P.O. Box 2600 | |
Valley Forge, PA 19482-2600 | |
(610) 669-8005 | |
seth_ruderman@vanguard.com | |
June 17, 2019 | |
Lisa N. Larkin, Esq. | |
U.S. Securities and Exchange Commission | via electronic filing |
100 F Street, N.E. | |
Washington, DC 20549 | |
RE: Vanguard Trustees’ Equity Fund (the “Trust”) | |
File No. 2-65955-99 | |
Post-Effective Amendment No. 86 |
Dear Ms. Larkin, | |
This letter responds to your comments provided via telephone on May 22, 2019, on the above- | |
referenced post-effective amendment. The comments apply to Vanguard Commodity Strategy Fund | |
(the “Fund”), a series of the Trust. | |
Comment 1: | Prospectus – Fund Summary – Principal Investment Strategies |
Comment: | The Fund discloses that it may engage in transactions involving total return |
swaps. A total return swap is a senior security for purposes of Section 18 of the | |
Investment Company Act of 1940 (the “1940 Act”). When a fund engages in a | |
total return swap, the fund will need to set aside an appropriate amount of liquid | |
assets as determined by Staff guidance to address Section 18 concerns. See | |
Investment Company Act Release No. 10666. Please note that the Commission | |
has issued a release proposing to update the regulations regarding fund use of | |
derivatives for purposes of Section 18. Accordingly, please note that the | |
Commission could issue a new rule or guidance relating to fund use of derivatives | |
which could impact the manner in which the fund operates. | |
Response: | We acknowledge the issuance of this release and this possible future rulemaking |
or guidance. | |
Comment 2: | Prospectus – Fund Summary – Annual Fund Operating Expenses Table |
Comment: | Confirm that the acquired fund fees and expenses (“AFFE”) are less than one |
basis point or add a line item for AFFE to the table. | |
Response: | We have amended the fee table to include AFFE. |
Lisa Larkin, Esq. | ||
February 1, 2019 | ||
Page 2 | ||
Comment 3: | Prospectus – Subsidiary | |
Comment: | The Fund’s principal investment strategies indicate that the Fund will invest in a | |
subsidiary. Please address the following comments with respect to the subsidiary: | ||
(1) | Disclose that the Fund complies with the provisions of the 1940 Act | |
governing investment policies (Section 8) and capital structure and | ||
leverage (Section 18) on an aggregate basis with the subsidiary. | ||
(2) | Disclose that the subsidiary’s investment adviser complies with the | |
provisions of the 1940 Act relating to investment advisory contracts | ||
(Section 15) as an investment adviser to the Fund, as defined under | ||
Section 2(a)(20) of the 1940 Act. The investment advisory agreement | ||
between the subsidiary and the investment adviser is a material contract | ||
that should be included as an exhibit to the registration statement. | ||
(3) | Disclose that the subsidiary complies with provisions related to custody | |
and affiliated transactions under Section 17 of the 1940 Act. | ||
(4) | Identify the custodian of the subsidiary. | |
(5) | Disclose whether the Fund has received a private letter ruling from the | |
IRS stating that undistributed income derived from its subsidiary is | ||
qualifying income. If the Fund has not received a private letter ruling, | ||
disclose its basis for determining that such undistributed income is | ||
qualifying income, such as an opinion of counsel. | ||
(6) | Disclose the subsidiary’s principal investment strategies and risks. | |
(7) | Confirm that the subsidiary’s financial statements will be consolidated | |
with those of the Fund. | ||
(8) | Confirm in correspondence that (a) the subsidiary’s management fee will | |
be included in “Management Fees” and the subsidiary’s expenses will be | ||
included in “Other Expenses” in the Fee Table in the Fund’s prospectus; | ||
(b) the subsidiary and its board of directors has agreed to or will agree to | ||
designate an agent for service of process in the United States; and (c) the | ||
subsidiary and its board of directors has agreed to or will agree to | ||
inspection by the Staff of its books and records, which will be maintained | ||
in accordance with Section 31 of the 1940 Act and the rules thereunder. | ||
Response: | The subsidiary is a wholly owned subsidiary of the Fund domiciled in the | |
Cayman Islands. The subsidiary is not a registered investment company under the | ||
1940 Act. Although the subsidiary is not required to comply with the | ||
requirements of the 1940 Act applicable to registered investment companies, the | ||
Fund is aware of the requirements of Section 48(a) of the 1940 Act, which | ||
prohibits the Fund from doing indirectly “through or by means of any other | ||
person” (i.e., the subsidiary) what it is prohibited from doing directly. The | ||
subsidiary will not engage in any activity prohibited by the 1940 Act that would | ||
cause the Fund to violate Section 48(a). |
Lisa Larkin, Esq. | |
February 1, 2019 | |
Page 3 | |
In terms of the operation of the subsidiary, the Fund confirms the following: | |
• | In complying with its fundamental and nonfundamental investment |
restrictions, the Fund will typically aggregate its direct investments with | |
the subsidiary’s investments when testing for compliance with each | |
investment restriction. However, the subsidiary will independently | |
“segregate” liquid assets or enter into offsetting positions with respect to | |
transactions that may give rise to leveraging risk to the same extent the | |
Fund segregates assets for, or offsets, similar transactions the Fund | |
engages in directly. The Fund makes different investments and employs a | |
different investment strategy than the subsidiary. For these reasons, the | |
Fund and the subsidiary do not have identical investment policies. | |
• | The subsidiary will comply with Section 18 of the 1940 Act. |
• | While the Fund and the subsidiary will have the same adviser, Vanguard, |
the subsidiary is not considered a registered investment company under | |
the 1940 Act and is not subject to Section 15 of the 1940 Act. The purpose | |
of the subsidiary is to provide commodity exposure for the Fund. The | |
Fund’s investment in the subsidiary has been approved by the Fund’s | |
board of trustees. | |
• | The subsidiary and the Fund will utilize the same custodian, State Street |
Bank and Trust Company. The assets of the subsidiary will be held at a | |
U.S. bank or an eligible foreign custodian. The subsidiary will comply | |
with provisions related to custody and affiliated transactions under Section | |
17 of the 1940 Act. | |
• | The Fund has not received a private letter ruling from the IRS regarding |
undistributed income from its subsidiary. The Fund intends to rely upon | |
final regulations published by the IRS in Treasury Decision 9851 on | |
March 19, 2019 (84 FR 9959). Under those final regulations, undistributed | |
income from a subsidiary is qualifying income for a fund provided the | |
income is connected to the fund’s business of investing in stock, | |
securities, or currencies. The final regulations reverse the IRS’s position | |
from its proposed regulations, which would have required a subsidiary’s | |
income to be distributed to its parent fund in order for it to be qualifying | |
income. In light of the final regulations, and after consulting with both | |
external and internal tax counsel, the Fund has determined that income | |
derived from investment in its subsidiary should constitute qualifying | |
income for U.S. federal income tax purposes. | |
• | The subsidiary’s principal investment strategies are described on page 8 of |
the Fund’s prospectus as follows: “The Fund gains exposure to | |
commodities primarily by investing in [the subsidiary], which in turn | |
invests in commodity-linked investments and fixed income securities | |
The subsidiary’s fixed income investments may include, but are not |
Lisa Larkin, Esq. | |||
February 1, 2019 | |||
Page 4 | |||
limited to, inflation-indexed securities, cash and cash equivalent | |||
investments, money market instruments, or other short-term instruments. | |||
Fixed income investments provide liquidity for the subsidiary and may | |||
serve as margin or collateral for the subsidiary’s commodity-linked | |||
investments.” The subsidiary’s principal risks are included in the | |||
description of subsidiary investment risk on page 4 of the Fund’s | |||
prospectus: “Risks associated with the subsidiary’s underlying | |||
investments… include commodity-linked investment risk, derivatives risk, | |||
tax risk, inflation-linked investment risks, other fixed income investment | |||
risks, and manager risk.” Each of these risks is described under the | |||
“Principal Risks” heading beginning on page 3 of the Fund’s prospectus. | |||
In addition, the following statement is included on page 8 of the Fund’s | |||
prospectus: “The Fund’s ownership of the subsidiary exposes it to the | |||
same risks as if it were invested directly in the assets owned by the | |||
subsidiary.” | |||
• | As a wholly owned subsidiary, the subsidiary’s financial statements will | ||
be consolidated with the Fund’s financial statements. | |||
• | The subsidiary will consent to service of process and the examination of | ||
its books and records. | |||
• | The subsidiary’s expenses will be reflected in the Fund’s fee table in | ||
“Acquired Fund Fees and Expenses.” | |||
Comment 4: | Prospectus – More on the Fund – Security Selection | ||
Comment: | Per Item 9(b)(2) of Form N-1A, please describe in general terms how the advisor | ||
determines which securities to sell. | |||
Response: | A discussion of how the Fund’s advisor determines which securities to buy and | ||
sell appears in the More on the Fund section of the Fund’s prospectus under the | |||
heading “Security Selection.” We have updated this disclosure as follows: | |||
“Vanguard manages the Fund through the use of a continually evolving process | |||
that was developed and is managed by Vanguard’s Quantitative Equity Group. All | |||
potential enhancements to the process go through rigorous vetting and validation | |||
before being implemented. The portfolio managers use the resulting process to | |||
determine which instruments to buy long and sell short for the portfolio | While | ||
the Fund predominantly holds long positions, the Fund’s performance depends on | |||
the net returns of its long and short positions. It is possible for the Fund to | |||
experience a net loss across all positions. If the Fund’s investment program is | |||
successful, however, the net returns of its long and short positions will produce | |||
long-term capital appreciation.” |
Lisa Larkin, Esq. | ||
February 1, 2019 | ||
Page 5 | ||
Comment 5: | SAI – Senior Securities | |
Comment: | Please disclose the Fund’s policy on senior securities. | |
Response: | We have added the following disclosure to the Fundamental Policies section of | |
the Fund’s SAI: “The Fund may not issue senior securities except as permitted by | ||
the 1940 Act or other governing statute, by the rules thereunder, or by the SEC or | ||
other regulatory agency with authority over the Fund.” | ||
Comment 6: | SAI – Industry Concentration | |
Comment: | Please add “a group of industries” to the Fund’s industry concentration policy to | |
conform with Item 16(c)(1)(iv) of Form N-1A. | ||
Response: | We have added the requested disclosure. | |
Tandy Requirements | ||
As required by the SEC, the Fund acknowledges that: | ||
• | The Fund is responsible for the adequacy and accuracy of the disclosure in the filing. | |
• | Staff comments or changes in response to Staff comments in the filings reviewed by the | |
Staff do not foreclose the Commission from taking any action with respect to the filing. | ||
• | The Fund may not assert Staff comments as a defense in any proceeding initiated by the | |
Commission or any person under the federal securities laws of the United States. | ||
Please contact me at (610) 669-8005 with any questions or comments regarding the above | ||
responses. Thank you. | ||
Sincerely, | ||
Seth Ruderman | ||
Senior Counsel | ||
The Vanguard Group, Inc. |