Exhibit (h)
THIRD AMENDED AND RESTATED FUNDS' SERVICE AGREEMENT
This third Amended and Restated Funds' Service Agreement, made as the
20th day of November, 1998 (the "Agreement"), between and among the 35
investment companies registered under the Investment Company Act of 1940 ("1940
Act"), whose names are set forth on the signature page of this Agreement, which
together with any additional investment companies which may become a party to
this Agreement pursuant to Section 5.4 are collectively called the "Funds"; and
The Vanguard Group, Inc., a Pennsylvania corporation ("Service Company").
Whereas, each of the Funds has heretofore determined (as evidenced by,
among many documents, prior versions* of this Agreement (the "Prior
Agreements"), and by prospectuses and proxy statements of the Funds related
thereto): (i) to manage and perform the corporate management, administrative and
share distribution functions required for its continued operation, (ii) to
create a structure which enhances the independence of the Funds from the
providers of external services, (iii) to share, on an equitable and fair basis,
with all of the other Funds the expenses of establishing the means to accomplish
these objectives at the lowest reasonable cost; and
Whereas, each of the Funds: (i) has heretofore determined that these
objectives can best be accomplished by establishing a company: (a) to be
wholly-owned by the Funds; (b) to provide corporate management, administrative,
and distribution services, and upon the reasonable request of any Fund to
provide other service to such Fund at cost; (c) to employ the executive,
managerial, administrative, secretarial and clerical personnel necessary or
appropriate to perform such services; and (d) to acquire such assets and to
obtain such facilities and equipment as are necessary or appropriate to carry
out such services, and to make those assets available to the Funds; and (ii)
since May 1, 1975 (or the commencement of its operations after this date) has
utilized Service Company, pursuant to the provisions of the Prior Agreements;
and
Whereas, each of the Funds recognizes that it may, from time to time,
be in the best interests of the Funds (i) for Service Company to provide similar
services to investment companies other than the Funds, (ii) for the Funds to
organize, from time to time, new investment companies which are intended to
become parties to this Agreement; and, (iii) for Service Company to engage in
business activities (directly or through subsidiaries), supportive of the Funds'
operations as investment companies; and
Whereas, each of the Funds desires to enter into a completely
integrated Seconded Amended and Restated Funds' Service Agreement with the other
Funds to set forth the current terms and provisions of the relationships which
the Funds have determined to establish;
Now, therefore, each Fund agrees with each and all of the other Funds,
and with Service Company, as follows:
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*Funds' Service Agreement dated May 1, 1975; an Amended and Restated Funds'
Service Agreement dated October 1, 1977; and an Amended and Restated Funds'
Service Agreement dated May 10, 1993, and an Amended and Restated Funds' Service
Agreement dated January 1, 1996, as therefore amended.
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I. CAPITALIZATION AND ASSETS OF SERVICE COMPANY
1.1 Capital and Assets. To provide the Service Company with the cash
and with the office space, facilities and equipment necessary for it to
discharge its responsibilities hereunder, each Fund agrees:
A. To make cash investments in the Service Company as provided in
Sections 1.2, 1.3 and 1.4.
B. To assign and transfer to Service Company on and after May 1,
1975 any and all right, title and interest which the Funds may have in
any office facilities and equipment necessary for it to discharge its
responsibilities and in any other assets which Service Company may
develop or acquire, subject only to the rights reserved in Section 1.6
(concerning certain major assets). Section 5.2 (concerning rights upon
withdrawal) and Section 5.3 (concerning rights upon termination) of
the Agreement.
1.2 Cash Investments in Service Company. To provide Service Company
with such cash as may be necessary or appropriate from time to time to
accomplish the purposes of the Funds and to discharge its responsibilities
hereunder, each Fund agrees to purchase, for cash, shares of common stock of
Service Company ("Shares") or such other securities of Service Company
(hereafter referred to as "other securities") upon the favorable vote of the
holders of a majority of the Shares adopting a resolution setting forth the
terms and provisions of the purchase. Provided, however, that:
A. Without the consent of all of the Funds, the date for the
purchase of Shares or other securities shall not be less than 15 days
following the date on which the resolution is approved by the
shareholders.
B. The cash purchase price to be paid by any Fund for the Shares
or other securities, expressed as a percentage of the total purchase
price for the additional securities to be paid by all of the Funds
shall not exceed the percentage which the then current net assets of
the Fund bears to the aggregate current net assets of all of the Funds
as of the most recent month-end preceding the purchase date.
1.3 Periodic Adjustments of Cash Investments. To maintain and
re-establish periodically a fair and proportionate ratio of cash investments by
each Fund in the Service Company as compared to its then current net assets,
each Fund agrees to purchase from one or more of the other Funds, or to sell one
or more of the Funds, sufficient Shares or other securities to re-establish the
ratio.
A. Such purchases and sales shall be made (1) as of the last
business day of any month upon the addition or withdrawal of any Fund
as a party to this Agreement, provided that if the addition or
withdrawal of a Fund creates no material disparity in the ratios (as
determined by the Service Company's Board of Directors), and no Fund
requests that an adjustment be made, the adjustment may be deferred
until the close of the Service Company's fiscal year; (2) in
connection with additional investments pursuant to Section 1.2; and
(3) annually as of the close of the Service Company's fiscal year, on
a date fixed by Service Company's Board of Directors within 90 days
after the close of the fiscal year unless there is no material
disparity in the ratios (as determined by the Service Company's Board
of Directors) and no Fund requests that an adjustment be made.
B. The cash purchases and sale price of the Share or other
securities shall be for each Fund (1) in the case of Shares, the fair
market value of Shares determined in accord with generally accepted
accounting principles and procedures established by the Board of
Directors of Service Company; and (2) in the case of debt securities,
the face value thereof.
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C. Unless specifically required by applicable law, the issuance
and transfer of Shares or other securities of Service Company, and the
cash investments of the Funds in Service Company, may be evidenced by
proper records of Service Company; and no certificates need be issued.
1.4 Limitation Upon Funds' Obligations to Make Cash Investments or
Purchases. Notwithstanding the provisions of Sections 1.1, 1.2 and 1.3 above, no
Fund shall be obligated to purchase Shares or other securities of Service
Company if, as a result of such purchase the Fund would thereby have invested in
cash a total of more than 0.40% of its then current net assets in Shares or
other securities of Service Company.
1.5 Restrictions on Transfer of Shares or Other Securities. Each Fund
agrees that it will not, without the written consent of all other parties to
this Agreement, transfer or dispose of or encumber any of its Shares or other
securities of Service Company except as provided in this Agreement, and that, if
issued, each certificate for Shares or other securities of Service Company will
be stamped with a legend referring to this restriction.
1.6 Assets of Service Company. The Funds agree that Service Company
may acquire, by purchase or lease, office space, furniture, equipment, supplies,
files, records, computer hardware and software, and other assets necessary or
appropriate for the discharge of the Service Company's responsibilities
hereunder. Each of the Funds hereby assigns and transfers to Service Company,
any and all right, title and interest that it may have or hereafter acquire in
any such assets, subject to the rights of each Fund (A) to receive the then fair
value of such assets upon the purchase or sale of Shares pursuant to this
Agreement, (B) to the continued use of such assets in the administration of the
business affairs of a Fund so long as the Fund remains a party to this
Agreement.
1.7 Borrowing by Service Company. The Funds agree that Service Company
may borrow money, and may issue a note or other security in connection with such
borrowing, as long as such borrowing, is in connection with the discharge of
Service Company's responsibilities hereunder and is undertaken in accord with
procedures approved by the Service Company's Board of Directors.
II. SERVICES TO BE OBTAINED INDEPENDENTLY BY EACH FUND
2.1 Services and Expenses. Each Fund shall, at its own expense, obtain
from Service Company or an outside vendor (as that Fund's Board of Directors
shall determine):
A. Services of an independent public accountant.
B. Services of outside legal counsel.
C. Transfer agency services, including "shareholder services."
D. Custodian, registrar and dividend disbursing services.
E. Brokerage fees, commissions and transfer taxes in connection
with the purchase and sale of securities for its investment portfolio.
F. Investment advisory services.
G. Taxes and other fees applicable to its operations.
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H. Costs incident to its annual or special meetings of
shareholders, including but not limited to legal and accounting fees, and
the preparations, printing and mailing of proxy materials.
I. Directors' fees.
J. Costs incurred in the continued maintenance of its corporate
existence, including reports to shareholders and government agencies, and
the expenses, if any, attributable to the registration of the Fund's
shares with Federal and state regulatory authorities.
K. And, in general and except as provided in Section 3.2(B), any
other costs directly attributable to and identified with a particular
Fund or Funds rather than all Funds which are parties to this Agreement.
2.2 Disbursement of Payment for These Services. Notwithstanding the
provisions of Section 2.1 above, Service Company may, as agent for any Fund,
disburse to third parties payments for any of the foregoing services or
expenses. Each Fund shall reimburse Service Company promptly for such
disbursements made on behalf of the Fund.
III. SERVICES PROVIDED BY AND EXPENSES OF SERVICE COMPANY
3.1 Services to be Provided to Funds. Service Company shall with
respect to each Fund, subject to the direction and control of the Board of
Directors and officers of the Fund:
A. Manage, administer and/or conduct the general business
activities of the Fund.
B. Provide the personnel and obtain the office space, facilities
and equipment necessary to perform such general business activities
under the direction of the Funds' executive officers (who may also be
officers of Service Company) who will have the full responsibility for
the general management of these functions.
C. Establish wholly-owned subsidiaries, and supervise the
management and operations of such subsidiaries, as are necessary or
appropriate to carry on or support the business activities of the
Fund; and authorize such subsidiaries to perform such other functions
for the Fund, including organizing new investment companies which are
intended to become parties to this Agreement pursuant to Section 5.4,
as Service Company's Board of Directors shall determine.
No provisions hereof shall prohibit the Service Company from
performing such additional services to the Fund as the Fund's Board of
Directors may appropriately request and which two-thirds of the
shareholders of the Service Company shall approve.
3.2 Expenses of Operation of Service Company. Each of the Funds agrees
to pay to the Service Company, within 10 days after the last business day of
each month or at such other time as agreed to by the Fund and the Service
Company, the Fund's portion of the actual costs of operation of Service Company
for each monthly period, or for such other period as is agreed upon, during
which the Fund is a party to this Agreement.
A. Corporate Management and Administrative Expenses. A Fund's
portion of the cost of operation of Service Company shall mean its
share of the direct and indirect expenses of Service Company's
providing corporate management and administrative services, including
distribution services of an administrative nature, as allocated among
the Funds with Allocation of indirect costs based on one or more of
the following methods of allocation:
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(1) Net Assets: The proportionate allocation of expenses based
upon the value of each Fund's net assets, computed as a percentage of
the value of total net assets of all Funds receiving services from
Service Company, determined at the end of the last preceding monthly
period.
(2) Personnel Time: The proportionate allocation of expenses based
upon a summary by each Fund of the time spent by each employee who
works directly on the affairs of one or more of the Funds, computed as
a percentage of the total time spent by such employee on the affairs
of all of the Funds.
(3) Shareholder Accounts: The proportionate allocation of expenses
based upon the number of each Fund's shareholder accounts and
transaction activity in those accounts, measured over a period of
time, relative to the total number of shareholder accounts and
transaction activity in those accounts for all Funds receiving number
of portfolio transactions for all Funds receiving services from the
Service Company during such period.
(4) Such other methods of allocation as may be approved by the
Board of Directors of the Service Company based upon its determination
that the allocation method is fair to each Fund in view of (i) the
nature, amount and purpose of the expenditure, (ii) the benefits, if
any, to be derived directly by each Fund relative to the benefits
derived by other Funds, (iii) the need or desirability for the Funds
as a group to provide competitive investment programs and services at
competitive prices for the group to survive and grow, (iv) the
benefits which each Fund derives by being a member of a strong Fund
group, and (v) such other factors as the Board considers relevant to
the specific expenditure and allocation.
B. Distribution Expenses. Each of the Funds expressly agrees to pay to
Service Company, as requested, the Fund's portion of the actual cost of
distributing shares of the Funds, which shall mean its share of all of the
direct and indirect expenses of a marketing and promotional nature including,
but not limited to, advertising, sales literature, and sales personnel, as well
as expenditures on behalf of any newly organized registered investment company
which is to become a party of this Agreement pursuant to Section 5.4. The cost
of distributing shares of the Funds shall not include distribution-related
expenses of an administrative nature, which shall be allocated among the Funds
pursuant to Section 3.2(A). Distribution expenses of a marketing and promotional
nature shall be allocated among the Funds in the manner approved by the
Securities and Exchange Commission in Investment Company Act Release No. 11645
(Feb. 25, 1981):
(1) 50% of these expenses will be allocated based upon each Fund's
average month-end assets during the preceding quarter relative to the
average month-end assets during the preceding quarter of the Funds as
a group.
(2) 50% of these expenses will be allocated initially among the
Funds based upon each Fund's sales for the 24 months ended with the
last day of the preceding quarter relative to the sales of the Funds
as a group for the same period. (Shares issued pursuant to a
reorganization shall be excluded from the sales of a Fund and the
Funds as a group.)
(3) Provided, however, that no Fund's aggregate quarterly
contribution for distribution expenses, expressed as a percentage of
its assets, shall exceed 125% of the average expenses for the Funds as
a Group, expressed as a percentage of the total assets of the Funds.
Expenses not charged to a particular Fund(s) because of this 125%
limitation shall be reallocated to other Funds on iterative basis; and
that no Fund's annual expenses for distribution shall exceed 0.2% of
its average month-end net assets.
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IV. CONCERNING THE SERVICE COMPANY
4.1 Name. Each Fund acknowledge and agrees:
A. That the name "The Vanguard Group, Inc.", and any variants
thereof used to identify (1) the Funds as a group, (2) any Fund as a
member of a group being served by Service Company, or (3) any other
person as being served or related to Service Company (whether now in
existence or hereafter created), shall be the sole and exclusive
property of Service Company, its affiliates, and its successors.
B. That Service Company shall have the sole and exclusive right to
permit the use of said name or variants thereof so long as this
Agreement or any amendments thereto are effective.
C. That upon its withdrawal from this Agreement and upon the
written request of Service Company, the Fund shall cease to use, or in
any way to refer to itself as related to, "The Vanguard Group, Inc."
or any variant thereof.
The foregoing agreements on the part of each Fund are hereby made
binding upon it, its directors, officers, shareholders and creditors
and all other persons claiming under or through it.
4.2 Services to Others. The Service Company may render services to any
person other than the Funds so long as:
A. The services to be rendered to the Funds hereunder are not
impaired thereby.
B. The terms and provisions upon which the services are to be
rendered have been approved by the holders of a majority of the
Shares.
C. The services rendered for compensation and, to the extent
achievable, for the purpose of gaining a profit thereon.
D. Any income earned and fees received by Service Company shall be
used to reduce the total costs and expenses of Service Company.
4.3 Books, Records, and Audits of Service Company. The Service
Company, and any subsidiary established pursuant to Section 3.1(C), shall
maintain complete, accurate, and current books, records, and financial
statements concerning its activities. To the extent appropriate, it will
preserve said records in the manner and for the periods prescribed by law.
Financial records and statements shall be kept in accord with generally accepted
accounting principles and shall be audited at least annually by independent
public accountants (who may also be accountants for any of the Funds). Within
120 days after the close of Service Company's fiscal year, it shall deliver to
each Fund a copy of its audited financial statements for that year and the
accountants report thereon. Service Company, on behalf of itself and any
subsidiary, acknowledges that all of the records they shall prepare and maintain
pursuant to this Agreement shall be the property of the Funds and that upon a
request of any Fund they shall make the Fund's records available to it, along
with such other information and data as are reasonably requested by the Fund,
for inspection, audit or copying, or turn said records over to the Fund.
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4.4 Indemnification.
A. Each Fund (herein the "Indemnitor") agrees to indemnify, hold
harmless, and reimburse (herein "indemnify") every other Fund, Service
Company and/or any subsidiary of Service Company (herein the
"Indemnitee"):
(1) which Indemnitee (a) was or is a party to, or is
threatened to be made a party to, any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (herein a "suit"), or (b) incurs
an actual economic loss or expense (herein a "loss").
(2) if: (a) such suit or loss arises from an action or failure
to act, event, occurrence, transaction, or other analogous
happening (herein an "event") under circumstances in which the
Indemnitee is involved in a suit or incurs a loss.
(i) as a result substantially of, or attributable
primarily to, its being a party to this Agreement, or to its
indirect participation in transactions contemplated by this
Agreement; and
(ii) where the suit or loss arises primarily and
substantially from an event related primarily and
substantially to the business and/or operations of the
Indemnitor; and
(b) an independent third party, who may but need not be legal
counsel for the Funds, advises the Funds in writing (i) that the
condition set forth in "(1)" and "(2)(a)" have occurred and (ii)
that the Indemnitee is without significant fault or responsibility
for the suit or loss as measured by the comparative conduct of the
Indemnitor and Indemnitee and by the purposes sought to be
accomplished by this Agreement.
B. The financial obligations of the Indemnitor under this Section
shall be limited to:
(1) In the case of a suit, to expenses (including attorneys'
fees), actually incurred by the Indemnitee. The termination of any
suit by judgment, order, settlement, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the Indemnitee is not entitled to be indemnified
hereunder.
(2) In the case of an event, to losses and/or expenses
(including attorney's fees) actually incurred by the Indemnitee.
The Indemnitee shall not be liable financially hereunder for lost
profits in the case of either a suit or loss.
C. Expenses incurred in defending a suit or resolving an event may
be paid by the prospective Indemnitor in advance of the final
disposition of such suit or event if authorized by the Board of
Directors of the prospective Indemnitor in the specific case upon
receipt of an undertaking by or on behalf of the prospective
indemnitee to repay such amount unless it shall ultimately be
determined that the Indemnitee is entitled to be indemnified by the
Indemnitor as provided in this Section.
D. The indemnification provided by this section shall not be
deemed exclusive of any other rights to which the Indemnitee may be
entitled under any agreement or otherwise.
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V. TERM OF AGREEMENT
5.1 Effective Period. This Agreement shall become effective on the
date first written above, and shall continue in full force and effect as to all
parties hereto until terminated or amended by mutual agreement of all parties
hereto. The withdrawal pursuant to Section 5.2(A) or 5.2(B) of one or more of
the Funds from this agreement shall not affect the continuance of this Agreement
except as to the parties withdrawing.
5.2 Withdrawal from Agreement.
A. Any Fund may elect to withdraw from this Agreement effective at
the end of any monthly period by giving at least 90 days' prior
written notice to each of the parties to this Agreement. Upon the
written demand of all other Funds which are parties to this Agreement
a Fund shall withdraw, and in the event of its failure to do so shall
be deemed to have withdrawn, from this Agreement; such demand shall
specify the date of withdrawal which shall be at the end of any
monthly period at least 90 days from the time of service of such
demand.
B. In the event of the withdrawal of any Fund from this Agreement,
all its rights and obligations, except for lease commitments, under
this Agreement (except such rights or obligations as have accrued
prior to the date of withdrawal) shall terminate as of the date of the
withdrawal. The withdrawing Fund shall surrender its Shares to Service
Company, and (1) shall be entitled to receive from Service Company an
amount equal to the excess of the fair value of (i) its Shares of
other securities Service Company as of the date of its withdrawal less
(ii) its proportionate interest in any liabilities of Service Company,
including when appropriate any commitments of Service Company and
unexpired leases at the date of withdrawal; (2) shall be obligated to
pay Service Company an amount equal to the excess of (ii) over (i).
Such amount to be received from or paid to Service Company shall be
determined by the favorable vote of the holders of a majority of the
Shares whose determination shall be conclusive upon the Funds. Any
amount found payable by the Service Company to the withdrawing Fund
shall be recoverable by Service Company from the Funds remaining under
this Agreement in accordance with the provisions of Section 1.2, 1.3
and 1.4 hereof.
5.3 Termination by Mutual Consent. In the event that all Funds
withdraw from this Agreement without entering into a comparable successor
agreement, each Fund shall surrender its Shares to Service Company and after
payment by Service Company of all its liabilities, including the settlement of
unexpired lease obligations, shall:
A. Receive from Service Company in cash an amount equal to its
proportionate share of the actual value of all assets of the Service
Company which can be reduced readily to cash.
B. Negotiate in good faith with the other Funds provision for the
equitable use and/or disposition of assets of the Service Company
which are not readily reducible to cash.
5.4 Additional Parties to Agreement. Upon the favorable vote of
two-thirds of the shareholders and of the holders of two-thirds of the Shares of
the Service Company, any investment company registered under the Investment
Company Act of 1940 may become a party to this Agreement and share as a Fund in
all of the rights, duties and liabilities hereunder by adopting, executing and
delivering to the Service Company and the Funds a signed copy of this Agreement
which shall evidence that investment company's agreement to assume the duties
and obligations of a Fund hereunder. Upon the delivery of a signed copy of this
Agreement, the new Fund shall be subject to all provisions of this Agreement and
become a holder of Shares by adjustment in cash investments among the Funds
pursuant to Section 1.3. No person shall become a holder of shares without
becoming a party to this Agreement.
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VI. GENERAL
6.1 Definition of Certain Terms. As used in this Agreement, the terms
set forth below shall mean:
A. "Fair Value of Shares" shall mean the proportionate interest,
as represented by the ratio of the number of Shares owned by a Fund to
the number of Shares issued and outstanding, in all assets of the
Service Company less all liabilities of the Service Company on the
date fair value is to be determined. Assets shall be valued at fair
market value. In case of any dispute as to the proportionate interest
of any Fund or as to the fair value of the Shares, the issue shall be
determined by the favorable vote of the holders of a majority of the
Shares, whose determination shall be conclusive upon the Fund.
B. "Person" shall mean a natural person, a corporation, a
partnership, an association, a joint-stock company, a trust, a fund or
any organized group of persons whether incorporated or not.
6.2 Assignment. This Agreement shall bind and inure to the benefit of
the parties thereto, their respective successors and assigns.
6.3 Captions. The captions in this Agreement are included for
convenience of reference only and in no way define any of the provisions hereof
or otherwise affect their construction or effect.
6.4 Amendment. Unless prohibited by applicable laws, regulations or
orders of regulatory authorities and except as set forth below, this Agreement
may be amended at any time and in one or more respects upon the favorable vote
of the holders of a majority of the Shares (except that the vote required in
Sections 3.1 and 5.4 may be amended only by the favorable votes of the number of
holders or Shares specified therein) and without the further approval or vote of
shareholders of any of the Funds; provided, however, that Section 1.4 (limiting
cash investments by the Funds in Service Company) may not be amended unless and
exemptive order permitting such amendment is obtained from the U.S. Securities
and Exchange Commission.
6.5 Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
In Witness Whereof, each of the parties hereto has caused the
Agreement to be signed and its corporate seal to be hereto affixed by its proper
officers thereunto duly authorized, all as of the date and year first above
written.
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The Vanguard Group of Investment Companies:
Vanguard Money Market Funds
Vanguard Municipal Bond Funds
Vanguard California Tax-Free Funds
Vanguard Florida Tax-Free Fund
Vanguard New Jersey Tax-Free Funds
Vanguard New York Tax-Free Funds
Vanguard Ohio Tax-Free Funds
Vanguard Pennsylvania Tax-Free Funds
Vanguard Bond Index Funds
Vanguard Fixed Income Securities Funds
Vanguard Wellesley Income Fund
Vanguard Preferred Stock Fund
Vanguard Asset Allocation Fund
Vanguard Convertible Securities Fund
Vanguard Wellington Fund
Vanguard Trustees' Equity Fund
Vanguard Equity Income Fund
Vanguard Index Funds
Vanguard Institutional Index Fund
Vanguard International Equity Index Fund
Vanguard Quantitative Funds
Vanguard Windsor Funds
Vanguard Primecap Fund
Vanguard World Fund
Vanguard ▇▇▇▇▇▇ Growth Fund
Vanguard Explorer Fund
Vanguard Specialized Funds
Vanguard Variable Insurance Funds
Vanguard Admiral Funds
Vanguard Balanced Index Fund
Vanguard Tax-Managed Funds
Vanguard Horizon Funds
Vanguard Treasury Fund
Vanguard Whitehall Funds
Vanguard Massachussetts Tax-Exempt Fund
Attest:
By //s// ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ By //s// ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
SECRETARY CHAIRMAN
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