-----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, CwQh9yKSJI/LPLJw5jhpn6GZ0rKGt5bpFpdGj2dWNsiON917ccJIC5fCaGlokeW/ byM7urAKqHFEE/lA8K4M2w== 0000932471-07-000016.txt : 20091209 0000932471-07-000016.hdr.sgml : 20091209 20070108161231 ACCESSION NUMBER: 0000932471-07-000016 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20070108 DATE AS OF CHANGE: 20070314 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: 07517773 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: 07517774 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 0000107606 S000004417 Vanguard Windsor Fund C000045322 Signal Shares S000004418 Vanguard Windsor II Fund C000045323 Signal Shares 0000107606 S000004417 Vanguard Windsor Fund C000012178 Investor Shares VWNDX C000012179 Admiral Shares VWNEX 0000107606 S000004418 Vanguard Windsor II Fund C000012180 Investor Shares VWNFX C000012181 Admiral Shares VWNAX 485APOS 1 windsor485a012007.txt VANGUARD WINDSOR FUNDS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. 108 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 111 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, 2007, PURSUANT TO PARAGRAPH (A) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Vanguard/(R)/ Windsor/(TM)/ Fund > Prospectus Investor Shares and Admiral(TM) Shares February 28, 2007 [SHIP LOGO][Vanguard/(R)/] This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Contents - ---------------------------------------------------------------------------------------------------------- Fund Profile 1 Investing With Vanguard 21 - ---------------------------------------------------------------------------------------------------------- More on the Fund 6 Purchasing Shares 21 - ---------------------------------------------------------------------------------------------------------- The Fund and Vanguard 12 Converting Shares 24 - ---------------------------------------------------------------------------------------------------------- Investment Advisors 12 Redeeming Shares 25 - ---------------------------------------------------------------------------------------------------------- Dividends, Capital Gains, and Taxes 14 Exchanging Shares 28 - ---------------------------------------------------------------------------------------------------------- Share Price 16 Frequent-Trading Limits 28 - ---------------------------------------------------------------------------------------------------------- Financial Highlights 18 Other Rules You Should Know 30 - ---------------------------------------------------------------------------------------------------------- Fund and Account Updates 33 - ---------------------------------------------------------------------------------------------------------- Contacting Vanguard 35 - --------------------------------------------------------------------------------------------------------- Glossary of Investment Terms 37 - ---------------------------------------------------------------------------------------------------------
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 three separate classes of shares: Investor Shares, Admiral Shares, and Signal Shares. This prospectus offers the Fund's Investor Shares and 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. A separate prospectus offers Signal(TM) Shares, which are generally for Vanguard's institutional clients who invest at least $1 million and meet other eligibility requirements. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. 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 an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. .. Asset concentration risk, which is the chance that the Fund's performance may be hurt disproportionately by the poor performance of relatively few stocks. The Fund tends to invest a high percentage of assets in its ten largest holdings. .. 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 a relevant market index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns--Investor Shares - ------------------------------------------------------------ - ------------------------------------------------------------ 1 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).
Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - -------------------------------------------------------------------------------------------- Vanguard Windsor Fund Investor Shares 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/1/ - -------------------------------------------------------------------------------------------- Return Before Taxes xx.xx% xx.xx -- - -------------------------------------------------------------------------------------------- Russell 1000 Value Index (reflects no deduction for fees, expenses, or taxes) xx.xx% xx.xx% xx.xx% - -------------------------------------------------------------------------------------------- 1 From the inception of the Fund's Admiral Shares on November 12, 2001, through December 31, 2006, 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 the Investor Shares and will vary for a fund's other share classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, although such costs are reflected in the investment performance figures included in this prospectus. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2006. 2 Shareholder Fees (Fees paid directly from your investment) Investor Shares Admiral Shares - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None None - ------------------------------------------------------------------------------- Purchase Fee None None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested None None Dividends - ------------------------------------------------------------------------------- Redemption Fee None None - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) Investor Shares Admiral Shares - ------------------------------------------------------------------------------- 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% - ------------------------------------------------------------------------------- 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. 3 - -------------------------------------------------------------------------------- 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 Fund's expense ratios in fiscal year 2006 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 multi-cap value fund had expenses in 2005 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 As of October 31, 2006 - ------------------------------------------------------------------------------------------------ Net Assets (all share classes) $x.xx billion - ------------------------------------------------------------------------------------------------ Investment Advisors Wellington Management Company, LLP, Boston, Mass., since inception AllianceBernstein L.P., New York City, N.Y., since 1999 - ------------------------------------------------------------------------------------------------ Dividends and Capital Gains Dividends are distributed semiannually in June and December; capital gains, if any, are distributed annually in December - ------------------------------------------------------------------------------------------------ Investor Shares Admiral Shares - ------------------------------------------------------------------------------------------------ Suitable for IRAs Yes Yes - ------------------------------------------------------------------------------------------------ Inception Date October 23, 1958 November 12, 2001 - ------------------------------------------------------------------------------------------------ Minimum Initial Investment $3,000 $100,000 - ------------------------------------------------------------------------------------------------ Conversion Features May be converted to Admiral May be converted to Investor Shares if you meet eligibility shares if you are no longer requirements eligible for Admiral Shares - ------------------------------------------------------------------------------------------------ Newspaper Abbreviation Wndsr WndsrAdml - ------------------------------------------------------------------------------------------------ Vanguard Fund Number 22 5022 - ------------------------------------------------------------------------------------------------ CUSIP Number 922018106 922018403 - ------------------------------------------------------------------------------------------------ Ticker Symbol VWNDX VWNEX - ------------------------------------------------------------------------------------------------
5 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 LOGO] 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 capitalizations) 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. 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, 2006, was $xx.x billion.< [FLAG LOGO] 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. 6 U.S. Stock Market Returns (1926-2005) 1 Year 5Years 10Years 20 Years - ---------------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% - ---------------------------------------------------------------- Worst -43.1 -12.4 -0.8 3.1 - ---------------------------------------------------------------- Average 12.3 10.4 11.2 11.4 - ---------------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2005. You can see, for example, that while the average return on common stocks for all of the 5-year periods was xxx%, average returns for individual 5-year periods ranged from xxx% (from 1928 through 1932) to xxx% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular. - -------------------------------------------------------------------------------- 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, earnings, cash flow, or other similar criteria. 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 LOGO] 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. Security Selection The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations about companies and their financial prospects, the prices of the securities, and the advisors' 7 assessments of the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. Although each advisor uses a different process to select securities, each is committed to investing in mid- and large-cap stocks that, in the advisor's opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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 broad market averages, while at the same time being undervalued relative to the market. AllianceBernstein L.P. (AllianceBernstein), 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 AllianceBernstein 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." [FLAG LOGO] 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. [FLAG LOGO] Because the Fund tends to invest a high percentage of assets in its ten largest holdings, the Fund is subject to asset concentration risk, which is the chance that the Fund's performance may be hurt disproportionately by the poor performance of relatively few stocks. The Fund is generally managed without regard to tax ramifications. Other Investment Policies and Risks Besides investing in undervalued common stocks, the Fund may make other kinds of investments to achieve its objective. 8 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 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 ETF 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities 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. 9 - -------------------------------------------------------------------------------- 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 Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Temporary Investment Measures The Fund may temporarily depart from its normal investment policies--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 holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may 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 Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated 10 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 ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. .. Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will 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, 2006. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 11 The Fund and Vanguard The Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- 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 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. The Fund's board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time. .. Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is an investment advisory firm founded in 1928. As of October 31, 2006, Wellington Management managed approximately $557 billion in assets. .. AllianceBernstein L.P., 1345 Avenue of the Americas, New York, NY 10105, is a registered investment advisor. As of October 31, 2006, AllianceBernstein managed approximately $xx billion in assets. The Fund pays Wellington Management and AllianceBernstein 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 for each quarter. In addition, 12 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 AllianceBernstein) over the same period. For the fiscal year ended October 31, 2006, 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 most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 13 - -------------------------------------------------------------------------------- Plain Talk About The Fund's Portfolio Managers The managers primarily responsible for the day-to-day management of the Fund's are: David R. Fassnacht, CFA, Senior Vice President, Partner, and Equity Portfolio Manager of Wellington Management. He has worked in investment management since 1988; has been with Wellington Management since 1991; was Assistant Fund Manager from 2001 to 2004; and has managed a portion of the fund since 2001. 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 AllianceBernstein and its predecessor since 1984; and has comanaged a portion of the Fund since 1999. Education: B.A., Smith College; M.B.A., Harvard Business School. John D. Phillips, Jr., CFA, Senior Portfolio Manager at AllianceBernstein and an officer of Alliance Capital Management L.P. He has worked in investment management since 1972; has been with AllianceBernstein and its predecessor since 1994; and has comanaged a portion of 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. 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 semiannually in June and December; capital gains distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. 14 - -------------------------------------------------------------------------------- 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. 15 - -------------------------------------------------------------------------------- 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, 16 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 ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a 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. 17 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. - -------------------------------------------------------------------------------- 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 2006 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, 2006, 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. - -------------------------------------------------------------------------------- 18
Windsor Fund Investor Shares Year Ended October 31, 2006 2005 2004 2003 2002 -------------------------------------------------- Net Asset Value, Beginning of Period $16.75 $15.23 $11.81 $14.27 - -------------------------------------------------------------------------------------------------------------------- Investment Operations - -------------------------------------------------------------------------------------------------------------------- Net Investment Income .265/1/ .214 .17 .164 - -------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 1.163 1.501 3.42 (2.143) - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.428 1.715 3.59 (1.979) - -------------------------------------------------------------------------------------------------------------------- Distributions - -------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.280) (.195) (.17) (.169) - -------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains (.088) -- -- (.312) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.368) (.195) (.17) (.481) - -------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $17.81 $16.75 $15.23 $11.81 - -------------------------------------------------------------------------------------------------------------------- Total Return 8.54% 11.30% 30.66% -14.55% - -------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - -------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $12,871 $15,130 $13,733 $11,012 - -------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets/2/ 0.37% 0.39% 0.48% 0.45% - -------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.47%/1/ 1.32% 1.27% 1.16% - -------------------------------------------------------------------------------------------------------------------- Turnover Rate 32% 28% 23% 30% - -------------------------------------------------------------------------------------------------------------------- 1 Net investment income per share and the ratio of net investment income to average net assets include $0.03 and 0.17%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004. 2 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.08%, 0.08%, 0.03%, and (0.08%).
19
Windsor Fund Admiral Shares Nov. 12, Year Ended Oct. 31, 2001/1/ to ------------------------------------------------------------- Oct. 31, 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $56.56 $51.41 $39.88 $50.00 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .968/2/ .787 .605 .556 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 3.896 5.082 11.537 (9.030) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 4.864 5.869 12.142 (8.474) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.007) (.719) (.612) (.592) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains (.297) -- -- (1.054) - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.304) (.719) (.612) (1.646) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $60.12 $56.56 $51.41 $39.88 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return 8.62% 11.46% 30.72% -17.61% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $7,551 $4,195 $3,321 $2,214 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets/3/ 0.27% 0.28% 0.37% 0.40%/4/ - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.57%/2/ 1.43% 1.36% 1.22%/4/ - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate 32% 28% 23% 30% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Inception. 2 Net investment income per share and the ratio of net investment income to average net assets include $0.110 and 0.17%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004. 3 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.08%, and 0.08%. 4 Annualized.
20 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing 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, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. Account Minimums for Admiral Shares To open and maintain an account. $100,000 for new investors. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in the same Fund account are eligible to convert their Investor Shares 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, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. 21 By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--22. See Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of 22 receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know-Good Order. The requirements vary among types of accounts and transactions. Other 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may disrupt a fund's operation or performance. 23 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, wire, check, or automatic 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. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values 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 net asset values. 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. 24 Automatic conversions. The Fund conducts periodic reviews of account balances and may convert an eligible account's Investor Shares into Admiral Shares. The Fund will notify the investor in writing before any automatic conversion into Admiral Shares. If you do not wish to convert to the lower-cost Admiral Shares, you may choose not to convert to them. 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 automatically 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. Vanguard reserves the right, without prior notice, to change conversion policies. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. 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 25 balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. 26 Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would 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 available balance. Share certificates. If share certificates have been issued for your fund 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 or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. 27 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. Exchanging Shares An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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. 28 .. Section 529 college savings plans. .. Certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that 29 intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "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 caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. 30 Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: .. The fund name and account number. .. The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: .. Signatures of all registered owners. .. Signature guarantees, if required for the type of transaction.* .. Any supporting legal documentation that may be required. The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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. 31 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. 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 without prior notice, to liquidate any investment-only retirement-plan fund account or any nonretirement fund 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 (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services 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, 32 or illegal activity. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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. 33 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 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 ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 34
Contacting Vanguard - ---------------------------------------------------------------------------------------------------------------------- Web - ---------------------------------------------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a week For fund, account, and service information For most account transactions For literature requests - ---------------------------------------------------------------------------------------------------------------------- Phone - ---------------------------------------------------------------------------------------------------------------------- Vanguard Tele-Account/(R)/ For automated fund and account information (ON-BOARD) For exchange transactions (subject to limitations) Toll-free, 24 hours a day, 7 days a week - ---------------------------------------------------------------------------------------------------------------------- Investor Information 800-662-7447 (SHIP) For fund and service information (Text telephone at 800-952-3335) 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) For account information (Text telephone at 800-749-7273) 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 For Admiral account information 888-237-9949 For most Admiral transactions Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ---------------------------------------------------------------------------------------------------------------------- Institutional Division For information and services for large institutional investors 888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ---------------------------------------------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial intermediaries 800-997-2798 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 - ----------------------------------------------------------------------------------------------------------------------
35 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Numbers Please use the specific fund number when contacting us: Investor Shares Admiral Shares - --------------------------------------------------------------------- Vanguard Windsor Fund 22 5022 - --------------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal, Vanguard Tele-Account, Tele-Account, Vanguard ETF, 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. 36 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. 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. 37 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. 38 [SHIP LOGO][Vanguard/(R)/ Logo] P.O. Box 2600 Valley Forge, PA 19482-2600 CONNECT WITH VANGUARD/TM/ > www.vanguard.com 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 visit www.vanguard.com or contact us as follows: The Vanguard Group Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP) Text Telephone: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone: 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) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P022 022007 Vanguard/(R)/ Windsor/(TM)/ Fund > Prospectus Signal(TM) Shares February 28, 2007 [SHIP LOGO][Vanguard/(R)/ LOGO] This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - -------------------------------------------------------------------------------- Fund Profile 1 Investing With Vanguard 20 - ------------------------------------------------------------------------------- More on the Fund 6 Purchasing Shares 20 - ------------------------------------------------------------------------------- The Fund and Vanguard 12 Converting Shares 23 - ------------------------------------------------------------------------------- Investment Advisors 12 Redeeming Shares 24 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 14 Exchanging Shares 26 Taxes - ------------------------------------------------------------------------------- Share Price 16 Frequent-Trading Limits 27 - ------------------------------------------------------------------------------- Financial Highlights 18 Other Rules You Should Know 28 - ------------------------------------------------------------------------------- Fund and Account Updates 31 - ------------------------------------------------------------------------------- Contacting Vanguard 34 - ------------------------------------------------------------------------------- Glossary of Investment Terms 36 - ------------------------------------------------------------------------------- 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 three separate classes of shares: Investor Shares, Admiral/(TM)/ Shares, and Signal Shares. This prospectus offers the Fund's Signal Shares, which are generally for investors who invest a minimum of $1 million. A separate prospectus offers Investor Shares and Admiral Shares. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. 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 an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. .. Asset concentration risk, which is the chance that the Fund's performance may be hurt disproportionately by the poor performance of relatively few stocks. The Fund tends to invest a high percentage of assets in its ten largest holdings. .. 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. Both the bar chart and the table present information for the Admiral Shares, because Signal Shares were not available during the time periods shown. The expense ratio of the Signal Shares is expected to be the same as that of the Admiral Shares; therefore, performance of the Signal Shares should closely match that of the Admiral Shares. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of a relevant market index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. 1 Annual Total Returns-Admiral 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).
Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year 5 Years Inception/1/ - ----------------------------------------------------------------------------------------------------------------------------------- Vanguard Windsor Fund Admiral Shares x.xx% x.xx% x.xx% - ----------------------------------------------------------------------------------------------------------------------------------- Comparative Index (reflect no deduction for fees or expenses) - ----------------------------------------------------------------------------------------------------------------------------------- Russell 1000 Value Index xx.xx% xx.xx xx.xx% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Since- inception returns are from February 28, 2007--the inception date of the Signal Shares--through December 31, 2006.
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 actual after-tax returns will vary for a fund's other 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 Signal 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 on those incurred in the fiscal year ended October 31, 2006. 2 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------- Redemption Fee None - ------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------- Management Expenses 0.xx% - ------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------- Other Expenses 0.xx% - ------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.xx% The following example is intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses match our estimate. 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 - -------------------------------------------------------- $xx $xx $xxx $xxx - -------------------------------------------------------- This example should not be considered to represent actual expenses or performance for the future. Actual future expenses may be higher or lower than those shown. 3 - -------------------------------------------------------------------------------- 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 Fund Admiral Shares' expense ratio in fiscal year 2005 was XX.XX%, or $XX.XX per $1,000 of average net assets. The average multi-cap value fund had expenses in 2006 of XX.XX%, or $XX.XX 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 As of October 31, 2006 - --------------------------------------------------------------------------------------------- Net Assets (all share classes) $x.xx billion - --------------------------------------------------------------------------------------------- Investment Advisor Wellington Management Company, LLP, Boston, Mass., since inception AllianceBernstein L.P., New York City, N.Y., since 1999 - --------------------------------------------------------------------------------------------- Dividends and Capital Gains Dividends are distributed semiannually in June and December; capital gains, if any, are distributed annually in December - --------------------------------------------------------------------------------------------- Inception Date Investor Shares--October 23, 1958 Signal Shares--February 28, 2007 - --------------------------------------------------------------------------------------------- Minimum Initial Investment $1 million - --------------------------------------------------------------------------------------------- Conversion Features Signal Shares--May be converted to Investor Shares if you are no longer eligible for Signal Shares - --------------------------------------------------------------------------------------------- Newspaper Abbreviation - --------------------------------------------------------------------------------------------- Vanguard Fund Number - --------------------------------------------------------------------------------------------- CUSIP Number - --------------------------------------------------------------------------------------------- Ticker Symbol - ---------------------------------------------------------------------------------------------
5 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 LOGO] 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 capitalizations) 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. 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, 2006, was $xx.x billion. [FLAG LOGO] 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. 6 U.S. Stock Market Returns (1926-2005) 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 xxx xxx xxx xxx - ------------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2005. You can see, for example, that while the average return of common stocks for all of the 5-year periods was xxx%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular. - -------------------------------------------------------------------------------- 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, earnings, cash flow, or other similar criteria. 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 LOGO] 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 advisor independently selects and maintains a portfolio of common stocks for the Fund. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations about companies and their financial prospects, the prices of the securities, and the advisors' 7 assessments of the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. Although each advisor uses a different process to select securities, each is committed to investing in mid- and large-cap stocks that, in the advisors opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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 broad market averages, while at the same time being undervalued relative to the market. AllianceBernstein L.P. (AllianceBernstein), 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 AllianceBernstein 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." [FLAG LOGO] 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. [FLAG LOGO] Because the Fund tends to invest a high percentage of assets in its ten largest holdings, the Fund is subject to asset concentration risk, which is the chance that the Fund's performance may be hurt disproportionately by the poor performance of relatively few stocks. The Fund is generally managed without regard to tax ramifications. Other Investment Policies and Risks Besides investing in undervalued common stocks, the Fund may make other kinds of investments to achieve its objective. 8 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 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 ETF 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a country's currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities 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. 9 - -------------------------------------------------------------------------------- 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 Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Temporary Investment Measures The Fund may temporarily depart from its normal investment policies--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 holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated 10 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 ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. .. Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will 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, 2006. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 11 The Fund and Vanguard The Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- 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 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. The Fund's board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time. .. Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is an investment advisory firm founded in 1928. As of October 31, 2006, Wellington Management managed approximately $557 billion in assets. .. AllianceBernstein L.P., 1345 Avenue of the Americas , New York, NY 10105, is a registered investment advisor. As of October 31, 2006, AllianceBernstein managed approximately $xx billion in assets. The Fund pays Wellington Management and AllianceBernstein 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 for each quarter. In addition, 12 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 AllianceBernstein) over the same period. For the fiscal year ended October 31, 2006, 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 most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 13 - -------------------------------------------------------------------------------- Plain Talk About The Fund's Portfolio Managers The managers primarily responsible for the day-to-day management of the Fund's are: David R. Fassnacht, CFA, Senior Vice President, Partner, and Equity Portfolio Manager of Wellington Management. He has worked in investment management since 1988; has been with Wellington Management since 1991; was Assistant Fund Manager from 2001 to 2004; and has managed a portion of the fund since 2001. 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 AllianceBernstein and its predecessor since 1984; and has comanaged a portion of the Fund since 1999. Education: B.A., Smith College; M.B.A., Harvard Business School. John D. Phillips, Jr., CFA, Senior Portfolio Manager at AllianceBernstein and an officer of Alliance Capital Management L.P. He has worked in investment management since 1972; has been with AllianceBernstein and its predecessor since 1994; and has a portion of 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. 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 semiannually in June and December; capital gains distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. 14 - -------------------------------------------------------------------------------- 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. 15 - -------------------------------------------------------------------------------- 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., 16 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 ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a 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. 17 Financial Highlights The following financial highlights table is intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. 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. Note: This prospectus offers the Fund Signal Shares, not the Admiral Shares. Information for the Admiral Shares is shown here because the Fund's Signal Shares had not commenced operations. However, the two share classes invest in the same portfolio of securities and will have the same financial performance except to the extent that their operating expenses may differ. - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the Fund's Admiral Shares as an example. The Admiral Shares began fiscal year 2006 with a net asset value (price) of $xx.xx per share. During the year, each Admiral 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, 2006, the Admiral 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. - -------------------------------------------------------------------------------- 18
Windsor Fund Admiral Shares Nov. 12, Year Ended Oct. 31, 2001/1/ to ---------------------------------------------------- Oct. 31, 2006 2005 2004 2003 2002 - --------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $56.56 $51.41 $39.88 $50.00 - --------------------------------------------------------------------------------------------------------------------------------- Investment Operations - --------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .968/2/ .787 .605 .556 - --------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 3.896 5.082 11.537 (9.030) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 4.864 5.869 12.142 (8.474) - --------------------------------------------------------------------------------------------------------------------------------- Distributions - --------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.007) (.719) (.612) (.592) - --------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains (.297) -- -- (1.054) - --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.304) (.719) (.612) (1.646) - --------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $60.12 $56.56 $51.41 $39.88 - --------------------------------------------------------------------------------------------------------------------------------- Total Return 8.62% 11.46% 30.72% -17.61% - --------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - --------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $7,551 $4,195 $3,321 $2,214 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets/3/ 0.27% 0.28% 0.37% 0.40%/4/ - --------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.57%/2/ 1.43% 1.36% 1.22%/4/ - --------------------------------------------------------------------------------------------------------------------------------- Turnover Rate 32% 28% 23% 30% - --------------------------------------------------------------------------------------------------------------------------------- 1 Inception. 2 Net investment income per share and the ratio of net investment income to average net assets include $0.110 and 0.17%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004. 3 Includes performance-based investment advisory fee increases (decreases) of 0.04%, 0.08%, and 0.08%. 4 Annualized.
19 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums for Signal Shares To open and maintain an account $1 million for new investors. Investment minimums may differ for certain categories of investors. 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. Institutional clients should contact Vanguard for information on special rules that may apply to them. .. Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Signal Shares only if the total amount invested across all accounts held by the intermediary in the Fund is at least $5 million. Signal Shares generally are not available to financial intermediaries that serve as retail fund supermarkets. .. Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients (including but not limited to financial intermediary, defined benefit, and contribution plan clients; endowments; and foundations) whose accounts are not recordkept by Vanguard may hold Signal Shares if the total amount aggregated among all accounts held by the client and invested in a single Signal Shares fund is at least $1 million. .. Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if the client has more than $10 million in the Fund and transacts with the Fund in a cost-effective manner. Please contact your Vanguard representative to determine whether your accounts qualify. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. 20 By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--"Fund #. " For a list of Fund numbers (for Funds in this prospectus), see Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., 21 Eastern time) will have a trade date of the first business day following the date of receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know-Good Order. The requirements vary among types of accounts and transactions. Other Purchase Rules You Should Know 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may disrupt a fund's operation or performance. 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 22 been confirmed. In the case of written, wire, check, or automatic 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. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values 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 net asset values. 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 Signal Shares You may convert Investor Shares into Signal Shares at any time if you meet the eligibility requirements for Signal Shares. Vanguard will not automatically convert accounts holding Investor Shares that qualify for conversion into Signal Shares. You may contact Vanguard by telephone or by mail to request this transaction. See Contacting Vanguard. Conversions From Admiral Shares Into Signal Shares The Fund may convert an eligible investor's Admiral Shares into Signal Shares. The fund will notify the investor in writing before any automatic conversion into Signal Shares. You may instruct the Fund if you do not wish to convert into Signal Shares. In such cases, your Admiral Shares will be converted into Investor Shares. Mandatory Conversions Into Investor Shares If an investor no longer meets the requirements for Admiral Shares, the Fund may automatically 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 23 conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. Vanguard reserves the right, without prior notice, to change conversion policies. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. For example, if your request is received by Vanguard before the close of regular trading on 24 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. 25 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 available balance. 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 or automatic 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. Exchanging Shares An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. 26 Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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 trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, 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. 27 .. 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. 28 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 caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: .. The fund name and account number. .. The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: .. Signatures of all registered owners. .. Signature guarantees, if required for the type of transaction.* .. Any supporting legal documentation that may be required. 29 The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 Signal Shares through a financial intermediary, such as a bank, broker, or investment advisor. Please consult your financial intermediary to determine whether Signal Shares are available through that firm and to learn about other rules that may apply. 30 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. Low-Balance Accounts The Fund reserves the right to convert an investor's Signal Shares into Investor Shares of the Fund if the investor's fund account balance falls below the minimum initial investment. Any such conversion will be preceded by written notice to the investor. Right to Change Policies In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 31 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 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. 32 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 ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 33
Contacting Vanguard - ------------------------------------------------------------------------------------------------------------ Web - ------------------------------------------------------------------------------------------------------------ Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a week For fund, account, and service information For most account transactions For literature requests - ------------------------------------------------------------------------------------------------------------ Phone - ------------------------------------------------------------------------------------------------------------ Vanguard Tele-Account/(R)/ 800-662-6273 For automated fund and account information (ON-BOARD) For exchange transactions (subject to limitations) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------------------------------------ Investor Information 800-662-7447 (SHIP) For fund and service information (Text telephone at 800-952-3335) 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) For account information (Text telephone at 800-749-7273 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 - ------------------------------------------------------------------------------------------------------------ Signal Service Centers For information regarding Signal Shares For institutional intermediary clients: 800-997-2798 For institutional clients whose accounts are not record kept at Vanguard: 888-809-8102 For institutional clients whose accounts are record kept at Vanguard: 800-523-1188 For most Signal Share transactions Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------------------------------------ Institutional Division For information and services for large institutional investors 888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------------------------------------ Intermediary Sales Support For information and services for financial intermediaries 800-997-2798 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 - ------------------------------------------------------------------------------------------------------------
34 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Number Please use the specific fund number when contacting us: Signal Shares - ----------------------------------------------------------- Vanguard Windsor Fund xxxx - ----------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal, Vanguard Tele-Account, Tele-Account, Vanguard ETF, 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. 35 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. 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. 36 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. 37 [SHIP LOGO][Vanguard/(R)/ LOGO] P.O. Box 2600 Valley Forge, PA 19482-2600 CONNECT WITH VANGUARD/TM/ > www.vanguard.com 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 visit www.vanguard.com or contact us as follows: The Vanguard Group Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP) Text Telephone: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone: 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: BACK COVER FILE NUMBER (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Pxxxx 022007 Vanguard (R) Windsor (TM) II Fund > Prospectus Investor Shares and Admiral(TM) Shares February 28, 2007 [SHIP LOGO][VANGUARD (R) LOGO] This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- Fund Profile 1 Investing With Vanguard 23 - ------------------------------------------------------------------------------- More on the Fund 6 Purchasing Shares 23 - ------------------------------------------------------------------------------- The Fund and Vanguard 12 Converting Shares 26 - ------------------------------------------------------------------------------- Investment Advisors 13 Redeeming Shares 27 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 16 Exchanging Shares 30 Taxes - ------------------------------------------------------------------------------- Share Price 18 Frequent-Trading Limits 30 - ------------------------------------------------------------------------------- Financial Highlights 20 Other Rules You Should Know 32 - ------------------------------------------------------------------------------- Fund and Account Updates 35 - ------------------------------------------------------------------------------- Contacting Vanguard 37 - ------------------------------------------------------------------------------- Glossary of Investment Terms 39 - ------------------------------------------------------------------------------- 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 three separate classes of shares: Investor Shares, Admiral Shares, and Signal Shares. This prospectus offers the Fund's Investor Shares and 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. A separate prospectus offers Signal(TM) Shares, which are generally for Vanguard's institutional clients who invest at least $1 million and meet other eligibility requirements. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. 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 an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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 performance (before and after taxes) does 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). 1
Average Annual Total Returns for Periods Ended December 31, 2006 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 Admiral Shares/1/ - -------------------------------------------------------------------------------------------------------------- Return Before Taxes 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 - -------------------------------------------------------------------------------------------------------------- 1 From the inception of the Fund's Admiral Shares on May 14, 2001, through December 31, 2006, 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 the Investor Shares and will vary for a fund's other share classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, although such costs are reflected in the investment performance figures included in this prospectus. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2006. 2 Shareholder Fees (Fees paid directly from your investment) Investor Shares Admiral Shares - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None None - ------------------------------------------------------------------------------- Purchase Fee None None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested None None Dividends - ------------------------------------------------------------------------------- Redemption Fee None None - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) Investor Shares Admiral Shares - ------------------------------------------------------------------------------- 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% - ------------------------------------------------------------------------------- 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. 3 - -------------------------------------------------------------------------------- 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 2006 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 fund had expenses in 2005 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 As of October 31, 2006 Net Assets (all share classes) $x.xx billion - ------------------------------------------------------------------------------------------------ Investment Advisors - Armstrong Shaw Associates Inc., New Canaan, Conn., since 2006 - Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, Tex., since inception - Hotchkis and Wiley Capital Management, LLC, Los Angeles, Calif., since 2003 - Lazard Asset Management, LLC, New York, N.Y., since 2007 - The Vanguard Group, Inc., Valley Forge, Pa., since 1991 - ------------------------------------------------------------------------------------------------ Dividends and Capital Gains Dividends are distributed semiannually in June and December; capital gains, if any, are distributed annually in December - ------------------------------------------------------------------------------------------------ Investor Shares Admiral Shares - ------------------------------------------------------------------------------------------------ Suitable for IRAs Yes Yes - ------------------------------------------------------------------------------------------------ Inception Date June 24, 1985 May 14, 2001 - ------------------------------------------------------------------------------------------------ Minimum Initial Investment $10,000 $100,000 - ------------------------------------------------------------------------------------------------ Conversion Features May be converted to Admiral May be converted to Investor Shares if you meet Shares if you are no longer eligibility requirements eligible for Admiral Shares - ------------------------------------------------------------------------------------------------ Newspaper Abbreviation WndsrII WndsrIIAdml - ------------------------------------------------------------------------------------------------ Vanguard Fund Number 73 573 - ------------------------------------------------------------------------------------------------ CUSIP Number 922018205 922018304 - ------------------------------------------------------------------------------------------------ Ticker Symbol VWNFX VWNAX - ------------------------------------------------------------------------------------------------
5 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 capitalizations) whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. 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, 2006, 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. 6 U.S. Stock Market Returns (1926-2005) 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 12.3 10.4 11.2 11.4 - ------------------------------------------------------------------------ The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2005. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.4%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular. - -------------------------------------------------------------------------------- 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, earnings, cash flow, or other similar criteria. 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 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 advisor independently selects and maintains a portfolio of common stocks for the Fund. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects, the prices of the securities, and the stock market and 7 the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. Although each advisor uses a different process to select securities, each is committed to investing in large- and mid-cap stocks that, in the advisor's opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. Armstrong Shaw Associates Inc. (Armstrong Shaw), which manages approximately xx% of the Fund's assets, constructs a portfolio of large-capitalization stocks using a combination of fundamental and qualitative criteria to identify individual companies for potential investment. The firm's disciplined, absolute-value-based approach determines the intrinsic value of a company through an analysis of its cash flow or an appraisal of its assets. Candidates for purchase are stocks selling at a substantial discount to this intrinsic value, from companies that have a sound business and capable management team. 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. Hotchkis and Wiley Capital Management, LLC (Hotchkis & Wiley), which manages approximately xx% of the Fund's assets, invests mainly in 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. Lazard Asset Management LLC (Lazard) employs a relative value approach that seeks a combination of attractive valuation and high financial productivity. The process is research-driven, relying upon bottom-up stock analysis performed by the firm's global sector analysts. The Vanguard Group (Vanguard), which manages approximately xx% 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 8 (approximately x%), by investing in stock index 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. 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 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 ETF 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. 9 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. - -------------------------------------------------------------------------------- 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 Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Temporary Investment Measures The Fund may temporarily depart from its normal investment policies--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 holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and 10 administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - - Each Vanguard fund reserves the right to reject any purchase request-- including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - - Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - - Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will 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, 2006. 11 - -------------------------------------------------------------------------------- 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 140 funds holding assets in excess of $xx trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- 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 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. - -------------------------------------------------------------------------------- 12 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. The Fund's board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time. - - Armstrong Shaw Associates Inc., 45 Grove Street, New Canaan, CT 06840, is an investment advisory firm founded in 1984. As of October 31, 2006, Armstrong Shaw managed approximately $xx billion in assets. - - 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, 2006, Barrow, Hanley managed approximately $62.7 billion in assets. - - Hotchkis and Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor, Los Angeles, CA 90017, is an investment advisory firm originally founded in 1980. As of October 31, 2006, Hotchkis & Wiley managed approximately $34.3 billion in assets. - - Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY 10112, is an investment management firm and wholly owned subsidiary of Lazard Freres & Co., LLC. As of September 30, 2006, Lazard managed approximately $90 billion in assets. - - The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $xxx billion in assets. The Fund pays four of its investment advisors--Armstrong Shaw; Barrow, Hanley; Hotchkis & Wiley; and Lazard--on a quarterly basis. For each advisor, the quarterly fee is based on certain annual percentage rates applied to average daily net assets managed by the advisor for each quarter. 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 (a 60-month period in the case of Hotchkis & Wiley and Lazard) is compared with that of the Russell 1000 Value Index (for Armstrong Shaw), the Morgan Stanley Capital International (MSCI) US Prime Market 750 Index (for Barrow, Hanley), the MSCI US Investable Market 2500 Index (for Hotchkis & Wiley), and the S&P 500 Index (for Lazard) 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, 2006, 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%. 13 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 most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. Joel M. Dickson, Ph.D., is head of Active Quantitative Equity Management and Principal of Vanguard. He has direct oversight responsibility for all active quantitative equity portfolios managed by Vanguard's Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University. 14 - -------------------------------------------------------------------------------- Plain Talk About The Fund's Portfolio Managers The managers primarily responsible for the day-to-day management of the Fund are: Jeffrey M. Shaw, Chairman, Chief Investment Officer, and Co-Founder of Armstrong Shaw. He has worked in investment management since 1984 and has managed a portion of the Fund since 2006. Education: B.S., Princeton University; M.B.A., Harvard Business School. 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 a portion of the Fund since 1985. Education: B.S., University of South Carolina. 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 co-managed the Hotchkis & Wiley portion of the Fund since 2003. Mr. Davis has authority to make investment decisions jointly with the other comanager. Education: B.A. and M.B.A., Stanford University. Sheldon J. 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 co-managed the Hotchkis & Wiley portion of the Fund since 2003. Mr. Lieberman has authority to make investment decisions jointly with the other comanager. Education: B.A., University of California, Los Angeles; M.B.A., California State University, Northridge. Andrew Lacey, Deputy Chairman of Lazard. He has worked in investment management since 1995; has been with Lazard since 1995; and has co-managed the Lazard portion of the Fund since 2007. Education: B.A., Wesleyan University; M.B.A., Columbia University. Christopher Blake, Managing Director of Lazard. He has worked in investment management since 1995; has been with Lazard since 1995; and has co-managed the Lazard portion of the Fund since 2007. Education: B.S.B.A., University of Denver. James D. Troyer, CFA and Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. 15 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 semiannually in June and December; capital gains distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- 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. 16 - - 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. - -------------------------------------------------------------------------------- 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. 17 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 ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a 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. 18 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. 19 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. - -------------------------------------------------------------------------------- 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 2006 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, 2006, 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. - -------------------------------------------------------------------------------- 20
Windsor II Fund Investor Shares Year Ended October 31, --------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $31.61 $28.49 $24.61 $20.87 $24.50 - ----------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------- Net Investment Income .65 .56 .51 .51 - ----------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 3.10 3.87 3.75 (3.47) - ----------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.75 4.43 4.26 (2.96) - ----------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.63) (.55) (.52) (.52) - ----------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- (.15) - ----------------------------------------------------------------------------------------------------------------------- Total Distributions (.63) (.55) (.52) (.67) - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $31.61 $28.49 $24.61 $20.87 - ----------------------------------------------------------------------------------------------------------------------- Total Return 13.22% 18.15% 20.68% -12.51% - ----------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $28,199 $26,232 $20,843 $17,735 - ----------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets/1/ 0.35% 0.37% 0.43% 0.42% - ----------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.14% 2.07% 2.31% 2.12% - ----------------------------------------------------------------------------------------------------------------------- Turnover Rate 28% 22% 29% 41% - ----------------------------------------------------------------------------------------------------------------------- 1 Includes performance-based investment advisory fee increases (decreases) of x.xx%, 0.01%, 0.02%, 0.03%, and 0.02%.
21
Windsor II Fund Investor Shares Year Ended October 31, --------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $56.13 $50.59 $43.69 $37.05 $43.50 - ----------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.224 1.043 .95 .944 - ----------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 5.493 6.885 6.65 (6.167) - ----------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.717 7.928 7.60 (5.223) - ----------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.177) (1.028) (.96) (.962) - ----------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- (.265) - ----------------------------------------------------------------------------------------------------------------------- Total Distributions (1.177) (1.028) (.96) (1.227) - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $56.13 $50.59 $43.69 $37.05 - ----------------------------------------------------------------------------------------------------------------------- Total Return 13.34% 18.30% 20.79% -12.44% - ----------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $11,992 $4,849 $3,412 $2,484 - ----------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets/2/ 0.22% 0.26% 0.32% 0.35% - ----------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.25% 2.17% 2.41% 2.18% - ----------------------------------------------------------------------------------------------------------------------- Turnover Rate 28% 22% 29% 41% - ----------------------------------------------------------------------------------------------------------------------- 1 Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.02%, 0.03%, 0.02%, and 0.00%.
22 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums for Investor Shares To open and maintain an account. $10,000. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. Account Minimums for Admiral Shares To open and maintain an account. $100,000 for new investors. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in the same Fund account are eligible to convert their Investor Shares 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, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. 23 By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--"Fund #_. " For a list of Fund numbers (for share classes in this prospectus), see Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of 24 receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Other 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the 25 investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. No cancellations. 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, wire, check, or automatic 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. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values 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 net asset values. 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. 26 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 account's Investor Shares into Admiral Shares. The Fund will notify the investor in writing before any automatic conversion into Admiral Shares. If you do not wish to convert to the lower-cost Admiral Shares, you may choose not to convert to them. 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 automatically 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. Vanguard reserves the right, without prior notice, to change conversion policies. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. 27 By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a 28 trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance. Share certificates. If share certificates have been issued for your fund 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. 29 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 or automatic 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. Exchanging Shares An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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. 30 - - Purchases of shares by asset transfer or direct rollover. - - Conversions of shares from one share class to another in the same fund. - - Checkwriting redemptions. - - Section 529 college savings plans. - - Certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, 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. 31 For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "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. 32 - - Fund name and account number, if applicable. - - Other information relating to the caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: - - The fund name and account number. - - The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - - Signatures of all registered owners. - - Signature guarantees, if required for the type of transaction.* - - Any supporting legal documentation that may be required. The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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. 33 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. 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 without prior notice, to liquidate any investment-only retirement-plan fund account or any nonretirement fund account whose balance falls below the minimum initial investment. Shares redeemed in accordance with this policy will be subject to applicable redemption fees. 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 (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services 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 34 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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, 35 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. 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 ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 36 Contacting Vanguard Web - ------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account (R) For automated fund and account information 800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone at 800-952-3335) 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 For account information 800-662-2739 (CREW) (Text For most account transactions telephone at 800-749-7273) 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 For Admiral account information 888-237-9949 For most Admiral transactions Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 37 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Numbers Please use the specific fund number when contacting us: Investor Shares Admiral Shares - --------------------------------------------------------------------- Vanguard Windsor II Fund 73 573 - --------------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal, Vanguard Tele-Account, Tele-Account, Vanguard ETF, 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. 38 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 potential for growth in revenue, earnings, cash flow, or other similar criteria. 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. 39 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. 40 This page intentionally left blank. [SHIP LOGO][VANGUARD (R) LOGO] P.O. Box 2600 Valley Forge, PA 19482-2600 CONNECT WITH VANGUARD/TM/ > www.vanguard.com 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 visit www.vanguard.com or contact us as follows: The Vanguard Group Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP) Text Telephone: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone: 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) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P073 022007 Vanguard (R) Windsor (TM) II Fund > Prospectus Signal(TM) Shares February 28, 2007 [SHIP LOGO][VANGUARD (R) LOGO] This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- Fund Profile 1 Investing With Vanguard 22 - ------------------------------------------------------------------------------- More on the Fund 6 Purchasing Shares 22 - ------------------------------------------------------------------------------- The Fund and Vanguard 12 Converting Shares 25 - ------------------------------------------------------------------------------- Investment Advisors 12 Redeeming Shares 26 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 16 Exchanging Shares 28 Taxes - ------------------------------------------------------------------------------- Share Price 18 Frequent-Trading Limits 29 - ------------------------------------------------------------------------------- Financial Highlights 20 Other Rules You Should Know 30 - ------------------------------------------------------------------------------- Fund and Account Updates 33 - ------------------------------------------------------------------------------- Contacting Vanguard 36 - ------------------------------------------------------------------------------- Glossary of Investment Terms 38 - ------------------------------------------------------------------------------- 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 three separate classes of shares: Investor Shares, Admiral(TM) Shares, and Signal Shares. This prospectus offers the Fund's Signal Shares, which are generally for investors who invest a minimum of $1 million. A separate prospectus offers Investor Shares and Admiral Shares. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. 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 an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. Both the bar chart and the table present information for the Admiral Shares, because Signal Shares were not available during the time periods shown. The expense ratio of the Signal Shares is expected to be the same as that of the Admiral Shares; therefore, performance of the Signal Shares should closely match that of the Admiral Shares. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Admiral Shares compare with those of relevent market indexes. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns-Admiral Shares - ----------------------------------------------------------- - ----------------------------------------------------------- 1 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).
Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year 5 Years Inception/1/ - ------------------------------------------------------------------------------------------------------------------ Vanguard Windsor II Fund Admiral Shares - ------------------------------------------------------------------------------------------------------------------ Return Before Taxes x.xx% x.xx% x.xx% - ------------------------------------------------------------------------------------------------------------------ Return After Taxes on Distributions x.xx x.xx x.xx - ------------------------------------------------------------------------------------------------------------------ Return After Taxes on Distributions and Sale of Fund Shares x.xx x.xx x.xx - ------------------------------------------------------------------------------------------------------------------ Comparative Indexes (reflect no deduction for fees, expenses, or taxes) - ------------------------------------------------------------------------------------------------------------------ Russell 1000 Value Index xx.xx% xx.xx% x.xx% - ------------------------------------------------------------------------------------------------------------------ Standard & Poor's 500 Index xx.xx xx.xx x.xx - ------------------------------------------------------------------------------------------------------------------ 1 Since- inception returns are from May 14, 2001--the inception date of the Admiral Shares--through December 31, 2006.
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 will vary for a fund's other 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 Signal 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 on estimated amounts for the current fiscal year. 2 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------- Redemption Fee None - ------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------- Management Expenses 0.xx% - ------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------- Other Expenses 0.xx% - ------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.xx% - ------------------------------------------------------------------------- The following example is intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the 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 - ------------------------------------------------------------------------- $xx $xx $xx $xx - ------------------------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 3 - -------------------------------------------------------------------------------- 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 II Fund Signal Shares' expense ratio to be XX.XX%, or $XX.XX per $1,000 of average net assets. The average large-cap value fund had expenses in 2005 of XX.XX%, or $XX.XX 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 As of October 31, 2006 - -------------------------------------------------------------------------------- Net Assets (all share classes) $x.xx billion - -------------------------------------------------------------------------------- Investment Advisor - Armstrong Shaw Associates Inc., New Canaan, Conn., since 2006 - Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, Tex., since inception - Hotchkis and Wiley Capital Management, LLC, Los Angeles, Calif., since 2003 - Lazard Asset Management LLC, New York, N.Y., since 2007 - The Vanguard Group, Inc., Valley Forge, Pa., since 1991 - -------------------------------------------------------------------------------- Dividends and Capital Gains Dividends are distributed semiannually in June and December; capital gains, if any, are distributed annually in December - -------------------------------------------------------------------------------- Inception Date Investor Shares--June 24, 1985 Signal Shares--February 28, 2007 - -------------------------------------------------------------------------------- Minimum Initial Investment $1 million - -------------------------------------------------------------------------------- Conversion Features Signal Shares--May be converted to Investor Shares if you are no longer eligible for Signal Shares - -------------------------------------------------------------------------------- Newspaper Abbreviation - -------------------------------------------------------------------------------- Vanguard Fund Number - -------------------------------------------------------------------------------- CUSIP Number - -------------------------------------------------------------------------------- Ticker Symbol - -------------------------------------------------------------------------------- 5 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 capitalizations) whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. 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, 2006, 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. 6 U.S. Stock Market Returns (1926-2005) 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 12.3 10.4 11.2 11.4 - ------------------------------------------------------------------------ The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2005. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.4%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular. - -------------------------------------------------------------------------------- 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, earnings, cash flow, or other similar criteria. 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 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 advisor independently selects and maintains a portfolio of common stocks for the Fund. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects, the prices of the securities, and the stock market and 7 the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. Although each advisor uses a different process to select securities, each is committed to investing in large- and mid-cap stocks that, in the advisors opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels 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. Armstrong Shaw Associates Inc. (Armstrong Shaw), which manages approximately xx% of the Fund's assets, constructs a portfolio of large-capitalization stocks using a combination of fundamental and qualitative criteria to identify individual companies for potential investment. The firm's disciplined, absolute-value-based approach determines the intrinsic value of a company through an analysis of its cash flow or an appraisal of its assets. Candidates for purchase are stocks selling at a substantial discount to this intrinsic value, from companies that have a sound business and capable management team. 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. Hotchkis and W iley Capital Management, LLC (Hotchkis & Wiley), which manages approximately xx% of the Fund's assets, invests mainly in 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. Lazard Asset Management LLC (Lazard) employs a relative-value approach that seeks a combination of attractive valuation and high financial productivity. The process is research-driven, relying upon bottom-up stock analysis performed by the firm's global sector analysts. The Vanguard Group (Vanguard), which manages approximately xx% 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 8 (approximately x%), by investing in stock index 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. 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 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 ETF 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 ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. 9 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. - -------------------------------------------------------------------------------- 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 Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Temporary Investment Measures The Fund may temporarily depart from its normal investment policies--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 holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and 10 administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - - Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - - Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will 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, 2006. 11 - -------------------------------------------------------------------------------- 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 140 funds holding assets in excess of $xx trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- 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 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. The Fund's board of trustees designates the 12 proportion of Fund assets to be managed by each advisor and may change these proportions at any time. - - Armstrong Shaw Associates Inc., 45 Grove Street, New Canaan, CT 06840, is an investment advisory firm founded in 1984. As of October 31, 2006, Armstrong Shaw managed approximately $xx billion in assets. - - 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, 2006, Barrow, Hanley managed approximately $62.7 billion in assets. - - Hotchkis and Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor, Los Angeles, CA 90017, is an investment advisory firm originally founded in 1980. As of October 31, 2006, Hotchkis & Wiley managed approximately $34.3 billion in assets. - - Lazard Asset Management, LLC, 30 Rockefeller Plaza, New York, NY 10112, is an investment management firm and wholly owned subsidiary of Lazard Freres & Co., LLC. As of September 30, 2006, Lazard managed approximately $90 billion in assets. - - The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $xxx billion in assets. The Fund pays four of its investment advisors--Armstrong Shaw; Barrow, Hanley; Hotchkis & Wiley; and Lazard--on a quarterly basis. For each advisor, the quarterly fee is based on certain annual percentage rates applied to average daily net assets managed by the advisor for each quarter. 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 (a 60-month period in the case of Hotchkis & Wiley and Lazard) is compared with that of the Russell 1000 Value Index (for Armstrong Shaw), the Morgan Stanley Capital International (MSCI) US Prime Market 750 Index (for Barrow, Hanley), the MSCI US Investable Market 2500 Index (for Hotchkis & Wiley), and the S&P 500 Index (for Lazard) 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, 2006, the advisory fees and expenses represented an effective annual rate of 0.xx% of the Fund's average net assets before a performance-based decrease of 0.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 13 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 most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. Joel M. Dickson, Ph.D., is head of Active Quantitative Equity Management and Principal of Vanguard. He has direct oversight responsibility for all active quantitative equity portfolios managed by Vanguard's Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University. 14 - -------------------------------------------------------------------------------- Plain Talk About The Fund's Portfolio Managers The managers primarily responsible for the day-to-day management of the Fund are: Jeffrey M. Shaw, Chairman, Chief Investment Officer, and Co-Founder of Armstrong Shaw. He has worked in investment management since 1984 and has managed a portion of the Fund since 2006. Education: B.S., Princeton University; M.B.A., Harvard Business School. 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 a portion of the Fund since 1985. Education: B.S., University of South Carolina. 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 co-managed the Hotchkis & Wiley portion of the Fund since 2003. Mr. Davis has authority to make investment decisions jointly with the other co-manager. Education: B.A. and M.B.A., Stanford University. Sheldon J. 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 co-managed the Hotchkis & Wiley portion of the Fund since 2003. Mr. Lieberman has authority to make investment decisions jointly with the other co-manager. Education: B.A., University of California, Los Angeles; M.B.A., California State University, Northridge. Andrew Lacey, Deputy Chairman of Lazard. He has worked in investment management since 1995; has been with Lazard since 1995; and has co-managed the Lazard portion of the Fund since 2007. Education: B.A., Wesleyan University; M.B.A., Columbia University. Christopher Blake, Managing Director of Lazard. He has worked in investment management since 1995; has been with Lazard since 1995; and has co-managed the Lazard portion of the Fund since 2007. Education: B.S.B.A., University of Denver. James D. Troyer, CFA and Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. 15 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 semiannually in June and December; capital gains distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- 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. 16 - - 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. - -------------------------------------------------------------------------------- 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. 17 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 ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a 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. 18 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. 19 Financial Highlights The following financial highlights table is intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. 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. Note: This prospectus offers the Fund's Signal Shares, not the Admiral Shares. Information for the Admiral Shares is shown here because the Fund's Signal Shares had not commenced operations. However, the two share classes invest in the same portfolio of securities and will have the same financial performance, except to the extent that their operating expenses may differ. - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Table This explanation uses the Fund's Admiral Shares as an example. The Admiral Shares began fiscal year 2006 with a net asset value (price) of $xx.xx per share. During the year, each Admiral 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, 2006, the Admiral 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. - -------------------------------------------------------------------------------- 20
Windsor II Fund Investor Shares Year Ended October 31, --------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $56.13 $50.59 $43.69 $37.05 $43.50 - ----------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.224 1.043 .95 .944 - ----------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 5.493 6.885 6.65 (6.167) - ----------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.717 7.928 7.60 (5.223) - ----------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.177) (1.028) (.96) (.962) - ----------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- (.265) - ----------------------------------------------------------------------------------------------------------------------- Total Distributions (1.177) (1.028) (.96) (1.227) - ----------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $56.13 $50.59 $43.69 $37.05 - ----------------------------------------------------------------------------------------------------------------------- Total Return 13.34% 18.30% 20.79% -12.44% - ----------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $11,992 $4,849 $3,412 $2,484 - ----------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets/2/ 0.22% 0.26% 0.32% 0.35% - ----------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.25% 2.17% 2.41% 2.18% - ----------------------------------------------------------------------------------------------------------------------- Turnover Rate 28% 22% 29% 41% - ----------------------------------------------------------------------------------------------------------------------- 1 Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.02%, 0.03%, 0.02%, and 0.00%.
21 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums for Signal Shares To open and maintain an account. $1 million for new investors. Investment minimums may differ for certain categories of investors. 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. Institutional clients should contact Vanguard for information on special rules that may apply to them. - - Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Signal Shares only if the total amount invested across all accounts held by the intermediary in the Fund is at least $5 million. Signal Shares generally are not available to financial intermediaries that serve as retail fund supermarkets. - - Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients (including but not limited to financial intermediary, defined benefit, and contribution plan clients; endowments; and foundations) whose accounts are not recordkept by Vanguard may hold Signal Shares if the total amount aggregated among all accounts held by the client and invested in a single Signal Shares fund is at least $1 million. - - Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if the client has more than $10 million in the Fund and transacts with the Fund in a cost-effective manner. Please contact your Vanguard representative to determine whether your accounts qualify. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. 22 By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--xx. See Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of 23 receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Other Purchase Rules You Should Know 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. No cancellations. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has 24 been confirmed. In the case of written, wire, check, or automatic 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. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values 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 net asset values. 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 Signal Shares You may convert Investor Shares into Signal Shares at any time if you meet the eligibility requirements for Signal Shares. Vanguard will not automatically convert accounts holding Investor Shares that qualify for conversion into Signal Shares. You may contact Vanguard by telephone or by mail to request this transaction. See Contacting Vanguard. Conversions From Admiral Shares Into Signal Shares The Fund may convert an eligible investor's Admiral Shares into Signal Shares. The fund will notify the investor in writing before any automatic conversion into Signal Shares. You may instruct the Fund if you do not wish to convert into Signal Shares. In such cases, your Admiral Shares will be converted into Investor Shares. Mandatory Conversions Into Investor Shares If an investor no longer meets the requirements for Admiral Shares, the Fund may automatically 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 25 conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. Vanguard reserves the right, without prior notice, to change conversion policies. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. For example, if your request is received by Vanguard before the close of regular trading on 26 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a 27 cash redemption would negatively affect 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 available balance. Share certificates. If share certificates have been issued for your fund 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 or automatic 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. Exchanging Shares An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. 28 Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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 trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, 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. 29 - - 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. 30 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 caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: - - The fund name and account number. - - The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - - Signatures of all registered owners. - - Signature guarantees, if required for the type of transaction.* - - Any supporting legal documentation that may be required. 31 The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 Signal Shares through a financial intermediary, such as a bank, broker, or investment advisor. Please consult your financial intermediary to determine whether Signal Shares are available through that firm and to learn about other rules that may apply. 32 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. Low-Balance Accounts The Fund reserves the right to convert an investor's Signal Shares into Investor Shares of the Fund if the investor's fund account balance falls below the minimum initial investment. Any such conversion will be preceded by written notice to the investor. Right to Change Policies In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 33 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 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. 34 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 ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 35 Contacting Vanguard Web Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account (R) For automated fund and account information 800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone at 800-952-3335) 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 For account information 800-662-2739 (CREW) (Text For most account transactions telephone at 800-749-7273) Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Signal Service Centers For information regarding Signal Shares For institutional intermediary clients: 800-997-2798 For institutional clients whose accounts are not recordkept at Vanguard: 888-809-8102 For institutional clients whose accounts are recordkept at Vanguard: 800-523-1188 For most Signal Share transactions Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 36 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Number Please use the specific fund number when contacting us: Signal Shares - ----------------------------------------------------------- Vanguard Windsor II Fund xx - ----------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Signal, Vanguard Tele-Account, Tele-Account, Vanguard ETF, 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. 37 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 potential for growth in revenue, earnings, cash flow, or other similar criteria. 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. 38 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. 39 This page intentionally left blank. This page intentionally left blank. [SHIP LOGO][VANGUARD (R) LOGO] Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/TM/ > www.vanguard.com 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: If you are an individual investor: The Vanguard Group Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-662-7447 (SHIP) Text Telephone: 800-952-3335 If you are a client of Vanguard's Institutional Division: The Vanguard Group Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102 Text Telephone: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone: 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) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P13xx 022007 PART B VANGUARD (R) WINDSOR(TM) FUNDS STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 28, 2007 This Statement of Additional Information is not a prospectus but should be read in conjunction with the Funds' current prospectuses (dated February 28, 2007). 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-18 PURCHASE AND REDEMPTION OF SHARES...........................................B-18 MANAGEMENT OF THE FUNDS ....................................................B-19 INVESTMENT ADVISORY SERVICES................................................B-29 PORTFOLIO TRANSACTIONS......................................................B-41 PROXY VOTING GUIDELINES.....................................................B-42 FINANCIAL STATEMENTS........................................................B-47 DESCRIPTION OF THE TRUST ORGANIZATION 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 (the SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company. The Trust currently offers the following funds (and classes thereof): Share Classes/1/ ------------- Fund/2/ Investor Admiral Signal ---- -------- ------- ------ Vanguard Windsor Fund Yes Yes Yes Vanguard Windsor II Fund Yes Yes Yes 1 Individually, a class; collectively, the classes 2 Individually, a Fund; collectively, the Funds 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, P.O. Box 2600, Valley Forge, PA 19482. 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 a 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 issued from time to time by the SEC and its staff, or any other regulatory authority having jurisdiction. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund's total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or for other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund's portfolio. Money borrowed will be subject to interest costs that may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund for purposes of the 1940 Act. These transactions can include entering into reverse repurchase agreements, engaging in mortgage-dollar-roll transactions, selling securities short (other than short sales "against-the-box"), buying and selling certain derivatives (such as futures contracts), selling (or writing) put and call options, engaging in sale-buybacks, entering into firm-commitment and standby-commitment agreements, engaging in when-issued, delayed-delivery, or forward-commitment transactions, and other trading practices that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing (additional discussion about a number of these transactions can be found below). A borrowing transaction will 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. The reorganization of an issuer under the federal bankruptcy laws may result in the issuer's debt securities being cancelled without repayment, repaid only in part, or repaid in part or whole through an exchange thereof for any combination of cash, debt securities, convertible securities, equity securities, or other instruments or rights in respect of the same issuer or a related entity. DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade securities, also referred to as "high-yield securities" or "junk bonds," are debt securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization (for example, lower than Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's) or are determined to be of comparable quality by the fund's advisor. These securities are generally considered to be, on balance, predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk than securities in the investment-grade categories. 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 B-5 regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary 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 depository 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 that has a value that is based on--or "derived from"--the values of other assets, reference rates, or indexes. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates, and related indexes. Derivatives include futures contracts and options on futures contracts, forward-commitment transactions, options on securities, caps, floors, collars, swap agreements, and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter (OTC) market. The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the securities, assets, or market indexes on which the derivatives are based. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. There is no assurance that any derivatives strategy used by a fund's advisor will succeed. The counterparties to the funds' derivatives will not be considered the issuers thereof for certain purposes of the 1940 Act and the IRC, although such derivatives may qualify as securities or investments under such laws. The funds' advisors, however, will monitor and adjust, as appropriate, the funds' credit risk exposure to derivative counterparties. Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds, and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions. The use of 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. B-6 Derivatives may be subject to pricing or "basis" risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A derivative transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, 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. Although hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds (ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock or bond market. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage. 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. Vanguard ETF(TM) * Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard index funds. Any Vanguard fund that issues ETF 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 ETF 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 Vanguard fund that repurchases its ETF Shares also may lend those shares to qualified institutional borrowers as part of the fund's securities lending activities. A fund's investments in Vanguard ETF Shares are also generally subject to the descriptions, limitations, and risks described under the heading "Other Investment Companies, " except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1) of the 1940 Act, subject to certain terms and conditions. - --------- * U.S. Pat. No. 6,879,964 B2. B-7 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. Depositary receipts are securities that are listed on exchanges or quoted in OTC markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in securities of U.S. companies or governments. Because foreign issuers are not generally subject to uniform accounting, auditing, and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there is a risk that a fund's trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers are generally less liquid than securities of comparable U.S. issuers. In certain countries, there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the 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 B-8 connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange and will enter into foreign currency transactions only to attempt to "hedge" the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss that would result from a decline in the value of the hedged currency, they also may limit any potential gain that might result should the value of such currency increase. Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, 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 B-9 fees or expenses and may also be subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts and options on futures contracts are derivatives. A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies, and broad-based securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position. The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market." A futures transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, 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. B-10 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss in trading futures contracts and in writing futures options can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds. A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange 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, among other things, the requirement that: (1) no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction; (2) no equity, taxable bond, or money market fund may loan funds if the loan would cause its aggregate outstanding loans through the program to exceed 5%, 7.5%, or 10%, respectively, of its net assets at the time of the loan; and (3) a fund's interfund loans to any one fund shall not exceed 5% of the lending fund's net assets. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund's investment objective and other investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs. B-11 OPTIONS. An option is a derivative. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price prior to the expiration date of the option. The writer of an option on a security has the obligation upon exercise of the option (1) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (2) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the size of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. The buyer (or holder) of an option is said to be "long" the option, while the seller (or writer) of an option is said to be "short" the option. A call option grants to the holder the right to buy (and obligates the writer to sell) the underlying security at the strike price. A put option grants to the holder the right to sell (and obligates the writer to buy) the underlying security at the strike price. The purchase price of an option is called the "premium." The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, 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 Section 12(d)(1) of the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company, as long as no investment represents more than 3% of the voting stock of an acquired investment company. The 1940 Act and certain rules provide certain exemptions from these restrictions. If a fund invests in other investment companies, shareholders will bear not only their proportionate share of the fund's expenses (including operating expenses and the fees of the advisor), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, B-12 issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded on the secondary market. PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer. Preferred stock normally pays dividends at a specified rate and has precedence over common stock in the event the issuer is liquidated or declares bankruptcy. However, in the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. Preferred stock is subject to many of the risks to which common stock and debt securities are subject. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the investment advisor will monitor a fund's repurchase agreement transactions generally and will evaluate the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The aggregate amount of any such agreements is not limited except to the extent required by law. The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement. RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a fund's books. 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. B-13 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 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 fund has knowledge that a material event will occur affecting securities on loan, and in respect of which the holder of the securities will be entitled to vote or consent, the lender must be entitled to call the loaned securities in time to vote or consent. SWAP AGREEMENTS. A swap agreement is a derivative. A swap agreement is an agreement between two parties (counterparties) to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted, and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be B-14 exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties. The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, swap transactions may be subject to a fund's limitation on investments in illiquid securities. Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement. Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. A leveraged swap transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, 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 B-15 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, 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. B-16 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." 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 or 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. B-17 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 act as an underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the1933 Act, in connection with the purchase and sale of portfolio securities. Compliance with the investment limitations set forth above is generally measured at the time the securities are purchased. All investment limitations must comply with applicable regulatory requirements. 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. The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day (Washington's Birthday), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although 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 The redemption price of shares of each Fund is the NAV next determined after the redemption request is received in good order, as defined in the Fund's prospectus. A redemption order received before the close of regular trading on the Exchange will be executed at the NAV computed on the date of receipt; a redemption order received after the close of regular trading on the Exchange will be executed at the NAV computed on the next day that the Exchange is open. 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. B-18 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 (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. INVESTING WITH VANGUARD THROUGH OTHER FIRMS 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, 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. MANAGEMENT OF THE FUNDS VANGUARD Each Fund is part of the Vanguard group of investment companies, which consists of more than 140 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 B-19 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, 2006, 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 (VMC), a wholly-owned subsidiary of Vanguard, is the principal underwriter for the funds and in that capacity performs and finances marketing, promotional, and distribution activities (collectively, marketing and distribution activities) that are primarily intended to result in the sale of the funds' shares. VMC performs marketing and distribution activities at cost in accordance with the terms and conditions of a 1981 SEC exemptive order that permits the Vanguard funds to internalize and jointly finance the marketing, promotion, and distribution of their shares. Under the terms of the SEC order, the funds' trustees review and approve the marketing and distribution expenses incurred on their behalf, including the nature and cost of the activities and the desirability of each fund's continued participation in the joint arrangement. To ensure that each fund's participation in the joint arrangement falls within a reasonable range of fairness, each fund contributes to VMC's marketing and distribution expenses in accordance with an SEC-approved formula. Under that formula, one half of the marketing and distribution expenses are allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each fund's sales for the preceding 24 months relative to the total sales of the funds as a group; provided, however, that no fund's aggregate quarterly rate of contribution for marketing and distribution expenses shall exceed 125% of the average marketing and distribution expense rate for Vanguard, and that no fund shall incur annual marketing and distribution expenses in excess of 0.20 of 1% of its average month-end net assets. As of October 31, 2006, none of the Vanguard funds' allocated share of VMC's marketing and distribution expenses was greater than 0.03% of the fund's average month-end net assets. Each fund's contribution to these marketing and distribution expenses helps to maintain and enhance the attractiveness and viability of the Vanguard complex as a whole, which benefits all of the funds and their shareholders. VMC's principal marketing and distribution expenses are for advertising, promotional materials, and marketing personnel. Other marketing and distribution activities that VMC undertakes on behalf of the funds may include, but are not limited to: - - Conducting or publishing Vanguard-generated research and analysis concerning the funds, other investments, the financial markets, or the economy; - - Providing views, opinions, advice, or commentary concerning the funds, other investments, the financial markets, or the economy; - - Providing analytical, statistical, performance, or other information concerning the funds, other investments, the financial markets, or the economy; B-20 - - Providing administrative services in connection with investments in the funds or other investments, including, but not limited to, shareholder services, recordkeeping services, and educational services; - - Providing products or services that assist investors or financial service providers (as defined below) in the investment decision-making process; - - Providing promotional discounts, commission-free trading, fee waivers, and other benefits to clients of Vanguard Brokerage Services/(R)/ who maintain qualifying investments in the funds; and - - Sponsoring, jointly sponsoring, financially supporting, or participating in conferences, programs, seminars, presentations, meetings, or other events involving fund shareholders, financial service providers, or others concerning the funds, other investments, the financial markets, or the economy, such as industry conferences, prospecting trips, due diligence visits, training or education meetings, and sales presentations. VMC performs most marketing and distribution activities itself. Some activities may be conducted by third parties pursuant to shared marketing arrangements under which VMC agrees to share the costs and performance of marketing and distribution activities in concert with a financial service provider. Financial service providers include, but are not limited to, investment advisors, broker-dealers, financial planners, financial consultants, banks, and insurance companies. Under these cost- and performance-sharing arrangements, VMC may pay or reimburse a financial service provider (or a third party it retains) for marketing and distribution activities that VMC would otherwise perform. VMC's cost- and performance-sharing arrangements may be established in connection with Vanguard investment products or services offered or provided to or through the financial service providers. VMC's arrangements for shared marketing and distribution activities may vary among financial service providers, and its payments or reimbursements to financial service providers in connection with shared marketing and distribution activities may be significant. VMC does not participate in the offshore arrangement Vanguard has established for qualifying Vanguard funds to be distributed in certain foreign countries on a private-placement basis to government-sponsored and other institutional investors through a third-party "asesor de inversiones" (investment advisor), which includes incentive-based remuneration. In connection with its marketing and distribution activities, VMC may give financial service providers (or their representatives): (1) promotional items of nominal value that display Vanguard's logo, such as golf balls, shirts, towels, pens, and mouse pads; (2) gifts that do not exceed $100 per person annually and are not preconditioned on achievement of a sales target; (3) an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target; and (4) reasonable travel and lodging accommodations to facilitate participation in marketing and distribution activities. VMC, as a matter of policy, does not pay asset-based fees, sales-based fees, or account-based fees to financial service providers in connection with its marketing and distribution activities for the Vanguard funds. VMC policy also prohibits marketing and distribution activities that are intended, designed, or likely to compromise suitability determinations by, or the fulfillment of any fiduciary duties or other obligations that apply to, financial service providers. Nonetheless, VMC's marketing and distribution activities are primarily intended to result in the sale of the funds' shares, and as such its activities, including shared marketing and distribution activities, may influence participating financial service providers (or their representatives) to recommend, promote, include, or invest in a Vanguard fund or share class. In addition, Vanguard or any of its subsidiaries may retain a financial service provider to provide consulting or other services, and that financial service provider also may provide services to investors. Investors should consider the possibility that any of these activities or relationships may influence a financial service provider's (or its representatives') decision to recommend, promote, include, or invest in a Vanguard fund or share class. Each financial service provider should consider its suitability determinations, fiduciary duties, and other legal obligations (or those of its representatives) in connection with any decision to consider, recommend, promote, include, or invest in a Vanguard fund or share class. The following table describes the expenses of Vanguard and VMC that are shared by the funds on an at-cost basis under the terms of two SEC exemptive orders. Amounts captioned "Management and Administrative Expenses" include a fund's allocated share of expenses associated with the management, administrative, and transfer agency services Vanguard provides to the funds. Amounts captioned "Marketing and Distribution Expenses" include a fund's allocated share of expenses associated with the marketing and distribution activities that VMC conducts on behalf of the Vanguard funds. B-21 As is the case with all mutual funds, transaction costs incurred by the Funds for buying and selling securities are not reflected in the table. Annual Shared Fund Operating Expenses are based on expenses incurred in the fiscal years ended October 31, 2004, 2005, and 2006, and are presented as a percentage of each Fund's average month-end net assets. ANNUAL SHARED FUND OPERATING EXPENSES (SHARED EXPENSES DEDUCTED FROM FUND ASSETS) ------------------------------------------- FUND 2004 2005 2006 - ---- ---- ---- ---- WINDSOR FUND Management and Administrative Expenses: XX% XX% XX% Marketing and Distribution Expenses: XX XX XX WINDSOR II FUND Management and Administrative Expenses: XX% XX% XX% Marketing and Distribution Expenses: XX XX XX The Funds' investment advisors may 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 Funds' management and administrative expenses and are not reflected in these totals. OFFICERS AND TRUSTEES Each Fund is governed by the board of trustees to the Trust and a single set of officers. The officers manage the day-to-day operations of the 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.
NUMBER OF VANGUARD VANGUARD FUNDS POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS OVERSEEN BY NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------- INTERESTED TRUSTEE John J. Brennan* Chairman of the May 1987 Chairman of the Board, Chief Executive Officer, and 146 (1954) Board, Chief Director (Trustee) of Vanguard, and each of the Executive Officer, investment companies served by Vanguard. and Trustee - ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES Charles D. Ellis Trustee January 2001 Applecore Partners (pro bono ventures in education); 146 (1937) Senior Advisor to Greenwich Associates (international business strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. Rajiv L. Gupta Trustee December 2001 Chairman and Chief Executive Officer of Rohm and 146 (1945) Haas Co. (chemicals); Board Member of American Chemistry Council; Director of Tyco International, Ltd. (diversified manufacturing and services) since 2005; Trustee of Drexel University and the Chemical Heritage Foundation. *Officers of the Fund are "interested persons" as defined in the 1940 Act.
B-22
NUMBER OF VANGUARD VANGUARD FUNDS POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS OVERSEEN BY NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------- Amy Gutmann Trustee June 2006 President of the University of Pennsylvania since 2004; 145 (1949) Professor in the School of Arts and Sciences, Annenberg School for Communication, and Graduate School of Education of the University of Pennsylvania since 2004; Provost (2001-2004) and Laurance S. Rockefeller Professor of Politics and the University Center for Human Vanues (1990-2004), Princeton University; Director of Carnegie Corporation of New York since 2005, and of Schuylkill River Development Corporation and Greater Philadelphia Chamber of Commerce since 2004. JoAnn Heffernan Heisen Trustee July 1998 Corporate Vice President and Chief Global Diversity 145 (1950) Officer since 2006, Vice President and Chief Information Officer (1997-2005), 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 Finance and Banking, 145 (1952) Harvard Business School; 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; Chair of the Investment Committee of HighVista Strategies LLC (private investment firm) since 2005; Director of registered investement companies advised by Merril Lynch Investment Managers and affiliates (1985-2004), Genbel Securities Limited (South African financial services firm) (1999-2003), Gensec Bank (1999-2003), Sanlam Ltd. (South African insurance company)(2001-2003), and Stockback, Inc.(credit card firm)(2000-2002). Alfred M. Rankin, Jr. Trustee January 1993 Chairman, President, Chief Executive Officer, and 145 (1941) Director of NACCO Industries, Inc.(forklift trucks/ housewares/lignite); Director of Goodrich Corporation (industrial products/aircraft systems and services). J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive Officer of Rohm 145 (1936) and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco Corp. (packaging products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University and Culver Educational Foundation. - ------------------------------------------------------------------------------------------------------------------------------------ EXECUTIVE OFFICERS Heidi Stam* Secretary July 2005 Managing Director of Vanguard since 2006; General 145 (1956) Counsel of Vanguard since 2005; Secretary of Vanguard, and of each of the investment companies served by Vanguard, since 2005; Principal of Vanguard (1997-2006). Thomas J. Higgins* Treasurer July 1998 Principal of Vanguard; Treasurer of each of the 145 (1957) investment companies served by Vanguard. *Officers of the Fund are "interested persons" as defined in the 1940 Act.
B-23 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 2005 and 2006, Vanguard paid Greenwich subscription fees amounting to less than $xxx,000. Vanguard's subscription rates are similar to those of other subscribers. Board Committees: The Trust's board has the following committees: - - Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of each fund and Vanguard. All independent trustees serve as members of the committee. The committee held xx meetings during the Funds' 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 xx meetings during the Funds' 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 xx meetings during the Funds' last fiscal year. The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Rankin, Chairman of the Committee. TRUSTEE COMPENSATION The same individuals serve as trustees of all Vanguard funds and each fund pays a proportionate share of the trustees' compensation. The funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, not the funds. INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways: - - The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings. - - The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings. - - Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee's separate account was generally equal to the net present value of the benefits he or she had accrued under the trustees' former retirement plan. Each eligible trustee's separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan. "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as 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. B-24 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 Amy Gutmann/4/ xx,xxx N/A N/A xxx,xxx JoAnn Heffernan Heisen xx,xxx $xxx $ x,xxx xxx,xxx Andre F. Perold xx,xxx N/A N/A xxx,xxx Alfred M. Rankin, Jr. xx,xxx 355 x,xxx xxx,xxx J. Lawrence Wilson xx,xxx 375 x,xxx xxx,xxx 1 The amounts shown in this column are based on the Funds' fiscal year ended October 31, 2006. 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 xxx Vanguard funds for the 2006 calendar year. 4 Dr. Gutmann became a member of the Funds' board effective June 2006.
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, 2006.
AGGREGATE DOLLAR RANGE OF DOLLAR RANGE OF VANGUARD FUND SHARES FUND FUND SHARES OWNED BY TRUSTEE - ---- TRUSTEE OWNED BY TRUSTEE VANGUARD WINDSOR FUND John J. Brennan xxx Over $100,000 Charles D. Ellis xxx Over $100,000 Rajiv L. Gupta xxx Over $100,000 Amy Gutmann xxx xxx JoAnn Heffernan Heisen xxx Over $100,000 Andre F. Perold xxx Over $100,000 Alfred M. Rankin, Jr. xxx Over $100,000 J. Lawrence Wilson xxx Over $100,000 VANGUARD WINDSOR II FUND John J. Brennan xxx Over $100,000 Charles D. Ellis xxx Over $100,000 Rajiv L. Gupta xxx Over $100,000 Amy Gutmann xxx xxx JoAnn Heffernan Heisen xxx Over $100,000 Andre F. Perold xxx Over $100,000 Alfred M. Rankin, Jr. xxx Over $100,000 J. Lawrence Wilson xxx Over $100,000
B-25 As of January 31, 2007, the trustees and executive officers of the funds owned, in the aggregate, less than 1% of each class of each fund's outstanding shares. As of January 31, 2007, those listed below owned of record 5% or more of each class' outstanding shares: PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES INTRODUCTION Vanguard and the Boards of Trustees of the Vanguard funds (Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Policies and Procedures) to govern the disclosure of the portfolio holdings of each Vanguard fund. Vanguard and the Boards considered each of the circumstances under which Vanguard fund portfolio holdings may be disclosed to different categories of persons under the Policies and Procedures. Vanguard and the Boards also considered actual and potential material conflicts that could arise in such circumstances between the interests of Vanguard fund shareholders, on the one hand, and those of the fund's investment advisor, distributor, or any affiliated person of the fund, its investment advisor, or its distributor, on the other. After giving due consideration to such matters and after the exercise of their fiduciary duties and reasonable business judgment, Vanguard and the Boards determined that the Vanguard funds have a legitimate business purpose for disclosing portfolio holdings to the persons described in each of the circumstances set forth in the Policies and Procedures and that the Policies and Procedures are reasonably designed to ensure that disclosure of portfolio holdings and information about portfolio holdings is in the best interests of fund shareholders and appropriately addresses the potential for material conflicts of interest. The Boards exercise continuing oversight of the disclosure of Vanguard fund portfolio holdings by (1) overseeing the implementation and enforcement of the Policies and Procedures, the Code of Ethics, and the Policies and Procedures Designed to Prevent the Misuse of Inside Information (collectively, the portfolio holdings governing policies) by the Chief Compliance Officer of Vanguard and the Vanguard funds; (2) considering reports and recommendations by the Chief Compliance Officer concerning any material compliance matters (as defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings governing policies; and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. Vanguard and the Boards reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice 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 the fund's ten largest stock portfolio holdings and the percentages that each of these ten largest stock portfolio holdings represent of the fund's total assets as of the most recent calendar-quarter-end (quarter-end ten largest stock holdings) online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 15 calendar days after the end of the calendar quarter. In addition, those funds generally will seek to disclose the fund's ten largest stock portfolio holdings as of the most recent month-end (month-end ten largest stock holdings, and together with quarter-end ten largest stock holdings, ten largest stock holdings) online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 10 business days after the end of the month. Online disclosure of the ten largest stock holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons. ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS Each of the Vanguard funds, excluding Vanguard money market funds, generally will seek to disclose the fund's complete portfolio holdings (complete portfolio holdings) as of the most recent calendar-quarter-end online at www.vanguard.com in the "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. 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 B-26 investment advisor, may withhold any portion of the fund's complete portfolio holdings from online disclosure as described above when deemed to be in the best interests of the fund. DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS Vanguard, for legitimate business purposes, may disclose Vanguard fund complete portfolio holdings at times it deems necessary and appropriate to rating and ranking organizations, financial printers, proxy voting service providers, pricing information vendors, third-parties that deliver analytical, statistical, or consulting services, and other third parties that provide services (collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider is conditioned on the Service Provider being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which complete portfolio holdings may be disclosed to a Service Provider, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the Service Provider, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to a Service Provider varies and may be as frequent as daily, with no lag. Disclosure of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider must be authorized by a Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal Department. Any disclosure of Vanguard fund complete portfolio holdings to a Service Provider as previously described may also include a list of the other investment positions comprising the fund, such as cash investments and derivatives. As of October 31, 2006, Vanguard fund complete portfolio holdings are disclosed to the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: Advisor Software, Inc., Alcom Printing Group Inc., Apple Press, L.C., Automatic Data Processing, Inc., Brown Brothers Harriman & Co., FactSet Research Systems Inc., Intelligencer Printing Company, Investment Technology Group, Inc., McMunn Associates Inc., Moore Wallace Inc., Pitney Bowes Management Services, Reuters America Inc., State Street Investment Manager Solutions, Triune Color Corporation, and Tursack Printing Inc. DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS Vanguard fund complete portfolio holdings may be disclosed between and among the following persons (collectively, Affiliates and Fiduciaries) for legitimate business purposes within the scope of their official duties and responsibilities, subject to such persons' continuing legal duty of confidentiality and legal duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics, the Policies and Procedures Designed to Prevent the Misuse of Inside Information, by agreement, or under applicable laws, rules, and regulations: (1) persons who are subject to the Code of Ethics or the Policies and Procedures Designed to Prevent the Misuse of Inside Information; (2) an investment advisor, distributor, administrator, transfer agent, or custodian to a Vanguard fund; (3) an accounting firm, an auditing firm or outside legal counsel retained by Vanguard, a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor to whom complete portfolio holdings are disclosed for due diligence purposes when the advisor is in merger or acquisition talks with a Vanguard fund's current advisor; and (5) a newly hired investment advisor or sub-advisor to whom complete portfolio holdings are disclosed prior to the time it commences its duties. The frequency with which complete portfolio holdings may be disclosed between and among Affiliates and Fiduciaries, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed between and among the Affiliates and Fiduciaries, is determined by such Affiliates and Fiduciaries based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure between and among Affiliates and Fiduciaries varies and may be as frequent as daily, with no lag. Any disclosure of Vanguard fund complete portfolio holdings to any Affiliates and Fiduciaries as previously described may also include a list of the other investment positions comprising the fund, such as cash investments and derivatives. Disclosure of Vanguard fund complete portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be authorized by a Vanguard fund officer or a Principal of Vanguard. B-27 As of October 31, 2006, Vanguard fund complete portfolio holdings are disclosed to the following Affiliates and Fiduciaries as part of ongoing arrangements that serve legitimate business purposes: Vanguard and each investment advisor, custodian, and independent registered public accounting firm identified in this Statement of Additional Information. DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF MANAGING A FUND'S ASSETS An investment advisor, administrator, or custodian for a Vanguard fund may, for legitimate business purposes within the scope of its official duties and responsibilities, disclose portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions 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 fund's portfolio holdings, other investment positions, securities transactions, or derivatives transactions without the consent of the fund or its agents. The Vanguard funds have not given their consent to any such use or disclosure and no person or agent of Vanguard is authorized to give such consent except as approved in writing by the Boards of the Vanguard funds. Disclosure of portfolio holdings or other investment positions by Vanguard to broker-dealers must be authorized by a Vanguard fund officer or a Principal of Vanguard. DISCLOSURE OF NON-MATERIAL INFORMATION The Policies and Procedures permit Vanguard fund officers, Vanguard fund portfolio managers, and other Vanguard representatives (collectively, Approved Vanguard Representatives) to disclose any views, opinions, judgments, advice, or commentary, or any analytical, statistical, performance, or other information, in connection with or relating to a Vanguard fund or its portfolio holdings and/or other investment positions (collectively, commentary and analysis) or any changes in the portfolio holdings of a Vanguard fund that occurred after the most recent calendar-quarter end (recent portfolio changes) to any person if (1) such disclosure serves a legitimate business purpose, (2) such disclosure does not effectively result in the disclosure of the complete portfolio holdings of any Vanguard fund (which can be disclosed only in accordance with the Policies and Procedures), and (3) such information does not constitute material nonpublic information. Disclosure of commentary and analysis or recent portfolio changes by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be authorized by a Vanguard fund officer or a Principal of Vanguard. An Approved Vanguard Representative must make a good faith determination whether the information constitutes material nonpublic information, which involves an assessment of the particular facts and circumstances. Vanguard believes that in most cases recent portfolio changes that involve a few or even several securities in a diversified portfolio or commentary and analysis would be immaterial and would not convey any advantage to a recipient in making an investment decision concerning a Vanguard fund. Nonexclusive examples of commentary and analysis about a Vanguard fund include (1) the allocation of the fund's portfolio holdings and other investment positions among various asset classes, sectors, industries, and countries; (2) the characteristics of the stock and bond components of the fund's portfolio holdings and other investment positions; (3) the attribution of fund returns by asset class, sector, industry, and country; and (4) the volatility characteristics of the fund. 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 for no reason. "Approved Vanguard Representatives" include, for purposes of the Policies and Procedures, persons employed by or associated with Vanguard or a subsidiary of Vanguard who have been authorized by Vanguard's Portfolio Review Department to disclose recent portfolio changes and/or commentary and analysis in accordance with the Policies and Procedures. As of October 31, 2006, Vanguard non-material portfolio holdings information is disclosed to KPMG, LLP, and R.V. Kuhns & Associates. DISCLOSURE OF PORTFOLIO HOLDINGS RELATED INFORMATION TO THE ISSUER OF A SECURITY FOR LEGITIMATE BUSINESS PURPOSES Vanguard, in its sole discretion, may disclose portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security if the issuer presents, to the satisfaction of Fund Financial Services, convincing evidence that the issuer has a legitimate business purpose for such information. Disclosure of this information to an issuer is conditioned on the issuer being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which portfolio holdings information concerning a security may be disclosed to the issuer of such security, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the issuer, is B-28 determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to an issuer cannot be determined in advance of a specific request and will vary based upon the particular facts and circumstances and the legitimate business purposes, but in unusual situations could be as frequent as daily, with no lag. Disclosure of portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security must be authorized by a Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal Department. DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW Vanguard fund portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions 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. 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. INVESTMENT ADVISORY SERVICES The Trust currently uses seven investment advisors: - - AllianceBernstein, L.P., founded in 1971, provides investment advisory services to a portion of the assets in the Windsor Fund. - - Armstrong Shaw Associates Inc., founded in 1984, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Barrow, Hanley, Mewhinney & Strauss, Inc., founded in 1979, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Hotchkis and Wiley Capital Management, LLC, originally founded in 1980, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Lazard Asset Management LLC, founded in 1970, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355, which began operations in 1975, provides investment advisory services to a portion of the assets in the Windsor II Fund. - - Wellington Management Company, LLP, founded in 1928, provides investment advisory services to a portion of the assets in the Windsor Fund. The Trust previously employed two other firms as investment advisors: - - Equinox Capital Management, LLC managed a portion of the the Windsor II Fund's assets from 1991 through 2007. B-29 - - Tukman Capital Management, Inc. managed a portion of the Windsor II Fund's assets from 1991 through 2007. 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 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, 2006. I. VANGUARD WINDSOR FUND Vanguard Windsor Fund uses a multimanager approach. The Fund has entered into investment advisory agreements with its advisors to manage the investment and reinvestment of the portion of the Windsor Fund's assets that the Fund's board of trustees determines to assign to the advisor (hereafter referred to as each Portfolio). In this capacity, each advisor continuously reviews, supervises, and administers the Portfolio's investment program. Each advisor discharges its responsibilities subject to the supervision and oversight of Vanguard's Portfolio Review Group and the officers and trustees of the Fund. Vanguard's Portfolio Review Group is responsible for recommending changes in a fund's advisory arrangements to the fund's board of trustees, including changes in the amount of assets allocated to each advisor, and whether to hire, terminate, or replace an advisor. The Fund pays each advisor a basic advisory fee at the end of each of the Fund's fiscal quarters, calculated by applying a quarterly rate, based on certain annual percentage rates, to the average month-end net assets of the advisor's Portfolio for the quarter. The basic fee will be increased or decreased by applying a performance fee adjustment based on the investment performance of the Portfolio relative to the investment performance of the Russell 1000 Value Index (for AllianceBernstein) and the Standard & Poor's 500 Index (for Wellington Management) (each, the Index). The investment performance will be based on the cumulative return of the Portfolio over a trailing 36-month period ending with the applicable quarter, compared with the cumulative total return of the Index for the same period. During the fiscal years ended October 31, 2004, 2005, and 2006, Vanguard Windsor Fund incurred the following aggregate investment advisory fees:
2004 2005 2006 ---- ---- ---- Basic Fee $23,127,000 $25,516,000 $xx,xxx,000 Increase or Decrease for Performance Adjustment 8,396,000 7,447,000 x,xxx,000 --------- --------- --------- Total $31,523,000 $32,963,000 $xx,xxx,000
A. ALLIANCEBERNSTEIN, L.P. As of October 31, 2006, Alliance Capital had an ownership structure as follows: - - 32.8% owned by AllianceBernstein Holding L.P./1/ - - 60.5% owned by AXA Financial, Inc./2/ - - 6.7% owned by AllianceBernstein employees - --------- 1 "AllianceBernstein Holding L.P." is a holding company that is publicly traded on the New York Stock Exchange under the ticker symbol, "AB." 2 Includes ownership of AllianceBernstein units, indirect ownership of AllianceBernstein units through its interest in AllianceBernstein Holding, and general partnership interests in AllianceBernstein and AllianceBernstein Holding. AXA Financial, Inc. is a wholly-owned subsidiary of AX, one of the world's largest global financial service organizations. 1. OTHER ACCOUNTS MANAGED The management of and investment decisions for the AllianceBernstein Portfolio are made by the US Value Investment Policy Group, comprised of senior US Value Investment Team members. The US Value Investment Policy Group relies heavily on the fundamental analysis and research of the advisor's large internal research staff. The members of the US B-30 Value Investment Policy Group with the most significant responsibility for the day-to-day management of the AllianceBernstein Portfolio of the Windsor Fund are: Marilyn G. Fedak and John D Phillips, Jr. The US Value Investment Policy Group manages a portion of the Windsor Fund; as of October 31, 2006, the Fund held assets of $xx billion. As of October 31, 2006, the US Value Investment Policy Group managed xx other registered investment company(ies) with total assets of $xx billion (including xx with total assets of $xx billion where the advisory firm's fee was based on account performance), 35 other pooled investment vehicles with total assets of $2.3 billion, and 509 other accounts with total assets of $37 billion (including 13 with total assets of $3.2 billion where the advisory firm's fee was based on account performance). 2. MATERIAL CONFLICTS OF INTERESTS As an investment advisor and fiduciary, AllianceBernstein owes its clients and shareholders an undivided duty of loyalty. We recognize that conflicts of interest are inherent in our business and accordingly have developed policies and procedures (including oversight monitoring) reasonably designed to detect, manage, and mitigate the effects of actual or potential conflicts of interest in the area of employee personal trading, managing multiple accounts for multiple clients, including AllianceBernstein Mutual Funds, and allocating investment opportunities. Investment professionals, including portfolio managers and research analysts, are subject to the above-mentioned policies and oversight monitoring to ensure that all clients are treated equitably. We place the interests of our clients first and expect all of our employees to meet their fiduciary duties. Employee Personal Trading - ------------------------- AllianceBernstein has adopted a Code of Business Conduct and Ethics that is designed to detect and prevent conflicts of interest when investment professionals and other personnel of AllianceBernstein own, buy, or sell securities which may be owned by, or bought or sold for, clients. Personal securities transactions by an employee may raise a potential conflict of interest when an employee owns or trades in a security that is owned or considered for purchase or sale by a client, or recommended for purchase or sale by an employee to a client. Subject to the reporting requirements and other limitations of its Code of Business Conduct and Ethics, AllianceBernstein permits its employees to engage in personal securities transactions, and also allows them to acquire investments in the AllianceBernstein Mutual Funds through direct purchase, 401K/profit sharing plan investment and/or notionally in connection with deferred incentive compensation awards. AllianceBernstein's Code of Ethics and Business Conduct requires disclosure of all personal accounts and maintenance of brokerage accounts with designated broker-dealers approved by AllianceBernstein. The Code also requires preclearance of all securities transactions and imposes a one-year holding period for securities purchased by employees to discourage short-term trading. Managing Multiple Accounts for Multiple Clients - ----------------------------------------------- AllianceBernstein has compliance policies and oversight monitoring in place to address conflicts of interest relating to the management of multiple accounts for multiple clients. Conflicts of interest may arise when an investment professional has responsibilities for the investments of more than one account because the investment professional may be unable to devote equal time and attention to each account. The investment professional or investment professional teams for each client may have responsibilities for managing all or a portion of the investments of multiple accounts with a common investment strategy, including other registered investment companies, unregistered investment vehicles, such as hedge funds, pension plans, separate accounts, collective trusts, and charitable foundations. Among other things, AllianceBernstein's policies and procedures provide for the prompt dissemination to investment professionals of initial or changed investment recommendations by analysts so that investment professionals are better able to develop investment strategies for all accounts they manage. In addition, investment decisions by investment professionals are reviewed for the purpose of maintaining uniformity among similar accounts and ensuring that accounts are treated equitably. No investment professional that manages client accounts carrying performance fees is compensated directly or specifically for the performance of those accounts. Investment professional compensation reflects a broad contribution in multiple dimensions to long-term investment success for our clients and is not tied specifically to the performance of any particular client's account, nor is it directly tied to the level or change in level of assets under management. Allocating Investment Opportunities - ----------------------------------- AllianceBernstein has policies and procedures intended to address conflicts of interest relating to the allocation of investment opportunities. These policies and procedures are designed to ensure that information relevant to investment B-31 decisions is disseminated promptly within its portfolio management teams and investment opportunities are allocated equitably among different clients. The investment professionals at AllianceBernstein routinely are required to select and allocate investment opportunities among accounts. Portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar accounts, which minimizes the potential for conflicts of interest relating to the allocation of investment opportunities. Nevertheless, investment opportunities may be allocated differently among accounts due to the particular characteristics of an account, such as size of the account, cash position, tax status, risk tolerance, and investment restrictions or for other reasons. AllianceBernstein's procedures are also designed to prevent potential conflicts of interest that may arise when Alliance has a particular financial incentive, such as a performance-based management fee, relating to an account. An investment professional may perceive that he or she has an incentive to devote more time to developing and analyzing investment strategies and opportunities or allocating securities preferentially to accounts for which AllianceBernstein could share in investment gains. To address these conflicts of interest, AllianceBernstein's policies and procedures require, among other things, the prompt dissemination to investment professionals of any initial or changed investment recommendations by analysts; the aggregation of orders to facilitate best execution for all accounts; price averaging for all aggregated orders; objective allocation for limited investment opportunities (e.g., on a rotational basis) to ensure fair and equitable allocation among accounts; and limitations on short sales of securities. These procedures also require documentation and review of justifications for any decisions to make investments only for select accounts or in a manner disproportionate to the size of the account. 3. DESCRIPTION OF COMPENSATION AllianceBernstein's compensation program for investment professionals is designed to be competitive and effective in order to attract and retain the highest caliber employees. The compensation program for investment professionals is designed to reflect their ability to generate long-term investment success for our clients, including shareholders of the AllianceBernstein Mutual Funds. Investment professionals do not receive any direct compensation based upon the investment returns of any individual client account, nor is compensation tied directly to the level or change in level of assets under management. Investment professionals' annual compensation is comprised of the following: - -Fixed base salary: This is generally the smallest portion of compensation. The base salary is a relatively low, fixed salary within a similar range for all investment professionals. The base salary is determined at the outset of employment based on level of experience, does not change significantly from year to year, and hence, is not particularly sensitive to performance. - -Discretionary incentive compensation in the form of an annual cash bonus: AllianceBernstein's overall profitability determines the total amount of incentive compensation available to investment professionals. This portion of compensation is determined subjectively based on qualitative and quantitative factors. In evaluating this component of an investment professional's compensation, AllianceBernstein considers the contribution to his/her team or discipline as it relates to that team's overall contribution to the long-term investment success, business results and strategy of AllianceBernstein. Quantitative factors considered include, among other things, relative investment performance (e.g., by comparison to competitor or peer group funds or similar styles of investments, and appropriate, broad-based or specific market indices), and consistency of performance. There are no specific formulas used to determine this part of an investment professional's compensation and the compensation is not tied to any pre-determined or specified level of performance. AllianceBernstein also considers qualitative factors such as the complexity and risk of investment strategies involved in the style or type of assets managed by the investment professional; success of marketing/business development efforts and client servicing; seniority/length of service with the firm; management and supervisory responsibilities; and fulfillment of AllianceBernstein's leadership criteria. - -Discretionary incentive compensation in the form of awards under AllianceBernstein's Partners Compensation Plan (deferred awards): AllianceBernstein's overall profitability determines the total amount of deferred awards available to investment professionals. The deferred awards are allocated among investment professionals based on criteria similar to those used to determine the annual cash bonus. There is no fixed formula for determining these amounts. Deferred awards, for which there are various investment options, vest over a four-year period and are generally forfeited if the employee resigns or AllianceBernstein terminates his/her employment. Investment options under the deferred awards plan include many of the same AllianceBernstein Mutual Funds offered to mutual fund investors, thereby creating a close alignment between the financial interests of the investment professionals and those of AllianceBernstein's B-32 clients and mutual fund shareholders with respect to the performance of those mutual funds. AllianceBernstein also permits deferred award recipients to allocate up to 50% of their award to investments in AllianceBernstein's publicly traded equity securities. - -Contributions under AllianceBernstein's Profit Sharing/401(k) Plan: The contributions are based on AllianceBernstein's overall profitability. The amount and allocation of the contributions are determined at the sole discretion of AllianceBernstein. 4. OWNERSHIP OF SECURITIES As of October 31, 2006, Ms. Fedak and Mr. Phillips owned (no shares of the Windsor Fund/shares of the Windsor Fund in the $xx-$xx range). B. WELLINGTON MANAGEMENT COMPANY, LLP Wellington Management Company, LLP (Wellington Management) is a professional investment advisory firm that provides services to investment companies, employee benefits plans, endowments, foundations, and other institutions. The firm is organized as a Massachusetts limited liability partnership. 1. OTHER ACCOUNTS MANAGED David R. Fassnacht manages a portion of the Windsor Fund; as of October 31, 2006, the Fund held assets of $xx billion. As of October 31, 2006, Mr. Fassnacht managed xx other registered investment company(ies) with total assets of $xx million (including xx with total assets of $xx million where the advisory firm's fee was based on account performance), xx other pooled investment vehicle(s) with total assets of $xx million, and xx other account(s) with total assets of $xx billion (including xx with total assets of $xx million where the advisory firm's fee was based on account performance). 2. MATERIAL CONFLICTS OF INTEREST Individual investment professionals at Wellington Management manage multiple accounts for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions, such as pension funds, insurance companies, foundations, or separately managed account programs sponsored by financial intermediaries), bank common trust accounts, and hedge funds. The Fund's manager listed in the prospectuses who is primarily responsible for the day-to-day management of the Fund (the Portfolio Manager) generally manages accounts in several different investment styles. These accounts may have investment objectives, strategies, time horizons, tax considerations, and risk profiles that differ from those of the Fund. The Portfolio Manager makes investment decisions for each account, including the Fund, based on the investment objectives, policies, practices, benchmarks, cash flows, tax, and other relevant investment considerations applicable to that account. Consequently, the Portfolio Manager may purchase or sell securities, including IPOs, for one account and not another account, and the performance of securities purchased for one account may vary from the performance of securities purchased for other accounts. Alternatively, these accounts may be managed in a similar fashion to the Fund and thus the accounts may have similar, and in some cases nearly identical, objectives, strategies, and/or holdings to that of the Fund. 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 impact the Fund depending on market conditions. For example, the Portfolio Manager may purchase a security in one account while appropriately selling that same security in another account. Similarly, the Portfolio Manager may purchase the same security for the Fund and one or more other accounts at or about the same time, and in those instances the other accounts will have access to their respective holdings prior to the public disclosure of the Fund's holdings. In addition, some of these accounts 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 paid by Wellington Management to the Portfolio Manager are tied to revenues earned by Wellington Management, and where noted, to the performance achieved by the manager in each account, the incentives associated with any given account may be significantly higher or lower than those associated with other accounts managed by a given portfolio manager. Finally, the Portfolio Manager may hold shares or investments in the other pooled investment vehicles and/or accounts identified above. B-33 Wellington Management's goal is to meet its fiduciary obligation to treat all clients fairly and provide high quality investment services to all of its clients. Wellington Management has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, 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 account 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 account, Wellington Management does periodically assess whether a Portfolio Manager has adequate time and resources to effectively manage the Portfolio Manager's various client mandates. 3. DESCRIPTION OF COMPENSATION The Fund pays Wellington Management a fee based on the assets under management of the Fund as set forth in the Investment Advisory Agreement between Wellington Management and the Fund. Wellington Management pays its investment professionals out of its total revenues and other resources, including the advisory fees earned with respect to the Fund. The following information relates to the fiscal year ended October 31, 2006. Wellington Management's compensation structure is designed to attract and retain high-caliber investment professionals necessary to deliver high quality investment management services to its clients. Wellington Management's compensation of the Portfolio Manager includes a base salary and incentive components. The base salary for the Portfolio Manager, who is a partner of Wellington Management, is determined by the Managing Partners of the firm. The Portfolio Manager's base salary is generally a fixed amount that may change as a result of an annual review. The Portfolio Manager is eligible to receive an incentive payment based on the revenues earned by Wellington Management from the Fund managed by the Portfolio Manager and generally each other portfolio he manages. With respect to the Fund, the overall revenues to Wellington Management vary with the performance of the Fund relative to the S&P 500 Index over rolling three-year periods. The Portfolio Manager's incentive payment relating to the Fund is additionally linked to the net pre-tax performance of the Fund compared to the Lipper Multi-Cap Value Average over a one-year period. Wellington Management applies similar incentive structures (although the benchmarks or peer groups, time periods, and rates may differ) to other portfolios managed by the Portfolio Manager, including portfolios with performance fees. Portfolio-based incentives across all portfolios managed by a Portfolio Manager can, and typically do, represent a significant portion of a Portfolio Manager's overall compensation; incentive compensation varies significantly by individual and can vary significantly from year to year. Some Portfolio Managers are also eligible for bonus payments based on their overall contribution to Wellington Management's business operations. Senior management at Wellington Management may reward individuals as it deems appropriate based on factors other than portfolio performance. Each partner of Wellington Management is also eligible to participate in a partner-funded tax-qualified retirement plan, the contributions to which are made pursuant to an actuarial formula, as a partner of the firm. 4. OWNERSHIP OF SECURITIES As of October 31, 2006, Mr. Fassnacht owned (no shares of the Windsor Fund/shares of the Windsor Fund in the $xx-$xx range). II. VANGUARD WINDSOR II FUND Vanguard Windsor II Fund uses a multimanager approach. The Fund has entered into investment advisory agreements with its advisors to manage the investment and reinvestment of the portion of the Windsor Fund's assets that the Fund's board of trustees determines to assign to the advisor (hereafter referred to as each Portfolio). In this capacity, each advisor continuously reviews, supervises, and administers the Portfolio's investment program. Each advisor discharges its responsibilities subject to the supervision and oversight of Vanguard's Portfolio Review Group and the officers and trustees of the Fund. Vanguard's Portfolio Review Group is responsible for recommending changes in a fund's advisory arrangements to the fund's board of trustees, including changes in the amount of assets allocated to each advisor, and whether to hire, terminate, or replace an advisor. The Fund pays each unaffiliated advisor a basic advisory fee at the end of each of the Fund's fiscal quarters, calculated by applying a quarterly rate, based on certain annual percentage rates, to the average daily net assets of the advisor's B-34 Portfolio for the quarter. The basic fee will be increased or decreased by applying a performance fee adjustment based on the investment performance of the Portfolio relative to the investment performance of the Russell 1000 Value Index (for Armstrong Shaw), the MSCI US Prime Market 750 Index (for Barrow, Hanley), the MSCI US Investable Market 2500 Index (for Hotchkis & Wiley), and the Standard & Poor's 500 Index (for Lazard), (each, the Index). The investment performance will be based on the cumulative return of the Portfolio over a trailing 36-month period (a 60-month period for Hotchkis & Wiley and Lazard) ending with the applicable quarter, compared with the cumulative total return of the Index for the same period. Vanguard provides advisory services to a portion of the Fund on an at-cost basis. Vanguard's performance is evaluated against the MSCI US Prime Market Value Index. For the fiscal years ended October 31, 2004, 2005, and 2006, Vanguard Windsor II Fund incurred the following aggregate investment advisory fees:
2004 2005 2006 ---- ---- ---- Basic Fee $39,948,000 $44,005,000 $xx,xxx,000 Increase or Decrease for Performance Adjustment 5,153,000 2,811,000 x,xxx,000 --------- --------- --------- Total $45,101,000 $46,816,000 $xx,xxx,000
Of the aggregate fees previously described, the investment advisory fee paid to Vanguard for the fiscal year ended October 31, 2006, was $xxx,000 (representing an effective annual rate of less than 0.xx%). The investment advisory fee paid to the remaining advisors for the fiscal year ended October 31, 2006, was $xx,xxx,000 (representing an effective annual rate of 0.xx%). A. ARMSTRONG SHAW ASSOCIATES INC. Armstrong Shaw Associates Inc. (Armstrong Shaw), an employee-owned Delaware corporation, was founded in 1984 by Raymond Armstrong (now retired) and Jeffrey Shaw. The firm is wholly owned by Mr. Armstrong, Mr. Shaw, and three other investment professionals at the firm. All of the assets managed by Armstrong Shaw are invested in large-cap value products. Chairman and Chief Investment Officer, Jeffrey Shaw, leads an investment team of six professionals with diverse backgrounds in industry, merchant banking, private equity, and investment banking. 1. OTHER ACCOUNTS MANAGED Jeffrey Shaw manages a portion of the Windsor II Fund; as of October 31, 2006, the Fund held assets of $xx billion. As of October 31, 2006, Mr. Shaw also managed four other registered investment companies with total assets of $997 million, three other pooled investment vehicles with total assets of $309 million, and 165 other accounts with total assets of $6.1 billion (including one with total assets of $5 million where the advisory firm's fee was based on account performance). 2. MATERIAL CONFLICTS OF INTEREST It is possible that from time to time, potential conflicts of interest may arise between the portfolio manager's management of the investments in the Windsor II Fund, on the one hand, and the management of other accounts, on the other. A potential conflict of interest may arise as a result of the portfolio manager's day-to-day management of the Windsor II Fund. Because of the portfolio manager's positions with the Fund, the portfolio manager knows the size, timing, and possible market impact of the Fund's trades. It is theoretically possible that the portfolio manager could use this information to the advantage of the other accounts he manages and to the possible detriment of the Windsor II Fund. Armstrong Shaw has adopted a Code of Ethics containing policies and procedures to ensure against this potential conflict. Potential conflicts of interest may arise when allocating and/or aggregating trades. Armstrong Shaw often aggregates into a single trade order many individual contemporaneous client trade orders in a single security. Armstrong Shaw has in place policies and procedures to ensure such transactions will be allocated to all participating client accounts in a fair and equitable manner. The portfolio manager may advise certain accounts with respect to which the advisory fee is based partially or entirely on performance. Performance fee arrangements may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that he believes might be the profitable B-35 to accounts with incentive fees. Armstrong Shaw believes it has adopted policies and procedures reasonably designed to allocate investment opportunities between the accounts it manages on a fair and equitable basis over time. 3. DESCRIPTION OF COMPENSATION Compensation as Armstrong Shaw is comprised primarily of two components: salary and bonus. The salary portion of compensation is fixed and based on a combination of factors including, but not necessarily limited to, industry experience, firm experience, and job performance. The bonus portion of compensation is variable, depending on both the overall firm results (i.e., profitability) and merit. Bonuses are a very meaningful piece of overall compensation. Everyone at the firm participates in the bonus program. The remaining components of compensation, for eligible employees, are the company-sponsored and -paid retirement plan and health benefits. Mr. Shaw's compensation is not specifically dependant on the performance of the Windsor II Fund, on an absolute basis or relative to our style-specific benchmark, the Russell 1000 Value Index. Mr. Shaw is not compensated based on the growth of the Fund, or any other client's assets, except to the extent that such growth contributes to the firm's overall asset growth, which in turn contributes to the firm's overall profitability. Mr. Shaw does not receive a percentage of the revenue earned on any client portfolios. Mr. Shaw's compensation is not increased or decreased specifically as the result of any performance fee that may be earned by Armstrong Shaw. 4. OWNERSHIP OF SECURITIES As of October 31, 2006, Mr. Shaw owned no shares of the Windsor II Fund. B. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), a Nevada Corporation, provides investment advisory services to individuals, employee benefits 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. 1. OTHER ACCOUNTS MANAGED James P. Barrow manages a portion of the Windsor II Fund; as of October 31, 2006, the Fund held assets of $xx billion. As of October 31, 2006, Mr. Barrow also managed 15 other registered investment companies with total assets of $6.5 billion (including two with total assets of $4.3 billion where the advisory firm's fee was based on account performance) and 27 other accounts with total assets of $3 billion. 2. MATERIAL CONFLICTS OF INTEREST Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities to more than one account (including the Windsor II Fund). Barrow, Hanley 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 to ensure that no client, regardless of type or fee structure, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities. 3. DESCRIPTION OF COMPENSATION In addition to base salary, all Barrow, Hanley portfolio managers and analysts share in a bonus pool that is distributed semiannually. Analysts and portfolio managers are rated on their value added to the team-oriented investment process. Overall compensation applies with respect to all accounts managed and compensation does not differ with respect to distinct accounts managed by a portfolio manager. Compensation is not tied to a published or private benchmark. It is important to understand that 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. The compensation of portfolio managers is not directly tied to fund performance or growth in assets for any fund or other account managed by a portfolio manager and portfolio managers are no compensated for bringing in new business. Of course, growth in assets from the appreciation of existing assets and/or growth in new assets will increase revenues and profit. The consistent, long-term growth in assets at any investment firm is, to a great extent, dependent B-36 upon the success of the portfolio management team. The compensation of the portfolio management team at the Advisor will increase over time, if and when assets continue to grow through competitive performance. 4. OWNERSHIP OF SECURITIES As of October 31, 2006, Mr. Barrow owned shares of the Windsor II Fund in an amount exceeding $1 million. C. HOTCHKIS AND WILEY CAPITAL MANAGEMENT, LLC 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 current and retired employees of Hotchkis & Wiley, and Stephens-H&W, a limited liability company whose primary member is SF Holding Corp., which is a diversified holding company. 1. OTHER ACCOUNTS MANAGED A portion of the Windsor II Fund, as well as institutional separate accounts and other mutual funds, are managed by the Hotchkis & Wiley investment team (Investment Team). The investment process is the same for similar accounts, including the Windsor II Fund, and is driven by team oriented, in-depth, fundamental research. The investment research staff is organized by industry coverage and supports all of the accounts managed in each of the Hotchkis & Wiley's investment strategies. Weekly research meetings provide a forum where analysts and portfolio managers discuss current investment ideas within their assigned industries. Generally, the entire investment team, or a sub-set of the team, then debates the merits of recommendations, taking into account the prevailing market environment, the portfolio's current composition, and the relative value of alternative investments. Investment decisions are made by majority agreement of the investment team. The culmination of this process is the formation of a "target portfolio" for each investment strategy representing the best investment ideas with appropriate weights for each of the holdings. The members of the Investment Team with the most significant responsibility for the day-to-day management of the Hotchkis & Wiley Portfolio of the Windsor II Fund are: George H. Davis, Jr. and Sheldon J. Lieberman. The Investment Team manages a portion of the Windsor II Fund; as of October 31, 2006, the Fund held assets of $xx billion. As of October 31, 2006, the Investment Team managed 17 other registered investment companies with total assets of $14.9 billion, ten other pooled investment vehicles with total assets of $1.4 billion, and 162 other accounts with total assets of $15.4 billion (including 7 with total assets of $1.2 billion where the advisory firm's fee was based on account performance). 2. MATERIAL CONFLICTS OF INTERESTS The Investment Team also manages institutional accounts and other mutual funds in several different investment strategies. The portfolios within an investment strategy are managed using a target portfolio; however, each portfolio may have different restrictions, cash flows, tax, and other relevant considerations which may preclude a portfolio from participating in certain transactions for that investment strategy. Consequently, the performance of portfolios may vary due to these different considerations. The Investment Team may place transactions for one investment strategy that are directly or indirectly contrary to investment decisions made on behalf of another investment strategy. Hotchkis & Wiley may be restricted from purchasing more than a limited percentage of the outstanding shares of a company. If a company is a viable investment for more than one investment strategy, Hotchkis & Wiley has adopted policies and procedures reasonably designed to ensure that all of its clients are treated fairly and equitably. Different types of accounts and investment strategies may have different fee structures. Additionally, certain accounts pay Hotchkis & Wiley performance-based fees, which may vary depending on how well the account performs compared to a benchmark. Because such fee arrangements have the potential to create an incentive for Hotchkis & Wiley to favor such accounts in making investment decisions and allocations, Hotchkis & Wiley has adopted policies and procedures reasonably designed to ensure that all of its clients are treated fairly and equitably, including in respect of allocation decisions, such as initial public offerings. Since all accounts are managed to a target portfolio by the Investment Team, adequate time and resources are consistently applied to all accounts in the same investment strategy. B-37 3. 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. The majority of the Portfolio Managers own 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. 4. OWNERSHIP OF SECURITIES As of October 31, 2006, none of the Investment Team owned shares of the Windsor II Fund. D. LAZARD ASSET MANAGEMENT, LLC Lazard is a registered investment advisor and is a direct, wholly owned subsidiary of Lazard Freres & Co., LLC, and an indirect, wholly owned subsidiary of Lazard Ltd., both of which also are Delaware limited liability companies. 1. OTHER ACCOUNTS MANAGED Andrew Lacey manages a portion of the Windsor II Fund. As of November 30, 2006, the Fund held assets of $47 billion. As of November 30, 2006, Mr. Lacey managed nine other registered investment companies with total assets of $5.2 billion, 17 other pooled investment vehicles with total assets of $973.8 million, and 535 other accounts with total assets of $1.5 billion. Christopher Blake manages a portion of the Windsor II Fund. As of November 30, 2006, the Fund held assets of $47 billion. As of November 30, 2006, Mr. Blake managed six other registered investment companies with total assets of $5.1 billion, 17 other pooled investment vehicles with total assets of $704.3 million, and 85 other accounts with total assets of $1.5 billion. 2. MATERIAL CONFLICTS OF INTEREST Although the potential for conflicts of interest exists when an investment advisor and portfolio managers manage other accounts with similar investment objectives and strategies as those of the Fund (Similar Accounts), Lazard has procedures in place that are designed to ensure that all accounts are treated fairly and that the Fund is not disadvantaged, including procedures regarding trade allocations and "conflicting trades" (e.g., long and short positions in the same security, as described below). In addition, the Fund, as a registered investment company, is subject to different regulations from certain of the Similar Accounts, and consequently, may not be permitted to engage in all the investment techniques or transactions, or to engage in such techniques or transactions to the same degree, as the Similar Accounts. Potential conflicts of interest may arise because of Lazard's management of the Fund and Similar Accounts. For example, conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of limited investment opportunities, as Lazard may be perceived as causing accounts it manages to participate in an B-38 offering to increase Lazard's overall allocation of securities in that offering, or to increase Lazard's ability to participate in future offerings by the same underwriter or issuer. Allocations of bunched trades, particularly trade orders that were only partially filled due to limited availability, and allocation of investment opportunities generally, could raise a potential conflict of interest, as Lazard may have an incentive to allocate securities that are expected to increase in value to preferred accounts. Initial public offerings, in particular, are frequently of very limited availability. Additionally, portfolio managers may be perceived to have a conflict of interest because of the large number of Similar Accounts, in addition to the Fund, that they are managing on behalf of Lazard. Although Lazard does not track each individual portfolio manager's time dedicated to each account, Lazard periodically reviews each portfolio manager's overall responsibilities to ensure that they are able to allocate the necessary time and resources to effectively manage the Fund. In addition, Lazard could be viewed as having a conflict of interest to the extent that Lazard and/or portfolio managers have a materially larger investment in a Similar Account than their investment in the Fund. A potential conflict of interest may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by the other account, or when a sale in one account lowers the sale price received in a sale by a second account. Lazard managed hedge funds that are subject to performance/incentive fees. Certain hedge funds managed by Lazard may also be permitted to sell securities short. When Lazard engages in short sales of securities of the type in which the Fund invests, Lazard could be seen as harming the performance of the Fund for the benefit of the account managing short sales if the short sales cause the market value of the securities to fall. As described above, Lazard has procedures in place to address these conflicts. Additionally, the Fund's portfolio managers do not manage both hedge funds that engage in short sales and long-only accounts, including open-end and closed-end registered investment companies. 3. DESCRIPTION OF COMPENSATION Lazard's portfolio managers are generally responsible for managing multiple types of accounts that may, or may not, have similar investment objectives, strategies, risks, and fees to those of the Fund. Portfolio managers responsible for managing the Fund may also manage other sub-advised registered investment companies, collective investment trusts, unregistered funds, and/or other pooled investment vehicles, separate accounts, separately managed account programs (often referred to as "wrap accounts"), and model portfolios. Lazard compensates portfolio managers by a competitive salary and bonus structure, which is determined both quantitatively and qualitatively. Salary and bonus are paid in cash. Portfolio managers are compensated on the performance of the aggregate group of portfolios managed by them rather than for a specific fund or account. Various factors are considered in the determination of a portfolio manager's compensation. All of the portfolios managed by a portfolio manager are comprehensively evaluated to determine his or her positive and consistent performance contribution over time. Further factors include the amount of assets in the portfolios as well as qualitative aspects that reinforce Lazard's investment philosophy, such as leadership, teamwork, and commitment. Total compensation in not fixed, but rather is based on the following factors: (1) maintenance of current knowledge and opinions on companies owned in the portfolio; (2) generation and development of new investment ideas, including the quality of security analysis and identification of appreciation catalysts; (3) ability and willingness to develop and share ideas on a team basis; and (4) the performance results of the portfolios managed by the investment team. The variable bonus is based on the portfolio manager's quantitative performance as measured by the manager's ability to make investment decisions that contribute to the pre-tax absolute and relative returns of the accounts managed by him or her, by comparison of each account to a pre-determined benchmark, including, as appropriate for the relevant account's investment strategy, the S&P 500 Index, over the current year and the longer-term performance (3-, 5-, or 10-year, if applicable) of such account, as well as performance of the account relative to peers. In addition, the portfolio manager's bonus can be influenced by subjective measurement of the manager's ability to help others make investment decisions. Portfolio managers also have an interest in the Lazard Asset Management LLC Equity Plan, an equity-based incentive program for Lazard Asset Management. The plan offers permanent equity in Lazard Asset Management to a significant number of its professionals, including portfolio managers, as determined by the board of directors of Lazard Asset Management, from time to time. This plan gives certain Lazard employees a permanent equity interest in Lazard and an opportunity to participate in the future growth of Lazard. B-39 In addition, effective May 2005, the Lazard Ltd. 2005 Equity Incentive Plan was adopted and approved by the Board of Directors of Lazard Ltd. The purpose of this plan is to give the company a competitive advantage in attracting, retaining, and motivating officers, employees, directors, advisors, and/or consultants and to provide the company and its subsidiaries and affiliates with a stock plan providing incentive directly linked to shareholder value. 4. OWNERSHIP OF SECURITIES As of November 30, 2006, neither Mr. Lacey nor Mr. Blake owned any shares of the Windsor II Fund. E. 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. 1. OTHER ACCOUNTS MANAGED James D. Troyer manages a portion of the Windsor II Fund; as of October 31, 2006, the Fund held assets of $xx billion. As of October 31, 2006, Mr. Troyer managed all or a portion of xx other registered investment company(ies) with total assets of $xx billion and xx other pooled investment vehicle(s) with total assets of $xx million. 2. MATERIAL CONFLICTS OF INTEREST At Vanguard, individual portfolio managers may manage multiple accounts for multiple clients. In addition to mutual funds, these other accounts may include separate accounts, collective trusts, or offshore funds. Managing multiple accounts may give rise to potential conflicts of interest including, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. Vanguard manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal review processes, and oversight by directors and independent third parties. Vanguard has developed trade allocation procedures and controls to ensure that no one client, regardless of type, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities. 3. DESCRIPTION OF COMPENSATION The named Vanguard portfolio manager is a Vanguard employee. This section describes the compensation of the Vanguard employees who manage Vanguard funds. As of October 31, 2006, 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 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 the Windsor II Fund, the performance factor depends on how successfully the portfolio manager outperforms the MSCI US Prime Market Value Index and maintains the risk parameters of the Fund over a three-year period. Additional factors include the portfolio manager's contributions to the investment management functions within the sub-asset class, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for the investment group. The target bonus is expressed as a B-40 percentage of base salary. The actual bonus paid may be more or less than the target bonus, based on how well the manager satisfies the objectives stated above. The bonus is paid on an annual basis. Under the long-term incentive compensation program, all full-time employees receive a payment from Vanguard's long-term incentive compensation plan based on their years of service, job level, and, if applicable, management responsibilities. Each year, Vanguard's independent directors determine the amount of the long-term incentive compensation award for that year based on the investment performance of the Vanguard funds relative to competitors, and Vanguard's operating efficiencies in providing services to the Vanguard funds. 4. OWNERSHIP OF SECURITIES Vanguard employees, including portfolio managers, allocate their investment 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, 2006, Vanguard employees collectively invested $1.8 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, 2006, Mr. Troyer owned xx. DURATION AND TERMINATION OF INVESTMENT ADVISORY ARRANGEMENTS The Funds' current agreements with its unaffiliated advisors are renewable for successive one-year periods (the initial agreement with Lazard is in effect until January 8, 2009, and renewable for 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 and Lazard) 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. The Fourth Amended and Restated Funds' Service Agreement, which governs the at-cost investment advisory services provided to a portion of the Vanguard Windsor II Fund, will continue in full force and effect until terminated or amended by mutual agreement of the Fund and Vanguard. 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 must 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. 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. B-41 During the fiscal years ended October 31, 2004, 2005, and 2006, the Funds paid brokerage commissions in the following amounts: FUND 2004 2005 2006 - ---- ---- ---- ---- Vanguard Windsor Fund $15,937,000 $13,687,000 $xx,xxx,000 Vanguard Windsor II Fund 16,004,000 27,280,000 xx,xxx,000 As of October 31, 2006, each Fund held securities of its "regular brokers or dealers," as that term is defined in Rule 10b-1 of the 1940 Act, as follows:
FUND REGULAR BROKER OR DEALER (OR PARENT) AGGREGATE HOLDINGS - ---- ------------------------------------ ------------------ Vanguard Windsor Fund $xxx,xxx,000 Vanguard Windsor II Fund xxx,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 oversight of proxy voting to the Proxy Oversight Committee (the Committee), composed of senior officers of Vanguard, a majority of whom are also officers of each Vanguard fund, and subject to the operating procedures and guidelines described below. The Committee reports directly to the Board. Vanguard is subject to these guidelines to the extent the guidelines call for Vanguard to administer the voting process and implement the resulting voting decisions, and for those purposes have been approved by the Board of Directors of Vanguard. The overarching objective in voting is simple: to support proposals and director nominees that maximize the value of a fund's investments--and those of fund shareholders--over the long term. While the goal is simple, the proposals the funds receive are varied and frequently complex. As such, the guidelines adopted by the Board provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented. For ease of reference, the procedures and guidelines often refer to all funds, however, our processes and practices seek to ensure that proxy voting decisions are suitable for individual funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the funds and the funds voting as a block. In some cases, however, a fund may vote differently, depending upon the nature and objective of the fund, the composition of its portfolio, and other factors. The guidelines do not permit the Board to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting if that would be in the fund's and its shareholders' best interests. These circumstances may arise, for example, 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 but not limited to the investment advisor for the fund, management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company's board, absent guidelines or other specific facts that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Proxy Oversight Committee, who are accountable to the fund's Board. While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the fund's vote in a manner that, in the Committee's view, will maximize the value of the fund's investment, subject to the individual circumstances of the fund. B-42 I. THE BOARD OF DIRECTORS A. ELECTION OF DIRECTORS Good governance starts with a majority-independent board, whose key committees are comprised entirely of independent directors. As such, companies should attest to the independence of directors who serve on the Compensation, Nominating, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained in the proxy statement. While the funds will generally support the board's nominees, the following factors will be taken into account in determining each fund's vote:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - -------------------- ------------------------ Nominated slate results in board comprised of a Nominated slate results in board comprised of a majority of non- majority of independent directors. independent directors. All members of Audit, Nominating, and Compensation Audit, Nominating, and/or Compensation committees include non- committees are independent of management. independent members. Incumbent board member failed to attend at least 75% of meetings in the previous year. Actions of committee(s) on which nominee serves are inconsistent with other guidelines (e.g., excessive option grants, substantial non-audit fees, lack of board independence).
B. CONTESTED DIRECTOR ELECTIONS In the case of contested board elections, we will evaluate the nominees' qualifications, the performance of the incumbent board, as well as the rationale behind the dissidents' campaign, to determine the outcome that we believe will maximize shareholder value. C. CLASSIFIED BOARDS The funds will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures, in which only part of the board is elected each year. II. APPROVAL OF INDEPENDENT AUDITORS The relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. The funds will generally support management's recommendation for the ratification of the auditor, except in instances 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 independence has been compromised. III. COMPENSATION ISSUES A. STOCK-BASED COMPENSATION PLANS Appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders and the interests of management, employees, and directors. Conversely, the funds oppose plans that substantially dilute their ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features. An independent compensation committee should have significant latitude to deliver varied compensation to motivate the company's employees. However, we will evaluate compensation proposals in the context of several factors (a company's industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the company's other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account. The following factors will be among those considered in evaluating these proposals. B-43
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - -------------------- ------------------------ Company requires senior executives to hold a minimum amount of company Total potential dilution (including all stock-based plans) stock (frequently expressed as a multiple of salary). shares outstanding. Company requires stock acquired through option exercise to be held for Annual option grants have exceeded 2% of shares a certain period of time. outstanding. Compensation program includes performance-vesting awards, indexed Plan permits repricing or replacement of options without options, or other performance-linked grants. shareholder approval. Concentration of option grants to senior executives is limited Plan provides for the issuance of reload options. (indicating that the plan is very broad-based). Stock-based compensation is clearly used as a substitute for cash in Plan contains automatic share replenishment (evergreen)fea- delivering market-competitive total pay. ture
B. BONUS PLANS Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the IRC, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported. C. EMPLOYEE STOCK PURCHASE PLANS The funds will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan comprise less than 5% of the outstanding shares. D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES) While executives' incentives for continued employment should be more significant than severance benefits, there are instances--particularly in the event of a change in control--in which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executive's salary and bonus may generally be approved by the compensation committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonus--or where severance is guaranteed absent a change in control--should be submitted for shareholder approval. IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS The exercise of shareholder rights, in proportion to economic ownership, is a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders' ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. In general, the market for corporate control should be allowed to function without undue interference from these artificial barriers. The funds' positions on a number of the most commonly presented issues in this area are as follows: A. SHAREHOLDER RIGHTS PLANS (POISON PILLS) A company's adoption of a so-called poison pill effectively limits a potential acquirer's ability to buy a controlling interest without the approval of the target's board of directors. Such a plan, in conjunction with other takeover defenses, may serve to entrench incumbent management and directors. However, in other cases, a poison pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium. In general, shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors: B-44
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - -------------------- ------------------------ Plan is relatively short-term (3-5 years). Plan is long term (>5 years). Plan requires shareholder approval Renewal of plan is automatic or does not require shareholder approval. for renewal. Plan incorporates review by a committee Ownership trigger is less than 15%. of independent directors at least every three years (so-called TIDE provisions). Plan includes permitted bid/qualified offer Classified board. feature (chewable pill) that mandates shareholder vote in certain situations. Ownership trigger is reasonable (15-20%). Board with limited independence. Highly independent, non-classified board.
B. CUMULATIVE VOTING The funds are generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation. C. SUPERMAJORITY VOTE REQUIREMENTS The funds support shareholders' ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, the funds will support proposals to remove supermajority requirements and oppose proposals to impose them. D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT The funds support shareholders' right to call special meetings of the board (for good cause and with ample representation) and to act by written consent. The funds will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them. E. CONFIDENTIAL VOTING The integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, the funds support proposals to provide confidential voting. F. DUAL CLASSES OF STOCK We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. We will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes. V. CORPORATE AND SOCIAL POLICY ISSUES Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. The Board generally believes that these are "ordinary business matters" that are primarily the responsibility of management and should be evaluated and approved solely by the corporation's board of directors. Often, proposals may address concerns with which the Board philosophically agrees, but absent a compelling economic impact on shareholder value (e.g., proposals to require expensing of stock options), the funds will typically abstain from voting on these proposals. This reflects the belief that regardless of our philosophical perspective on the issue, these decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund's investment and management is not responsive to the matter. VI. VOTING IN FOREIGN MARKETS Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. Each fund's votes will be used, where applicable, to advocate for improvements in governance and disclosure by each fund's portfolio companies. We will evaluate issues presented to shareholders for each fund's foreign holdings in the context with the guidelines described above, as well as local market standards and best practices. The funds will cast their votes in a manner believed to be philosophically consistent with these guidelines, while taking into account differing practices by market. In addition, there may be instances in which the funds elect not to vote, as described below. B-45 Many foreign markets require that securities be "blocked" or reregistered to vote at a company's meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements. The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets may be substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances where the issues presented are unlikely to have a material impact on shareholder value. VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund. VIII. THE PROXY VOTING GROUP The Board has delegated the day-to-day operations of the funds' proxy voting process to the Proxy Voting Group, which the Committee oversees. While most votes will be determined, subject to the individual circumstances of each fund, by reference to the guidelines as separately adopted by each of the funds, there may be circumstances when the Proxy Voting Group will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, 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 senior officers of Vanguard, a majority of whom are also officers of each Vanguard fund. The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse 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 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 each fund's shareholders. In determining how to apply the guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of fund shareholders in maximizing the value of their investments. The Board may review these procedures and guidelines and modify them from time to time. The procedures and guidelines are available on Vanguard's website at www.vanguard.com. You may obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30 by logging on to Vanguard's internet site, at www.vanguard.com, or the SEC's website at www.sec.gov. B-46 FINANCIAL STATEMENTS Each Fund's Financial Statements for the fiscal year ended October 31, 2006, appearing in the Funds' 2006 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-47 SAI022 032007 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) Instruments Defining Rights of Security Holders, Reference is made to Articles III and V of the Registrant's Amended and Restated Agreement and Declaration of Trust, incorporated by reference in Item 23(a) of this post-effective amendment. (d) Investment Advisory Contracts, for Wellington Management Company, LLP, 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 for Armstrong Shaw Associates, Inc., filed on January 4, 2006, Post-Effective Amendment No. 106; for AllianceBernstein L.P., filed on February 24, 2006, Post-Effective Amendment No. 107, are hereby incorporated by reference. For Lazard Asset Management, LLC, Barrow, Hanley, Mewhinney & Strauss, Inc. and addendums to the investment advisory contracts for Hotchkis and Wiley, and Armstrong Shaw, are filed herewith. The Vanguard Group, Inc., provides investment advisory services to the Fund at cost pursuant to the Amended and Restated Funds' Service Agreement, refer to (h) below. (e) Underwriting Contracts, Not Applicable (f) Bonus or Profit Sharing Contracts, 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., filed on January 4, 2006, Post-Effective Amendment No. 106, is hereby incorporated by reference. (h) Other Material Contracts, 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. (p) Code of Ethics, for Barrow, Hanley, Mewhinney & Srauss, 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 Wellington Management Company, LLP, filed on December 23, 2004, Post-Effective Amendment No. 103, are hereby incorporated by reference; for The Vanguard Group, Inc., Armstrong Shaw Associates, Inc., Lazard Asset Management, LLC, and AllianceBernstein L.P. are 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). Hotchkis and Wiley, is an investment adviser registered under the Advisers Act. The list required by this Item 26 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). AllianceBernstein L.P. (AllianceBernstein) is an investment adviser registered under the Advisers Act. The list required by this Item 26 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). Wellington Management Company LLC, (Wellington Management) is an investment adviser registered under the Advisers Act. The list required by this Item 26 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 26 of officers and directors of Vanguard, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-11953). Armstrong Shaw Associates, Inc. is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Armstrong Shaw Associates, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-20597). Lazard Asset Management LLC, is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Lazard Asset 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 Vanguard pursuant to the Advisers Act (SEC File No. 801-61701). ITEM 27. PRINCIPAL UNDERWRITERS (a)Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group, Inc., is the principal underwriter of each fund within the Vanguard group of investment companies, a family of 36 investment companies with more than 140 funds. (b)The principal business address of each named director and officer of Vanguard Marketing Corporation is 100 Vanguard Boulevard, Malvern, PA 19355.
Name Positions and Office with Underwriter Positions and Office with Funds - ---- ------------------------------------- ------------------------------- R. Gregory Barton Director and Senior Vice President None John J. Brennan Director Trustee, Chairman, President, and Chief Executive Officer Mortimer J. Buckley Director and Senior Vice President None F. William McNabb III Director and Senior Vice President None Michael S. Miller Director and Managing Director None Ralph K Packard Director None George U. Sauter Director, Vice President, and General Counsel None Heidi Stam Director, Vice President, and General Counsel Secretary Richard D. Carpenter Treasurer None David L. Cermak Principal None Joseph Colaizzo Financial and Operations Principal and Assistant None Treasurer Patti Colby Principal None Amy B. Cooper Secretary None Sean P. Hagerty Principal None A. Kimberly Lynch Assistant Treasurer None Brian P. McCarthy Senior Registered Options Principal None Deborah McCracken Assistant Secretary None Miranda O'Keefe Compliance Registered Options Principal None Joseph F. Miele Registered Municipal Securities Principal None Jane K. Myer Principal None Pauline C. Scalvino Chief Compliance Officer Chief Compliance officer
(c)Not Applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS The books, accounts, and other documents required to be maintained by Section 31(a) under the 1940 Act and the rules promulgated thereunder will be maintained at the offices of the Registrant, 100 Vanguard Boulevard, Malvern, PA 19355; the 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 8th day of January, 2007. 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:
SIGNATURES TITLE DATE - ---------------------------------------------------------------------------------------------------------------------------- By:/S/ JOHN J.BRENNAN President, Chairman,Chief January 8, 2007 - ------------------------------- Executive Officer, and Trustee (Heidi Stam) John J. Brennan* By:/S/ CHARLES D. ELLIS Trustee January 8, 2007 - ------------------------------- (Heidi Stam) Charles D. Ellis* By:/S/ RAJIV L.GUPTA Trustee January 8, 2007 - ------------------------------- (Heidi Stam) Rajiv L. Gupta* By:/S/ AMY GUTMANN Trustee January 8, 2007 - ------------------------------- (Heidi Stam) Amy Gutmann* By:/S/ JOANN HEFFERNAN HEISEN Trustee January 8, 2007 - ------------------------------- (Heidi Stam) Joann Heffernan Heisen* By:/S/ ANDRE F. PEROLD Trustee January 8, 2007 - ------------------------------- (Heidi Stam) Andre F. Perold* By:/S/ ALFRED M. RANKIN JR. Trustee January 8, 2007 - ------------------------------- (Heidi Stam) Alfred M. Rankin Jr.* By:/S/ J. LAWRENCE WILSON Trustee January 8, 2007 - ------------------------------- (Heidi Stam) J. Lawrence Wilson* By:/S/ THOMAS J. HIGGINS Treasurer and Principal January 8, 2007 - ------------------------------- Financial and Principal (Heidi Stam) Accounting Officer Thomas J. Higgins*
*By Power of Attorney. Filed on July 26, 2006, see File Number 002-65955-99. Incorporated by Reference. INDEX TO EXHIBITS Investment Advisory Contracts (Barrow, Hanley). . . . . . . . . . .Ex-99.D Investment Advisory Contracst (Lazard).. . . . . . . . . . . . . . Ex-99.D Investment Advisory Contracts (Addendum for Armstrong Shaw). . . . Ex-99.D Investment Advisory Contracts (Addendum for Hotchkis and Wiley). . Ex-99.D Rule 18f-3 Plan. . . . . . . . . . . . . . . . . . . . . . . . . . Ex-99.N Code of Ethics (AllianceBernstein). . . . . . . . . . . . . . . . .Ex-99.P Code of Ethics (Armstrong). . . . . . . . . . . . . . . . . . . . .Ex-99.P Code of Ethics (Lazard). . . . . . . . . . . . . . . . . . . . . . Ex-99.P Code of Ethics (Vanguard). . . . . . . . . . . . . . . . . . . . . Ex-99.P EX-99.D 2 lazardiadraft.txt LAZARD IA CONTRACT DRAFT INVESTMENT ADVISORY AGREEMENT THIS AGREEMENT is made as of this 8th day of January, 2007, between Vanguard Windsor Funds, a StateDelaware statutory trust (the "Trust"), and Lazard Asset Management LLC (the "Advisor"), a placeStateDelaware limited liability company. 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"); and WHEREAS, the Trust offers a series of shares known as Vanguard Windsor II Fund (the "Fund"); and WHEREAS, the Trust desires to retain the Advisor to render investment advisory services to the Fund, and the Advisor is willing to render such services. 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 "Lazard Portfolio"), as communicated to the Advisor on behalf of the Board of Trustees by The Vanguard Group, Inc. ("Vanguard"). 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 Lazard Portfolio; to continuously review, supervise, and administer an investment program for the Lazard 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 the 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 objective, 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 Lazard Portfolio, and is directed to seek to obtain best execution for such transactions consistent with Section 28(e) of the Securities Exchange Act of 1934, and subject to written policies and procedures provided to the Advisor. The Advisor will promptly communicate to the Trust's officers and the Board of Trustees such information relating to portfolio transactions as they may reasonably request. 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 an amount (the "Total Advisory Fee") equal to a base fee ("Base Fee") plus a performance adjustment amount ("Performance 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. The Fund acknowledges receipt of Part II of the Advisor's Form ADV. The Fund hereby agrees to provide to the Advisor with reasonable advance notice, in writing, of: (i) any change to the Fund's investment objectives, policies and restrictions as stated in the prospectus; (ii) any change to the Trust's declaration of trust or by-laws that is material to the services to be provided by the Advisor; or (iii) any material change in the Trust's compliance procedures. In addition to such notice, the Fund shall provide to the Advisor a copy of a modified Prospectus and copies of the revised Trust compliance procedures, as applicable, reflecting such changes. 6. Compliance. The Advisor agrees to comply with all Applicable Law and all policies, procedures, or reporting requirements that the Board of Trustees reasonably adopts and communicates to the Advisor in writing, including, without limitation, any such policies, procedures or reporting requirements relating to soft dollar or other brokerage arrangements. "Applicable Law" means (i) the "federal securities laws" as defined in Rule 38a-1(e)(1) under the 1940 Act, as amended from time to time, 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 in relation to the Lazard Portfolio. 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 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 will continue in effect for a period of two years thereafter, and shall continue in effect for successive twelve-month periods thereafter, only so long as each such continuance is approved at least annually by the Board of Trustees, including a majority of those 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 or by vote of a majority of the outstanding voting securities of the Fund, on thirty days' written notice to the Advisor, (ii) this 2 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: 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: Lazard Asset Management LLC 30 Rockefeller Plaza 59th Floor New York, New York 10112 Attention: General Counsel Telephone: 212-632-6621 Facsimile: 212-332-1703 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. 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 shall not disclose any such information to any person other than the Trust, the Board of Trustees, 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, 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 Lazard 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 placeStateDelaware applicable to contracts made and to be performed in that state. 3 15. Use of Advisor's Name. It is understood that the name "Lazard Asset Management" or "Lazard" and the logo associated with these names is the valuable property of the Advisor. During the term of this Agreement, the Fund and Vanguard shall have permission to use the Advisor's name in the marketing of the Fund, and agrees to furnish the Advisor all prospectuses, proxy statements, and reports to shareholders prepared for distribution to shareholders of the Fund or the public, which refer to the Advisor in any way. IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory Agreement to be executed as of the date first set forth herein. Lazard Asset Management LLC Vanguard Windsor Funds - ------------------------ --------- ------------------------ --------- Signature Date Signature Date - ------------------------ ------------------------ Print Name Print Name EX-99.D 3 armstrongwindsorriiaddendum.txt ARMSTRONG SHAW IA CONTRACT ADDENDUM VANGUARD WINDSOR II FUND INVESTMENT ADVISORY AGREEMENT ADDENDUM EFFECTIVE MAY 1, 2006 This Addendum amends Section 1.1 of Schedule A of the Investment Advisory Agreement dated January 1, 2006 between Vanguard Windsor Funds (the "Trust") and Armstrong Shaw Associates Inc. ("ASA," or the "Advisor") for the management of a portion of Vanguard Windsor II Fund (the "Fund"), a series of the Trust, as follows: A. AMENDMENT 1.1. CALCULATION OF THE BASE FEE. The Base Fee for each fiscal quarter of the Fund is calculated by multiplying an Annual Percentage Rate (shown below) to the average daily net assets of the ASA Portfolio during such fiscal quarter, and dividing the result by four. The Fund's fiscal quarter ends are the months ending January, April, July, and October. Annual Percentage Rate Schedule ------------------------------- Average Net Assets Annual Percentage Rate ------------------ ---------------------- In the event of termination of this Agreement, the fee provided in this Section for the period beginning on the first day of the then-current fiscal quarter and ending on the last business day on which this Agreement is in effect (the "Short Quarter") shall be calculated by applying the foregoing annual percentage rates to the average daily net assets of the ASA Portfolio during the Short Quarter, dividing the result by four, and multiplying that figure by a ratio equal to the number of days in the Short Quarter divided by the total number of days in the full quarter. B. MISCELLANEOUS Except as specifically amended hereby, all of the terms and conditions of the Investment Advisory Agreement are unaffected and shall continue to be in full force and effect and shall be binding upon the parties in accordance with its terms. ARMSTRONG SHAW ASSOCIATES INC. VANGUARD WINDSOR FUNDS /S/ Monica C. Grady 6/8/06 /S/ John J. Brennan 6/5/06 - ------------------------------ -------------- ---------------------- -------- Signature Date Signature Date MONICA C. GRADY JOHN J. BRENNAN - ------------------------------ ---------------------- Print Name Print Name EX-99.D 4 hotchkisaddendum052006.txt HOTCHKIS WILEY IA CONTRACT ADDENDUM VANGUARD WINDSOR II FUND INVESTMENT ADVISORY AGREEMENT ADDENDUM EFFECTIVE MAY 1, 2006 This Addendum amends Section 13.1 of Schedule A of the Investment Advisory Agreement dated December 1, 2003 between Vanguard Windsor Funds (the "Trust") and Hotchkis and Wiley Capital Management, LLC ("H&W," or the "Advisor") for the management of a portion of Vanguard Windsor II Fund (the "Fund"), a series of the Trust, as follows: A. AMENDMENT 1.1. CALCULATION OF THE BASE FEE. The Base Fee for each fiscal quarter of the Fund is calculated by multiplying an Annual Percentage Rate (shown below) to the average daily net assets of the H&W Portfolio during such fiscal quarter, and dividing the result by four. The Fund's fiscal quarter ends are the months ending January, April, July, and October. Annual Percentage Rate Schedule ------------------------------- Average Net Assets Annual Percentage Rate ------------------ ---------------------- In the event of termination of this Agreement, the fee provided in this Section for the period beginning on the first day of the then-current fiscal quarter and ending on the last business day on which this Agreement is in effect (the "Short Quarter") shall be calculated by applying the foregoing annual percentage rates to the average daily net assets of the H&W Portfolio during the Short Quarter, dividing the result by four, and multiplying that figure by a ratio equal to the number of days in the Short Quarter divided by the total number of days in the full quarter. B. MISCELLANEOUS Except as specifically amended hereby, all of the terms and conditions of the Investment Advisory Agreement are unaffected and shall continue to be in full force and effect and shall be binding upon the parties in accordance with its terms. HOTCHKIS AND WILEY CAPITAL VANGUARD WINDSOR FUNDS MANAGEMENT, LLC /S/ Nancy D. Celick 6/8/06 /S/ John J. Brennan 6/7/06 - ----------------------------- --------- ---------------------- ---------- Signature Date Signature Date NANCY D. CELICK JOHN J. BRENNAN - ----------------------------- ---------------------- EX-99.D 5 windsorbhms052006.htm BARROW HANLEY IA CONTACT

 

INVESTMENT ADVISORY AGREEMENT

 

THIS AGREEMENT is made as of this 1st day of May, 2006, 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 December 19, 2005 (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, an investment advisory fee at the rate specified in Schedule A to this Agreement. The fee will be calculated based on annual percentage rates applied to the average daily net assets of the BHMS Portfolio (“Base Fee”) and will be paid to the Advisor quarterly. Further, the investment advisory fee will be increased or decreased by applying a performance adjustment (“Performance Adjustment”), as specified in Schedule A.

 

Notwithstanding the foregoing, for services rendered pursuant to this Agreement, the Fund shall pay to the Advisor, for the 12 fiscal quarters within which this Agreement is in effect, a Performance Fee Adjustment calculated as described in Schedule B.

 

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 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:

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 Avenue, 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.

 

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, Mewhinney &

 

 

Vanguard Windsor Funds 

 

Strauss, Inc.

 

 

 

 

/S/ James P. Barrow

3/29/06

 

/S/ John J. Brennan

4/21/2006

Signature

Date 

 

Signature

Date 

 

 

 

 

 

 

 

 

 

 

James P. Barrow

 

 

John J. Brennan

 

Print Name

 

 

Print Name

 

 

 

 

 

 EX-99.N 6 multiclassplanv17.txt MULTICLASS PLAN VANGUARD FUNDS MULTIPLE CLASS PLAN I. INTRODUCTION This Multiple Class Plan (the "Plan") describes five separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the "Funds," individually a "Fund"). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes. The Plan has been approved by the Board of Directors of The Vanguard Group ("Vanguard"). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time. II. SHARE CLASSES A Fund may offer any one or more of the following share classes: Investor Shares Admiral Shares Signal Shares Institutional Shares ETF Shares III. DISTRIBUTION, AVAILABILITY AND ELIGIBILITY Distribution arrangements for all classes are described below. Vanguard retains sole discretion in determining share class availability, and whether Fund shares shall be offered either directly or through certain financial intermediaries, or on certain financial intermediary platforms. Eligibility requirements for purchasing shares of each class will differ, as follows: A. Investor Shares Investor Shares generally will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for 1 Investor Shares will be substantially lower than the amount required for any other class of shares. B. Admiral Shares Admiral Shares generally will be available to individual and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may include, but are not limited to the following factors: (i) the total amount invested the Fund; (ii) the length of time that the Fund account has been maintained; (iii) whether the investor has registered for on-line access to the Fund account through Vanguard's web site; or (iv) any other factors deemed appropriate by a Fund's Board of Trustees. C. Signal Shares Signal Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that Signal Shares will be offered to Vanguard's institutional clients according to eligibility criteria that may include, but are not limited to the following factors: (i) the total amount invested in the Fund; (ii) nature and extent of client's relationship with Fund, including services provided by the Fund to the client's account; and (iii) any other factors deemed appropriate by the Fund's Board of Trustees. D. Institutional Shares Institutional Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount per account for Institutional Shares will be substantially higher than the amounts required for Investor Shares, Admiral Shares or Signal Shares. E. ETF Shares The Fund will sell ETF Shares to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their ETF shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund's distributor. Additional eligibility requirements may be specified in Schedule B hereto, as such Schedule may be amended from time to time. Investors who are not Authorized Participants may buy and sell ETF shares through various exchanges and market centers. 2 IV. SERVICE ARRANGEMENTS All share classes will receive a range of services provided by Vanguard on a per account basis. These "account-based" services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows: A. Investor Shares Investor Shares generally will receive the most basic level of service from Vanguard. Investor Shares generally will be serviced through a pool of Vanguard client service representatives. Investor Shares shareholders may receive VISTA recordkeeping services from Vanguard. B. Admiral Shares Admiral Shares will receive a different level of service from Vanguard as compared to Investor Shares, including but not limited to special client service representatives who are assigned to service Admiral Shares through a dedicated phone service center. In addition, holders of Admiral Shares may from time to time receive special mailings and unique additional services from Vanguard. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Admiral Shares. C. Signal Shares Signal Shares will receive a level of service from Vanguard that differs from the service provided to the holders of shares of other classes. Such services may include informational newsletters and other similar materials devoted to investment topics of interest and which have been developed exclusively for Signal shareholders. Such newsletters or other materials may be mailed on a periodic basis. These newsletters or other materials may also be available to Signal shareholders through separate electronic venues including a dedicated web site. In addition, special client service representatives may be assigned to service Signal Shares through a dedicated phone service center. Signal Shares' shareholders generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Signal shareholders may receive VISTA recordkeeping services from Vanguard. 3 D. Institutional Shares Institutional Shares will receive from Vanguard a level of service that differs from the service provided to the holders of shares of other classes. Such services may include special client service representatives who will be assigned to service Institutional Shares. Most holders of Institutional Shares periodically will receive special investment updates from Vanguard's investment staff. Holders of Institutional Shares also may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Institutional Shares. E. ETF Shares A Fund is expected to maintain only one shareholder of record for ETF Shares--DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, ETF Shares will not receive any special updates from Vanguard's investment staff. V. CONVERSION FEATURES A. Voluntary Conversions 1. Conversion into Investor Shares. An investor may convert Admiral Shares, Signal Shares, or Institutional Shares into Investor Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 2. Conversion into Admiral Shares. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 3. Conversion into Signal Shares. An investor may convert Investor Shares or Institutional Shares into Signal Shares (if available), 4 provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Signal Shares; and (ii) receives services consistent with Signal Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 4. Conversion into Institutional Shares. An investor may convert Investor Shares, Admiral Shares, or Signal Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 5. Conversion into ETF Shares. An investor may convert Investor Shares, Admiral Shares, Signal Shares or Institutional Shares into ETF Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold ETF Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. B. Automatic Conversions 1. Automatic conversion into Admiral Shares. Vanguard may automatically convert Investor Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's conversion without the imposition of any charge. Such automatic conversions may occur on a periodic, or one-time basis. Automatic conversions may occur at different times due to the differing mechanisms through which an account is funded or meets the required investment minimum. Automatic conversions do not apply to certain types of accounts, or to accounts that are eligible for Admiral Shares as a result of tenure in the Fund. 2. Automatic conversion into Signal Shares or Institutional Shares. Vanguard will not conduct automatic conversions of any share class into either Signal Shares or Institutional Shares. Shareholders may convert eligible shares into either Signal Shares or Institutional Shares only through either a self-directed conversion, or with the assistance of 5 Vanguard representatives. Notwithstanding this rule, once a Fund offers Signal Shares, Admiral Shares of that Fund held by institutional clients may be automatically converted into Signal Shares to align the share class investor eligibility requirements. C. Involuntary Conversions and Cash Outs 1. Cash Outs. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor's remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund's normal redemption fees, if any. 2. Conversion of Admiral Shares. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 3. Conversion of Signal Shares. If an investor no longer meets the eligibility requirements for Signal Shares, the Fund may convert the investor's Signal Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 4. Conversion of Institutional Shares. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor, according to the investor's ability to satisfy then current eligibility requirements, into Admiral Shares, Signal Shares, or Investor Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 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. 6 Securities and Exchange Commission ("Exemptive Orders"). Vanguard's direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement. B. Class Specific Expenses 1. Expenses for Account-Based Services. Expenses associated with Vanguard's provision of account-based services to the Funds will be allocated among the share classes of each Fund on the basis of the amount incurred by each such class as follows: (a) Account maintenance expenses. Expenses associated with the maintenance of investor accounts will be proportionately allocated among each Fund's share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class. (b) Expenses of special servicing arrangements. Expenses relating to any special servicing arrangements for a specific class will be proportionally allocated among each eligible Fund's share classes primarily based on their percentage of total shareholder accounts receiving the special servicing arrangements. (c) Literature production and mailing expenses. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among each Fund's share classes based upon the number of such items produced and mailed for each class. 2. Other Class Specific Expenses. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class. C. Fund-Wide Expenses 1. Marketing and Distribution Expenses. Expenses associated with Vanguard's marketing and distribution activities will be allocated among the Funds and their separate share classes according to the "Vanguard Modified Formula," with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the 7 Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund's Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940. 2. Asset Management Expenses. Expenses associated with management of a Fund's assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund's share classes on the basis of their relative net assets. 3. Other Fund Expenses. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets. VII. ALLOCATION OF INCOME, GAINS AND LOSSES Income, gains and losses will be allocated among each Fund's share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time. VIII. VOTING AND OTHER RIGHTS Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan. IX. AMENDMENTS All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard. Original Board Approval: July 21, 2000 Last Approved by Board: May 20, 2006 70124.17 8 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, Signal, Institutional Vanguard Bond Index Funds o Short-Term Bond Index Fund Investor, Admiral, Signal, o Intermediate-Term Bond Index Fund Investor, Admiral, Signal, Institutional o Long-Term Bond Index Fund Investor, Institutional o Total Bond Market Index Fund Investor, Admiral, Signal, Institutional Vanguard California Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Chester Funds o PRIMECAP Fund Investor, Admiral o Vanguard Target Retirement Income Fund Investor o Vanguard Target Retirement 2005 Fund Investor o Vanguard Target Retirement 2010 Fund Investor o Vanguard Target Retirement 2015 Fund Investor o Vanguard Target Retirement 2020 Fund Investor o Vanguard Target Retirement 2025 Fund Investor o Vanguard Target Retirement 2030 Fund Investor o Vanguard Target Retirement 2035 Fund Investor o Vanguard Target Retirement 2040 Fund Investor o Vanguard Target Retirement 2045 Fund Investor o Vanguard Target Retirement 2050 Fund Investor Vanguard Convertible Securities Fund Investor Vanguard Explorer Fund Investor, Admiral Vanguard Fenway Funds o Equity Income Fund Investor, Admiral o Growth Equity Fund Investor o PRIMECAP Core Fund Investor
- ----------------------------------------------------------------------------------------------------- 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 o Strategic Small-Cap Equity Fund Investor Vanguard Index Funds o 500 Index Fund Investor, Admiral, Signal o Extended Market Index Fund Investor, Admiral, Signal, Institutional, ETF o Growth Index Fund Investor, Admiral, Signal, Institutional, ETF o Large-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF o Mid-Cap Growth Index Fund Investor, ETF o Mid-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF o Mid-Cap Value Index Fund Investor, ETF o Small-Cap Growth Index Fund Investor, Institutional, ETF o Small-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF o Small-Cap Value Index Fund Investor, Institutional, ETF o Total Stock Market Index Fund Investor, Admiral, Signal, Institutional, ETF o Value Index Fund Investor, Admiral, Signal, Institutional, ETF Vanguard International Equity Index Funds o Emerging Markets Stock Index Fund Investor, Admiral, Signal, Institutional, ETF o European Stock Index Fund Investor, Admiral, Signal, Institutional, ETF o FTSE All-World ex USA Index Fund Investor, Institutional, ETF o Pacific Stock Index Fund Investor, Admiral, Signal, Institutional, ETF 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 Fund Share Classes Authorized - ----------------------------------------------------------------------------------------------------------- Vanguard Money Market Reserves o Prime Money Market Fund Investor, Institutional o Federal Money Market Fund Investor 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, Signal Institutional, ETF o Dividend Appreciation Index Fund Investor, ETF Vanguard Tax-Managed Funds o Tax-Managed Balanced Fund Investor o Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional o Tax-Managed Growth and Income Fund Investor, Admiral, Institutional o Tax-Managed International Fund Investor, Institutional o Tax-Managed Small-Cap Fund Investor, Institutional
- ----------------------------------------------------------------------------------------------------------- Vanguard Fund Share Classes Authorized - ----------------------------------------------------------------------------------------------------------- Vanguard Treasury Funds o Treasury Money Market Fund Investor Vanguard Trustees' Equity Fund o International Value Fund Investor o Diversified Equity 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 o High Dividend Yield Index Fund Investor, ETF 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 FTSE Social Index Fund Investor, Institutional o Consumer Discretionary Index Fund Admiral, ETF o Consumer Staples Index Fund Admiral, ETF o Energy Index Fund Admiral, ETF o Financial Index Fund Admiral, ETF o Health Care Index Fund Admiral, ETF o Industrial Index Fund Admiral, ETF o Information Technology Index Fund Admiral, ETF o Materials Index Fund Admiral, ETF o Telecommunication Services Index Fund Admiral, ETF o Utilities Index Fund Admiral, ETF
- --------------------------------------------------------------------------------------------------------- Vanguard Fund Share Classes Authorized - --------------------------------------------------------------------------------------------------------- Vanguard Variable Insurance Funds o Balanced Portfolio Investor o Diversified Value Portfolio Investor o Equity Income Portfolio Investor o Equity Index Portfolio Investor o Growth Portfolio Investor o Total Bond Market Index Portfolio Investor o High Yield Bond Portfolio Investor o International Portfolio Investor o Mid-Cap Index Portfolio Investor o Money Market Portfolio Investor o REIT Index Portfolio Investor o Short-Term Investment Grade Portfolio Investor o Small Company Growth Portfolio Investor o Capital Growth Portfolio Investor o Total Stock Market Index Portfolio Investor
Original Board Approval: July 21, 2000 Last Approved by Board: December 15, 2006 70124.17 SCHEDULE B to VANGUARD FUNDS MULTIPLE CLASS PLAN Vanguard has policies and procedures designed to ensure consistency and compliance with the offering of multiple classes of shares within this Multiple Class Plan's eligibility requirements. These policies are reviewed and monitored on an ongoing basis in conjunction with Vanguard's Compliance Department. Investor Shares - Eligibility Requirements Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Shares - Eligibility Requirements Admiral Shares generally are intended for clients who meet the required minimum initial investment and ongoing account balance of $100,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Admiral Shares. Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Share class eligibility also is subject to the following rules: o Account Tenure: The minimum amount for Admiral Shares is $50,000 if the investor has maintained an account in the applicable Fund for 10 years, subject to administrative policies developed by Vanguard to exclude costly accounts. For these purposes, a Fund may, in appropriate cases, count periods during which an investor maintained an account in the Fund through a financial intermediary. To take advantage of the tenure rule, an investor generally must be registered for on-line access to their Fund account through Vanguard.com, or otherwise transact with Vanguard on a similarly cost-effective basis. o Certain Retirement Plans: Admiral Shares generally are not available to 403(b)(7) custodial accounts and SIMPLE IRAs held directly with Vanguard; as well as other Vanguard Retirement Plans receiving special administrative services from Vanguard. o Financial Intermediaries -Admiral Shares are not available to financial intermediaries who would meet eligibility requirements by aggregating the holdings of underlying investors within an omnibus account. However, a financial intermediary may hold Admiral Shares in an omnibus account if: (1) each underlying investor in the omnibus account individually meets the $100,000 minimum amount or the tenure rule described above; and (2) the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the $100,000 minimum amount or the tenure rule described above; or (3) a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance with the eligibility requirements established by Vanguard. o VISTA - Admiral Shares are not available to participants in employee benefit plans that use Vanguard's VISTA system for plan recordkeeping. o Account Aggregation -- Vanguard clients may hold Admiral Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund is at least $1 million. For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries. o Accumulation Period -- Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Admiral Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Admiral Shares within a limited period of time (generally 90 days). Signal Shares - Eligibility Requirements Signal Shares generally are intended for institutional clients who meet the eligibility requirements set forth by Vanguard's institutional client service departments. Institutional clients generally must maintain a minimum balance of no less than $1 million in the Fund. Eligibility criteria are subject to the discretion of Vanguard management, and Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors and to change such requirements at any time. Signal Share class eligibility also is subject to the following rules: o Previously held Admiral Shares. Admiral Shares held by institutional clients prior to the effective date of Signal Shares will be converted at the discretion of Vanguard management into Signal Shares. o Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Signal Shares only if the total amount invested across all accounts held by the intermediary in the Fund is at least $5 million. Signal Shares generally are not available to financial intermediaries that serve as retail fund supermarkets. o Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients, including but not limited to financial intermediary and defined benefit and contribution plan clients, endowments, and foundations whose accounts are not recordkept by Vanguard may hold Signal Shares if the total amount aggregated among all accounts held by such client and invested in a single Fund is at least $1 million. Such institutional clients must disclose to Vanguard on behalf of their accounts the following: (1) that each account has a common decision-maker; and (2) the total balance in each account held by the client in the Fund. o Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if they meet eligibility criteria established by Vanguard management. These eligibility criteria include, but are not limited to the following factors, which may be changed at any time and without prior notice: (1) the total amount invested in the Fund must be greater than $10 million; (2) the amount of the client's underlying account balances in the Fund; and (3) the extent to which the client uses Fund and Vanguard account services. For purposes of this analysis, Vanguard management may consider clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. o Accumulation Period. Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Signal Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Signal Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management. Institutional Shares - Eligibility Requirements Institutional Shares generally require a minimum initial investment and ongoing account balance of $5,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Share class eligibility also is subject to the following special rules: o Vanguard Short-Term Investment Grade Fund - $50,000,000 minimum amount for Institutional Shares o Vanguard Long-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares o Vanguard Intermediate-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares o Individual clients. Individual clients may hold Institutional Shares by aggregating up to 3 accounts held by the same client (same tax I.D. number) in a single Fund. o Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Institutional Shares for the benefit of their underlying clients provided that each underlying client account invests at least $5 million (or such higher minimum required by the individual fund) in the Fund. o Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients, including but not limited to financial intermediary and defined benefit and contribution plan clients, endowments, and foundations whose accounts are not recordkept by Vanguard may hold Institutional Shares if the total amount aggregated among all accounts held by such client and invested in the Fund is at least $5 million (or such higher minimum required by the individual fund). Such institutional clients must disclose to Vanguard on behalf of their accounts the following: (1) that each account has a common decision-maker; and (2) the total balance in each account held by the client in the Fund. o Institutional clients whose accounts are recordkept by Vanguard - Institutional Shares are not available to institutional clients whose accounts are recordkept by Vanguard unless Vanguard management determines that the client's aggregate assets within a Fund as well as the extent to which the client uses Fund and Vanguard account services will likely generate substantial economies in the servicing of their accounts. o Accumulation Period -- Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management. ETF Shares - Eligibility Requirements The eligibility requirements for ETF Shares will be set forth in the Fund's Registration Statement. To be eligible to purchase ETF Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing ETF Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of ETF Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund's ETF Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash. Original Board Approval: July 21, 2000 Last Approved by Board: May 20, 2006 71024.17 EX-99.P 7 alliancebernstein_cob2005.htm ALLIANCEBERNSTEIN CODE OF ETHICS

ALLIANCEBERNSTEIN L.P.

 

CODE OF BUSINESS CONDUCT AND ETHICS

 

“Trust is the foundation of an investment management company, an attribute that takes years to establish and just days to destroy. Promoting and sustaining a fiduciary culture is, therefore, a business imperative.”

 

- Lewis A. Sanders, Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 2005

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A Message from Lewis A. Sanders,

Chief Executive Officer of AllianceBernstein

 

     Trust is the foundation of an investment management company, an attribute that takes years to establish, constant vigilance to maintain, and just days to destroy. Honesty, integrity, and high ethical standards must therefore be practiced on a daily basis in order to protect this most critical asset.

     Enhancing our sensitivity to our fiduciary obligations, and ensuring that we meet those obligations is an imperative for all. The Internal Compliance Controls Committee, the Code of Ethics Oversight Committee, the Conflicts Officer and the Office of the Company Ombudsman provide AllianceBernstein employees with comprehensive guidance and multiple avenues in which to explore work-related issues or questions.

     AllianceBernstein has long been committed to maintaining and promoting high ethical standards and business practices. We have prepared this Code of Business Conduct and Ethics (the “Code”) in order to establish a common vision of our ethical standards and practices. The Code is intended to establish certain guiding principles for all of us and not to be an exhaustive guide to all the detailed rules and regulations governing the conduct of business in the various countries where we do business. Separately, we have prepared a series of fiduciary and business-related policies and procedures, which set forth detailed requirements to which all employees are subject. We also have prepared various Compliance Manuals, which provide in summary form, an overview of the concepts described in more detail in this Code and in our other policies and procedures.

     You should take the time to familiarize yourself with the policies in this Code and use common sense in applying them to your daily work environment and circumstances. Your own personal integrity and good judgment are the best guides to ethical and responsible conduct. If you have questions, you should discuss them with your supervisor, the General Counsel, the Chief Compliance Officer or a representative of the Legal and Compliance Department or Human Resources. If the normal channels for reporting are not appropriate, or if you feel uncomfortable utilizing them, issues may be brought to the attention of the Company Ombudsman, who is an independent, informal and confidential resource for concerns about AllianceBernstein business matters that may implicate issues of ethics or questionable practices.

     Our continued success depends on each of us maintaining high ethical standards and business practices. I count on each of you to apply good ethics and sound judgment in your daily responsibilities in order to help ensure that success.

Lewis A. Sanders

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AllianceBernstein L.P

CODE OF BUSINESS CONDUCT AND ETHICS

 

1.

Introduction

............1

2.

The AllianceBernstein Fiduciary Culture

............2

3.

Compliance with Laws, Rules and Regulations

............2

4.

Conflicts of Interest / Unlawful Actions

............3

5.

Insider Trading

............4

6.

Personal Trading: Summary of Restrictions

............4

7.

Outside Directorships and Other Outside Activities and Interests

............6

 

(a) Board Member or Trustee

............6

 

(b) Other Affiliations

............7

 

(c) Outside Financial or Business Interests

............7

8.

Gifts, Entertainment and Inducements

............8

9.

Dealings with Government Personnel

............9

10.

Political Contributions by or on behalf of AllianceBernstein

............9

11.

“Ethical Wall” Policy

............10

12.

Corporate Opportunities and Resources

............10

13.

Antitrust and Fair Dealing

............10

14.

Recordkeeping and Retention

............11

15.

Improper Influence on Conduct of Audits

............11

16.

Accuracy of Disclosure

............11

17.

Confidentiality

............12

18.

Protection and Proper Use of AllianceBernstein Assets

............13

19.

Compliance Practices and Policies of Group Subsidiaries

............13

20.

Exceptions from the Code

............14

21.

Regulatory Inquiries and Litigation

............14

 

(a) Requests for Information

............14

 

(b) Types of Inquiries

............15

 

(c) Responding to Information Requests

............15

 

(d) Use of Outside Counsel

............15

 

(e) Regulatory Investigation

............15

 

(f) Litigation

............15

 

 

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22.

Compliance and Reporting of Misconduct / “Whistleblower” Protection

....15

23.

Company Ombudsman

....16

24.

Sanctions

....17

25.

Annual Certifications

....17

 

 

 

 

 

 

 

APPENDIX A

PERSONAL TRADING POLICIES AND PROCEDURES

 

1.

Overview

....A-1

 

(a) Introduction

....A-1

 

(b) Definitions

....A-1

2.

Requirements and Restrictions – All

....A-5

 

(a) General Standards

....A-5

 

(b) Disclosure of Personal Accounts

....A-6

 

(c) Designated Brokerage Accounts

....A-6

 

(d) Pre-Clearance Requirement

....A-7

 

(e) Limitation on the Number of Trades

....A-9

 

(f) Short-Term Trading

....A-9

 

(g) Short Sales

...A-10

 

(h) Trading in AllianceBernstein Units and Closed-End Mutual Funds

...A-10

 

(i) Securities Being Considered for Purchase or Sale

...A-10

 

(j) Restricted List

...A-12

 

(k) Dissemination of Research Information

...A-12

 

(l) Initial Public Offerings

...A-14

 

(m) Limited Offerings/Private Placements

...A-14

3.

Additional Restrictions – Portfolio Managers for Specific Client Accounts

...A-14

 

(a) Blackout Periods

...A-15

 

(b) Actions During Blackout Periods

...A-15

 

(c) Transactions Contrary to Client Positions

...A-15

4.

Additional Restrictions – Centralized Portfolio Management Groups

...A-15

 

(a) Value SPMs and Investment Policy Groups

...A-15

 

(b) Bernstein Value SBU

...A-16

 

 

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5.

Additional Restrictions – Research Analysts

...A-16

 

(a) Blackout Periods

...A-16

 

(b) Actions During Blackout Periods

...A-16

 

(c) Actions Contrary to Ratings

...A-16

6.

Reporting Requirements

...A-17

 

(a) Duplicate Confirmations and Account Statements

...A-17

 

(b) Initial Holdings Reports by Employees

...A-17

 

(c) Quarterly Reports by Employees

...A-18

 

(d) Annual Holdings Reports by Employees

...A-18

 

(e) Report and Certification to the Board of Directors of Fund Clients

...A-19

 

(f) Report Representations

...A-19

 

(g) Maintenance of Reports

...A-19

7.

Reporting Requirements for Directors Who are not Employees

...A-19

 

(a) Affiliated Directors

...A-20

 

(b) Outside Directors

...A-21

 

(c) Reporting Exceptions

...A-22

 

 

 

 

CODE CERTIFICATION FORM

 

 

 

 

 

Annual Certification Form

...Last Page

 

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1.       Introduction

 

This Code of Business Conduct and Ethics (the “Code”) summarizes the values, principles and business practices that guide our business conduct. The Code establishes a set of basic principles to guide all AllianceBernstein employees (including AllianceBernstein directors and consultants where applicable) regarding the minimum requirements which we are expected to meet. The Code applies to all of our offices worldwide. It is not, however, intended to provide an exhaustive list of all the detailed internal policies and procedures, regulations and legal requirements that may apply to you as an AllianceBernstein employee and/or a representative of one of our regulated subsidiaries.

All individuals subject to the provisions of this Code must conduct themselves in a manner consistent with the requirements and procedures set forth herein. Adherence to the Code is a fundamental condition of service with us, any of our subsidiaries or joint venture entities, or our general partner (the “AllianceBernstein Group”).

AllianceBernstein L.P. (“AllianceBernstein,” “we” or “us”) is a registered investment adviser and acts as investment manager or adviser to registered investment companies, institutional investment clients, employee benefit trusts, high net worth individuals and other types of investment advisory clients. In this capacity, we serve as fiduciaries. The fiduciary relationship mandates adherence to the highest standards of conduct and integrity.

Personnel acting in a fiduciary capacity must carry out their duties for the exclusive benefit of our clients. Consistent with this fiduciary duty, the interests of clients take priority over the personal investment objectives and other personal interests of AllianceBernstein personnel. Accordingly:

•  Employees must work to mitigate or eliminate any conflict, or appearance of conflict, between the self-interest of any individual covered under the Code and his or her responsibility to our clients, or to AllianceBernstein and its unitholders.

•  Employees must never improperly use their position with AllianceBernstein for personal gain to themselves, their family or any other person.

The Code is intended to comply with Rule 17j-1 under the (U.S.) Investment Company Act of 1940 (the “1940 Act”) which applies to us because we serve as an investment adviser to registered investment companies. Rule 17j-1 specifically requires us to adopt a code of ethics that contains provisions reasonably necessary to prevent our “access persons” (as defined herein) from engaging in fraudulent conduct, including insider trading. In addition, the Code is intended to comply with the provisions of the (U.S.) Investment Advisers Act of 1940 (the “Advisers Act”), including Rule 204A-1, which requires registered investment advisers to adopt and enforce codes of ethics applicable to their supervised persons. Finally, the Code is intended to comply with Section 303A.10 of the New York Stock Exchange (“NYSE”) Listed Company Manual, which applies to us because the units of AllianceBernstein Holding L.P. (“AllianceBernstein Holding”) are traded on the NYSE.

Additionally, certain entities within the AllianceBernstein Group, such as Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited, have adopted supplemental codes of ethics to address specific regulatory requirements applicable to them. All employees are obligated to determine if any of these codes are applicable to them, and abide by such codes as appropriate.

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2.

The AllianceBernstein Fiduciary Culture

The primary objective of AllianceBernstein’s business is to provide value, through investment advisory and other financial services, to a wide range of clients, including governments, corporations, financial institutions, high net worth individuals and pension funds.

AllianceBernstein requires that all dealings with, and on behalf of existing and prospective clients be handled with honesty, integrity and high ethical standards, and that such dealings adhere to the letter and the spirit of applicable laws, regulations and contractual guidelines. As a general matter, AllianceBernstein is a fiduciary that owes its clients a duty of undivided loyalty, and each employee has a responsibility to act in a manner consistent with this duty.

When dealing with or on behalf of a client, every employee must act solely in the best interests of that client. In addition, various comprehensive statutory and regulatory structures such as the 1940 Act, the Advisers Act and ERISA, the Employee Retirement Income Security Act, all impose specific responsibilities governing the behavior of personnel in carrying out their responsibilities. AllianceBernstein and its employees must comply fully with these rules and regulations. Legal and Compliance Department personnel are available to assist employees in meeting these requirements.

All employees are expected to adhere to the high standards associated with our fiduciary duty, including care and loyalty to clients, competency, diligence and thoroughness, and trust and accountability. Further, all employees must actively work to avoid the possibility that the advice or services we provide to clients is, or gives the appearance of being, based on the self-interests of AllianceBernstein or its employees and not the clients’ best interests.

Our fiduciary responsibilities apply to a broad range of investment and related activities, including sales and marketing, portfolio management, securities trading, allocation of investment opportunities, client service, operations support, performance measurement and reporting, new product development as well as your personal investing activities. These obligations include the duty to avoid material conflicts of interest (and, if this is not possible, to provide full and fair disclosure to clients in communications), to keep accurate books and records, and to supervise personnel appropriately. These concepts are further described in the Sections that follow.

 

3.

Compliance with Laws, Rules and Regulations

AllianceBernstein has a long-standing commitment to conduct its business in compliance with applicable laws and regulations and in accordance with the highest ethical principles. This commitment helps ensure our reputation for honesty, quality and integrity. All individuals subject to the Code are required to comply with all such laws and regulations. All U.S. employees, as well as non-U.S. employees who act on behalf of U.S. clients or funds, are required to comply with the U.S. federal securities laws. These laws include, but are not limited to, the 1940 Act, the Advisers Act, ERISA, the Securities Act of 1933 (“Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), the Sarbanes-Oxley Act of 2002, Title V of the Gramm-Leach-Bliley Act, any rules adopted by the SEC under any of these statutes, the Bank Secrecy Act as it applies to our activities, and any rules adopted thereunder by the Securities and Exchange Commission (“SEC”) or the Department of the Treasury. As mentioned above, as a listed company, we are also subject to specific rules promulgated by the NYSE. Similarly, our non-US affiliates are subject to additional laws and regulatory mandates in their respective jurisdictions, which must be fully complied with.

 

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4.

Conflicts of Interest / Unlawful Actions

A “conflict of interest” exists when a person’s private interests may be contrary to the interests of AllianceBernstein’s clients or to the interests of AllianceBernstein or its unitholders.

A conflict situation can arise when an AllianceBernstein employee takes actions or has interests (business, financial or otherwise) that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may arise, for example, when an AllianceBernstein employee, or a member of his or her family,1 receives improper personal benefits (including personal loans, services, or payment for services that the AllianceBernstein employee performs in the course of AllianceBernstein business) as a result of his or her position at AllianceBernstein, or gains personal enrichment or benefits through access to confidential information. Conflicts may also arise when an AllianceBernstein employee, or a member of his or her family, holds a significant financial interest in a company that does an important amount of business with AllianceBernstein or has outside business interests that may result in divided loyalties or compromise independent judgment. Moreover, conflicts may arise when making securities investments for personal accounts or when determining how to allocate trading opportunities. Additional conflicts of interest are highlighted in the AllianceBernstein Policy and Procedures for Giving and Receiving Gifts and Entertainment, a copy of which can be found on the Legal and Compliance Department intranet site.

Conflicts of interest can arise in many common situations, despite one’s best efforts to avoid them. This Code does not attempt to identify all possible conflicts of interest. Literal compliance with each of the specific procedures will not shield you from liability for personal trading or other conduct that violates your fiduciary duties to our clients.

 

AllianceBernstein employees are encouraged to seek clarification of, and discuss questions about, potential conflicts of interest. If you have questions about a particular situation or become aware of a conflict or potential conflict, you should bring it to the attention of your supervisor, the General Counsel, the Conflicts Officer, the Chief Compliance Officer or a representative of the Legal and Compliance Department or Human Resources.

In addition to the specific prohibitions contained in the Code, you are, of course, subject to a general requirement not to engage in any act or practice that would defraud our clients. This general prohibition (which also applies specifically in connection with the purchase and sale of a Security held or to be acquired or sold, as this phrase is defined in the Appendix) includes:

 

•

Making any untrue statement of a material fact or employing any device, scheme or artifice to defraud a client;

 

•

Omitting to state (or failing to provide any information necessary to properly clarify any statements made, in light of the circumstances) a material fact, thereby creating a materially misleading impression;

 

•

Making investment decisions, changes in research ratings and trading decisions other than exclusively for the benefit of, and in the best interest of, our clients;

 

___________________________________

1   For purposes of this section of the Code, unless otherwise specifically provided, (i) “family” means your spouse/domestic partner, parents, children, siblings, in-laws by marriage (i.e., mother, father, son and/or daughter-in-law) and anyone who shares your home; and (ii) “relative” means your immediate family members and your first cousins.

 

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•

Using information about investment or trading decisions or changes in research ratings (whether considered, proposed or made) to benefit or avoid economic injury to you or anyone other than our clients;

 

•

Taking, delaying or omitting to take any action with respect to any research recommendation, report or rating or any investment or trading decision for a client in order to avoid economic injury to you or anyone other than our clients;

 

•

Purchasing or selling a security on the basis of knowledge of a possible trade by or for a client with the intent of personally profiting from personal holdings in the same or related securities (“front-running” or “scalping”);

 

•

Revealing to any other person (except in the normal course of your duties on behalf of a client) any information regarding securities transactions by any client or the consideration by any client of any such securities transactions; or

 

•

Engaging in any act, practice or course of business that operates or would operate as a fraud or deceit on a client or engaging in any manipulative practice with respect to any client.

 

 

5.

Insider Trading

There are instances where AllianceBernstein employees may have confidential “inside” information about AllianceBernstein or its affiliates, or about a company with which we do business, or about a company in which we may invest on behalf of clients, that is not known to the investing public. AllianceBernstein employees must maintain the confidentiality of such information. If a reasonable investor would consider this information important in reaching an investment decision, the AllianceBernstein employee with this information must not buy or sell securities of any of the companies in question or give this information to another person who trades in such securities. This rule is very important, and AllianceBernstein has adopted the following three specific policies that address it: Policy and Procedures Concerning Purchases and Sales of AllianceBernstein Units, Policy and Procedures Concerning Purchases and Sales of AllianceBernstein Closed-End Mutual Funds, and Policy and Procedures Regarding Insider Trading (collectively, the “AllianceBernstein Insider Trading Policies”). A copy of the AllianceBernstein Insider Trading Policies may be found on the Legal and Compliance Department intranet site. All AllianceBernstein employees are required to be familiar with these policies2 and to abide by them.

 

6.

Personal Trading: Summary of Restrictions

AllianceBernstein recognizes the importance to its employees of being able to manage and develop their own and their dependents’ financial resources through long-term investments and strategies. However, because of the potential conflicts of interest inherent in our business, our industry and AllianceBernstein have implemented certain standards and limitations designed to minimize these conflicts and help ensure that we focus on meeting our duties as a fiduciary for our clients. As a general matter, AllianceBernstein discourages personal investments by employees in individual securities and encourages personal investments in managed collective vehicles, such as mutual funds.

 

_______________________________

2 The subject of insider trading will be covered in various Compliance training programs and materials.

 

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AllianceBernstein senior management believes it is important for employees to align their own personal interests with the interests of our clients. Consequently, employees are encouraged to invest in the mutual fund products and services offered by AllianceBernstein, where available and appropriate.


The policies and procedures for personal trading are set forth in full detail in the AllianceBernstein Personal Trading Policies and Procedures, included in the Code as Appendix A. The following is a summary of the major restrictions that apply to personal trading by employees, their immediate family members and other financial dependents:

 

 

•

Employees must disclose all of their securities and mutual fund accounts to the Legal and Compliance Department;

 

•

Employees may maintain securities accounts only at specified designated broker-dealers;

 

•

Employees must pre-clear all securities trades, including non-affiliated mutual funds (but not money market funds), with the Legal and Compliance Department prior to placing trades with their broker-dealer (prior supervisory approval is required for portfolio managers, research analysts, traders, persons with access to AllianceBernstein research, and others designated by the Legal and Compliance Department);

 

•

Employees may only make five trades in individual securities during any rolling thirty calendar-day period;

 

•

Employee purchases of individual securities are subject to a one-year holding period (ninety days for mutual funds). No holding period applies to money market funds;

 

•

Employees may not participate in initial public offerings;

 

•

Employees must get written approval, and make certain representations, in order to participate in limited or private offerings;

 

•

Employees must submit initial and annual holding reports, disclosing all securities (including mutual funds, other than money market funds) held in personal accounts;

 

•

Employees must submit quarterly reports identifying all securities and mutual fund transactions (other than money market funds) in personal accounts that were not otherwise included in broker trade confirmations or account statements already provided to the Legal and Compliance Department;

 

•

The Legal and Compliance Department has the authority to deny:

 

a.

Any personal trade by an employee if the security is being considered for purchase or sale in a client account, there are open orders for the security on a trading desk, or the security appears on any AllianceBernstein restricted list;

 

b.

Any short sale by an employee for a personal account if the security is being held long in AllianceBernstein - managed portfolios; and

 

c.

Any personal trade by a portfolio manager or research analyst in a security that is subject to a blackout period as a result of client portfolio trading or recommendations to clients.

 

•

Separate requirements and restrictions apply to directors who are not employees of AllianceBernstein, as explained in further detail in the AllianceBernstein Personal Trading Policies and Procedures, Exhibit A of this document.

 

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This summary should not be considered a substitute for reading, understanding and complying with the detailed restrictions and requirements that appear in the AllianceBernstein Personal Trading Policies and Procedures, included as Appendix A to the Code.

 

7.

Outside Directorships and Other Outside Activities and Interests

Although activities outside of AllianceBernstein are not necessarily a conflict of interest, a conflict may exist depending upon your position within AllianceBernstein and AllianceBernstein’s relationship with the particular activity in question. Outside activities may also create a potential conflict of interest if they cause an AllianceBernstein employee to choose between that interest and the interests of AllianceBernstein or any client of AllianceBernstein. AllianceBernstein recognizes that the guidelines in this Section are not applicable to directors of AllianceBernstein who do not also serve in management positions within AllianceBernstein (“Outside Directors”).


(a) Board Member or Trustee


 

i.

No AllianceBernstein employee shall serve on any board of directors or trustees or in any other management capacity of any unaffiliated public company.

 

ii.

No AllianceBernstein employee shall serve on any board of directors or trustees or in any other management capacity of any private company without prior written approval (other than not-for-profit organizations) from the employee’s supervisor.3 After obtaining supervisory approval, the employee must obtain written authorization from AllianceBernstein’s Chief Compliance Officer who will provide final approval. This approval is also subject to review by, and may require the approval of, AllianceBernstein’s Chief Executive Officer. The decision as to whether to grant such authorization will be based on a determination that such service would not be inconsistent with the interests of any client, as well as an analysis of the time commitment and potential personal liabilities and responsibilities associated with the outside affiliation.4 Any AllianceBernstein employee who serves as a director, trustee or in any other management capacity of any private company must resign that position prior to the company becoming a publicly traded company.

 

iii.

This approval requirement applies regardless of whether an AllianceBernstein employee plans to serve as a director of an outside business organization (1) in a personal capacity or

 

____________________________

3   No approval is required to serve as a trustee/board member of not-for-profit organizations such as religious organizations, foundations, educational institutions, co-ops, private clubs etc., provided that the organization communities and engage in a variety of charitable activities, and it commends such service. However, it is the duty of every AllianceBernstein employee to ensure that all outside activities, even charitable or pro bono activities, do not constitute a conflict of interest or are not otherwise inconsistent with employment by AllianceBernstein. Accordingly, although no approval is required, each employee must use his/her best efforts to ensure that the organization does not use the employee’s affiliation with AllianceBernstein, including his/her corporate title, in any promotional (other than a “bio” section) or fundraising activities, or to advance a specific mission or agenda of the entity. Such positions also must be reported to the firm pursuant to other periodic requests for information (e.g., the AllianceBernstein 10-K questionnaire).

 

4   Such authorization requires an agreement on the part of the employee to not hold him or herself out as acting on behalf of AllianceBernstein (or any affiliate) and to use best efforts to e nsure that AllianceBernstein’s name (or that of any AllianceBernstein affiliated company) is not used in connection with the proposed affiliation (other than in a “bio” section), and in particular, activities relating to fundraising or to the advancement of a specific entity mission or agenda.

 

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(2) as a representative of AllianceBernstein or of an entity within the AllianceBernstein Group holding a corporate board seat on the outside organization (e.g., where AllianceBernstein or its clients may have a significant but non-controlling equity interest in the outside company).


 

vi.

New employees with pre-existing relationships are required to resign from the boards of public companies and seek and obtain the required approvals to continue to serve on the boards of private companies.

 

(b) Other Affiliations

AllianceBernstein discourages employees from committing to secondary employment, particularly if it poses any conflict in meeting the employee’s ability to satisfactorily meet all job requirements and business needs. Before an AllianceBernstein employee accepts a second job, that employee must:

 

•

Immediately inform his or her Department Head and Human Resources in writing of the secondary employment;

 

•

Ensure that AllianceBernstein’s business takes priority over the secondary employment;

 

•

Ensure that no conflict of interest exists between AllianceBernstein’s business and the secondary employment (see also, footnote 4, previous page); and

 

•

Require no special accommodation for late arrivals, early departures, or other special requests associated with the secondary employment.

 

For employees associated with any of AllianceBernstein’s registered broker-dealer subsidiaries, written approval of the Chief Compliance Officer for the subsidiary is also required. 5 New employees with pre-existing relationships are required to ensure that their affiliations conform to these restrictions, and must obtain the requisite approvals.

 

 

(c) Outside Financial or Business Interests

AllianceBernstein employees should be cautious with respect to personal investments that may lead to conflicts of interest or raise the appearance of a conflict. Conflicts of interest in this context may arise in cases where an AllianceBernstein employee, a member of his or her family, or a close personal acquaintance, holds a substantial interest in a company that has significant dealings with AllianceBernstein or any of its subsidiaries either on a recurring or “one-off” basis. For example, holding a substantial interest in a family-controlled or other privately-held company that does business with, or competes against, AllianceBernstein or any of its subsidiaries may give rise to a conflict of interest or the appearance of a conflict. In contrast, holding shares in a widely-held public company that does business with AllianceBernstein from time to time may not raise the same types of concerns. Prior to making any such personal investments, AllianceBernstein employees must pre-clear the transaction, in accordance with the Personal Trading Policies and Procedures, attached as Exhibit A of this Code, and should consult as appropriate with their supervisor, the Conflicts Officer, General

 

____________________________

5   In the case of AllianceBernstein subsidiaries that are holding companies for consolidated subgroups, unless otherwise specified by the holding company’s Chief Executive Officer, this approval may be granted by the Chief Executive Officer or Chief Financial Officer of each subsidiary or business unit with such a consolidated subgroup.

 

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Counsel, Chief Compliance Officer or other representative of the Legal and Compliance Department.

 

AllianceBernstein employees should also be cautious with respect to outside business interests that may create divided loyalties, divert substantial amounts of their time and/or compromise their independent judgment. If a conflict of interest situation arises, you should report it to your supervisor, the Conflicts Officer, General Counsel, Chief Compliance Officer and/or other representative of AllianceBernstein’s Human Resources or Legal and Compliance Department. Business transactions that benefit relatives or close personal friends, such as awarding a service contract to them or a company in which they have a controlling or other significant interest, may also create a conflict of interest or the appearance of a conflict. AllianceBernstein employees must consult their supervisor and/or the Conflicts Officer, General Counsel, Chief Compliance Officer or other representative of AllianceBernstein’s Human Resources or Legal and Compliance Department before entering into any such transaction. New employees that have outside financial or business interests (as described herein) should report them as required and bring them to the attention of their supervisor immediately.

 

8.

Gifts, Entertainment and Inducements

Business gifts and entertainment are designed to build goodwill and sound working relationships among business partners. However, under certain circumstances, gifts, entertainment, favors, benefits, and/or job offers may be attempts to “purchase” favorable treatment. Accepting or offering such inducements could raise doubts about an AllianceBernstein employee’s ability to make independent business judgments in our clients’ or AllianceBernstein’s best interests. For example, a problem would arise if (i) the receipt by an AllianceBernstein employee of a gift, entertainment or other inducement would compromise, or could be reasonably viewed as compromising, that individual’s ability to make objective and fair business decisions on behalf of AllianceBernstein or its clients, or (ii) the offering by an AllianceBernstein employee of a gift, entertainment or other inducement appears to be an attempt to obtain business through improper means or to gain any special advantage in our business relationships through improper means.

These situations can arise in many different circumstances (including with current or prospective suppliers and clients) and AllianceBernstein employees should keep in mind that certain types of inducements may constitute illegal bribes, pay-offs or kickbacks. In particular, the rules of various securities regulators place specific constraints on the activities of persons involved in the sales and marketing of securities. AllianceBernstein has adopted the Policy and Procedures for Giving and Receiving Gifts and Entertainment to address these and other matters. AllianceBernstein Employees must familiarize themselves with this policy and comply with its requirements, which include reporting the acceptance of most business meals, gifts and entertainment to the Compliance Department. A copy of this policy can be found on the Legal and Compliance Department intranet site, and will be supplied by the Compliance Department upon request.

 

Each AllianceBernstein employee must use good judgment to ensure there is no violation of these principles. If you have any question or uncertainty about whether any gifts, entertainment or other type of inducements are appropriate, please contact your supervisor or a representative of AllianceBernstein’s Legal and Compliance Department and/or the Conflicts Officer, as appropriate. If you feel uncomfortable utilizing the normal channels, issues may be brought to the attention of the Company Ombudsman, who is an independent, informal and confidential resource for concerns about AllianceBernstein business matters that may implicate issues of ethics or

 

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questionable practices. Please see Section 23 for additional information on the Company Ombudsman.

9.

Dealings with Government Personnel

AllianceBernstein employees should be aware that practices that may be acceptable in the commercial business environment (such as providing certain transportation, business meals, entertainment and other things of nominal value), may be entirely unacceptable and even illegal when they relate to government employees or others who act on a government’s behalf. Therefore, you must be aware of and adhere to the relevant laws and regulations governing relations between government employees and customers and suppliers in every country where you conduct business.

No AllianceBernstein employee may give money or gifts to any official or any employee of a governmental entity if doing so could reasonably be construed as having any inappropriate connection with AllianceBernstein’s business relationship. Such actions are prohibited by law in many jurisdictions. It is the responsibility of all AllianceBernstein employees to adhere to the laws and regulations applicable in the jurisdictions where they do business.

We expect all AllianceBernstein employees to refuse to make questionable payments. Any proposed payment or gift to a government official must be reviewed in advance by a representative of the Legal and Compliance Department, even if such payment is common in the country of payment. AllianceBernstein employees should be aware that they do not actually have to make the payment to violate AllianceBernstein’s policy and the law — merely offering, promising or authorizing it will be considered a violation of this Code.

10.

Political Contributions by or on behalf of AllianceBernstein

Election laws in many jurisdictions generally prohibit political contributions by corporations to candidates. Many local laws also prohibit corporate contributions to local political campaigns. In accordance with these laws, AllianceBernstein does not make direct contributions to any candidates for national or local offices where applicable laws make such contributions illegal. In these cases, contributions to political campaigns must not be, nor appear to be, made with or reimbursed by AllianceBernstein assets or resources. AllianceBernstein assets and resources include (but are not limited to) AllianceBernstein facilities, personnel, office supplies, letterhead, telephones, electronic communication systems and fax machines. Please see the Policy and Procedures for Giving and Receiving Gifts and Entertainment, which can be found on the Legal and Compliance Department intranet site, for a discussion relating to political contributions suggested by clients.

AllianceBernstein employees who hold or seek to hold political office must do so on their own time, whether through vacation, after work hours or on weekends. Additionally, the employee must notify the General Counsel or Chief Compliance Officer prior to running for political office to ensure that there are no conflicts of interest with AllianceBernstein business.

Election laws in many jurisdictions allow corporations to establish and maintain political action or similar committees, which may lawfully make campaign contributions. AllianceBernstein or companies affiliated with AllianceBernstein may establish such committees or other mechanisms through which AllianceBernstein employees may make political contributions, if permitted under

 

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the laws of the jurisdictions in which they operate. Any questions about this policy should be directed to the General Counsel or Chief Compliance Officer.

AllianceBernstein employees may make personal political contributions as they see fit in accordance with all applicable laws and the guidelines in the Policy and Procedures for Giving and Receiving Gifts and Entertainment. Certain employees involved with the offering or distribution of municipal fund securities (e.g., a “529 Plan”) or acting as a director for certain subsidiaries, must also adhere to the restrictions and reporting requirements of the Municipal Securities Rulemaking Board.

 

11.

“Ethical Wall” Policy

AllianceBernstein has established the Policy and Procedures to Control the Flow and Use of Material Non-Public Information (“Ethical Wall Policy”), a copy of which can be found on the Legal and Compliance Department intranet site. This policy was established to prevent the flow of material non-public information about a listed company or its securities from AllianceBernstein employees who receive such information in the course of their employment to those AllianceBernstein employees performing investment management activities. If “Ethical Walls” are in place, AllianceBernstein’s investment management activities may continue despite the knowledge of material non-public information by other AllianceBernstein employees involved in different parts of AllianceBernstein’s business. “Investment management activities” involve making, participating in, or obtaining information regarding purchases or sales of securities of public companies or making, or obtaining information about, recommendations with respect to purchases or sales of such securities. Given AllianceBernstein’s extensive investment management activities, it is very important for AllianceBernstein employees to familiarize themselves with AllianceBernstein’s Ethical Wall Policy and abide by it.

 

12.

Corporate Opportunities and Resources

AllianceBernstein employees owe a duty to AllianceBernstein to advance the firm’s legitimate interests when the opportunity to do so arises and to use corporate resources exclusively for that purpose. Corporate opportunities and resources must not be taken or used for personal gain. AllianceBernstein Employees are prohibited from:

 

•

Taking for themselves personally opportunities that are discovered through the use of company property, information or their position;

 

•

Using company property, information, resources or their company position for personal gain; and

 

•

Competing with AllianceBernstein directly or indirectly.

Please also refer to the Policy and Procedures for Giving and Receiving Gifts and Entertainment, and its Appendix B, the Code of Conduct Regarding the Purchase of Products and Services on Behalf of AllianceBernstein and its Clients, which can be found on the Legal and Compliance Department intranet site.

 

13.

Antitrust and Fair Dealing

 

AllianceBernstein believes that the welfare of consumers is best served by economic competition. Our policy is to compete vigorously, aggressively and successfully in today’s increasingly

 

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competitive business climate and to do so at all times in compliance with all applicable antitrust, competition and fair dealing laws in all the markets in which we operate. We seek to excel while operating honestly and ethically, never through taking unfair advantage of others. Each AllianceBernstein employee should endeavor to deal fairly with AllianceBernstein’s customers, suppliers, competitors and other AllianceBernstein employees. No one should take unfair advantage through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing practices.

The antitrust laws of many jurisdictions are designed to preserve a competitive economy and promote fair and vigorous competition. We are all required to comply with these laws and regulations. AllianceBernstein employees involved in marketing, sales and purchasing, contracts or in discussions with competitors have a particular responsibility to ensure that they understand our standards and are familiar with applicable competition laws. Because these laws are complex and can vary from one jurisdiction to another, AllianceBernstein employees are urged to seek advice from the General Counsel, Chief Compliance Officer or Corporate Secretary if questions arise. Please also refer to the Policy and Procedures for Giving and Receiving Gifts and Entertainment, which can be found on the Legal and Compliance Department intranet site, for a discussion relating to some of these issues.

14.

Recordkeeping and Retention

Properly maintaining and retaining company records is of the utmost importance.

AllianceBernstein employees are responsible for ensuring that AllianceBernstein’s business records are properly maintained and retained in accordance with applicable laws and regulations in the jurisdictions where it operates. AllianceBernstein Employees should familiarize themselves with these laws and regulations. Please see the Record Retention Policy on the Legal and Compliance intranet site for more information.

15.

Improper Influence on Conduct of Audits

AllianceBernstein employees, and persons acting under their direction, are prohibited from taking any action to coerce, manipulate, mislead or fraudulently influence any independent public or certified public accountant engaged in the performance of an audit or review of AllianceBernstein’s financial statements. The following is a non-exhaustive list of actions that might constitute improper influence:

 

•

Offering or paying bribes or other financial incentives to an auditor, including offering future employment or contracts for audit or non-audit services;

 

•

Knowingly providing an auditor with inaccurate or misleading legal or financial analysis;

 

•

Threatening to cancel or canceling existing non-audit or audit engagements if the auditor objects to the company’s accounting; or

 

•

Seeking to have a partner or other team member removed from the audit engagement because such person objects to the company’s accounting.

16.

Accuracy of Disclosure

Securities and other laws impose public disclosure requirements on AllianceBernstein and require it to regularly file reports, financial information and make other submissions to various regulators

 

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and stock market authorities around the globe. Such reports and submissions must comply with all applicable legal requirements and may not contain misstatements or omit material facts.

AllianceBernstein employees who are directly or indirectly involved in preparing such reports and submissions, or who regularly communicate with the press, investors and analysts concerning AllianceBernstein, must ensure within the scope of the employee’s job activities that such reports, submissions and communications are (i) full, fair, timely, accurate and understandable, and (ii) meet applicable legal requirements. This applies to all public disclosures, oral statements, visual presentations, press conferences and media calls concerning AllianceBernstein, its financial performance and similar matters. In addition, members of AllianceBernstein’s Board, executive officers and AllianceBernstein employees who regularly communicate with analysts or actual or potential investors in AllianceBernstein securities are subject to the AllianceBernstein Regulation FD Compliance Policy. A copy of the policy can be found on the Legal and Compliance Department intranet site.


17.

Confidentiality

AllianceBernstein employees must maintain the confidentiality of sensitive non-public and other confidential information entrusted to them by AllianceBernstein or its clients and vendors and must not disclose such information to any persons except when disclosure is authorized by AllianceBernstein or mandated by regulation or law. However, disclosure may be made to (1) other AllianceBernstein employees who have a bona-fide “need to know” in connection with their duties, (2) persons outside AllianceBernstein (such as attorneys, accountants or other advisers) who need to know in connection with a specific mandate or engagement from AllianceBernstein or who otherwise have a valid business or legal reason for receiving it and have executed appropriate confidentiality agreements, or (3) regulators pursuant to an appropriate written request (see Section 21).

Confidential information includes all non-public information that might be of use to competitors, or harmful to AllianceBernstein or our clients and vendors, if disclosed. The identity of certain clients may be confidential, as well. Intellectual property (such as confidential product information, trade secrets, patents, trademarks, and copyrights), business, marketing and service plans, databases, records, salary information, unpublished financial data and reports as well as information that joint venture partners, suppliers or customers have entrusted to us are also viewed as confidential information. Please note that the obligation to preserve confidential information continues even after employment with AllianceBernstein ends.

To safeguard confidential information, AllianceBernstein employees should observe at least the following procedures:

 

•

Special confidentiality arrangements may be required for certain parties, including outside business associates and governmental agencies and trade associations, seeking access to confidential information;

 

•

Papers relating to non-public matters should be appropriately safeguarded;

 

•

Appropriate controls for the reception and oversight of visitors to sensitive areas should be implemented and maintained;

 

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•

Document control procedures, such as numbering counterparts and recording their distribution, should be used where appropriate;

 

•

If an AllianceBernstein employee is out of the office in connection with a material non-public transaction, staff members should use caution in disclosing the AllianceBernstein employee’s location;

 

•

Sensitive business conversations, whether in person or on the telephone, should be avoided in public places and care should be taken when using portable computers and similar devices in public places; and

 

•

E-mail messages and attachments containing material non-public information should be treated with similar discretion (including encryption, if appropriate) and recipients should be made aware of the need to exercise similar discretion.

18.

Protection and Proper Use of AllianceBernstein Assets

AllianceBernstein employees have a responsibility for safeguarding and making proper and efficient use of AllianceBernstein’s property. Every AllianceBernstein employee also has an obligation to protect AllianceBernstein’s property from loss, fraud, damage, misuse, theft, embezzlement or destruction. Acts of fraud, theft, loss, misuse, carelessness and waste of assets may have a direct impact on AllianceBernstein’s profitability. Any situations or incidents that could lead to the theft, loss, fraudulent or other misuse or waste of AllianceBernstein property should be reported to your supervisor or a representative of AllianceBernstein’s Human Resources or Legal and Compliance Department as soon as they come to an employee’s attention. Should an employee feel uncomfortable utilizing the normal channels, issues may be brought to the attention of the Company Ombudsman, who is an independent, informal and confidential resource for concerns about AllianceBernstein business matters that may implicate issues of ethics or questionable practices. Please see Section 23 for additional information on the Company Ombudsman.

 

19.

Compliance Practices and Policies of Group Subsidiaries

AllianceBernstein is considered for most purposes to be a subsidiary of AXA, a French holding company doing business in more than more than 50 countries around the world, each of which has its own unique business, legal and regulatory environment. Various AXA Group companies, such as AllianceBernstein, have adopted their own compliance policies adapted to their specific businesses and to the specific legal, regulatory and ethical environments in the country or countries where they do business, which the AXA Group encourages for all its companies as a matter of “best practices.” The AXA Group has adopted a Compliance Guide, and AXA Financial has put forth a Policy Statement on Ethics, both of which are included on the Legal and Compliance Department intranet site. AllianceBernstein employees are subject to these AXA policy statements and should therefore be familiar with their requirements.


Importantly, all AXA Group employees are able to submit anonymously, any concerns they may have regarding accounting, internal control or auditing matters, including fraud, directly to the Chairman of AXA’s Audit Committee The Chairman of AXA’s Audit Committee has a dedicated fax (+331 4500 3016) to receive these concerns from Group employees. See also Sections 22 and 23 for AllianceBernstein’s “whistleblower” protection and related reporting mechanisms.

 

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20. Exceptions from the Code

In addition to the exceptions contained within the specific provisions of the Code, the General Counsel, Chief Compliance Officer (or his or her designee) may, in very limited circumstances, grant other exceptions under any Section of this Code on a case-by-case basis, under the following procedures:

(a) Written Statement and Supporting Documentation

 

The individual seeking the exception furnishes to the Chief Compliance Officer, as applicable:


          

(1)  

A written statement detailing the efforts made to comply with the requirement from which the individual seeks an exception;


          

(2)  

A written statement containing a representation and warranty that (i) compliance with the requirement would impose a severe undue hardship on the individual and (ii) the exception would not, in any manner or degree, harm or defraud a client, violate the general principles herein or compromise the individual’s or AllianceBernstein’s fiduciary duty to any client; and


          

(3)  

Any supporting documentation that the Chief Compliance Officer may require.


(b) Compliance Interview

The Chief Compliance Officer (or designee) will conduct an interview with the individual or take such other steps deemed appropriate in order to determine that granting the exception will not, in any manner or degree, harm or defraud a client, violate the general principles herein or compromise the individual’s or AllianceBernstein’s fiduciary duty to any client; and will maintain all written statements and supporting documentation, as well as documentation of the basis for granting the exception.

PLEASE NOTE: To the extent required by law or NYSE rule, any waiver or amendment of this Code for AllianceBernstein’s executive officers (including AllianceBernstein’s Chief Executive Officer, Chief Financial Officer, and Principal Accounting Officer) or directors shall be made at the discretion of the Board of AllianceBernstein Corporation and promptly disclosed to the unitholders of AllianceBernstein Holding pursuant to Section 303A.10 of the NYSE Exchange Listed Company Manual.

 

21. Regulatory Inquiries, Investigations and Litigation

(a) Requests for Information

Governmental agencies and regulatory organizations may from time to time conduct surveys or make inquiries that request information about AllianceBernstein, its customers or others that generally would be considered confidential or proprietary.


All regulatory inquiries concerning AllianceBernstein are to be handled by the Chief Compliance Officer or General Counsel. Employees receiving such inquiries should refer such matters immediately to the Legal and Compliance Department.

 

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(b) Types of Inquiries

Regulatory inquiries may be received by mail, e-mail, telephone or personal visit. In the case of a personal visit, demand may be made for the immediate production or inspection of documents. While any telephone or personal inquiry should be handled in a courteous manner, the caller or visitor should be informed that responses to such requests are the responsibility of AllianceBernstein’s Legal and Compliance Department. Therefore, the visitor should be asked to wait briefly while a call is made to the Chief Compliance Officer or General Counsel for guidance on how to proceed. In the case of a telephone inquiry, the caller should be referred to the Chief Compliance Officer or General Counsel or informed that his/her call will be promptly returned. Letter or e-mail inquiries should be forwarded promptly to the Chief Compliance Officer or General Counsel, who will provide an appropriate response.

 

(c) Responding to Information Requests

Under no circumstances should any documents or material be released without prior approval of the Chief Compliance Officer or General Counsel. Likewise, no employee should have substantive discussions with any regulatory personnel without prior consultation with either of these individuals. Note that this policy is standard industry practice and should not evoke adverse reaction from any experienced regulatory personnel. Even if an objection to such delay is made, the policy is fully within the law and no exceptions should be made.

 

(d) Use of Outside Counsel

It is the responsibility of the Chief Compliance Officer or General Counsel to inform AllianceBernstein’s outside counsel in those instances deemed appropriate and necessary.

 

(e) Regulatory Investigation

Any employee that is notified that they are the subject of a regulatory investigation, whether in connection with his or her activities at AllianceBernstein or at a previous employer, must immediately notify the Chief Compliance Officer or General Counsel.

 

(f) Litigation

Any receipt of service or other notification of a pending or threatened action against the firm should be brought to the immediate attention of the General Counsel or Chief Compliance Officer. These individuals also should be informed of any instance in which an employee is sued in a matter involving his/her activities on behalf of AllianceBernstein. Notice also should be given to either of these individuals upon receipt of a subpoena for information from AllianceBernstein relating to any matter in litigation or receipt of a garnishment lien or judgment against the firm or any of its clients or employees. The General Counsel or Chief Compliance Officer will determine the appropriate response.

 

22. Compliance and Reporting of Misconduct / “Whistleblower” Protection

No Code can address all specific situations. Accordingly, each AllianceBernstein employee is responsible for applying the principles set forth in this Code in a responsible fashion and with the exercise of good judgment and common sense. Whenever uncertainty arises, an AllianceBernstein

 

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employee should seek guidance from an appropriate supervisor or a representative of Human Resources or the Legal and Compliance Department before proceeding.

All AllianceBernstein employees should promptly report any practices or actions the employee believes to be inappropriate or inconsistent with any provisions of this Code. In addition all employees must promptly report any actual violations of the Code to the General Counsel, Chief Compliance Officer or a designee. Any person reporting a violation in good faith will be protected against reprisals.

If you feel uncomfortable utilizing the normal channels, issues may be brought to the attention of the Company Ombudsman, who is an independent, informal and confidential resource for concerns about AllianceBernstein business matters that may implicate issues of ethics or questionable practices. Please see Section 23 for additional information on the Company Ombudsman. AllianceBernstein employees may also utilize the AXA Group’s anonymous reporting mechanism as detailed in Section 19.

 

23. Company Ombudsman

AllianceBernstein’s Company Ombudsman provides a neutral, confidential, informal and independent communications channel where any AllianceBernstein employee can obtain assistance in surfacing and resolving work-related issues. The primary purpose of the Ombudsman is to help AllianceBernstein:

 

•

Safeguard its reputation and financial, human and other company assets;

 

•

Maintain an ethical and fiduciary culture;

 

•

Demonstrate and achieve its commitment to “doing the right thing;” and

 

•

Comply with relevant provisions of the Sarbanes-Oxley Act of 2002, the U.S. Sentencing Guidelines, as well as AllianceBernstein’s 2003 SEC Order, New York Stock Exchange Rule 303A.10 and other laws, regulations and policies.


The Ombudsman seeks to provide early warnings and to identify changes that will prevent malfeasance and workplace issues from becoming significant or recurring. The Ombudsman has a reporting relationship to the AllianceBernstein CEO, the Audit Committee of the Board of Directors of AllianceBernstein Corporation and independent directors of AllianceBernstein’s U.S. mutual fund boards.

Any type of work-related issue may be brought to the Ombudsman, including potential or actual financial malfeasance, security matters, inappropriate business practices, compliance issues, unethical behavior, violations of law, health and safety issues, and employee relations issues. The Ombudsman supplements, but does not replace existing formal channels such as Human Resources, Legal and Compliance, Internal Audit, Security and line management.

 

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24. Sanctions

Upon learning of a violation of this Code, any member of the AllianceBernstein Group, with the advice of the General Counsel, Chief Compliance Officer and/or the AllianceBernstein Code of Ethics Oversight Committee, may impose such sanctions as such member deems appropriate, including, among other things, restitution, censure, suspension or termination of service. Persons subject to this Code who fail to comply with it may also be violating the U.S. federal securities laws or other federal, state or local laws within their particular jurisdictions.

 

25. Annual Certifications

Each person subject to this Code must certify at least annually to the Chief Compliance Officer that he or she has read and understands the Code, recognizes that he or she is subject hereto and has complied with its provisions and disclosed or reported all personal securities transactions and other items required to be disclosed or reported under the Code. The Chief Compliance Officer may require interim certifications for significant changes to the Code.

 

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APPENDIX A

 

ALLIANCEBERNSTEIN L.P.

 

PERSONAL TRADING POLICIES AND PROCEDURES

 

1.

Overview

(a) Introduction

AllianceBernstein recognizes the importance to its employees of being able to manage and develop their own and their dependents’ financial resources through long-term investments and strategies. However, because of the potential conflicts of interest inherent in our business, our industry and AllianceBernstein have implemented certain standards and limitations designed to minimize these conflicts and help ensure that we focus on meeting our duties as a fiduciary for our clients. Employees should be aware that their ability to liquidate positions may be severely restricted under these policies, including during times of market volatility. Therefore, as a general matter, AllianceBernstein discourages personal investments by employees in individual securities and encourages personal investments in managed collective vehicles, such as mutual funds.

AllianceBernstein senior management believes it is important for employees to align their own personal interests with the interests of our clients. Consequently, employees are encouraged to invest in the mutual fund products and services offered by AllianceBernstein, where available and appropriate.

 

(b) Definitions

The following definitions apply for purposes of this Appendix A of the Code; however additional definitions are contained in the text itself.1

 

1.  

“AllianceBernstein” means AllianceBernstein L.P., its subsidiaries and its joint venture entities.

 

2.  

“Beneficial Ownership” is interpreted in the same manner as in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 16a-1 and the other rules and regulations thereunder and includes ownership by any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in a Security. For example, an individual has an indirect pecuniary interest in any Security owned by the individual’s spouse.

 

______________________________

1   Due to the importance that AllianceBernstein places on promoting responsible personal trading, we have applied the definition of “access person,” as used in Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, and related requirements to all AllianceBernstein employees and officers. We have drafted special provisions for directors of AllianceBernstein who are not also employees of AllianceBernstein.

 

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Beneficial Ownership also includes, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, having or sharing “voting power” or “investment power,” as those terms are used in Section 13(d) of the Exchange Act and Rule 13d-3 thereunder.

 

3.  

“Client” means any person or entity, including an investment company, for which AllianceBernstein serves as investment manager or adviser.

 

4.  

“Chief Compliance Officer” refers to AllianceBernstein’s Chief Compliance Officer.

 

5.  

“Code of Ethics Oversight Committee” refers to the committee of

AllianceBernstein’s senior officers that is responsible for monitoring compliance with the Code.

 

6.  

“Conflicts Officer” refers to AllianceBernstein’s Conflicts Officer, who reports to the Chief Compliance Officer.

 

7.  

“Control ” has the meaning set forth in Section 2(a)(9) of the 1940 Act.

 

8.  

“Director” means any person who serves in the capacity of a director of AllianceBernstein Corporation. “Affiliated Director” means any Director who is not an Employee (as defined below) but who is an employee of an entity affiliated with AllianceBernstein. “ Outside Director” means any Director who is neither an Employee (as defined below) nor an employee of an entity affiliated with AllianceBernstein.

 

9.  

“Director“Employee” refers to any person who is an employee or officer of AllianceBernstein, including part-time employees and consultants (acting in the capacity of a portfolio manager, trader or research analyst) under the Control of AllianceBernstein.

 

10.  

“Initial Public Offering” means an offering of Securities registered under the Securities Act of 1933 (the “1933 Act”), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, as well as similar offerings of Securities issued outside the United States.

 

11.  

“Investment Personnel” refers to:

 

a.

Any Employee who acts in the capacity of a portfolio manager, research analyst or trader or any other capacity (such as an assistant to one of the foregoing) and in connection with his or her regular duties makes or participates in making, or is in a position to be aware of, recommendations regarding the purchase or sale of securities by a Client;


 

b.

Any Employee who receives the AllianceBernstein Global Equity Review or has access to the AllianceBernstein Express Research database, or Research Wire;

 

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c.

Any Employees participating in (including passively listening to) “morning calls” for any of the managed account disciplines or broker-dealer subsidiaries;

 

d.

Any other Employee designated as such by the Legal and Compliance Department; or e.

 

e.

Any natural person who Controls AllianceBernstein and who obtains information concerning recommendations made to a Client regarding the purchase or sale of securities by the Client.


 

12.  

“Investment Personnel“ Limited Offering” means an offering that is exempt from registration under the 1933 Act pursuant to Sections 4(2) or 4(6) thereof or pursuant to Rules 504, 505 or 506 under the 1933 Act, as well as similarly exempted offerings of Securities issued outside the United States. Investments in hedge funds are typically sold in a limited offering setting.

 

13.  

“Investment Personnel“ means the Company Ombudsman of AllianceBernstein, or any of his/her staff members.

 

14.  

“Personal Account” refers to any account (including, without limitation, a custody account, safekeeping account and an account maintained by an entity that may act in a brokerage or a principal capacity) in which Securities may be traded or custodied, and in which an Employee has any Beneficial Ownership, and any such account maintained by or for a financial dependent of an Employee. For example, this definition includes Personal Accounts of:

 

a.

An Employee’s spouse/domestic partner, including a legally separated or divorced spouse who is a financial dependent;

 

b.

Financial dependents of an Employee, including both those residing with the Employee and those not residing with the Employee, such as financially dependent children away at college; and

 

c.

Any person or entity for which the Employee acts as a fiduciary (e.g., acting as a Trustee) or who has given investment discretion to the Employee, other than accounts over which the employee has discretion as a result of his or her responsibilities at AllianceBernstein.

 

 

Personal Accounts include any account meeting the above definition even if the Employee has given discretion over the account to someone else.


 

15.  

“ Purchase or Sale of a Security” includes, among other transactions, the writing or purchase of an option to sell a Security and any short sale of a Security.

 

16.  

“Security ” has the meaning set forth in Section 2(a)(36) of the Investment Company Act and includes any derivative thereof, commodities, options or forward contracts, except that it shall not include:

 

 a.

   Securities issued by the government of the United States;

 

 

 

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 b.

   Short-term debt securities that are government securities within the meaning of Section 2(a)(16) of the Investment Company Act; and


 

 c.

   Bankers’ acceptances, bank certificates of deposit, commercial paper, and such other instruments as may be designated from time to time by the Chief Compliance Officer.


NOTE: Shares of all mutual funds, including exchange-traded funds and money market funds, are “Securities” for purposes of this policy. However, the pre-clearance and reporting requirements, as well as the short-term trading and number of trade limitations do not apply to money market fund shares.

 

 

17.  

A Security is “Being Considered for Purchase or Sale” when:

 

a.  

An AllianceBernstein Growth research analyst issues research information (including as part of the daily morning call) regarding initial coverage of, or changing a rating with respect to, a Security;

 

b.  

A portfolio manager has indicated (e.g., during the daily Growth morning call or identified as a Value priority purchase/sale, or otherwise) his or her intention to purchase or sell a Security; or

 

c.  

An open order2 in the Security exists on any buy-side trading desk.


This is not an exhaustive list. At the discretion of the Legal and Compliance Department, a Security may be deemed “Being Considered for Purchase or Sale” even if none of the above events have occurred, particularly if a portfolio manager is contemplating the purchase or sale of that Security, as evidenced by e-mails or the manager’s preparation of, or request for, research.


 

18.  

“Security held or to be acquired or sold” means:

 

a.  

Any Security which, within the most recent 15 days (i) is or has been held by a Client in an AllianceBernstein-managed account or (ii) is being or has been considered by AllianceBernstein for purchase or sale for the Client; and

 

b.  

Any option to purchase or sell, and any Security convertible into or exchangeable for, a Security.


 

19.  

“Subsidiary” refers to entities with respect to which AllianceBernstein, directly or indirectly, through the ownership of voting securities, by contract or otherwise has the power to direct or cause the direction of management or policies of such entity.

 

____________________________

2 Defined as any client order on a Growth trading desk which has not been completely executed, as well as any “significant” open Value client orders, or Value “priority” purchases or sales, as those terms are defined by the applicable Value SBU CIO.

 

 

 

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2.

Requirements and Restrictions – All Employees

The following are the details of the standards which must be observed:

 

(a) General Standards

Employees have an obligation to conduct their personal investing activities and related Securities transactions lawfully and in a manner that avoids actual or potential conflicts between their own interests and the interests of AllianceBernstein and its clients. Employees must carefully consider the nature of their AllianceBernstein responsibilities - and the type of information that he or she might be deemed to possess in light of any particular securities transaction - before engaging in any investment-related activity or transaction.

i. Material Nonpublic Information: Employees in possession of material nonpublic information about or affecting Securities, or their issuer, are prohibited from buying or selling such Securities, or advising any other person to buy or sell such Securities. Similarly, they may not disclose such information to anyone without the permission of the General Counsel or Chief Compliance Officer. Please see the AllianceBernstein Insider Trading Policies, which can be found on the Legal and Compliance Department intranet site.

ii. Market-Timing: Purchases and exchanges of shares of mutual funds should be made for investment purposes only. Accordingly, Employees are prohibited from engaging in short-term trading (“market-timing”) in mutual funds (other than money market fund shares), which for purposes of the Code is defined as a purchase and redemption, regardless of size, in and out of the same mutual fund within any ninety (90) day period. Employees also are prohibited from engaging in any other transactions in a mutual fund that are in violation of the fund’s prospectus, whether or not that fund is managed by AllianceBernstein, an affiliate of AllianceBernstein or an outside adviser.3

iii. Personal Responsibility: It is the responsibility of each Employee to ensure that all Securities transactions in Personal Accounts are made in strict compliance with the restrictions and procedures in the Code and this Appendix A, and otherwise comply with all applicable legal and regulatory requirements.

iv. Affiliated Directors and Outside Directors: The personal trading restrictions of Appendix A of the Code do not apply to any Affiliated Director or Outside Director, provided that at the time of the transaction, he or she has no actual knowledge that the Security involved is “Being Considered for Purchase or Sale.” Affiliated

 

_________________________

3 These restrictions shall not apply to investments in mutual funds through non-discretionary asset allocation programs; automatic reinvestment programs; automatic investments through 401(k) and similar retirement accounts; and any other non-volitional investment vehicles. These restrictions also do not apply to transactions in money market funds and other short duration funds used as checking accounts or for similar cash management purposes.

 

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Directors and Outside Directors, however, are subject to reporting requirements as described in Section 7 below.


(b) Disclosure of Personal Accounts

All Employees must disclose their Personal Accounts to the Compliance Department (and take all necessary actions to close any accounts held with non-designated brokers, see next section). It is each Employee’s responsibility to ensure that the Compliance Department is appropriately notified of all accounts and to direct the broker to provide the Compliance Department with electronic and/or paper brokerage transaction confirmations and account statements (and verify that it has been done). Do not assume that the broker-dealer will automatically arrange for this information to be set up and forwarded correctly.

(c) Designated Brokerage Accounts

Personal Accounts of an Employee that are maintained as brokerage accounts must be held only at the following approved designated broker-dealers (each a “Designated Broker”): 4

 

•

  Charles Schwab;

 

•

  Credit Suisse First Boston (the DLJ group);

 

•

  E*TRADE Financial (formerly Harrisdirect);

 

•

  Merrill Lynch; and/or

 

•

  Sanford C. Bernstein & Co., LLC

Under limited circumstances, the Compliance Department may grant exceptions to this policy and approve the use of other broker-dealers or custodians (such as in the case of proprietary products that can only be held at specific firms). In addition, the Chief Compliance Officer may in the future modify this list.

All Securities in which an Employee has any Beneficial Ownership must be held in Personal Accounts and maintained in accordance with the Designated Broker requirements described above (except that shares of open-end mutual funds may be held directly with the investment company). Additionally, Employees may effect Securities transactions only in Personal Accounts (or directly through a mutual fund’s transfer agent). In limited circumstances, the Chief Compliance Officer, or his designee, may grant an exception to these requirements (see Section 20 of the Code). This requirement applies to all types of Securities and personal Securities transactions including, for example, Securities issued in a Limited Offering or other direct investments.

 

_________________________

4 Exceptions may apply in certain non-U.S. locations. Please consult with your local compliance officer.

 

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(d) Pre-Clearance Requirement

 

 i.

Subject to the exceptions specified below, an Employee may not purchase or sell, directly or indirectly, any Security (including mutual fund shares, but excluding money market funds and AllianceBernstein open-end mutual fund shares)5 in which the Employee has (or after such transaction would have) any Beneficial Ownership unless the Employee obtains the prior approval from the Compliance Department and, in the case of Investment Personnel, the head of the business unit (or a designated manager) in which the Employee works.6 Pre-clearance requests must be made on the date of the contemplated transaction, through the use of the appropriate Pre-Clearance Form. These requests will document (a) the details of the proposed transaction and (b) representations as to compliance with the personal trading restrictions of this Code.

Pre-Clearance requests will be acted on by the Legal and Compliance Department only between the hours of 10:00 a.m. and 3:30 p.m. (New York time). The Legal and Compliance Department will review the request to determine if the proposed transaction complies with the Code, whether that security is restricted for AllianceBernstein personnel, and if appropriate, contact the appropriate supervisor (or a person designated by the supervisor) to determine whether the proposed transaction raises any potential conflicts of interest or other issues. The Compliance Department will communicate to the requesting Employee its approval or denial of the proposed transaction, either in writing or orally. In the U.S. and Canada, any approval given under this paragraph will remain in effect only until the end of the trading day on which the approval was granted. For employees in offices outside the U.S. and Canada, such approval will remain in effect for the following business day as well. Good-until-cancel limit orders are not permitted without daily requests for pre-clearance approval. Employees must wait for approval before placing the order with their broker.

The Legal and Compliance Department will maintain an electronic log of all pre-clearance requests and indicate the approval or denial of the request in the log.

PLEASE NOTE: When a Security is Being Considered for Purchase or Sale for a Client (see Section 2(i) below) or is being purchased or sold for a Client following the approval on the same day of a personal trading request form for the same Security, the Legal and Compliance Department is authorized to cancel the personal order if (a) it has not been executed and the order exceeds a market value of $50,000 or (b) the Legal and Compliance Department determines, after consulting with the trading desk and the appropriate business unit head (if available), that the order, based on market conditions, liquidity and other relevant factors, could have an adverse impact on a

 

____________________________

5 Open-end mutual fund purchases not directed by the Employee (e.g., by spouses or domestic partners) are not subject to the pre-clearance requirements. See other exceptions later in this section.

6 For purposes of the pre-clearance requirement, all employees in the Value SBU are considered Investment Personnel, and are therefore required to have all of their trades pre-approved by the head of their respective departments (or a designee).

 

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Client or on a Client’s ability to purchase or sell the Security or other Securities of the issuer involved.

 

 

 ii.

Exceptions: The pre-clearance requirements do not apply to7 :

a. Non-Volitional Transactions, including:

 

•

Transactions in a Personal Account managed for an Employee on a discretionary basis by a third person or entity, when the Employee does not discuss any specific transactions for the account with the third-party manager;

 

•

Any Security received as part of an Employee’s compensation (although any subsequent sales must be pre-cleared);

 

•

Investment vehicles in which the specific funds are not identified. For example, certain “529” and 401(k) plans only permit the investor to choose among generically named collective vehicles (e.g., “aggressive growth option”) without naming the specific underlying fund(s) in which it is invested. If, however, the employee is able to direct the assets to a specific mutual fund, the transaction should be pre-cleared.

 

•

Any Securities transaction effected in an Employee’s Personal Account pursuant to an automatic investment plan, which means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) a Personal Account in accordance with a predetermined schedule and allocation, and includes dividend reinvestment plans. Additional purchases and sales that are not automatic, however, are subject to the pre-clearance requirement.

The Legal and Compliance Department may request an Employee to certify as to the non-volitional nature of these transactions.

b. Money Market Funds/AllianceBernstein Open-End Mutual Funds

Employees are not required to pre-clear transactions in money market funds, or other short duration funds used as checking accounts or for similar cash management purposes. Transactions in AllianceBernstein open-end mutual funds are not required to go through the formal pre-clearance process.

c. Exercise of Pro Rata Issued Rights

Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of the issuer’s Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. This exemption applies only to the exercise or sale of rights that are issued in connection with a specific

 

___________________________

7 Additional Securities may be exempted from the pre-clearance requirement if, in the opinion of the Chief Compliance Officer, no conflict of interest could arise from personal trades in such Security.

 

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upcoming public offering on a specified date, as opposed to rights acquired from the issuer (such as warrants or options), which may be exercised from time-to-time up until an expiration date. This exemption does not apply to the sale of stock acquired pursuant to the exercise of rights.

 

(e) Limitation on the Number of Trades

No more than an aggregate of five (5) transactions in individual Securities may occur in an Employee’s Personal Accounts during any rolling thirty-day period. However, if the transaction in a Personal Account is directed by a non-Employee spouse or domestic partner and/or other non-Employee covered under the Code (and not by the Employee), the number of permitted Securities transactions is limited to twenty (20) transactions in any rolling thirty-day period. Mutual fund transactions do not count toward either of these limitations.

(f) Short-Term Trading

 

 i.

Employees must always conduct their personal trading activities lawfully, properly and responsibly, and are encouraged to adopt long-term investment strategies that are consistent with their financial resources and objectives. AllianceBernstein discourages short-term trading strategies, and Employees are cautioned that such strategies may inherently carry a higher risk of regulatory and other scrutiny. In any event, excessive or inappropriate trading that interferes with job performance, or compromises the duty that AllianceBernstein owes to its Clients will not be tolerated. Employees are subject to a mandatory buy and hold of all individual Securities held in a Personal Account for twelve months.8 A last-in-first out accounting methodology will be applied to a series of Securities purchases for determining compliance with this holding rule.

 

 ii.

Exceptions to the short-term trading rules (i.e., the one-year hold) :

a. Mutual Funds: Purchases of mutual funds, whether such funds are managed by AllianceBernstein or an outside adviser/investment company, whether open- or closed-end, are subject to a 90-day holding period. Exchange-Traded Funds (“ETFs”) are covered under this 90-day provision. No holding period applies to money market funds (nor do they require pre-clearance or reporting).

b. For Securities transactions in Personal Accounts of spouses and domestic partners and other non-Employees (e.g., financially dependent children) which are not directed by the Employee are subject to a mandatory buy and hold (or sale and buyback) of 60-calendar days. However, after 30 calendar days, such a transaction will be permitted for these Personal Accounts if necessary to minimize a loss.

 

________________________

8 Relating to the buyback of a previously sold Security, an employee must wait 60 days if the new purchase price is lower than the previous sale, and 30 days if the new purchase price exceeds the previous sale price.

 

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c. Transactions in a Personal Account managed for an Employee on a discretionary basis by a third person or entity.

Any trade made in violation of this section of the Code shall be unwound, or, if that is not practicable, all profits from the short-term trading may be disgorged as directed by the Chief Compliance Officer.

 

(g) Short Sales

The Legal and Compliance Department will prohibit an Employee from engaging in any short sale of a Security in a Personal Account if, at the time of the transaction, any Client has a long position in such Security in an AllianceBernstein-managed portfolio (except that an Employee may engage in short sales against the box and covered call writing provided that these personal Securities transactions do not violate the prohibition against short-term trading).

 

(h) Trading in AllianceBernstein Units and Closed-End Mutual Funds

During certain times of the year, Employees may be prohibited from conducting transactions in the equity units of AllianceBernstein. Additional restricted periods may be required for certain individuals and events, and the Legal and Compliance Department will announce when such additional restricted periods are in effect. Transactions in AllianceBernstein Units and closed-end mutual funds managed by AllianceBernstein are subject to the same pre-clearance process as other Securities, with certain additional Compliance Department approval required. See the Statement of Policy and Procedures Concerning Purchases and Sales of AllianceBernstein Units and the Statement of Policy and Procedures Concerning Purchases and Sales of AllianceBernstein Closed-End Mutual Funds. Employees are not permitted to transact in short sales of AllianceBernstein Units.

 

(i) Securities Being Considered for Purchase or Sale

 

 i.

The Legal and Compliance Department will, subject to the exceptions below, prohibit an Employee from purchasing or selling a Security (or a derivative product), or engaging in any short sale of a Security, in a Personal Account if, at the time of the transaction, the Security is Being Considered for Purchase or Sale for a Client or is being purchased or sold for a Client. Please see the definition of a Security “Being Considered for Purchase or Sale” (Section 1(b)(17) of this Appendix) for a non-exhaustive list of examples which illustrate this prohibition.

 

 ii.

Exceptions: This prohibition does not apply to

a. Non-Volitional Transactions, including:

 

•

Transactions in a Personal Account managed for an Employee on a discretionary basis by a third person or entity, when the Employee does not discuss any specific transactions for the account with the third-party manager;

 

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•

Any Security received as part of an Employee’s compensation (although any subsequent sales must be pre-cleared);

 

•

Any Securities transaction effected in an Employee’s Personal Account pursuant to an automatic investment plan, which means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) a Personal Account in accordance with a predetermined schedule and allocation, and includes dividend reinvestment plans. Additional purchases and sales that are not automatic, however, are subject to this prohibition.


The Legal and Compliance Department may request an Employee to certify as to the non-volitional nature of these transactions.

b. Exercise of Pro Rata Issued Rights

Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of the issuer’s Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. This exemption applies only to the exercise or sale of rights that are issued in connection with a specific upcoming public offering on a specified date, as opposed to rights acquired from the issuer (such as warrants or options), which may be exercised from time-to-time up until an expiration date. This exemption does not apply to the sale of stock acquired pursuant to the exercise of rights.

c. De Minimis Transactions -- Fixed Income Securities

Any of the following Securities, if at the time of the transaction, the Employee has no actual knowledge that the Security is Being Considered for Purchase or Sale by a Client or that the Security is being purchased or sold by or for the Client:

 

•

Fixed income securities transaction involving no more than 100 units or having a principal amount not exceeding $25,000; or

 

•

Non-convertible debt securities and non-convertible preferred stocks which are rated by at least one nationally recognized statistical rating organization (“NRSRO”) in one of the three highest investment grade rating categories.


d. De Minimis Transactions -- Equity Securities

Any equity Security transaction, or series of related transactions, involving shares of common stock and excluding options, warrants, rights and other derivatives, provided:

 

•

Any orders are entered after 10:00 a.m. and before 3:00 p.m. and are not designated as “market on open” or “market on close;”

 

•

The aggregate value of the transactions do not exceed (1) $10,000 for Securities of an issuer with a market capitalization of less than $1 billion; (2)

 

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$25,000 for Securities of an issuer with a market capitalization of $1 billion to $5 billion and (3) $50,000 for Securities of an issuer with a market capitalization of greater than $5 billion; and


 

•

The Employee has no actual knowledge that the Security is Being Considered for Purchase or Sale by a Client or that the Security is being purchased or sold by or for the Client.


PLEASE NOTE: Even if a trade qualifies for a de minimis exception, it must be pre-cleared by the Legal and Compliance Department in advance of being placed.

 

(j) Restricted List

A Security may not be purchased or sold in a Personal Account if, at the time of the transaction, the Security appears on the AllianceBernstein Daily Restricted List and is restricted for Employee transactions. The Daily Restricted List is made available each business day to all Employees via the AllianceBernstein intranet home page at: http://www.acml.com.

(k) Dissemination of Research Information

 

 i.

An Employee may not buy or sell any Security for a Personal Account that is the subject of “significantly new” or “significantly changed” research during the period commencing with the approval of the research and continuing for twenty-four hours subsequent to the first publication or release of the research. An Employee also may not buy or sell any Security on the basis of research that AllianceBernstein has not yet made public or released. The terms “significantly new” and “significantly changed” include:

a.

  The initiation of coverage by an AllianceBernstein Growth or Sanford C. Bernstein & Co., LLC research analyst;

a.

  b. Any change in a research rating or position by an AllianceBernstein Growth or Sanford C. Bernstein & Co., LLC research analyst;

a.

  c. Any other rating, view, opinion, or advice from an AllianceBernstein Growth research analyst, the issuance (or re-issuance) of which in the opinion of such research analyst, or his or her director of research, would be reasonably likely to have a material effect on the price of the security.

 

 ii.

Exceptions: This prohibition does not apply to:

a. Non-Volitional Transactions, including:

 

•

Transactions in a Personal Account managed for an Employee on a discretionary basis by a third person or entity, when the Employee does not discuss any specific transactions for the account with the third-party manager;

 

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•

Any Security received as part of an Employee’s compensation (although any subsequent sales must be pre-cleared);

 

•

Any Securities transaction effected in an Employee’s Personal Account pursuant to an automatic investment plan, which means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) a Personal Account in accordance with a predetermined schedule and allocation, and includes dividend reinvestment plans. Additional purchases and sales that are not automatic, however, are subject to this prohibition.


The Legal and Compliance Department may request an Employee to certify as to the non-volitional nature of these transactions.

b. Exercise of Pro Rata Issued Rights

Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of the issuer’s Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. This exemption applies only to the exercise or sale of rights that are issued in connection with a specific upcoming public offering on a specified date, as opposed to rights acquired from the issuer (such as warrants or options), which may be exercised from time-to-time up until an expiration date. This exemption does not apply to the sale of stock acquired pursuant to the exercise of rights.

c. De Minimis Transactions -- Fixed Income Securities

This exception does not apply to research issued by Sanford C. Bernstein & Co., LLC. Any of the following Securities, if at the time of the transaction, the Employee has no actual knowledge that the issuer is the subject of significantly new or significantly changed research:

 

•

Fixed income securities transaction involving no more than 100 units or having a principal amount not exceeding $25,000; or

 

•

Non-convertible debt securities and non-convertible preferred stocks which are rated by at least one nationally recognized statistical rating organization (“NRSRO”) in one of the three highest investment grade rating categories.

d. De Minimis Transactions -- Equity Securities

This exception does not apply to research issued by Sanford C. Bernstein & Co., LLC. Any equity Securities transaction, or series of related transactions, involving shares of common stock and excluding options, warrants, rights and other derivatives, provided:

 

•

Any orders are entered after 10:00 a.m. and before 3:00 p.m. and are not designated as “market on open” or “market on close;”

 

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•

The aggregate value of the transactions do not exceed (1) $10,000 for Securities of an issuer with a market capitalization of less than $1 billion; (2) $25,000 for Securities of an issuer with a market capitalization of $1 billion to $5 billion and (3) $50,000 for Securities of an issuer with a market capitalization of greater than $5 billion; and

 

•

The Employee has no actual knowledge that the issuer is the subject of significantly new or significantly changed research.

PLEASE NOTE: Even if a trade qualifies for a de minimis exception, it must be pre-cleared by the Legal and Compliance Department in advance of being placed.

 

(l) Initial Public Offerings

No Employee shall acquire for a Personal Account any Security issued in an Initial Public Offering.

(m) Limited Offerings/Private Placements

No Employee shall acquire any Security issued in any limited or private offering (please note that hedge funds are sold as limited or private offerings) unless the Chief Compliance Officer (or designee) and the Employee’s Business Unit Head give express prior written approval and document the basis for granting approval after due inquiry. The Chief Compliance Officer, in determining whether approval should be given, will take into account, among other factors, whether the investment opportunity should be reserved for a Client and whether the opportunity is being offered to the individual by virtue of his or her position with AllianceBernstein. Employees authorized to acquire Securities issued in a limited or private offering must disclose that investment when they play a part in any Client’s subsequent consideration of an investment in the issuer, and in such a case, the decision of AllianceBernstein to purchase Securities of that issuer for a Client will be subject to an independent review by Investment Personnel with no personal interest in such issuer.9 Additional restrictions or disclosures may be required if there is a business relationship between the Employee or AllianceBernstein and the issuer of the offering.

 

3.

Additional Restrictions – Portfolio Managers for Specific Client Accounts

 

In addition to the requirements and restrictions on Employee trading in Section 2 of this Appendix A of the Code, the following restrictions apply to all persons acting in the capacity of a portfolio manager of a Client account. For purposes of the restrictions in this section, a

 

___________________________

9 Any Employee who acquires (or any new Employee with a pre-existing position in) an interest in any private investment fund (including a “hedge fund”) or any other Security that cannot be purchased and held in an account at a Designated Broker shall be exempt from the Designated Broker requirement as described in this Appendix A of the Code. The Legal and Compliance Department may require an explanation as to why such Security can not be purchased and held in such manner. Transactions in these Securities nevertheless remain subject to all other requirements of this Code, including applicable private placement procedures, pre-clearance requirements and blackout-period trading restrictions.

 

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portfolio manager is defined as an Employee who has specific decision-making authority regarding trades to be entered for specific Client accounts, as well as such Employee’s supervisor. Individuals who are members of a centralized portfolio management group (i.e., the Bernstein Value SBU) should refer to Section 4 of this Appendix for applicable restrictions.


(a) Blackout Periods

No person acting in the capacity of a portfolio manager will be permitted to buy or sell a Security for a Personal Account within seven calendar days before and after any Client serviced in that manager’s product group (e.g., Large Cap Growth) trades in the same Security. If a portfolio manager engages in such a personal securities transaction during a blackout period, the Chief Compliance Officer may break the trade or, if the trade cannot be broken, the Chief Compliance Officer may direct that any profit realized on the trade be disgorged.

(b) Actions During Blackout Periods

No person acting in the capacity of a portfolio manager shall delay or accelerate a Client trade due to a previous purchase or sale of a Security for a Personal Account. In the event that a portfolio manager determines that it is in the best interest of a Client to buy or sell a Security for the account of the Client within seven days of the purchase or sale of the same Security in a Personal Account, the portfolio manager must contact the Chief Compliance Officer immediately, who may direct that the trade in the Personal Account be canceled, grant an exception or take other appropriate action.

(c) Transactions Contrary to Client Positions

No person acting in the capacity of a portfolio manager shall purchase or sell a Security in a Personal Account contrary to investment decisions made on behalf of a Client, unless the portfolio manager represents and warrants in the personal trading request form that (1) it is appropriate for the Client account to buy, sell or continue to hold that Security and (2) the decision to purchase or sell the Security for the Personal Account arises from the need to raise or invest cash or some other valid reason specified by the portfolio manager and approved by the Chief Compliance Officer and is not otherwise based on the portfolio manager’s view of how the Security is likely to perform.

 

4.

Additional Restrictions – Bernstein Value Portfolio Management Groups

In addition to the requirements and restrictions on Employee trading in Section 2 of this Appendix A of the Code, the following restrictions apply to all persons in the firm’s Bernstein centralized portfolio management groups.

(a) Senior Portfolio Managers and Members of the Value Investment Policy Groups

Senior Portfolio Managers (SPMs) and members of the Value Investment Policy Groups (IPGs) are restricted from transacting in any Security included in the top 2 quintiles of the Value Research Universe.

 

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(b) All Other Members of the Bernstein Value SBU

Members of the Bernstein Value SBU are deemed to have actual knowledge of the unit’s Securities Being Considered for Purchase or Sale. As a consequence, the de minimis exceptions in Section 2(i) of this Appendix relating to “significant” Value Client orders or “priority” purchases or sales (as those terms are defined by the applicable Value CIO) are not available to individuals in the Bernstein Value SBU.

5.

Additional Restrictions – Research Analysts

In addition to the requirements and restrictions on Employee trading in Section 2 of this Appendix A of the Code, the following restrictions apply to all persons acting in the capacity of a research analyst, other than Bernstein Value buy-side analysts. Please note that rules of the National Association of Securities Dealers and the New York Stock Exchange impose additional limitations on the personal trading of the research analysts of Sanford C. Bernstein & Co., LLC. Such research analysts should refer to the relevant policy documents that detail those additional restrictions.

(a) Blackout Periods

No person acting as a research analyst shall buy or sell a Security for a Personal Account within seven calendar days before and after making a change in a rating or other published view with respect to that Security. If a research analyst engages in such a personal securities transaction during a blackout period, the Chief Compliance Officer may break the trade or, if the trade cannot be broken, the Chief Compliance Officer may direct that any profit realized on the trade be disgorged.

(b) Actions During Blackout Periods

No person acting as a research analyst shall delay or accelerate a rating or other published view with respect to any Security because of a previous purchase or sale of a Security in such person’s Personal Account. In the event that a research analyst determines that it is appropriate to make a change in a rating or other published view within seven days of the purchase or sale of the same Security in a Personal Account, the research analyst must contact the Chief Compliance Officer immediately, who may direct that the trade in the Personal Account be canceled, grant an exception or take other appropriate action.

(c) Actions Contrary to Ratings

No person acting as a research analyst shall purchase or sell a Security (to the extent such Security is included in the research analyst’s research universe) contrary to an outstanding rating or a pending ratings change or traded by a research portfolio, unless (1) the research analyst represents and warrants in the personal trading request form that (as applicable) there is no reason to change the outstanding rating and (2) the research analyst’s personal trade arises from the need to raise or invest cash, or some other valid reason specified by the research analyst and approved by the Chief Compliance Officer

 

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and is not otherwise based on the research analyst’s view of how the security is likely to perform.

6.

Reporting Requirements

(a) Duplicate Confirmations and Account Statements

 

All Employees must direct their brokers to supply to the Chief Compliance Officer, on a timely basis, duplicate copies of broker trade confirmations of, and account statements concerning, all Securities transactions in any Personal Account.10

The Compliance Department will review such documents for Personal Accounts to ensure that AllianceBernstein’s policies and procedures are being complied with, and make additional inquiries as necessary. Access to duplicate confirmations and account statements will be restricted to those persons who are assigned to perform review functions, and all such materials will be kept confidential except as otherwise required by law.

(b) Initial Holdings Reports by Employees

An Employee must, within 10 days of commencement of employment with AllianceBernstein, provide a signed and dated Initial Holdings Report to the Chief Compliance Officer. The report must contain the following information current as of a date not more than 45 days prior to the date of the report:

 

i.

All Securities (including mutual fund shares and private investments, but not money market funds)11 held in a Personal Account of the Employee or held directly with the transfer agent of a mutual fund, including the title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares and/or principal amount of each Security beneficially owned);

 

ii.

The name of any broker-dealer or financial institution with which the Employee maintains a Personal Account in which any Securities are held for the Employee; and

 

iii.

Details of any outside business affiliations.

Employees must then take all necessary actions to bring their accounts into compliance with the designated broker guidelines detailed in Section 2(c) of this Appendix.

 

________________________________

10 Each Employee must verify with his or her Designated Broker(s) that the Employee’s account(s) is properly “coded” for AllianceBernstein to receive electronic data feeds.

11 Employees are not required to report transactions or holdings in money market funds or other short duration funds used as checking accounts or for similar cash management purposes. In addition, transactions and holdings in investment vehicles in which the specific funds are not identified (e.g., certain “529” and 401(k) plans that only permit the investor to choose among generically named collective vehicles without naming the specific underlying fund(s) in which it invests) do not require reporting.

 

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(c) Quarterly Reports by Employees – including Mutual Funds and Limited Offerings

Following each calendar quarter, the Legal and Compliance Department will forward to each Employee, an individualized form containing all Securities transactions in the Employee’s Personal Accounts during the quarter based on information reported to AllianceBernstein by the Employee’s brokers. Transactions in Personal Accounts managed on a discretionary basis or pursuant to an automated investment program need not be included for purposes of this reporting requirement.

Within thirty (30) days following the end of each calendar quarter, every Employee must review the form and return it to the Chief Compliance Officer, disclosing all transactions made in shares of mutual funds and limited offerings and any other Securities that are not otherwise already pre-populated on the form (generally this will include those shares of mutual funds held directly with the investment company and Securities issued in limited offerings which are not sent directly to the Compliance Department, but also see footnote #11). For each such Security, the report must contain the following information: (1) the date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each Security involved; (2) the nature of the transaction (i.e., purchase or sale or any other type of acquisition or disposition); (3) the price of the Security at which the transaction was effected; (4) the name of the broker or other financial institution through which the transaction was effected; and (5) the date the Employee submits the report.

In addition, any new Personal Account established during the calendar quarter must be reported, including (1) the name of the broker or other financial institution with which the account was established and (2) the date the account was established.

(d) Annual Holdings Reports by Employees

On an annual basis, by a date to be specified by the Compliance Department (typically February 15th), each Employee must provide to the Chief Compliance Officer, a signed and dated (or electronically certified) Annual Holdings Report containing data current as of a date not more than forty five (45) days prior to the date of the submission. The report must disclose:

 

i.

All Securities (including mutual fund shares and limited offerings, but see footnote #11, held in a Personal Account of the Employee, including the title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares and/or principal amount of each Security beneficially owned); and

 

ii.

The name of any broker-dealer or financial institution with which the Employee maintains a Personal Account in which any Securities are held for the Employee.


 

In the event that AllianceBernstein already maintains a record of the required information via duplicate copies of broker trade confirmations and account statements received from the Employee’s broker-dealer, an Employee may satisfy this requirement by (i) confirming in writing (which may include e-mail) the accuracy of the record on at least an annual basis and (ii) recording the date of the confirmation.

 

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e) Report and Certification of Adequacy to the Board of Directors of Fund Clients

On a periodic basis, but not less than annually, the Chief Compliance Officer shall prepare a written report to the management and the board of directors of each registered investment fund (other than a unit investment trust) in which AllianceBernstein acts as investment adviser setting forth the following:

 

i.

A certification on behalf of AllianceBernstein that AllianceBernstein has adopted procedures reasonably necessary to prevent Employees and Directors from violating the Code;


 

ii.

A summary of existing procedures concerning personal investing and any changes in procedures made during the past year; and


 

iii.

A description of any issues arising under the Code or procedures since the last report to the Board including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations. AllianceBernstein shall also submit any material changes to this Code to each Fund’s Board at the next regular board meeting during the quarter following the change.


(f) Report Representations

Any Initial or Annual Holdings Report or Quarterly Transaction Report may contain a statement that the report is not to be construed as an admission by the person making the report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates.

(g) Maintenance of Reports

The Chief Compliance Officer shall maintain the information required by this Section and such other records, if any, and for such time periods required by Rule 17j-1 under the Investment Company Act and Rules 204-2 and 204A-1 under the Advisers Act. All reports furnished pursuant to this Section will be kept confidential, subject to the rights of inspection and review by the General Counsel, the Chief Compliance Officer and his or her designees, the Code of Ethics Oversight Committee (or sub-Committee thereof), the Securities and Exchange Commission and by other third parties pursuant to applicable laws and regulations.

7.

Reporting Requirements for Directors who are not Employees

All Affiliated Directors (i.e., not Employees of AllianceBernstein, but employees of an AllianceBernstein affiliate) and Outside Directors (i.e., neither Employees of AllianceBernstein, nor of an AllianceBernstein affiliate) are subject to the specific reporting requirements of this Section 7 as described below. Directors who are Employees, however, are subject to the full range of personal trading requirements, restrictions and reporting obligations outlined in Sections 1 through 6 of this Appendix A of the Code, as applicable. In addition, all Directors are expected to adhere to the fiduciary duties and high ethical standards described in the Code. The designation of a Director as an Affiliated Director or

 

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Outside Director will be communicated to each such Director by the Chief Compliance Officer.

(a) Affiliated Directors

i. Initial Holdings Report

Upon becoming a Director, an Affiliated Director must submit a signed and dated Initial Holdings Report within ten (10) days of becoming Director. The Initial Holdings Report must contain the following information current as of a date not more than 45 days prior to the date of the report:

 

a.  

All Securities (including mutual fund shares, but not money market funds) held in a Personal Account of the Affiliated Director or held directly with the transfer agent of a mutual fund, including the title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares and/or principal amount of each Security beneficially owned);

 

b.  

The name of any broker-dealer or financial institution with which the Affiliated Director maintains a Personal Account in which any Securities are held for the Employee; and

 

c.  

Details of any outside business affiliations.


ii. Annual Holdings Report


Once each year, by a dated to be specified by the Legal and Compliance Department (typically February 15th), each Affiliated Director must provide to the Chief Compliance Officer a signed and dated report containing the following information as of a date not more than 45 days prior to the date of the report:

 

a.  

All Securities (including mutual fund shares, but not money market funds), held in a Personal Account of the Affiliated Director, including the title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares and/or principal amount of each Security beneficially owned); and

 

b.  

The name of any broker-dealer or financial institution with which the Affiliated Director maintains a Personal Account in which any Securities are held for the Employee.


PLEASE NOTE: In the event that AllianceBernstein already maintains a record of the required information via duplicate copies of broker trade confirmations and account statements received from the Affiliated Director’s broker-dealer(s), the Affiliated Director may satisfy this requirement by (i) confirming in writing (which may include e-mail) the accuracy of the record on at least an annual basis and (ii) recording the date of the confirmation.

 

 

 

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iii. Quarterly Transaction Report

Within thirty (30) days following the end of each calendar quarter (see exceptions in section (c)), each Affiliated Director must provide to the Chief Compliance Officer, a signed and dated report disclosing all Securities transactions in any Personal Account. For each such Security, the report must contain the following information:

a.  

The date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each Security involved;


b.  

The nature of the transaction (i.e., purchase or sale or any other type of acquisition or disposition);


c.  

The price of the Security at which the transaction was effected; and


d.  

The name of the broker or other financial institution through which the transaction was effected.

(b) Outside Directors

i.  

In general, pursuant to various regulatory rule exceptions and interpretations, no reporting is required of Outside Directors. However, if an Outside Director knew, or in the ordinary course of fulfilling his or her official duties as a Director should have known, that during the 15-day period immediately before or after the Outside Director’s transaction in a Security for a Personal Account, a Client bought or sold the Security, or the Client or AllianceBernstein considered buying or selling the Security, the following reporting would be required.


Quarterly Transaction Report.

In the event that a quarterly transaction report is required pursuant to the scenario in the preceding paragraph, subject to the exceptions in part (c) of this Section 7 below, each outside director must within thirty (30) days following the end of each calendar quarter, provide to the Chief Compliance Officer, a signed and dated report disclosing all Securities transactions in any Personal Account. For each such Security, the report must contain the following information:

 

a.  

The date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and principal amount of each Security involved;

 

b.  

The nature of the transaction (i.e., purchase or sale or any other type of acquisition or disposition);

 

c.  

The price of the Security at which the transaction was effected; and

 

d.  

The name of the broker or other financial institution through which the transaction was effected.

 

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(c) Reporting Exceptions

i.  

Duplicate Broker Confirmations and Account Statements

An Affiliated Director or Outside Director is not required to submit any report for any Securities transaction in a Personal Account provided that the transaction and required information are otherwise reported on duplicate copies of broker trade confirmations and account statements provided to the Chief Compliance Officer.

ii.  

Accounts with No Influence or Control

An Affiliated Director or Outside Director is not required to submit any report for any Securities transaction in a Personal Account provided that the Affiliated Director or Outside Director has no direct or indirect influence or control over the account. In addition, an Affiliated Director and Outside Director may include a statement that the report is not to be construed as an admission by the person making the report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates.

 

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ALLIANCEBERNSTEIN L.P.

 

CODE OF BUSINESS CONDUCT AND ETHICS

 

CERTIFICATION

 

I hereby acknowledge receipt of the Code of Business Conduct and Ethics (the “Code”) of AllianceBernstein L.P., its subsidiaries and joint ventures, which includes the AllianceBernstein Personal Trading Policies and Procedures attached as Appendix A to the Code. I certify that I have read and understand the Code and recognize that I am subject to its provisions.

I have reviewed my own situation and conduct in light of the Code. I confirm that I am in compliance with the Code, including the requirements regarding the manner in which I maintain and report my Securities holdings and transactions in my Personal Accounts (as such terms are defined in Appendix A of the Code) and conduct my personal securities trading activities, as well as the requirements associated with the firm’s Policy and Procedures for Giving and Receiving Gifts and Entertainment.

I understand that any violation(s) of the Code is grounds for immediate disciplinary action up to, and including, termination of employment.

 

 

Signature

 

 

 

Print Name

 

 

 

Date

 

 

 

Please return this form to the Chief Compliance Officer at:

1345 Avenue of the Americas – 17th Floor

New York, N.Y. 10105

 

 

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 EX-99.P 8 armstrongshawcodeofethics.txt ARMSTRONGSHAW CODE OF ETHICS ARMSTRONG SHAW ASSOCIATES INC. 45 GROVE STREET NEW CANAAN, STATECONNECTICUT 06840 PRINCIPALS: PHONE: (203) 972-9600 JEFFREY M. SHAW FAX: (203) 972-9630 MONICA C. GRADY STEPHEN J. WEINBERGER BRUCE P. CRYSTAL FRED NORTEN TERRY NEWMAN CODE OF ETHICS October 2006 Page 2 I. INTRODUCTION Armstrong Shaw Associates Inc. ("ASA") is a registered investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act"). As a registered investment adviser, ASA is subject to the Advisers Act and to the rules and regulations promulgated thereunder. The Securities and Exchange Commission has jurisdiction to enforce the Advisers Act and its rules and regulations. Where ASA handles the accounts of United States pension plans, it is also subject to the Employees Retirement Income Security Act of 1974 ("ERISA") and the rules and regulations promulgated thereunder, under the jurisdiction of the United States Department of Labor. As a registered investment advisor, ASA owes a duty of loyalty to each of its clients, which requires that the firm serve the best interests of its clients at all times. ASA's access persons (includes all employees) shall always place the interests of clients ahead of their own. ASA will not tolerate illegal or improper actions undertaken either for personal benefit or in a misguided effort to achieve gains on behalf of the firm or its clients. Each access person must review this manual and abide by its terms. Of course, there will always be situations not covered by this manual, and some situations may have compliance or regulatory implications that become apparent only upon examination. Therefore, you should consult PersonNameGivenNameMonica SnGrady, Chief Compliance Officer, whenever you are in doubt about the proper way to respond to the situation. II. PURPOSE This Code of Ethics (the "Code") was originally adopted in accordance with Rule 17j-1 under the Investment Company Act of 1940 (the "1940 Act"), as amended. The purpose of this amended Code is to provide regulations and procedures consistent with the 1940 Act, and Rule 17j-1 thereunder, as well as the Advisers Act's new rule 204A-1. In addition to the various laws and regulations covering our activities, it is clearly in our best interest as a professional investment advisory organization to avoid potential conflicts of interest or even the appearance of such conflicts with respect to the conduct of our officers and access persons. While it is not possible to anticipate all instances of potential conflict, the standard is clear. Rule 17j-1 and Rule 204A-1 set forth the following general prohibitions: It shall be unlawful for any access person of ASA in connection with the purchase or sale, directly or indirectly, of a security held or to be acquired to: 1. employ any device, scheme or artifice to defraud; 2. make any untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; Page 3 3. engage in any act, practice, or course of business which operates or would operate as a fraud or deceit; 4. engage in any manipulative practice with respect to any client; or 5. to engage in any manipulative practice with respect to securities, including price manipulation III. GENERAL PRINCIPLES It is the policy of ASA that no access person shall engage in any act, practice or course of conduct that would violate the provisions of the Investment Advisors Act or the 1940, as amended. Our aim is to be as flexible as possible in our organization and our internal procedures, while simultaneously protecting our organization and our clients from the damage that could arise from a situation involving a real or apparent conflict of interest. As a general principle, it is imperative that those who work on behalf of ASA avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interests of clients. While it is not possible to specifically define and prescribe rules regarding all possible cases in which conflicts might arise, this Code is designed to set forth our policy regarding access person conduct in those situations in which conflicts are most likely to develop. As you consider the more detailed portions of the Code below, you should keep in mind the following fundamental fiduciary principles that govern personal investment activities: A. The interests of ASA's clients must come first at all times. In any decision relating to your personal investments, you must scrupulously avoid serving your own interests ahead of those of the shareholders. B. Personal investments should comport with both the letter and the spirit of this Code, and should avoid any actual or potential conflicts of interest. Individual security transactions by access persons of ASA must be conducted consistent with this Code and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an access person's position of trust and responsibility. Further, access persons should not take inappropriate advantage of their positions with, or on behalf of, any client of ASA. Page 4 IV. DEFINITIONS A. "Adviser" means Armstrong Shaw Associates Inc. ("ASA"). B. "Access Person" means any director, officer, or employee of ASA. C. "Beneficial Ownership" shall be interpreted to include any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares a direct or indirect pecuniary interest in the security. As set forth in Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, the term "pecuniary interest" in securities shall mean the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities. A person is regarded as the beneficial owner of securities held in 1) the name of his or her spouse, domestic partner, minor children, financial dependents, or other relatives living in his or her household, 2) a trust, estate or other account in which he or she has a present or future interest in the income principal or right to obtain title to securities, or 3) the name of another person or entity by reason of any contract, understanding, relationship, agreement or other arrangement whereby he or she obtains benefits substantially equivalent of ownership. D. "Buy or sell program" means transactions in client accounts resulting from changes in ASA's model portfolio and excludes maintenance trades. Maintenance trades typically occur to raise cash, invest cash deposits or to get a portfolio in line with client guidelines. E. "Chief Compliance Officer" (CCO) is PersonNameGivenNameMonica SnGrady or her successor. F. "Control" shall have the same meaning as that set forth in Section 2(a) (9) of the Act (the power to exercise a controlling influence). G. "Gifts" include, but are not limited to, occasional meals, tickets to games, concerts or other social events and/or gatherings, wine, food, trips and miscellaneous merchandise and entertainment. H. "Investment Company" means a company registered as such under the 1940 Act or any series thereof for which ASA is an investment adviser or sub-advisor. I. "Inside information" means material non-public information. J. "Personal Securities Transactions" means transactions in securities 1) for your own accounts, including IRAs, or 2) for an account in which you have indirect beneficial ownership, unless you have no direct or indirect influence or control over the account. Accounts involving family members (including husband, wife, minor children or other dependent relatives), or accounts in which you have a beneficial interest (such as a trust of which you are an income or principal beneficiary) are included within the meaning of "indirect beneficial interest." Page 5 L. "Purchase or sale of a security" includes, among other things, the writing of an option to purchase or sell a security, the conversion of a convertible security, and the exercise of a warrant for the purchase of a security. M. "Review Officer" shall mean the officer or employee of ASA designated from time to time by ASA to pre-clear access person trades and to receive and review reports of purchases and sales by access persons. The term "Alternate Review Officer" shall mean the officer or employee of ASA designated from time to time by ASA to pre-clear Review Officer trades and to receive and review reports of purchases and sales by the Review Officer, and who shall act in all respects in the manner prescribed herein for the Review Officer. N. "Security" means any stock, bond, future, investment contract or any other instrument that is considered a "security" under the Advisers Act. The term "security" is very broad and includes items you might not ordinarily think of as securities, such as: 1) options on securities, on indexes, and on currencies, 2) all kinds of limited partnerships, 3) foreign unit trusts and foreign mutual funds, and 4) private investment funds, hedge funds, and investment clubs and ETF's. "Security" does not include: 1) direct obligations of the U.S. government (e.g., treasury securities), 2) bankers' acceptances, bank certificates of deposit, commercial paper, repurchase agreements, and high quality short-term debt obligations, (any instrument having a maturity at issuance of less than 366 days and which is rated in one of the highest two rating categories by a Nationally Recognized Statistical Rating Organization, or which is unrated but is of comparable quality), 3) shares issued by money market funds, 4) shares of open-end mutual funds that are not sub-advised by ASA, and 5) shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are funds sub-advised by ASA. V. CONFLICTS OF INTEREST ASA has an affirmative duty of care, loyalty, honesty, and good faith to act in the best interests of its clients. Compliance with this duty can be achieved by trying to avoid any actual and/or possible conflicts of interest and by fully disclosing all material facts concerning any actual and/or possible conflict that does arise with respect to any client. A. Conflicts Among Client Interests. Conflicts of interest may arise where ASA or its access persons have reason to favor the interests of one client over another client (e.g., larger accounts over smaller accounts, accounts compensated by performance fees over accounts not so compensated, accounts in which employees have made material personal investments, accounts of close friends or relatives of supervised persons). This Code specifically prohibits inappropriate favoritism of one client over another client that would constitute a breach of fiduciary duty. Page 6 B. Competing with Client Trades. This Code prohibits access persons from using knowledge about pending or currently considered securities transactions for clients to profit personally, directly or indirectly, as a result of such transactions, including by purchasing or selling such securities. C. Other Potential Conflicts Provisions: 1) Referrals/Brokerage. All access persons shall act in the best interests of the firm's clients regarding execution and other costs paid by clients for brokerage services. At all times strict adherence to ASA's policies and procedures regarding brokerage (including allocation, best execution, soft dollars, and directed brokerage) is required. 2) No Transactions with Clients. Access persons are not permitted to knowingly sell to or purchase from a client any security or other property, except securities issued by the client. 3) Gifts and Entertainment. Access persons should not accept inappropriate gifts, favors, entertainment, special accommodations, or other things of a material value that could influence their decision-making or make them feel beholden to a person or firm. Similarly, access persons should not offer gifts, favors, entertainment or other things of value that could be viewed as overly generous or aimed at influencing decision-making or making a client feel beholden to the firm or the access person. VI. SUBSTANTIVE RESTRICTIONS ON PERSONAL TRADING ACTIVITIES A. Pre-clearance of Personal Securities Transactions. All access persons must pre-clear all purchases and sales of securities on ASA's Pre-approval List, and in Initial Public Offerings and Private Placements (includes any security that is not a publicly traded/listed security) with the Review Officer or Alternate Review Officer. The ASA Pre-approval List is an actively monitored list of securities which are in the ASA model portfolio or being considered for addition to the ASA model portfolio. In considering approval for Initial Public Offerings and Private Placements the Review Officer or Alternate Review Officer will take into account, among other factors, whether the investment opportunity should be reserved for an advisory client and whether the opportunity is being offered to the access person by virtue of his or her position. Access persons should request pre-clearance by completing, signing and submitting a Personal Securities Transaction Pre- Page 7 clearance Form (Attachment A). The Pre-Clearance Form will document the details of the proposed transaction. The Review Officer or Alternate Review Officer will communicate to the requesting access person approval or denial of the proposed transactions, either in writing or orally. Access persons must wait for approval before placing an order with their broker. Pre-clearance approval will expire at the close of the trading day on which the approval is received. If the proposed trade is not completed before pre-clearance expires, the access person is required to again obtain pre-clearance for the trade. B. Blackout Periods for Personal Securities Transactions. No access person may initiate a transaction in any security until the third business day after a buy or sell program for that security has been completed or cancelled by the firm on behalf of clients. In the event an access person makes a prohibited purchase or sale within the three-day blackout period, the access person may be required to unwind the transaction and relinquish any gain to a charity picked by ASA. No access person may initiate a transaction in any security in an opposite side transaction (i.e. access person is requesting approval to buy a security when ASA clients have been selling it or when access person is requesting approval to sell a security when ASA clients have been buying it) until the seventh business day after a buy or sell program has been completed or cancelled by the firm on behalf of clients. In the event an access person makes a prohibited purchase or sale within the seven day blackout period, the access person may be required to unwind the transaction and relinquish any gain to a charity picked by ASA. C. Special Exemptions. The Chief Compliance Officer may grant exemptions from the personal trading restrictions in this Code upon determining that the transaction for which an exemption is requested would not result in a conflict with ASA's clients interest, would not violate any policy embodied in this Code and that an exemption is appropriate to avoid an injustice to or hardship the access person. Factors to be considered may include: the size and holding period of the access person's position in the security, the market capitalization of the issuer, the liquidity of the security, market conditions, the reason for the access person's requested transaction, the amount and timing of client trading in the same or a related security, and other relevant factors. Purchases and sales for which the Chief Compliance Officer has granted an exemption are subject to reporting requirements (detailed below). Any access person wishing an exemption should submit a written request to the Chief Compliance Officer setting forth the pertinent facts and reasons why the access person believes that the exemption should be granted. The CCO shall maintain a record of exemptions granted and the reasons supporting the decision. Access persons are cautioned that exemptions are intended to be exceptions and will not routinely be approved. D. Insider Information. No access person shall trade, either personally or on behalf of others, on "inside information." While the law concerning insider trading is not static, Page 8 it is generally understood that the law prohibits: 1) trading by an insider while in possession of inside information, 2) trading by a non-insider while in possession of inside information where the information was either disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated, and 3) communicating material non-public information to others. "Insiders" include officers, directors and employees of a company, as well as "temporary insiders" who enter into a special confidential relationship in the conduct of a company's affairs and as a result gain access to information solely for the company's purpose. Temporary insiders can include, for example, lawyers, accountants, advisers, consultants and employees of such persons. Trading on inside information is not a basis for liability unless the information material; i.e., information for which there is a substantial likelihood that a reasonable investor would consider such information important in making his or her investment decisions, or information that is reasonably certain to have substantial effect on the price of the company's securities. Such information would include, for example, dividend changes, earnings estimates, changes in previously released earnings estimates, merger or acquisition proposals or agreements, major litigation, liquidation problems and extraordinary management developments. Material information does not have to relate to a company's business per se; for example, courts have found information respecting the contents of forthcoming newspaper columns to be material. In addition, the information must be non-public; i.e., not effectively communicated to the marketplace. One must be able to point to some fact; e.g., an SEC filing, to show that the information is generally public. Material nonpublic information relates not only to issuers but also to ASA's securities recommendations and client securities holdings, transactions and pending transactions. E. No access person shall reveal to any other person (except in the normal course of his or her duties on behalf of ASA) any information regarding any client interests or actual or contemplated securities transactions, investment decisions or research priorities of ASA. VII. PERSONAL SECURITIES HOLDINGS AND TRADING REPORTING REQUIREMENTS A. Initial Holdings Report. No later than 10 days after becoming an access person of ASA, every access person shall report to the Review Officer the following information: 1. The title, the interest rate and maturity date (if applicable), number of shares and principal amount of each security in which the access person had any beneficial ownership when the person became an access person. Page 9 2. The name of any broker, dealer or bank with which the access person maintained an account in which any securities were held for the direct or indirect benefit of the access person as of the date the person became an access person. 3. The date that the report is submitted by the access person. B. Quarterly Transaction Reports. No later than 15 days after the end of each calendar quarter, every access person shall report to the Review Officer the following information: 1. With respect to any transaction during the quarter in which the access person had any direct or indirect beneficial ownership: a) The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each security involved. b) The nature of the transaction (i.e., purchase, sale or other type of acquisition or disposition). c) The price of the security at which the transaction was effected. d) The name of the broker, dealer or bank with or through which transaction was effected. e) The date that the report is submitted by the access person. 2. With respect to any account established by the access person in which any securities were held during the quarter for the direct or indirect benefit of the access person: a) The name of the broker, dealer or bank with which the access person established the account. b) The date the account was established. c) The date the report is submitted by the access person. C. Annual Holdings Report. Annually, every access person shall report and certify to the Review Officer the following information (information must be current as of a date no more than 30 days before the report is submitted): 1. The title, number of shares and principal amount of each security in which the access person had any direct or indirect beneficial ownership. Page 10 2. The name of any broker, dealer or bank with which the access person maintains an account in which any securities are held for the direct or indirect benefit of the Access person. 3. The date that the report is submitted by the access person. 4. Every access person shall execute an Annual Certification of Compliance with Code of Ethics form (Attachment B) as of the same date as the Annual Holdings Report. D. Excepted Securities and Funds. Because certain types of securities do not present the opportunity for the type of improper trading activities this Code of Ethics is designed to prevent, the following are excepted from coverage and therefore from reporting requirements: 1. Money market fund investments. 2. Direct obligations of the government of the country-regionUnited States (country-regionplaceU.S. and securities guaranteed by the U.S. Government. 3. Bankers' acceptances, bank certificates of deposit, commercial paper, high quality short-term debt, instruments including repurchase agreements. 4. Securities of publicly-traded, open-ended mutual funds, except those sub-advised by ASA. 5. Automatic dividend reinvestment plans or other periodic payment for the purchase or sale of a security other than optional cash purchase. 6. Securities issued by any state or municipal subsidiary thereof. E. Exceptions to Reporting Requirements. An access person need not make a report under this Section with respect to transactions effected for, and securities held in any account over which the person has no direct or indirect influence or control. F. Mutual Fund Transactions Certifications. ASA opposes short-term trading (also known as market timing) in the mutual funds to which it sub-advises. Annually every access person shall report and certify to the Review Officer the following: Page 11 1) The name of any mutual fund for which Armstrong Shaw Associates serves as a subadvisor in which the access person had any direct or indirect beneficial ownership. 2) Whether or not the access person has engaged in any short-term trading in any mutual fund to which Armstrong Shaw Associates subadvises. For these purposes, short-term trading is defined as a purchase and sale within a 30-day period. The reinvestment of any dividends and distributions should be disregarded for this purpose. G. Responsibility to Report. Each access person required to make a report is responsible for taking the initiative to file reports required under this Code. Any effort by the Chief Compliance Officer to facilitate the reporting process does not change or alter that responsibility. Reports are required even if there were no reportable holdings, transactions, accounts, or gifts. It is the responsibility of each access person to ensure that all securities transactions are made in strict compliance with this Code and would otherwise comply with all applicable laws and regulatory requirements. VIII. GIFTS Business gifts and entertainment are designed to build goodwill and sound working relationships among business partners. However giving or accepting gifts and entertainment in connection with your job may raise questions about your impartiality and ethical values. Each ASA employee must use good judgment to ensure accepting or offering gifts, entertainment and/or other inducements will not or be reasonably viewed as compromising their ability to make fair and objective decisions on behalf of ASA and our clients. If question arise about ethical or questionable practices relating to gifts, entertainment or other inducements, please contact PersonNameGivenNameMonica SnGrady. Reporting. No later than 15 days after the end of each calendar quarter, every access person shall report to the Review Officer the following information with respect to any gifts received during the quarter: 1. Description of the gift. 2. The giver of the gift. 3. The date the gift was received. 4. The approximate value of the gift. 5. The date the report is submitted by the access person. Page 12 IX. REVIEW OF REPORTS After the end of each calendar quarter, access person reports submitted shall be reviewed to determine whether a violation of this Code of Ethics may have occurred. If it is determined that a violation of this Code of Ethics has or may have occurred, it will be determined whether it is appropriate to impose sanctions or take other actions against the access person. The determination will be made in light of all relevant facts and circumstances including, but not limited to, the nature and seriousness of the violation, the extent to which the violation reflects a willful disregard of the access person's responsibilities under the Code and the access person's past history of compliance or non-compliance with the Code. All access person reports will be maintained in confidence, except to the extent necessary to implement and enforce the provisions of the Code or to comply with requests for information from government agencies. X. PRIVACY POLICY Access persons must not use or disclose any proprietary and/or confidential information that they obtain during employment with the firm, except as required by their jobs. This obligation remains even after an access person's association with the firm ends. Procedures to Implement Policy 1. Access persons are not to give personal information out over the telephone or in response to an e-mail unless they have identified the person to whom they are communicating as either the client, a fiduciary representative of the client, or a party that needs the information to complete a transaction for the client, e.g., broker-dealers and custodians. 2. In order to confirm the identity of the persons requesting personal information over the telephone or by e-mail, access persons are required to ask for some personal identifying information, such as social security number or account number, before releasing nonpublic information. 3. Access to client information is limited to those access persons that need access to the information either to provide services to the client or conduct firm operations. 4. Client information should be returned promptly to the client's file when no longer required by the access person to provide services to the client or conduct firm operations. 5. Client information should not be left in offices or conference rooms unattended. Page 13 6. Visitors are not allowed to walk unattended into our offices. All visitors should be met by the receptionist, and in his/her absence, a properly designated employee. 7. Documents containing client nonpublic personal information should be destroyed or shredded prior to disposal. 8. Any questions regarding Armstrong Shaw Associates Inc.'s Privacy Policy should be directed to PersonNameGivenNameMonica SnGrady. 9. Any access person who violates Armstrong Shaw Associates Inc.'s Privacy Policy may be subject to disciplinary action up to, and including termination of employment. XI. SANCTIONS Any violation of this Code of Ethics may result in the imposition of sanctions as ASA may deem appropriate under the circumstances. Such sanctions or other actions may include, but are not limited to, one or more of the following: o requiring the access person to refrain from personal trading for a period o disgorgement of any profits associated with transactions which constitute a violation of the Code, or restitution to an affected client, if applicable o equiring the access person to reverse the trade(s) in question and forfeit any profit or absorb any loss derived therefrom o a letter of censure o a monetary fine levied at the access person o suspension of the employment of the access person o termination of the employment of the access person o civil referral to the SEC or other civil regulatory authority, if appropriate under the circumstances o criminal referral, if appropriate under the circumstances The Review Officer and the Alternate Review Officer shall have the authority to determine the sanction or other action, if any, to be imposed for any violation of the Code, including appropriate disposition of any monies forfeited pursuant to this provision. Prior to imposing sanctions or taking other actions against the access person, the Review Officer or the Alternate Review Officer shall provide the access person with an opportunity to present information bearing on these matters. Failure to comply with any sanctions, including the failure to abide by a directive to reverse a trade or refrain from further trading, may result in the imposition of additional sanctions. Unless, in the opinion of the Review Officer and the Alternate Review Officer, there are extenuating circumstances, a repeat violation of the Code and any violation involving deception, dishonesty or a willful failure to comply, will result in one or more of the most Page 14 severe sanctions, including the imposition of a monetary fine and/or the suspension or termination of employment. If the access person committing the violation is the Review Officer or the Alternate Review Officer, then the other Officer shall make a determination with respect to sanctions or actions described above. XII. RECORDS Armstrong Shaw Associates shall maintain and preserve in an easily accessible place: 1. A copy of this Code and any other Code that is, or at any time within the past five years has been, in effect. 2. A record of any violation of this Code, and of any action taken as a result of such violation, for a period of not less than five years following the end of the fiscal year in which the violation occurred. 3. A copy of each report made by an access person pursuant to the Code shall be preserved for a period of not less than five years from the end of the fiscal year in which it is made. 4. A list of all persons who are, or within the past five years have been, required to make reports pursuant to this Code. 5. A record of each decision and the reasons supporting the decision, to approve the acquisition by access persons of initial public offerings and private placements shall be maintained for at least five years after the end of the fiscal year in which the approval was granted. Page 15 ATTACHMENT A ARMSTRONG SHAW ASSOCIATES INC. 45 GROVE STREET NEW CANAAN, CONNECTICUT 06840 PERSONAL SECURITY TRANSACTION PRE-CLEARANCE FORM* Employee Name:___________________________________________ Date:__________________________ Type of security: _____Stock _____Bond _____ Option _____ Other ______ (specify): Name of security: _________________________________________ Symbol or Cusip: _________________________________________ Type of transaction: ______ Buy ______ Sell ______ Other (explain) ____________ Number of shares/face value: ________________________ Estimated Principal Amount of trade: __________________ Brokerage firm to handle trade: - ------------------------------------------------------ Is the proposed trade part of an Initial Public Offering or Private Placement? ================================================================================ Compliance Review Approved by: _____________________________ Date Approved**: _________________________ * Pre-clearance is not required for certain transactions including those for money market instruments and funds, US Government securities, and open-ended mutual funds not sub-advised by ASA. Please see the Code of Ethics for a more complete list. ** Pre-clearance approval will expire at the close of the trading day on which the approval is received. Page 16 ATTACHMENT B ARMSTRONG SHAW ASSOCIATES INC. 45 GROVE STREET NEW CANAAN, CONNECTICUT 06840 PHONE: (203) 972-9600 Fax: (203) 972-9630 ANNUAL CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS By signing below I certify the following: 1. I have read and understand the Armstrong Shaw Associates Code of Ethics. 2. I am subject to the provision of the Code of Ethics. 3. I have complied with all of the requirements of the Code of Ethics to which I am subject during the year ended December 31, ___________. 4. I have disclosed or reported all personal securities transactions, holdings, brokerage accounts and gifts required to be disclosed or reported pursuant to the requirements of the Code of Ethics for the year ended December 31, ___________. 5. I understand that any violation of the Code of Ethics may lead to serious disciplinary action up to, and including, termination of employment. _____________________ Signature _____________________ Name (printed) _____________________ Date EX-99.P 9 lazardcoe.txt LAZARD CODE OF ETHICS February 2006 CODE OF ETHICS AND PERSONAL INVESTMENT POLICY For Lazard Asset Management LLC Lazard Asset Management Securities LLC Lazard Asset Management (Canada) Inc. Lazard Alternatives LLC And Certain Registered Investment Companies Lazard Asset Management LLC, Lazard Asset Management Securities LLC, Lazard Asset Management (Canada) Inc., Lazard Alternatives LLC (collectively "LAM"), and those U.S.-registered investment companies advised or managed by LAM that have adopted this policy ("Funds"), have adopted this policy in order to accomplish two primary goals: first, to minimize conflicts and potential conflicts of interest between LAM employees and LAM's clients (including the Funds and shareholders of the Funds), and between Fund directors or trustees ("Directors") and their Funds, and second, to provide policies and procedures consistent with applicable law, including Rule 204-2 under the Investment Advisers Act of 1940 (the "Advisers Act") and Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act"), to prevent fraudulent or manipulative practices with respect to purchases or sales of securities held or to be acquired by client accounts. In addition, it is LAM's policy that LAM employees should not be engaging in short-term investing, including so-called market timing of any mutual funds, whether or not managed by LAM. This Policy therefore prohibits certain short-term trading activity by LAM employees. All employees of LAM, including employees who serve as Fund officers or directors, are "Covered Persons" under this policy and are required to comply with all applicable federal securities laws. Additionally, all Directors are subject to this policy as indicated below. A. Statement of Principles. All Covered Persons owe a fiduciary duty to LAM's clients when conducting their personal investment transactions. Covered Persons must place the interest of clients first and avoid activities, interests and relationships that might interfere with the duty to make decisions in the best interests of the clients. All Directors owe a fiduciary duty to each Fund of which they are a director and to that Fund's shareholders when conducting their personal investment transactions. At all times and in all matters Directors shall place the interests of their Funds before their personal interests. The fundamental standard to be followed in personal securities transactions is that Covered Persons and Directors may not take inappropriate advantage of their positions. Covered Persons are reminded that they also are subject to other policies of LAM, including policies on insider trading, and the receipt of gifts and service as a director of a publicly traded company. Covered Persons must never trade in a security while in possession of material, non-public information about the issuer or the market for those securities, even if the Covered Person has satisfied all other requirements of this policy. LAM's Chief Executive Officer has appointed the Chief Compliance Officer as the person who shall be responsible for the implementation of this Code of Ethics and Personal Investment Policy and all record-keeping functions mandated hereunder, including the review of all initial and annual holding reports as well as the quarterly transactions reports described below. The Chief Compliance Officer may delegate this function to others in the Legal / Compliance Department, and shall promptly report to LAM's General Counsel or the Chief Executive Officer all material violations of, or deviations from, this policy. B. Personal Securities Accounts. For purposes of this Policy, "Personal Securities Accounts" include: 1. Any account in or through which securities (including open end mutual funds) can be purchased or sold, which includes, but is not limited to, a brokerage account, 401k account, or variable annuity or variable life insurance policy; 2. Accounts in the Covered Person's or Director's name or accounts in which the Covered Person or Director has a direct or indirect beneficial interest (a definition of Beneficial Ownership is included in Exhibit A); 3. Accounts in the name of the Covered Person's or Director's spouse; 4. Accounts in the name of children under the age of 18, whether or not living with the Covered Person or Director, and accounts in the name of relatives or other individuals living with the Covered Person or Director or for whose support the Covered Person or Director is wholly or partially responsible (together with the Covered Person's or Director's spouse and minor children, "Related Persons"); (1) 5. Accounts in which the Covered Person or Director or any Related Person directly or indirectly controls, participates in, or has the right to control or participate in, investment decisions. For purposes of this Policy, Personal Securities Accounts do not include: 1. Estate or trust accounts in which a Covered Person, Director, or Related Person has a beneficial interest, but no power to affect investment decisions. There must be no communication between the account(s) and the Covered Person, Director or Related Person with regard to investment decisions prior to execution; 2. Fully discretionary accounts managed by LAM or another registered investment adviser are permitted if, (i) for Covered Persons and Related Persons, the Covered Persons receives permission from the Legal / Compliance Department, and (ii) for all persons covered by this Code, there is no communication between the adviser to the account and such person with regard to investment decisions prior to execution. Covered Persons with managed accounts must designate that copies of trade confirmations and monthly statements be sent to the Legal / Compliance Department; 3. Direct investment programs, which allow the purchase of securities directly from the issuer without the intermediation of a broker/dealer, provided that the timing and size of the purchases are established by a pre-arranged, regularized schedule (e.g., dividend reinvestment plans). Covered Persons must pre-clear the transaction at the time that the dividend reinvestment plan is being set up. Covered Persons also must provide documentation of these arrangements and direct periodic (monthly or quarterly) statements to the Legal / Compliance Department; 4. 401k and similar retirement accounts that permit the participant to change their investments no more frequently than once per quarter. Such accounts that allow participants to trade more frequently (such as, for example, an "Individually Directed Account"), are Personal Securities Accounts for purposes of this Code. 5. Other accounts over which the Covered Person or Director has no direct or indirect influence or control; 6. Qualified state tuition programs (also known as "529 Programs") where investment options and frequency of transactions are limited by state or federal laws. C. Opening and Maintaining Employee Accounts. All Covered Persons and their Related Persons must maintain their Personal Securities Accounts at Lazard Capital Markets LLC ("LCM"). If your account is a mutual fund only account, you do not need to maintain it at LCM. Additionally, if LCM does not offer a particular investment product or service, or for Related Persons who, by reason of their employment, are required to conduct their securities transactions in a manner inconsistent with this policy, or in other exceptional circumstances, Covered Persons may submit a request for exemption to the Legal / Compliance Department. For any Personal Securities Account not maintained at LCM Covered Persons and their Related Persons must arrange to have duplicate copies of trade confirmations and statements provided to the Legal and Compliance Department at the following address: Lazard Asset Management LLC, Attn: Chief Compliance Officer, 30 Rockefeller Plaza, 59th Floor, New York, NY 10112. All other provisions of this policy will continue to apply to any Personal Securities Account not maintained at LCM. D. Securities. For purposes of this Policy, "Security" includes, in general, any interest or instrument commonly known as a security including the following: 1. stocks 2. bonds 3. shares of open and closed-end funds (including exchange-traded funds) and unit investment trusts 4. hedge funds 5. private equity funds 6. limited partnerships 7. private placements or unlisted securities 8. debentures, and other evidences of indebtedness, including senior debt, subordinated debt 9. investment, commodity or futures contracts 10. all derivative instruments such as options, warrants and indexed instruments "Security" also includes securities that are "related" to a security being purchased or sold by a LAM client. A "related security" is one whose value is derived from the value of another security (e.g., a warrant, option, or an indexed instrument). For purposes of this Policy, Security does not include: 1. money market mutual funds 2. U.S. Treasury obligations 3. mortgage pass-throughs (e.g., Ginnie Maes) that are direct obligations of the U.S. government 4. bankers' acceptances 5. bank certificates of deposit 6. commercial paper 7. high quality short-term debt instruments (meaning any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a nationally recognized statistical rating organization, such as S&P or Moody's), including repurchase agreements. E. Restrictions. The following restrictions apply to trading for Personal Securities Accounts of Covered Persons and Related Persons: 1. Conflicts with Client Activity. No security, excluding open end mutual funds, may be purchased or sold in any Personal Securities Account seven (7) calendar days before or after a LAM client account trades in the same security. 2. 60 Day Holding Period. Securities transactions, including transactions in mutual funds other than money-market mutual funds, must be for investment purposes rather than for speculation. Consequently, Covered Persons or their Related Persons may not profit from the purchase and sale, or sale and purchase, of the same or equivalent securities within sixty (60) calendar days (i.e., the security may be purchased or sold on the 61st day), calculated on a First In, First Out (FIFO) basis. All profits from short-term trades are subject to disgorgement. However, with the prior written approval of the Chief Compliance Officer, or in his absence another senior member of the Legal / Compliance Department, and only in the case of hardship, or other rare and/or unusual circumstances, a Covered Person or a Related Person may execute a short-term trade that results in a loss or in break-even status. Notwithstanding the above, the 60-day holding period will not apply (although the obligation to pre-clear trades will apply) to shares of exchange traded funds, options on exchange traded funds and open-end mutual funds that seek to track the performance of U.S. broad-based large-capitalization indices (i.e., the QQQ or an S&P 500 Index fund). Nevertheless, short-term trading in shares of these funds is discouraged. If a pattern of frequent trading is detected, the Legal / Compliance Department may reject any order to buy or sell these shares. 3. Initial Public Offerings (IPOs). No transaction for a Personal Securities Account may be made in securities offered pursuant to an initial public offering. 4. Private Placements. Securities offered pursuant to a private placement (e.g., hedge funds, private equity funds or any other pooled investment vehicle the interests or shares of which are offered in a private placement) may not be purchased or sold by a Covered Person without the prior approval of LAM's Chief Executive Officer and the Chief Compliance Officer; however, purchases or sales of Lazard sponsored hedge funds do not require such approval. The Alternative Investments Operations Department instead provides the Legal / Compliance Department on at least a quarterly basis with a report for their review of all Covered Persons' investments in Lazard sponsored hedge funds. In connection with any decision to approve such a private placement, the Legal / Compliance Department will prepare a report of the decision that explains the reasoning for the decision and an analysis of any potential conflict of interest. Any Covered Person receiving approval to acquire securities in a private placement must disclose that investment when the Covered Person participates in a LAM client's subsequent consideration of an investment in such issuer and any decision by or made on behalf of the LAM client to invest in such issuer will be subject to an independent review by investment personnel of LAM with no personal interest in the issuer. 5. Hedge Funds. Hedge funds are sold on a private placement basis and as noted above, with the exception of Lazard sponsored hedge funds, are subject to prior approval by LAM's Chief Executive Officer and Chief Compliance Officer. In considering whether or not to approve an investment in a hedge fund, the Chief Compliance Officer or his designee, will review a copy of the fund's offering memorandum, subscription documents and other governing documents ("Offering Documents") in order to ensure that the proposed investment is being made on the same terms generally available to all other investors in the hedge fund. The Chief Compliance Officer may grant exceptions to this general rule under certain circumstances. For example, such as when a family relationship exists between the Covered Person and the hedge fund manager. Upon receipt of a request by a Covered Person to invest in a hedge fund, the Legal / Compliance Department will contact the Fund of Funds Group (the "Team") and identify the fund in which the Covered Person has requested permission to invest. The Team will advise the Legal / Compliance Department if the fund is on the Team's approved list or if the Team is otherwise interested in investing clients assets in the fund. If the fund is not on the Team's approved list and the Team is not interested in investing in the fund, the Chief Compliance Officer and the Chief Executive Officer will generally approve the Covered Person's investment, unless other considerations warrant disapproving the investment. If the fund is on the approved list or the Team may be interested in investing in the fund, then the Legal / Compliance Department will determine whether the fund is subject to capacity constraints. If the fund is subject to capacity constraints, then the Covered Person's request will be denied and priority will be given to the Team to invest client assets in the fund. If the fund is not subject to capacity constraints, then the Covered Person will generally be permitted to invest along with the Team. If the fund is on the approved list or the Team may be interested in investing in the fund, then the Covered Person's investment must be made generally on the same terms available to all investors as set forth in the fund's Offering Documents. 6. Speculative Trading. Absent approval from the appropriate compliance personnel, Covered Persons are prohibited from engaging in the trading of options or futures and from engaging in speculative trading, as opposed to investment activity. The Covered Person must wait 60 days from the date of the opening transaction before effecting the closing transaction. 7. Short Sales. Covered Persons are prohibited from engaging in short sales of any security. However, provided the investment is otherwise permitted under this Policy and has received all necessary approvals, an investment in a hedge fund that engages in short selling is permitted. 8. Inside Information. No transaction may be made in violation of the Material Non-Public Information Policies and Procedures ("Inside Information") as outlined in Section 32 of the LAM Compliance Manual; and 9. Directorships. Covered Persons may not serve on the board of directors of any corporation (other than a not-for-profit corporation or a related Lazard entity) without the prior approval of LAM's Chief Compliance Officer or General Counsel. 10. Control of Issuer. Covered Persons and Related Persons may not acquire any security, directly or indirectly, for purposes of obtaining control of the issuer. F. Prohibited Recommendations. No Covered Person shall recommend or execute any securities transaction for any client account, or, in the case of a Director, for the Director's Fund, without having disclosed, in writing, to the Chief Compliance Officer, or in his absence another senior member of the Legal / Compliance Department, any direct or indirect interest in such securities or issuers (including any such interest held by a Related Person). Prior written approval of such recommendation or execution also must be received from the Chief Compliance Officer, or in his absence another senior member of the Legal / Compliance Department. The interest in personal accounts could be in the form of: 1. Any direct or indirect beneficial ownership of any securities of such issuer; 2. Any contemplated transaction by the person in such securities; 3. Any position with such issuer or its affiliates; or 4. Any present or proposed business relationship between such issuer or its affiliates and the person or any party in which such person has a significant interest. G. Transaction Approval Procedures. All transactions by Covered Persons (including Related Persons) in Personal Securities Accounts must receive prior approval as described below. To pre-clear a transaction, Covered Persons must: 1. Electronically complete and "sign" a "New Equity Order", "New Bond Order" or "New Mutual Fund Order" trade ticket located in the Firm's Lotus-Notes e-mail application under the heading "Employee Trades." 2. The ticket is then automatically transmitted to the Legal / Compliance Department where it will be processed. If approved, the Legal / Compliance Department will route mutual fund orders directly to Securities Processing and will route equity and bond orders directly to the trading desk for execution, provided the employee selected the "Direct Execution" option when completing the equity or bond order ticket. For any account not maintained at LCM, the ticket will be returned to the employee. Note: In completing an equity or bond order ticket, if the employee does not select the "Direct Execution" button, the ticket will be returned to her/him after Compliance approval for submission to the trading desk, or in the case of an account not maintained at LCM, to the Legal / Compliance Department to indicate that the trade will be executed. In such case, the trade must be submitted within 2 business days or it will expire and be null and void. The Legal / Compliance Department endeavors to preclear transactions promptly; however, transactions may not always be approved on the day in which they are received. Certain factors such as time of day the order is submitted or length of time it takes a LAM portfolio manager to confirm there is no client activity, all play a role in the length of time it takes to preclear a transaction. Mutual Fund Orders that are not received by the Legal / Compliance Department by 2:00 p.m. on any business day will most likely not be processed until the next business day (i.e., the order will not receive that business days' net asset value for the relevant mutual fund). H. Acknowledgment and Reporting. 1. Initial Certification. Within 10 days of becoming a Covered Person or Director, such Covered Person or Director must submit to the Legal / Compliance Department an acknowledgement that they have received a copy of this policy, and that they have read and understood its provisions. See Exhibit B for the form of Acknowledgement. 2. Initial Holdings Report. Within 10 days of becoming a Covered Person, all LAM personnel must submit to the Legal / Compliance Department a statement of all securities in which such Covered Person has any direct or indirect beneficial ownership. This statement must include (i) the title, number of shares and principal amount of each security, (ii) the name of any broker, dealer, insurance company, mutual fund or bank with whom the Covered Person maintained an account in which any securities were held for the direct or indirect benefit of such Covered Person and (iii) the date of submission by the Covered Person. The information provided in this statement must be current as of a date no more than 45 days prior to the Covered Person's date of employment at LAM. Such information should be provided on the form attached as Exhibit B. 3. Quarterly Report. Within 30 days after the end of each calendar quarter, provide information to the Legal / Compliance Department relating to securities transactions executed during the previous quarter for all securities accounts. Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect beneficial ownership in the security to which the report relates. Note: Covered Persons satisfy this requirement by holding their personal securities accounts at LCM. 4. Annual Report. Each Covered Person shall submit an annual report to the Legal / Compliance Department showing as of a date no more than 45 days before the report is submitted (1) all holdings in securities in which the person had any direct or indirect beneficial ownership and (2) the name of any broker, dealer, insurance company, mutual fund or bank with whom the person maintains an account in which any securities are held for the direct or indirect benefit of the Covered Person or Related Persons. Note: Covered Persons satisfy this requirement by certifying annually that all transactions during the year were executed in Internal Accounts or Outside Accounts for which the Legal and Compliance Department receives confirmations and periodic statements. 5. Annual Certification. All Covered Persons and Directors are required to certify annually that they have (i) read and understand this policy and recognize that they are subject to its terms and conditions, (ii) complied with the requirements of this policy and (iii) disclosed or reported all personal securities accounts and transactions required to be disclosed or reported pursuant to this Code of Ethics and Personal Investment Policy. I. Fund Directors. A Director who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the 1940 Act, and who would be required to make reports solely by reason of being a Director, is required to make the quarterly transactions reports required by Section H (3.) as to any security if at the time of a transaction by the Director in that security, he/she knew, or in the ordinary course of fulfilling his/her official duties as a Fund Director, should have known that during the 15-day period immediately preceding or following the date of that transaction, that security was purchased or sold by that Director's Fund or was being considered for purchase or sale by that Director's Fund. If a Director introduces a hedge fund to the Team, as previously defined in Section E (5.), the Director is required to inform the Team whether the Director or an affiliated person of the Director has invested in the fund and the terms of such investment. If a Director decides to invest in a hedge fund that he knew or, in the ordinary course of fulfilling his responsibilities as a Director should have known that the hedge fund is held by or is being considered for purchase or sale by the Team, the Director is required, before making the investment, to disclose this to the Team and any different terms or rights that have been granted to the Director. If a Director learns, in the ordinary course of fulfilling his responsibilities as a Director, that the Team has invested in a fund in which the Director has an investment, the Director should advise the Chief Compliance Officer of such investment. J. Exemptions. 1. Purchases or sales of securities which receive the prior approval of the Chief Compliance Officer, or in his absence another senior member of the Legal / Compliance Department, may be exempted from certain restrictions if such purchases or sales are determined to be unlikely to have any material negative economic impact on any client account managed or advised by LAM. 2. Section E (1.) (blackout period) shall not apply to any securities transaction, or series of related transactions, involving up to 500 shares of a security, but not to exceed an aggregate transaction amount of $25,000 of any security, provided the issuer has a market capitalization greater than US $5 billion ("Large Cap/De Minimus exemption"). This exemption does not apply to shares of mutual funds or to option contracts on indices or other types of securities whose value is derived from a broad-based index. K. Sanctions. The Legal / Compliance Department shall report all material violations of this Code of Ethics and Personal Investment Policy to LAM's Chief Executive Officer, who may impose such sanctions as deemed appropriate, including, among other things, a letter of censure, fine or suspension or termination of the employment of the violator. L. Confidentiality. All information obtained from any person pursuant to this policy shall be kept in strict confidence, except that such information will be made available to the Securities and Exchange Commission or any other regulatory or self-regulatory organization or to the Fund Boards of Directors to the extent required by law, regulation or this policy. M. Retention of Records. All records relating to personal securities transactions hereunder and other records meeting the requirements of applicable law, including a copy of this policy and any other policies covering the subject matter hereof, shall be maintained in the manner and to the extent required by applicable law, including Rule 204-2 under the Advisers Act and Rule 17j-1 under the 1940 Act. The Legal / Compliance Department shall have the responsibility for maintaining records created under this policy. N. Board Review. Fund management shall provide to the Board of Directors of each Fund, on a quarterly basis, a written report of all material violations of this policy, and at least annually, a written report and certification meeting the requirements of Rule 17j-1 under the 1940 Act. O. Other Codes of Ethics. To the extent that any officer of any Fund is not a Covered Person hereunder, or an investment subadviser of or principal underwriter for any Fund and their respective access persons (as defined in Rule 17j-1) are not Covered Persons hereunder, those persons must be covered by separate codes of ethics which are approved in accordance with applicable law. P. Amendments. 1. Covered Persons. Unless otherwise noted herein, this policy shall become effective as to all Covered Persons on April 1, 2005. This policy may be amended as to Covered Persons from time to time by the Legal / Compliance Department. Any material amendment of this policy shall be submitted to the Board of Directors of each Fund for approval in accordance with Rule 17j-1 under the 1940 Act. 2. Fund Directors. This policy shall become effective as to a Fund upon the approval and adoption of this policy by the Board of Directors of that Fund in accordance with Rule 17j-1 under the 1940 Act or at such earlier date as determined by the Secretary of the Fund. Any material amendment of this policy that applies to the Directors of a Fund shall become effective as to the Directors of that Fund only when the Board of Directors of that Fund has approved the amendment in accordance with Rule 17j-1 under the 1940 Act or at such earlier date as determined by the Secretary of the Fund. Exhibit A EXPLANATION OF BENEFICIAL OWNERSHIP You are considered to have "Beneficial Ownership" of Securities if you have or share a direct or indirect "Pecuniary Interest" in the Securities. You have a "Pecuniary Interest" in Securities if you have the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the Securities. The following are examples of an indirect Pecuniary Interest in Securities: 1. Securities held by members of your immediate family sharing the same household; however, this presumption may be rebutted by convincing evidence that profits derived from transactions in these Securities will not provide you with any economic benefit. "Immediate family" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and includes any adoptive relationship. 2. Your interest as a general partner in Securities held by a general or limited partnership. 3. Your interest as a manager-member in the Securities held by a limited liability company. You do not have an indirect Pecuniary Interest in Securities held by a corporation, partnership, limited liability company or other entity in which you hold an equity interest, unless you are a controlling equityholder or you have or share investment control over the Securities held by the entity. The following circumstances constitute Beneficial Ownership by you of Securities held by a trust: 1. Your ownership of Securities as a trustee where either you or members of your immediate family have a vested interest in the principal or income of the trust. 2. Your ownership of a vested interest in a trust. 3. Your status as a settlor of a trust, unless the consent of all of the beneficiaries is required in order for you to revoke the trust. The foregoing is a summary of the meaning of "beneficial ownership". For purposes of the attached policy, "beneficial ownership" shall be interpreted in the same manner, as it would be in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder. Exhibit B LAM ACKNOWLEDGEMENT & INITIAL HOLDINGS REPORT Pursuant to Code of Ethics and Personal Investment Policy (the "Policy") This report must be completed and returned to the Legal / Compliance Department within 10 days of employment. Name: ________________________________ Date of Employment: _______________ (Please print) Account Information: |_| I do not have a beneficial interest in any account(s) with any financial services firm. |_| I maintain the following account(s). Please list any broker, dealer, insurance company, mutual fund or bank, which holds securities for your direct or indirect benefit as of the date of your employment. This includes 401k accounts, insurance company variable insurance contracts, mutual fund-only accounts.* - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ Type of Account (Brokerage, Mutual Fund, Variable Annuity, 401k.) Is this a Account Number Managed Name of Financial Services Firm Name on Account Account? - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ - ---------------------------------------- ------------------ ---------------------- -------------------- ------------ *401k accounts and similar retirement accounts that permit the participant to change their investments no more frequently than once per quarter need not be reported. Securities Holdings Information: For each of the accounts listed above, attach to this report a copy of your most recent statements(s) listing all of your securities holdings. All statements must be current as of a date no more than 45 prior to your date of employment at LAM. In addition, please list in the space provided below holdings in hedge funds, private equity funds, limited partnerships or any other type of security that may not be held in an account listed above. - ---------------------------------------- ----------------------- ----------------- ---------------------------------- Description of Security Type of Security No. of Shares Principal Amount Invested - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ---------------------------------- - ---------------------------------------- ----------------------- ----------------- ----------------------------------
|_| I have no securities holdings to report. I certify that I have received a copy of the Policy, and that I have read and understood its provisions. I further certify that this report represents a complete and accurate description of my account(s) and securities holdings as of my initial date of employment. The information provided is current as of a date no more than 45 days prior to my employment at LAM. Signature: ____________________________________ Date: ___________________ (1) Unless otherwise indicated, all provisions of this Code apply to Related Persons. EX-99.P 10 vgicode07052006.txt VANGUARD CODE OF ETHICS 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 AND ENTERTAINMENT POLICY Vanguard crew members are generally prohibited from accepting gifts from clients, vendors, brokers, or other business contacts. In certain limited circumstances, as specified in Vanguard's Gift and Entertainment Policy, Vanguard personnel may accept gifts. The Gift and Entertainment Policy also governs gifts from Vanguard crew members to third parties and business entertainment received or provided by Vanguard crew, and requires that crew members keep records of gifts and entertainment. Crew members should use good judgment when giving or accepting gifts or entertainment and should not participate in inappropriate or lavish entertainment. 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 11 filename11.txt January 8, 2007 Christian Sandoe, Esq. U.S. Securities & Exchange Commission 100 F Street, N.E. Washington, DC 20549 Re: Vanguard Windsor Funds (the "Trust") File No. 2-14336 Commissioners: We respectfully submit the enclosed 108th Post-Effective Amendment of the registration statement on Form N-1A for the Trust, which we are filing pursuant to Rule 485(a) under the Securities Act of 1933. By separate letter dated January 8, 2007, the Trust and its distributor, Vanguard Marketing Corporation, requested an accelerated effective date of Wednesday, February 28, 2007 pursuant to Rule 461(a) under the Securities Act of 1933. The request for acceleration is attached to this letter as Appendix A. The purposes of this Post-Effective Amendment 108 are to: (1) disclose the addition of an investment advisor to the Vanguard Windsor II Fund (the "Fund"), a series of the Trust; and (2) implement a number of non-material editorial changes. Prior to the effective date of the Amendment, Vanguard will submit a Rule 485(a) filing, with a requested accelerated effective date of February 28, 2007, that will include: (1) text addressing any SEC staff comments; and (2) updated financial statements for the Trust. We appreciate the Staff's assistance and thank you for your consideration. Please contact me at (610) 669-5854 if you have any questions or comments. Sincerely, Judith L. Gaines Associate Counsel The Vanguard Group, Inc. Enclosures cc: Brion Thompson, Esq. U.S. Securities and Exchange Commission APPENDIX A 461(a) Acceleration Request January 8, 2007 Christian Sandoe, Esq. U.S. Securities & Exchange Commission 100 F Street, N.E. Washington, DC 20549 Re: Vanguard Windsor Funds (the "Trust") File No. 2-14366 Commissioners: Pursuant to Rule 461(a) under the Securities Act of 1933, Vanguard Windsor Funds (the "Trust") and its distributor, Vanguard Marketing Corporation, respectfully request that the effectiveness of the 108th Post-Effective Amendment (PEA) of the Trust's registration statement on Form N-1A be accelerated to Wednesday, February 28, 2007. We filed PEA 108 of the Trust's registration statement today, January 8, 2007. PEA 108 will reflect the addition of an investment advisor to the Fund, and the implementation of minor non-material editorial changes. Sincerely, VANGUARD WINDSOR FUNDS - ------------------------------ Name: John J. Brennan (Heidi Stam)* Title: President VANGUARD MARKETING CORPORATION, Distributor - ------------------------------ Name: Amy Cooper Title: Secretary *By Power of Attorney. See File number 002-65955-99, filed on July 27, 2006. -----END PRIVACY-ENHANCED MESSAGE-----