February 2, 1998
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth St., N.W.
Washington, D.C. 20549
Re: Proposed Householding Rules
(File No. S7-27-97)
Dear Mr. Katz:
The Vanguard Group, Inc. is pleased to comment on the Securities and Exchange Commissions proposed householding rules, including proposed rule 154 under the Securities Act of 1933 and amendments to rules 14a-3 and 14c-3 of the Securities Exchange Act of 1934, and rules 30d-1 and 30d-2 under the Investment Company Act of 1940. [ SEC Release Nos. 33-7475, 34-39321, IC-22884 (November 13, 1997) ("Proposing Release").]
Vanguard agrees with the Commission that it is common for investors to hold shares of the same fund in a number of separately designated accounts. As a result, many investors are inundated with multiple copies of the same fund documents. Mailing multiple copies of the same document to one address annoys investors and increases printing and mailing costs. As the Commission has noted, these costs are ultimately borne by fund shareholders. As the fund industry continues to grow, it is particularly important for the industry and regulators to identify unnecessary costs and inefficiencies and eliminate them. The Commissions householding proposal is consistent with those goals and, if implemented, will result in significant benefits to fund shareholders.
As part of Vanguards continual effort to contain costs, we have recently developed householding procedures for annual reports, consistent with Commission staff no-action letters on this subject. [ See, e.g., Oppenheimer Funds, SEC No-Action Letter (July 20, 1994) .] In implementing the procedures, we became aware that the vast majority of our shareholders favor householding. When we began the project, we notified approximately 3,000,000 investors of our intention to implement householding. Only 1,703 (or .057 %) of those investors asked to continue receiving separate mailings for each account. Many shareholders voluntarily expressed their support, in correspondence and telephone calls, for reduced mailings through the use of householding -- which many recognized as a more cost efficient and environmentally sound policy.
In view of our experience, we strongly support the householding concept and commend the Commission and its staff for developing the proposed rule changes. [ We support the point noted by the Investment Company Institute in its comment letter at footnote 10. Fund companies that are currently householding shareholder reports in reliance on the no-action letters should be able to continue to do so without renotifying shareholders or obtaining duplicative consents. It would be helpful if the Commission clarified this position in its adopting release.] We further believe that modifying the proposal in certain respects, as detailed below, would improve the operational efficiency and cost savings associated with householding without compromising investor protection.
Notice and Consent Requirements
Implied consent is appropriate for all accounts. As proposed, the rules would have different notice and consent provisions depending upon whether an account is established before or after the effective date of the rules. Both existing and new shareholders would have to be notified of a funds intent to "household" prospectuses and annual reports. In each case, a fund would be required to seek the written consent of shareholders to the householding procedures. It is only in the case of existing shareholders, however, that a fund company may imply that consent is granted if no reply is received within 60 days. The Commission made this distinction because it believes that it would be easier to obtain consent to householding for accounts established after the rules effective date since consent could be obtained easily through new account applications. [ See Proposing Release, supra , at 12.] While we agree that notice of householding procedures will be most effective in new account applications, we believe that an implied consent procedure would be more effective than the affirmative consent requirements that are currently proposed for new accounts.
In our experience, relatively few shareholders desire multiple copies of fund reports and most view the householding procedures as fair and effective means of reducing costs without eliminating needed information. Incorporating an implied response into the notice of an intent to household would not only give shareholders fair notice of the policy, but would also further reduce the time, effort, and cost required to implement the procedure. [ For example, an application could state that the fundís householding policy will apply to all eligible investors unless they elect to receive multiple copies.] In addition, if notice and implied consent are appropriate means of implementing a householding policy for existing shareholders, it would not seem to be necessary to apply a different standard for new accounts. We suggest that the most effective way to implement the proposal would be to establish consistent notice and consent requirements for both existing and new shareholders.
The rules should not restrict the manner of shareholder communications. Under the proposal, a funds notice of proposed householding would be required to include a reply form that each shareholder could use to consent or to request individual copies of fund prospectuses and reports. Whether or not the Commission permits implied consent for all shareholder accounts, limiting the method of shareholder communication to a written reply card that must be sent through the mail is unnecessarily restrictive and limits the utility of the rule. We believe that investors would be well served and adequately protected if the rule permitted a variety of methods for consenting or electing to receive individual reports. For example, the notice could identify a number of different means of contacting the fund, including a toll-free telephone number and an e-mail address, thus allowing investors to respond in the most convenient manner.
Although some investors may wish to consent or request individual reports by mailing a return form, we believe that most would not. Our shareholders regularly communicate with us through our toll-free telephone number and through e-mail. In our experience, these methods of communication are reliable and more convenient for investors. We do not see any advantage or additional protection for shareholders by limiting responses to mailed reply forms and recommend that this limitation be removed from the final rule.
A sixty day response period is unnecessarily long. The proposed rules would permit a fund to imply consent to householding for existing shareholders that do not reply within 60 days of receiving notice. In our view, 30 days is sufficient time for a shareholder to respond. Based on our experience with householding annual reports under the staffs no-action positions, investors who are going to respond will not need 60 days to do so. Furthermore, there is no real danger that a shorter time period will cause investors to involuntarily accept householding since the proposal allows investors to rescind consent -- whether express or implied -- at any time.
Shareholder reports and prospectuses should be treated equally for purposes of householding. Vanguard, like many fund companies, often combines prospectuses and shareholder reports in a single mailing. Imposing different conditions for householding shareholder reports and prospectuses would lead to operational inefficiencies that would add costs and reduce the expected benefits of the proposal.
The rules should not require investors to specify the name of the person who will receive the prospectus and reports. Doing so will only generate additional administrative procedures to ensure that an investor designates a recipient, and thereafter to monitor the investors choice. These requirements are not necessary for investor protection and merely add to the cost of implementing a householding policy. In addition, most computerized mailing systems will automatically select eligible accounts and address the mailing to the person who is most likely to be authorized to act for the accounts, e.g., the trustee of a minors account.
Materials should only be sent to the shared address, unless all investors in the household designate a different address. Funds should not send prospectuses or reports to addresses that are not shared by all investors in the household since this may limit some investors access to the information.
Electronic delivery. If different investors in a household wish to receive materials through different media, then they should consider that factor in deciding whether to elect householding. Requiring all investors to choose a form of delivery would increase administrative costs due to the effort required to make all investors designate a form of delivery, and later to record and implement their choices. Again, the resulting increase in costs would diminish the benefits of the proposal.
Vanguard appreciates the opportunity to comment on the householding proposal. If you would like to discuss any of these matters further, or if you have any questions, please contact the undersigned at (610) 503-4016 or Adán Araujo, Associate Counsel, at (610) 503-4015.
cc: B.P. Barbash