J. Conlon By: /s/ Robert D. Snowden Name: Kevin J. Conlon Name: Robert D. Snowden Title: Vice President Title: Assistant Treasurer SCHEDULE A - AMENDMENT #4 The following is an amendment ("Amendment") to the Global Custodial Services Agreement dated June 1, 2000 and amended May 18, 2001, July 23, 2001, and May 20, 2002 (the "Agreement") by and between Citibank, N.A. ("Custodian") and each open-end management investment company listed on Schedule A thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule A. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule A is hereby amended as follows: Funds (and the relevant series) - ------------------------------- Vanguard Explorer Fund (51-0106626) Vanguard Fenway Funds Vanguard Equity Income Fund (23-2491240) Vanguard Institutional Index Funds Vanguard Institutional Total Stock Market Index Fund (23-3075564) Vanguard Malvern Funds Vanguard Asset Allocation Fund (23-2520805) Vanguard Capital Value Fund (23-3095856) Vanguard U.S. Value Fund (23-3035290) Vanguard Morgan Growth Fund (51-0108190) Vanguard Specialized Funds Vanguard Energy Fund (23-2284351) Vanguard Utilities Income Fund (23-2677693) Vanguard Variable Insurance Funds Equity Income Portfolio (23-2719786) Small-Cap Index Portfolio (55-0795785) Total Stock Market Index Portfolio (55-0795777) Vanguard Whitehall Funds Vanguard Mid-Cap Growth Fund (95-4573506) Vanguard Windsor Funds Vanguard Windsor Fund (51-0082711) Vanguard Windsor II Fund (23-2439132) Vanguard World Fund Vanguard U.S. Growth Fund (04-6035483) Other Accounts - -------------- Vanguard Capital Stock Concentration Account -(849355) Vanguard Securities Lending Concentration Account (849356) Vanguard Pooled Cash Concentration Account (849357) Vanguard General Purpose Concentration Account (849358) AGREED TO as of September 30, 2002 BY: Citibank, N.A. Each Fund Listed on Schedule A By: /S/ Kevin J. Conlon By: /S/ Thomas J. Higgins Name: Kevin J. Conlon Name: Thomas J. Higgins Title: Vice President Title: Treasurer SCHEDULE A - AMENDMENT #5 The following is an amendment ("Amendment") to the Global Custodial Services Agreement dated June 1, 2000 and amended May 18, 2001, July 23, 2001, May 20, 2002, September 30, 2002, and April ________, 2005 (the "Agreement") by and between Citibank, N.A. ("Custodian") and each open-end management investment company listed on Schedule A thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule A. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule A is hereby amended as follows: Funds (and the relevant series) - ------------------------------- Vanguard Explorer Fund (51-0106626) Vanguard Fenway Funds Vanguard Equity Income Fund (23-2491240) Vanguard Institutional Index Funds Vanguard Institutional Total Stock Market Index Fund (23-3075564) Vanguard Malvern Funds Vanguard Asset Allocation Fund (23-2520805) Vanguard Capital Value Fund (23-3095856) Vanguard U.S. Value Fund (23-3035290) Vanguard Morgan Growth Fund (51-0108190) Vanguard Specialized Funds Vanguard Energy Fund (23-2284351) Vanguard Dividend Growth Fund(1) (23-2677693) Vanguard Trustees' Equity Fund Vanguard Diversified Equity Fund (20-2502709) Vanguard Variable Insurance Funds Equity Income Portfolio (23-2719786) Total Stock Market Index Portfolio (55-0795777) Vanguard Whitehall Funds Vanguard Mid-Cap Growth Fund (95-4573506) - ------------------------------------------ (1)Formerly named Vanguard Utilities Income Fund Vanguard Windsor Funds Vanguard Windsor Fund (51-0082711) Vanguard Windsor II Fund (23-2439132) Vanguard World Fund Vanguard U.S. Growth Fund (04-6035483) Other Accounts - -------------- Vanguard Capital Stock Concentration Account -(849355) Vanguard Securities Lending Concentration Account (849356) Vanguard Pooled Cash Concentration Account (849357) Vanguard General Purpose Concentration Account (849358) AGREED TO as of April 8, 2005 BY: Citibank, N.A. Each Fund Listed on Schedule A By: /S/ ALFRED F. NOLL By: /S/ THOMAS J. HIGGINS Name: Alfred F. Noll Name: Thomas J. Higgins Title: Vice President Title: Treasurer EX-99.N 5 multiclassplan112005.txt MULTI-CLASS PLAN VANGUARD FUNDS MULTIPLE CLASS PLAN I. INTRODUCTION This Multiple Class Plan (the "Plan") describes four separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the "Funds," individually a "Fund"). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes. The Plan has been approved by the Board of Directors of The Vanguard Group ("Vanguard"). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time. II. SHARE CLASSES A Fund may offer any one or more of the following share classes: Investor Shares Admiral Shares Institutional Shares VIPER Shares If a Fund has not previously issued separate classes of shares, all of its currently outstanding shares will be designated as Investor Shares. Currently outstanding shares of other Funds will continue to be designated as Investor Shares, Admiral Shares or Institutional Shares, as appropriate. III. DISTRIBUTION, AVAILABILITY AND ELIGIBILITY Distribution arrangements will be the same for all classes. Vanguard retains sole discretion in determining share class availability, and whether Fund shares shall be offered either directly or through certain financial intermediaries, or on certain financial intermediary platforms. Eligibility requirements for purchasing shares of each class will differ, as follows: A. INVESTOR SHARES Investor Shares will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Investor Shares will be substantially lower than the amount required for any other class of the Fund's shares. B. ADMIRAL SHARES Admiral Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may take into account: (i) the amount of an investment in the Fund; (ii) the length of time that a Fund account has been maintained; (iii) whether the investor has registered for on-line access to the Fund account through Vanguard's web site; or (iv) any other factors deemed appropriate by a Fund's Board of Trustees. C. INSTITUTIONAL SHARES Institutional Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Shares will be substantially higher than the amount required for any other class of the Fund's shares. D. VIPER SHARES VIPER Shares will be available to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their VIPER shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund's distributor. Additional eligibility requirements may be specified in Schedule B hereto, as such Schedule may be amended from time to time. IV. SERVICE ARRANGEMENTS All share classes will receive a range of services provided by Vanguard on a per account basis. These "account-based" services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows: A. INVESTOR SHARES Investor Shares will receive the most basic level of service from Vanguard. In general, Investor Shares will be serviced through a pool of Vanguard client service representatives. Investor Shares held through an employee benefit plan may receive VISTA recordkeeping services from Vanguard. 2 B. ADMIRAL SHARES Admiral Shares will receive a higher level of service from Vanguard as compared to Investor Shares. Special client service representatives will be assigned to service Admiral Shares, and holders of such shares from time to time may receive special mailings from Vanguard and unique additional services. Admiral Shares generally are not eligible to receive VISTA recordkeeping services. C. INSTITUTIONAL SHARES Institutional Shares will receive the highest level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Shares, and most holders of such shares periodically will receive special updates from Vanguard's investment staff. Holders of Institutional Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Institutional Shares generally are not eligible to receive VISTA recordkeeping services. D. VIPER Shares A Fund is expected to maintain only one shareholder of record for VIPER Shares--DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, VIPER Shares will not receive any special updates from Vanguard's investment staff. VIPER Shares are not eligible to receive VISTA recordkeeping services. V. CONVERSION FEATURES A. VOLUNTARY CONVERSIONS 1. CONVERSION INTO INVESTOR SHARES. An investor may convert Admiral Shares or Institutional Shares into Investor Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. 3 Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 2. CONVERSION INTO ADMIRAL SHARES. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 3. CONVERSION INTO INSTITUTIONAL SHARES. An investor may convert Investor Shares or Admiral Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 4. CONVERSION INTO VIPER SHARES. An investor may convert Investor Shares, Admiral Shares, or Institutional Shares into VIPER Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold VIPER Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. B. AUTOMATIC CONVERSIONS TO ADMIRAL SHARES Vanguard may automatically convert Investor Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's conversion without the imposition of any charge. Such automatic conversions may occur on a periodic, or one-time basis. Automatic conversions may occur at different times due to the differing mechanisms through which an account is funded or meets the required investment minimum. Automatic conversions do not apply to certain types of accounts (e.g. accounts held through certain intermediaries, or other accounts as may be excluded by Vanguard management), or to accounts that are eligible for Admiral Shares as a result of tenure in a Fund. 4 C. INVOLUNTARY CONVERSIONS AND CASH OUTS 1. CASH OUTS. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor's remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund's normal redemption fees, if any. 2. CONVERSION OF ADMIRAL SHARES. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 3. CONVERSION OF INSTITUTIONAL SHARES. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor's Institutional Shares into Admiral Shares (or into Investor Shares if the investor does not meet the eligibility requirements for Admiral Shares). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. VI. EXPENSE ALLOCATION AMONG CLASSES A. BACKGROUND Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a Funds' Service Agreement between itself and the Funds (the "Agreement"), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission ("Exemptive Orders"). Vanguard's direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement. B. CLASS SPECIFIC EXPENSES 1. EXPENSES FOR ACCOUNT-BASED SERVICES. Expenses associated with Vanguard's provision of account-based services to the Funds will be allocated among the share classes of each Fund on the basis of the amount incurred by each such class as follows: (A) ACCOUNT MAINTENANCE EXPENSES. Expenses associated with the maintenance of investor accounts will be proportionately allocated among the Funds' share classes based upon a monthly 5 determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class. (B) EXPENSES OF SPECIAL SERVICING ARRANGEMENTS. Expenses relating to any special servicing arrangements for a specific class will be proportionally allocated among the eligible Funds' share classes primarily based on their percentage of total shareholder accounts receiving the special servicing arrangements. (C) LITERATURE PRODUCTION AND MAILING EXPENSES. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among the Funds' share classes based upon the number of such items produced and mailed for each class. 2. OTHER CLASS SPECIFIC EXPENSES. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class. C. FUND-WIDE EXPENSES 1. MARKETING AND DISTRIBUTION EXPENSES. Expenses associated with Vanguard's marketing and distribution activities will be allocated among the Funds and their separate share classes according to the "Vanguard Modified Formula," with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund's Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940. 2. ASSET MANAGEMENT EXPENSES. Expenses associated with management of a Fund's assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund's share classes on the basis of their relative net assets. 3. Other Fund Expenses. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets. VII. ALLOCATION OF INCOME, GAINS AND LOSSES Income, gains and losses will be allocated among the Fund's share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time. 6 VIII. VOTING AND OTHER RIGHTS Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan. II. AMENDMENTS All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard. Original Board Approval: July 21, 2000 Last Approved by Board: May 20, 2005 7 SCHEDULE A to VANGUARD FUNDS MULTIPLE CLASS PLAN
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- Vanguard Admiral Funds o Admiral Treasury Money Market Fund Investor Vanguard Balanced Index Fund Investor, Admiral, Institutional Vanguard Bond Index Funds o Short-Term Bond Index Fund Investor, Admiral o Intermediate-Term Bond Index Fund Investor, Admiral, Institutional o Long-Term Bond Index Fund Investor, Institutional o Total Bond Market Index Fund Investor, Admiral, Institutional Vanguard California Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Chester Funds o PRIMECAP Fund Investor, Admiral o Target Retirement Funds Investor Vanguard Convertible Securities Fund Investor Vanguard Explorer Fund Investor, Admiral Vanguard Fenway Funds o Equity Income Fund Investor, Admiral o Growth Equity Fund Investor o PRIMECAP Core Fund Investor
A-1
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- Vanguard Fixed Income Securities Funds o Short-Term Treasury Fund Investor, Admiral o Short-Term Federal Fund Investor, Admiral o Short-Term Investment Grade Fund Investor, Admiral, Institutional o Intermediate-Term Treasury Fund Investor, Admiral o Intermediate-Term Investment Grade Fund Investor, Admiral o GNMA Fund Investor, Admiral o Long-Term Treasury Fund Investor, Admiral o Long-Term Investment Grade Fund Investor, Admiral o High Yield Corporate Fund Investor, Admiral o Inflation-Protected Securities Fund Investor, Admiral, Institutional Vanguard Florida Tax-Exempt Fund Investor, Admiral Vanguard Horizon Funds o Capital Opportunity Fund Investor, Admiral o Global Equity Fund Investor o Strategic Equity Fund Investor Vanguard Index Funds o 500 Index Fund Investor, Admiral o Extended Market Index Fund Investor, Admiral, Institutional, VIPER o Growth Index Fund Investor, Admiral, Institutional, VIPER o Large-Cap Index Fund Investor, Admiral, Institutional, VIPER o Mid-Cap Index Fund Investor, Admiral, Institutional, VIPER o Small-Cap Growth Index Fund Investor, Institutional, VIPER o Small-Cap Index Fund Investor, Admiral, Institutional, VIPER o Small-Cap Value Index Fund Investor, Institutional, VIPER o Total Stock Market Index Fund Investor, Admiral, Institutional, VIPER o Value Index Fund Investor, Admiral, Institutional, VIPER Vanguard International Equity Index Funds o Emerging Markets Stock Index Fund Investor, Institutional, VIPER o European Stock Index Fund Investor, Admiral, Institutional, VIPER o Pacific Stock Index Fund Investor, Admiral, Institutional, VIPER Vanguard Malvern Funds o Asset Allocation Fund Investor, Admiral o Capital Value Fund Investor o U.S. Value Fund Investor Vanguard Massachusetts Tax-Exempt Fund Investor Vanguard Money Market Reserves o Prime Money Market Fund Investor, Institutional o Federal Money Market Fund Investor
A-2
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- Vanguard Morgan Growth Fund Investor, Admiral Vanguard Municipal Bond Funds o Tax-Exempt Money Market Fund Investor o Short-Term Tax-Exempt Fund Investor, Admiral o Limited-Term Tax-Exempt Fund Investor, Admiral o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Insured Long-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral o High Yield Tax-Exempt Fund Investor, Admiral Vanguard New Jersey Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor, Admiral Vanguard New York Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Ohio Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor Vanguard Pennsylvania Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Quantitative Funds o Growth and Income Fund Investor, Admiral Vanguard Specialized Funds o Energy Fund Investor, Admiral o Precious Metals Fund Investor o Health Care Fund Investor, Admiral o Dividend Growth Fund Investor o REIT Index Fund Investor, Admiral, Institutional, VIPERS Vanguard Tax-Managed Funds o Tax-Managed Balanced Fund Investor o Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional o Tax-Managed Growth and Income Fund Investor, Admiral, Institutional o Tax-Managed International Fund Investor, Institutional o Tax-Managed Small-Cap Fund Investor, Institutional Vanguard Treasury Funds o Treasury Money Market Fund Investor
A-3
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- Vanguard Trustees' Equity Fund o International Value Fund Investor Vanguard Wellesley Income Fund Investor, Admiral Vanguard Wellington Fund Investor, Admiral Vanguard Whitehall Funds o Selected Value Fund Investor o Mid-Cap Growth Fund Investor o International Explorer Fund Investor Vanguard Windsor Funds o Windsor Fund Investor, Admiral o Windsor II Investor, Admiral Vanguard World Funds o U.S. Growth Fund Investor, Admiral o International Growth Fund Investor, Admiral o Calvert Social Index Fund Investor, Institutional o Consumer Discretionary Index Fund Admiral, VIPER o Consumer Staples Index Fund Admiral, VIPER o Energy Index Fund Admiral, VIPER o Financial Index Fund Admiral, VIPER o Health Care Index Fund Admiral, VIPER o Industrial Index Fund Admiral, VIPER o Information Technology Index Fund Admiral, VIPER o Materials Index Fund Admiral, VIPER o Telecommunication Services Index Fund Admiral, VIPER o Utilities Index Fund Admiral, VIPER
A-4
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- Vanguard Variable Insurance Funds o Balanced Portfolio Investor o Diversified Value Portfolio Investor o Equity Income Portfolio Investor o Equity Index Portfolio Investor o Growth Portfolio Investor o Total Bond Market Index Portfolio Investor o High Yield Bond Portfolio Investor o International Portfolio Investor o Mid-Cap Index Portfolio Investor o Money Market Portfolio Investor o REIT Index Portfolio Investor o Short-Term Investment Grade Portfolio(1) Investor o Small Company Growth Portfolio Investor o Capital Growth Portfolio Investor o Total Stock Market Index Portfolio Investor
Original Board Approval: July 21, 2000 Last Approved by Board: November 17, 2005 - ---------------------------------------- 1 Short-Term Corporate Portfolio was renamed Short-Term Investment-Grade Portfolio in August 2004 after board approval. A-5 SCHEDULE B to VANGUARD FUNDS MULTIPLE CLASS PLAN INVESTOR SHARES - ELIGIBILITY REQUIREMENTS Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000 ($1,000 for IRAs and UGMA accounts). Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. ADMIRAL SHARES - ELIGIBILITY REQUIREMENTS Admiral Shares generally require a minimum initial investment and ongoing account balance of $100,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Share class eligibility also is subject to the following special rules: o Account Tenure - The minimum amount for Admiral Shares is $50,000 if the investor has maintained an account in the applicable Fund for 10 years, subject to administrative policies developed by Vanguard to exclude costly accounts. For these purposes, a Fund may, in appropriate cases, count periods during which an investor maintained an account in the Fund through a financial intermediary. To take advantage of the tenure rule, an investor generally must be registered for on-line access to their Fund account through Vanguard.com, or otherwise transact with Vanguard on a similarly cost-effective basis. o Financial Intermediaries -Admiral Shares are not available to financial intermediaries who would meet eligibility requirements by aggregating the holdings of underlying investors within an omnibus account. However, a financial intermediary may hold Admiral Shares in an omnibus account if: (1) each underlying investor in the omnibus account individually meets the $100,000 minimum amount or the tenure rule described above; and (2) the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the $100,000 minimum amount or the tenure rule described above; or (3) a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance with the eligibility requirements established by Vanguard. o VISTA - Admiral Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. B-1 o Certain Retirement Plans - Admiral Shares are not available to 403(b)(7) custodial accounts, SIMPLE IRAs, and other Vanguard Retirement Plans receiving special administrative services from Vanguard. o Asset Allocation Fund -- Admiral Shares of Asset Allocation Fund are not available to Vanguard's Institutional Asset Management (IAM) clients. o Account Aggregation -- Vanguard institutional clients may hold Admiral Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund is at least $1 million. For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of institutional clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The institutional client aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries. o Accumulation Period -- Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Admiral Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Admiral Shares within a limited period of time (generally 90 days). o Asset Allocation Models -- Vanguard institutional clients with defined asset allocation models whose assets meet eligibility requirements may qualify for Admiral Shares if such models comply with policies and procedures that have been approved by Vanguard management. INSTITUTIONAL SHARES - ELIGIBILITY REQUIREMENTS Institutional Shares generally require a minimum initial investment and ongoing account balance of $5,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Share class eligibility also is subject to the following special rules: o Vanguard Short-Term Investment Grade Fund(2) - $50,000,000 minimum amount for Institutional Shares o Vanguard Long-Term Bond Index Fund - $25,000,000 minimum amount for Institutional Shares o Vanguard Intermediate-Term Bond Index Fund - $25,000,000 minimum amount for Institutional Shares o Financial Intermediaries - Institutional Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. However, a financial intermediary may hold Institutional Shares in an omnibus account if: - --------------------------------------- 2 Short-Term Corporate Fund was renamed Short-Term Investment-Grade Fund in August 2004 after board approval. B-2 (1) each underlying investor in the omnibus account individually meets the investment minimum amount or the tenure rule described above; and (2) the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the investment minimum amount or the tenure rule described above; or (3) a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance with the eligibility requirements established by Vanguard. o VISTA - Institutional Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping, unless Vanguard management determines that a plan sponsor's aggregate assets within the Vanguard Funds will likely generate substantial economies in the servicing of their accounts. o Account Aggregation-- Vanguard institutional clients may hold Institutional Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund is at least $5 million ($50 million for Short-Term Corporate Fund). For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of institutional clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The institutional client account aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries. o Accumulation Period -- Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Shares within a limited period of time (generally 90 days). o Asset Allocation Models -- Vanguard institutional clients with defined asset allocation models whose assets meet eligibility requirements may qualify for Institutional Shares if such models comply with policies and procedures that have been approved by Vanguard management. VIPER SHARES - ELIGIBILITY REQUIREMENTS The eligibility requirements for VIPER Shares will be set forth in the Fund's Registration Statement. To be eligible to purchase VIPER Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing VIPER Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of VIPER Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund's VIPER Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash. B-3 Original Board Approval: July 21, 2000 Last Approved by Board: November 17, 2005 B-4 EX-99.P 6 vgi10102005.txt VANGUARD COE 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(R) funds in compliance with Rule 17j-1 under the Investment Company Act of 1940 and Rule 204A-1 under the Investment Advisers Act of 1940. 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. Employees, officers, directors, and trustees of Vanguard subsidiaries that provide services to Vanguard funds, including subsidiaries located outside the United States, also are subject to the Code unless the subsidiary has adopted its own Code of Ethics. 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 federal securities laws and 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. 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: a) 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; b) information on Vanguard fund shareholders and prospective shareholders, including their identities, investments, and account transactions; c) information on other Vanguard personnel, including their pay, benefits, position level, and performance ratings; and d) 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 Professional Conduct Policy) but only if they obtain the approval of a Vanguard officer. 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. 1) REPORTABLE ACTIVITIES: o All compensated positions held outside of Vanguard. Business activities exempt from this reporting are those in retail businesses; including retail/department stores, food services, etc. All other positions should be reported prior to accepting the position. o All entrepreneurial activities. o Volunteer positions that involve recommending or approving of investments for an organization, i.e., finance committees, treasurer. All other volunteer or civic activities do not need reporting. o Serving in an official capacity for any federal, state, or local government authority; including serving on the board or in any representative capacity for any civic, public interest, or regional business interest organization, such as a local chamber of commerce or a wildlife protection organization. o Prior to accepting a position to serve on the board of directors of any publicly traded company, approval must be granted by the Compliance Department. 2) PROHIBITIONS: o Crew members may not hold a second job with any company or organization whose activities could create a conflict of interest with their Vanguard employment. This includes, but is not limited to, selling securities, term insurance and fixed or variable annuities, providing investment advice or financial planning, or engaging in any business activity similar to Vanguard's. o Crew members are prohibited from working for any organization that could possibly benefit from the crew member's knowledge of confidential Vanguard information, such as new Vanguard services and technologies. b) PROHIBITION ON SERVICE AS MEMBER OF BOARD OF DIRECTORS. Vanguard officers and employees are prohibited from serving on the board of directors of any publicly traded company without prior approval from the 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 RESTRICTIONS 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. 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. c) TRANSACTIONS IN VANGUARD MUTUAL FUNDS. When purchasing, exchanging, or redeeming shares of Vanguard mutual funds, Vanguard personnel must comply in all respects with the policies and standards set forth in the funds' prospectuses, including specifically the restrictions on market timing activities and exchanges. The Compliance Department will monitor the trading activity of Vanguard personnel and will review all situations where there has been a redemption of shares of a Vanguard fund purchased within the preceding 30 days (a "short-term trade"). Vanguard personnel may be required to relinquish any profit made on a short-term trade and will be subject to disciplinary action (as noted in Section 13) if the Compliance Department or other appropriate department determines that the short-term trade was detrimental to the interests of a fund or its shareholders or because of a history of frequent trading by the Vanguard personnel. For purposes of this paragraph: o This policy does not cover purchases and redemptions/sales (i) into or out of money market funds, short-term bond funds, or VIPER(R) Share classes; or (ii) effected on a regular periodic basis by automated means, such as 401(k) purchases or monthly redemptions to a checking or savings account. d) TRADING THROUGH VANGUARD BROKERAGE SERVICES(R). All Vanguard personnel must conduct all their securities transactions through Vanguard Brokerage Services. SECTION 7A: ADDITIONAL TRADING RESTRICTIONS FOR FUND ACCESS PERSONS a) APPLICATION. The restrictions of this section 7A apply to all fund access persons. For purposes of the Code of Ethics, "fund 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. (See Appendix A for a list of RCs, employees of which are all deemed fund access persons.) The Vanguard Compliance Department will notify all Vanguard personnel who qualify as fund access persons of their duties and responsibilities under this Code of Ethics. The restrictions of this section 7A apply to all transactions in which a fund access person has or will acquire beneficial ownership (see section 6(a)) of a security, including transactions by a spouse or minor child. However, the restrictions of paragraphs (b) and (c) of this Section 7A do not apply to transactions involving the following types of securities: (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; (iii) shares of registered open-end investment companies (including shares of any Vanguard fund); (iv) shares of exchange-traded funds organized as open-end investment companies or unit investment trusts. In addition, the restrictions do not apply to transactions: (v) in accounts over which the fund access person has no direct or indirect control or influence; or (vi) effected pursuant to an automatic investment program. b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Fund access persons are subject to the following restrictions with respect to their securities transactions: 1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Fund access persons must receive approval from the Vanguard Compliance Department before purchasing or selling any securities. The Vanguard Compliance Department will notify fund access persons if their proposed securities transactions are permitted under this Code of Ethics. 2) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Fund access persons are prohibited from acquiring securities in an initial public offering. 3) PROHIBITION ON PRIVATE PLACEMENTS. Fund access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event a fund access person receives approval to purchase securities in a private placement, the fund 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. 4) PROHIBITION ON FUTURES AND OPTIONS. Fund access persons are prohibited from entering into, acquiring, or selling any futures contract (including single stock futures) or any option on any security. 5) PROHIBITION ON SHORT-SELLING. Fund access persons are prohibited from selling any security that the access person does not own or otherwise engaging in "short-selling" activities. 6) PROHIBITION ON SHORT-TERM TRADING PROFITS. Fund 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. If a fund access person realizes profits on such short-term trades, the fund access person must relinquish such profits to The Vanguard Group Foundation(R). c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All fund access persons are subject to the following restrictions when their purchases and sales of securities coincide with trades by a Vanguard fund (other than a Vanguard index fund): 1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Fund 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 a fund access person makes a prohibited purchase or sale within the three-day period, the fund 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 fund 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 gain (exclusive of commissions) for a period of six months following the fund's trade. If a fund access person makes a prohibited sale within the six-month period, the fund access person must relinquish to The Vanguard Group Foundation the difference between the purchase and sales prices. 3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A fund 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 fund access person's sale price and the Vanguard fund's sale price (assuming the fund access person's sale price is higher). d) TRANSACTIONS IN VANGUARD MUTUAL FUNDS. Transactions by fund access persons involving Vanguard mutual funds are subject to the reporting requirements of section 9. SECTION 7B: ADDITIONAL TRADING RESTRICTIONS FOR VANGUARD ADVISERS, INC. (VAI) ACCESS PERSONS a) APPLICATION. The restrictions of this section apply to all VAI access persons. For purposes of the Code of Ethics, "VAI access persons" include all VAI officers, as well as any associated person of VAI who has access to nonpublic information regarding a VAI client's securities transactions, is involved in making securities recommendations to VAI clients, or has access to nonpublic information regarding the portfolio holdings of VAI clients. (See Appendix B for a list of RCs, employees of which are all deemed VAI access persons). The Vanguard Compliance Department will notify all Vanguard personnel who qualify as VAI access persons of their duties and responsibilities under this Code of Ethics. The restrictions of this section 7B apply to all transactions in which a VAI access person has or will acquire beneficial ownership (see section 6(a)) of a security, including transactions by a spouse or minor child. However, the restrictions of paragraphs (b) and (c) of this section 7B do not apply to transactions involving the following types of securities: (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; (iii) shares of registered open-end investment companies (including shares of any Vanguard fund); (iv) shares of exchange-traded funds organized as open-end investment companies or unit investment trusts. In addition, the restrictions do not apply to transactions: (v) in accounts over which the VAI access person has no direct or indirect control or influence; or (vi) effected pursuant to an automatic investment program. b) GENERAL RESTRICTIONS FOR VAI ACCESS PERSONS. VAI access persons are subject to the following restrictions with respect to their securities transactions: 1) PROHIBITION ON INITIAL PUBLIC OFFERINGS. VAI access persons are prohibited from acquiring securities in an initial public offering. 2) PROHIBITION ON PRIVATE PLACEMENTS. VAI access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event a VAI access person receives approval to purchase securities in a private placement, the VAI access person must disclose that investment if he or she plays any part in a Vanguard client's later consideration of an investment in the issuer. 3) PROHIBITION ON SHORT-TERM TRADING PROFITS. VAI 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. If a VAI access person realizes profits on such short-term trades, the VAI access person must relinquish such profits to The Vanguard Group Foundation. 4) PROHIBITION ON SHORT-SELLING. VAI access persons are prohibited from selling any security that the access person does not own or otherwise engaging in "short-selling" activities. 5) PROHIBITION ON TRADING CERTAIN SECURITIES. VAI access persons are prohibited from acquiring securities (or derivatives of those securities) issued by companies of which the officers or directors are current VAI clients. The Vanguard Compliance Department will maintain a list of the restricted securities to which the prohibitions of this section 7B(b)(5) apply. The Vanguard Compliance Department may waive the prohibition on acquiring securities on the VAI restricted list in appropriate cases (including, for example, cases in which the VAI access person acquires securities as part of an inheritance or through an employer-sponsored employee benefits or compensation program). c) TRANSACTIONS IN VANGUARD MUTUAL FUNDS. Transactions by VAI access persons involving Vanguard mutual funds are subject to the reporting requirements of section 9. SECTION 7C: ADDITIONAL TRADING RESTRICTIONS FOR NON-ACCESS PERSONS a) GENERALLY, Vanguard's Compliance and Legal Departments shall have the authority to apply any or all of the trading restrictions specified in Sections 7A and 7B to all non-access persons or to groups of non-access persons. b) ON AN INDIVIDUAL BASIS, Vanguard's Compliance and Legal Departments shall have the authority to apply any or all of the trading restrictions specified in Sections 7A and 7B to any individual non-access person for cause. For example, they may require a non-access person who has previously violated the Code or who has a history of frequent trading activity to pre-clear trades. SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS 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 (see Appendix C). 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). The restrictions of this section 8 apply to all transactions in which Institutional client contacts have acquired or would acquire beneficial ownership (see section 6(a)) 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(a)(1)). The requirements apply to all transactions in which Vanguard personnel have acquired or would acquire beneficial ownership (see section 6(a)) of a security, including transactions by a spouse or minor child, except (i) transactions in securities or interests excluded by section 7A(a) of this Code, (ii) securities acquired for accounts over which the person has no direct or indirect control or influence, (iii) transactions effected pursuant to an automatic investment plan, and (iv) information that would duplicate information contained in trade confirmations or account statements provided to Vanguard's Compliance Department, so long as such reports are received no later than 30 days after the end of each applicable quarter. 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. In addition, and notwithstanding section 9(a)(i), all fund access persons and VAI access persons are required to disclose their holdings in Vanguard mutual funds. 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 (see section 6(d)). Vanguard Brokerage Services will supply the Vanguard Compliance Department with duplicate confirmations of securities transactions and copies of all periodic statements. 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 (iii) they have reported all transactions required to be reported under the Code of Ethics. e) REPORT VIOLATIONS. Any Vanguard employee who becomes aware of a violation of the Code of Ethics must promptly report such violation to the Vanguard Compliance Department via the Compliance Hotline. SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES Disinterested Directors and Trustees (see section 7A(a)) 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 one or more codes of ethics in compliance with Rule 17j-1 under the Investment Company Act of 1940 and Rule 204A-1 under the Investment Advisers Act of 1940 and provide the Vanguard Compliance Department with a copy of the codes of ethics and any subsequent amendments. Each investment adviser is responsible for enforcing its codes of ethics and reporting to the Vanguard Compliance Department on a timely basis any violations of the codes of ethics and resulting sanctions. b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard fund must prepare an annual report on its codes 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 codes of ethics including, but not limited to, information about any violations of the codes, sanctions imposed in response to such violations, changes made to the codes' provisions or procedures, and any recommended changes to the codes; and 2) a certification that the investment adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the codes 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 and Rule 204A-1 under the Investment Advisers 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 and Rule 204A-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 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 and/or its subsidiaries must maintain all records required by Rule 17j-1 and Rule 204A-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 9(d); (iv) lists of all Vanguard personnel who are, or within the past five years have been, access persons subject to the trading restrictions of sections 7A and 7B, and lists of the Vanguard compliance personnel responsible for monitoring compliance with those trading restrictions; (v) copies of the annual reports to the Boards of Directors and Trustees pursuant to section 12; and (vi) holdings and transaction reports and any other documentation submitted in substitution for these reports. COVER 7 filename7.txt December 19, 2005 U.S. Securities & Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 RE: VANGUARD WINDSOR FUNDS FILE NO. 2-14336 - ---------------------------------------------------------------- Commissioners: Enclosed is the 105th Post-Effective Amendment of the registration statement on Form N-1A for the Vanguard Windsor Funds (the "Trust"). The purposes of this Amendment are: (1) to update information relating to the adoption of new advisory fee schedules for two of the advisors for the Windsor II Fund, a series of the Trust, (2) to amend the Funds' Frequent Trader Policy Disclosure, and (3) to effect a number of non-material editorial changes. Pursuant to the requirements of Rule 485(a), it is hereby requested that this Amendment be declared effective on February 28, 2006. During the review period, Vanguard will submit a Rule 485(b) filing that will include: (1) text addressing any SEC staff comments; and (2) updated financial statements for the Trust. Pursuant to Rule 485(d)(2), the Rule 485(b) filing will designate as its effective date the same date on which we have requested that this 485(a) filing be declared effective. Please contact me at (610) 503-2320 with any questions or comments that you have concerning the enclosed Amendment. Sincerely, Christopher A. Wightman Associate Counsel The Vanguard Group, Inc. Enclosures cc: Christian Sandoe, Esq. U.S. Securities and Exchange Commission -----END PRIVACY-ENHANCED MESSAGE-----