EXECUTION COPY
SUB-ADVISORY AGREEMENT
THIS SUB-ADVISORY AGREEMENT is made as of this ____ day of April, 2003,
among VANGUARD VARIABLE INSURANCE FUNDS, a Delaware statutory trust (the
"Trust"), ▇▇▇▇▇▇▇▇ INVESTMENT MANAGEMENT NORTH AMERICA INC., a Delaware
corporation (the "Adviser"), and ▇▇▇▇▇▇▇▇ INVESTMENT MANAGEMENT NORTH AMERICA
LIMITED, a U.K. corporation (the "Sub-Adviser").
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 International
Portfolio (the "Portfolio"); and
WHEREAS, the Trust retains the Adviser to render investment advisory
services to the Portfolio under an Amended and Restated Investment Advisory
Agreement dated as of February 6, 2003 (the "Investment Advisory Agreement");
and
WHEREAS, prior to the date hereof, the Adviser directly employed a
portfolio management team which provided investment advisory services to the
Portfolio under the Investment Advisory Agreement ("Portfolio Management Team")
and which operated out of the Adviser's London branch office; and
WHEREAS, effective as of the date hereof, the Adviser completed a corporate
restructuring (the "Restructuring") under which (1) the Adviser contemplates
closing its London branch, (2) the Sub-Adviser agreed to act as sub-adviser and
make the Portfolio Management Team available to the Adviser for purposes of
providing investment advisory services to the Trust pursuant to the Investment
Advisory Agreement, (3) the Adviser and the Sub-Adviser determined that there
will be no change in the Portfolio Management Team, or in the investment
personnel who oversee and supervise the Portfolio Management Team, as a result
of the Restructuring, (4) the Sub-Adviser and the Portfolio Management Team will
be subject to day-to-day oversight, supervision and reporting by the Adviser,
and (5) in order to reasonably reflect the apportionment of such services and
responsibilities, the Adviser agreed to pay to the Sub-Adviser twenty-five
percent (25%) of all fees actually paid by the Portfolio to the Adviser under
the Investment Advisory Agreement; and
WHEREAS, on the basis of the foregoing, the Trust desires to employ the
Sub-Adviser as investment sub-adviser, and the Sub-Adviser is willing to render
investment sub-advisory services to the Trust, subject to and in accordance with
the terms and conditions of this Agreement;
NOW THEREFORE, in consideration of the mutual promises and undertakings
set forth in this "Agreement," the Trust, the Adviser and the Sub-Adviser hereby
agree as follows:
1. APPOINTMENT OF SUB-ADVISER. The Adviser hereby employs the Sub-Adviser
as investment sub-adviser, on the terms and conditions set forth herein, for the
portion of the assets of the Portfolio that the Trust's Board of Trustees (the
"Board of Trustees") determines in its sole discretion to assign to the Adviser
from time to time (referred to in this Agreement as the "Schroder Portfolio").
As of the date of this Agreement, the Schroder Portfolio will consist of the
portion of the assets of the Portfolio that the Board of Trustees has determined
to assign to the Adviser, as communicated to the Adviser 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
Portfolio assigned to the Adviser. If and when the Adviser is notified of any
such addition or withdrawal, the Adviser shall promptly notify the Sub-Adviser
of the same. The Sub-Adviser accepts such employment and agrees to render the
services herein set forth, for the compensation herein provided.
2. DUTIES OF SUB-ADVISER.
(a) The Adviser employs the Sub-Adviser to manage the investment and
reinvestment of the assets of the Schroder Portfolio in accordance with the
Investment Advisory Agreement; to continuously review, supervise, and administer
an investment program for the Schroder 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 Portfolio (either directly or through the Adviser)
with all records concerning the activities of the Sub-Adviser that the Portfolio
is required to maintain; and to render or assist the Adviser in rendering
regular reports to the Portfolio's officers and Board of Trustees concerning the
discharge of the Sub-Adviser's responsibilities hereunder. The Sub-Adviser will
discharge the foregoing responsibilities subject to the supervision and
oversight of the Adviser, the Portfolio's officers and the Board of Trustees and
in compliance with the objectives, policies and limitations set forth in the
Portfolio's prospectus and Statement of Additional Information, any additional
operating policies or procedures that the Portfolio communicates to the
Sub-Adviser in writing (either directly or through the Adviser), and applicable
laws and regulations. The Sub-Adviser agrees to provide, at its own expense, the
office space, furnishings and equipment, and the personnel required by it to
perform the services on the terms and for the compensation provided herein.
(b) The Sub-Adviser acknowledges and agrees that the Adviser is ultimately
responsible for providing to the Trust the services required of the Adviser
under the Investment Advisory Agreement. Accordingly, the Sub-Adviser shall
discharge its duties and responsibilities specified in paragraph (a) of this
Section 2 and elsewhere in this Agreement subject at all times to the direction,
control, supervision and oversight of the Adviser. In furtherance thereof, the
Sub-Adviser shall, without limitation, (i) make its offices available to
representatives of the Adviser for on-site inspections and consultations with
the officers and applicable portfolio managers of the Sub-Adviser responsible
for the day-to-day management of the Portfolio, (ii) upon request, provide the
Adviser with copies of all records it maintains regarding its management of the
Portfolio and (iii) report to the Adviser each calendar quarter and at such
other times as the Adviser may reasonably request regarding (A) the
Sub-Adviser's implementation of the Portfolio's investment program and the
Portfolio's portfolio composition and performance, (B) any policies and
procedures implemented by the Sub-Adviser to ensure compliance with United
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States securities laws and regulations applicable to the Sub-Adviser and the
Portfolio, (C) the Portfolio's compliance with the objectives, policies and
limitations set forth in the Portfolio's prospectus and Statement of Additional
Information and any additional operating policies or procedures that the
Portfolio communicates to the Sub-Adviser in writing (either directly or through
the Adviser) and (D) such other matters as the Adviser may reasonably request.
3. SECURITIES TRANSACTIONS. The Sub-Adviser is authorized to select the
brokers or dealers that will execute purchases and sales of securities for the
Schroder Portfolio, and is directed to use its best efforts to obtain the best
available price and most favorable execution for such transactions. To the
extent expressly permitted by the written policies and procedures established by
the Board of Trustees, and subject to Section 28(e) of the Securities Exchange
Act of 1934, as amended, any interpretations thereof by the Securities and
Exchange Commission or its staff, and other applicable law, the Sub-Adviser is
permitted to pay a broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if the Sub-Adviser
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Sub-Adviser's overall responsibilities to the accounts as to which it exercises
investment discretion. The execution of such transactions in conformity with the
authority expressly referenced in the immediately preceding sentence shall not
be deemed to represent an unlawful act or breach of any duty created by this
Agreement or otherwise. Subject to the first sentence of this Section 3, the
Sub-Adviser agrees to comply with any directed brokerage or other brokerage
policies and procedures that the Portfolio communicates to the Sub-Adviser in
writing (either directly or through the Adviser). The Sub-Adviser will promptly
communicate or assist the Adviser in communicating to the Portfolio's officers
and the Board of Trustees any information relating to the portfolio transactions
the Sub-Adviser has directed on behalf of the Schroder Portfolio as the Adviser
or such officers or the Board may reasonably request.
4. COMPENSATION OF SUB-ADVISER. For the services to be rendered by the
Sub-Adviser as provided in this Agreement, the Adviser (and not the Trust or the
Portfolio) will pay to the Sub-Adviser at the end of each of the Portfolio's
fiscal quarters an amount equal to twenty-five percent (25%) of all fees
actually paid by the Portfolio to the Adviser for such fiscal quarter under
Section 4 of the Investment Advisory Agreement; provided, however, that the
Sub-Adviser's fee payable hereunder for any period shall be reduced such that
the Sub-Adviser bears twenty-five percent (25%) of any voluntary fee waiver
observed or expense reimbursement borne by the Adviser with respect to the
Portfolio for such period. For clarity, the Adviser (and not the Trust or the
Portfolio) shall be obligated to pay the Sub-Adviser fees hereunder for any
period only out of and following the Adviser's receipt from the Portfolio of
advisory fees pursuant to Section 4 of the Investment Advisory Agreement for
such period.
In the event of termination of this Agreement, the fees provided in this
Agreement will be computed on the basis of the period ending on the last
business day on which this Agreement is in effect, subject to a pro rata
adjustment based on the number of days the Sub-Adviser performed services
hereunder during the fiscal quarter in which such termination becomes effective
as a percentage of the total number of days in such quarter.
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5. REPORTS. The Fund and the Sub-Adviser (in either case either directly or
through the Adviser) 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, including, but not limited to, information about changes in
shareholders of the Sub-Adviser (to the extent applicable).
6. COMPLIANCE. The Sub-Adviser agrees to comply with all policies,
procedures or reporting requirements that the Board of Trustees of the Trust
reasonably adopts and communicates to the Sub-Adviser in writing (either
directly or through the Adviser), including, without limitation, any such
policies, procedures or reporting requirements relating to soft dollar or
directed brokerage arrangements.
7. STATUS OF SUB-ADVISER. The services of the Sub-Adviser to the Adviser
and the Portfolio are not to be deemed exclusive, and the Sub-Adviser will be
free to render similar services to others so long as its services to the Adviser
and the Portfolio are not impaired thereby. The Sub-Adviser will be deemed to be
an independent contractor with respect to the Portfolio and will, unless
otherwise expressly provided or authorized, have no authority to act for or
represent the Portfolio in any way or otherwise be deemed an agent of the
Portfolio or the Trust.
8. LIABILITY OF SUB-ADVISER. No provision of this Agreement will be deemed
to protect the Sub-Adviser against any liability to the Adviser or to the
Portfolio 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. FORCE MAJEURE. The Sub-Adviser shall not be responsible for any loss or
damage, or failure to comply or reasonable delay in complying with any duty or
obligation, under or pursuant to this Agreement arising as a direct or indirect
result of any reason, cause or contingency beyond its reasonable control,
including (without limitation) natural disasters, nationalization, currency
restrictions, act of war, act of terrorism, act of God, postal or other strikes
or industrial actions, or the failure, suspension or disruption of any relevant
stock exchange or market. The Sub-Adviser shall notify the Portfolio promptly
(either directly or through the Adviser) when it becomes aware of any event
described above. Neither the Adviser nor the Portfolio shall be responsible for
temporary delays in the performance of its or their duties and obligations
hereunder and correspondingly shall not be liable for any loss or damage
attributable to such delay in consequence of any event described above.
10. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will become
effective as of 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 successive continuance 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 Portfolio; 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 Portfolio.
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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 Portfolio, on sixty days' written notice to the Sub-Adviser,
(ii) this Agreement will automatically terminate in the event of its assignment,
(iii) this Agreement may be terminated by the Adviser on sixty days' written
notice to the Sub-Adviser and (iv) this Agreement may be terminated by the
Sub-Adviser on sixty days' written notice to the Trust and the Adviser. 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 Portfolio, at:
Vanguard Variable Insurance Funds -International Portfolio
▇.▇. ▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Portfolio Review Group
Telephone: ▇▇▇-▇▇▇-▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
If to the Adviser, at:
▇▇▇▇▇▇▇▇ Investment Management North America Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: ▇▇▇-▇▇▇-▇▇▇▇
Facsimile: ▇▇▇-▇▇▇-▇▇▇▇
If to the Sub-Adviser, at:
▇▇▇▇▇▇▇▇ Investment Management North America Limited.
▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇.▇. ▇▇▇▇ ▇▇▇
Attention: Compliance Director
Telephone: ▇▇▇ ▇▇▇▇ ▇▇▇▇
Facsimile: 020 7658 6965
This Agreement may be amended by mutual consent of the parties hereto, 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 Portfolio or 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.
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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 Sub-Adviser 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 Adviser,
the Trust, the Board of Trustees of the Trust, Vanguard, and any director,
officer, or employee of the Adviser, 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 Adviser or the
Sub-Adviser, or (iii) for information that is publicly available other than due
to disclosure by the Sub-Adviser or its affiliates or becomes known to the
Sub-Adviser from a source other than the Adviser, the Trust, the Board of
Trustees of the Trust, or Vanguard.
13. PROXY POLICY. The Sub-Adviser acknowledges that Vanguard will vote the
shares of all securities that are held by the Portfolio unless other mutually
acceptable arrangements are made by the Trust, the Adviser and the Sub-Adviser
with respect to the Schroder 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-interest law principles thereof) of
the State of Delaware applicable to contracts made and to be performed in that
state.
15. TREATMENT OF FUND UNDER FSA RULES. The Fund will be treated as an
Intermediate Customer under rules of the Financial Services Authority in the
United Kingdom.
16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed and original, but all of which shall
together constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Sub-Advisory
Agreement to be executed as of the date first set forth herein.
VANGUARD VARIABLE INSURANCE FUNDS
By: ____________________________________
Name:
Title:
▇▇▇▇▇▇▇▇ INVESTMENT MANAGEMENT
NORTH AMERICA INC.
By: ____________________________________
Name:
Title:
▇▇▇▇▇▇▇▇ INVESTMENT MANAGEMENT
NORTH AMERICA LIMITED
By: ____________________________________
Name:
Title:
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