Securities and Exchange Commission
summarily dismissed an attempt by
Standard & Poor's
from offering an exchange-traded version of its
Earlier this year, S&P sued Vanguard for trademark infringement, claiming the mutual fund giant is not authorized to use the S&P 500 name in its lineup of exchange-traded funds, known as Vipers. Vanguard contends the S&P 500 Vipers are just another class of its existing
Vanguard 500 Index fund, which has a license to use the S&P 500 name.
Exchange-traded funds are pools of securities that, unlike traditional mutual funds, are priced throughout the trading day and can be bought and sold like stocks. They have proved popular with many index-fund investors because of their low expense ratios and tax efficiency. Because of their unique structure, exchange-traded funds can't be offered without an SEC order exempting them from certain securities laws.
As previously reported, S&P asked the SEC to hold a hearing before granting Vanguard an exemption, arguing that if Vanguard lost the trademark suit, chaos would ensue and shareholders would be harmed.
Vanguard argued that S&P's claims should be settled in the course of the trademark litigation. Vanguard also said that in the unlikely event it lost the trademark suit, it would simply renegotiate the S&P license or have its funds begin tracking non-S&P indices.
The SEC agreed with Vanguard, and decided on Tuesday "that none of the issues
raised by S&P warrants ordering a hearing." In response to S&P's claim that "a potentially chaotic situation could develop" if S&P prevailed in the trademark litigation, the SEC "determined that the litigation is not relevant to the issues the Act requires the Commission to consider in deciding whether to grant or deny the application."
As the SEC's response suggests, S&P's hearing request may have had more to do with protecting the value of its trademark than with protecting Vanguard shareholders.
S&P already has licensed the S&P 500 trademark to two other exchange-traded funds,
State Street Global Advisors' S&P 500 SPDRs
Barclays' iShares S&P 500
. Though neither firm would discuss its S&P licenses, it's likely that both would have insisted on exclusivity to neutralize the threat posed by larger, more established S&P 500 funds.
Vanguard presents the greatest threat to SPDRs and iShares, in part because its pays substantially less for its S&P license. As reported in
The Independent Adviser
, a newsletter on Vanguard funds, Vanguard pays only $50,000 each year to use the S&P 500 name on its $104 billion, flagship S&P 500 index fund.
"Jack Bogle has got to be chortling to himself about the incredible deal he swung with Standard & Poor's back in 1988. He's saved Vanguard millions in licensing fees based solely on his vision," says Dan Wiener, the newsletter's editor and president of an advisory firm.
Barclays might not see the humor in this, as its iShares is probably paying about $185,000 annually for its S&P license. This is more than three times what Vanguard's S&P 500 Index fund is paying, though its asset level is 56 times larger than the $1.85 billion iShares 500 fund. In the exchange-traded fund business, where a 0.01% expense advantage can drive an investor's decision, Vanguard's cost advantage may be decisive.
If Vanguard wins the trademark lawsuit, it will continue to pay a mere pittance for the S&P 500 trademark, giving Vipers an extra edge over SPDRs and iShares. Barclays probably would claim that its exclusive right to offer an exchange traded S&P 500 mutual fund had been violated, and demand that S&P license the S&P 500 trademark to iShares on more favorable terms. This might lead to a lowering of iShares' rock bottom 0.0945% expense ratio -- at S&P's expense.
S&P's troubles may be just beginning. The
Wall Street Journal
reported last week that
plans to take a page from Vanguard's book and offer an exchange-traded class of its S&P 500 index fund in 2001. Michael Sapir, ProFund's chairman, said he felt "confident that the current license agreement
with S&P covers ProFunds adding an additional class of shares," the
stated. ProFunds did not immediately return calls. With the new threat from ProFunds, S&P may decide to focus its energy on its trademark claims, and leave protecting investors to the SEC.
Mercer Bullard, a former assistant chief counsel at the Securities and Exchange Commission, is the founder and CEO of Fund Democracy, a mutual fund shareholder advocacy group in Chevy Chase, Md.