Report of Independent Accountants

Transcription

1 To the Board of Directors of Vanguard Advisers, Inc: Report of Independent Accountants We have examined the accompanying management assertion of Vanguard Advisers, Inc. ( VAI ) that VAI provided fee leveling investment advice for the period of January 1, 2016 to March 31, 2016, based on the criteria set forth in the Vanguard Advisers, Inc. Pension Protection Act Statement for Vanguard Financial Plan and Ask a CFP Professional for the period January 1, 2016 to March 31, VAI's management is responsible for its assertion. Our responsibility is to express an opinion on management s assertion based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the examination to obtain reasonable assurance about whether management's assertion is fairly stated, in all material respects. An examination involves performing procedures to obtain evidence about management s assertion. The nature, timing and extent of the procedures selected depend on our judgment, including an assessment of the risks of material misstatement of management s assertion, whether due to fraud or error. We believe that the evidence we obtained is sufficient and appropriate to provide a reasonable basis for our opinion. Because of the inherent limitations of an examination engagement, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the examination is properly planned and performed in accordance with the attestation standards. We were not engaged to perform and did not perform an examination of VAI s compliance or internal control over compliance with any laws or regulations during the period from January 1, 2016 to March 31, We also were not engaged to perform and did not perform an examination of VAI s compliance with its contractual obligations to its clients during the period from January 1, 2016 to March 31, In our opinion, management s assertion, that VAI provided fee leveling investment advice for the period of January 1, 2016 to March 31, 2016 based on the criteria set forth in the Vanguard Advisers, Inc. Pension Protection Act Statement for Vanguard Financial Plan and Ask a CFP Professional for the period January 1, 2016 to March 31, 2016, is fairly stated, in all material respects. This report is intended solely for the information and use of VAI and its affiliates, the Department of Labor and Internal Revenue Service, and clients (authorizing plan fiduciaries and Individual Retirement Account ( IRA ) beneficiaries who received the Vanguard Financial Plan or Ask a Certified Financial Planner services offered by VAI during some or all of the period of January 1, 2016, to March 31, 2016) and is not intended to be and should not be used by anyone other than the specified parties. November 16, 2017 PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA T: (267) , F: (267) ,

2 Vanguard Advisers, Inc. Pension Protection Act Statement for Vanguard Financial Plan and Ask a CFP Professional for the period January 1, 2016 to March 31, 2016 Overview Vanguard Advisers, Inc. (VAI) is registered as an investment advisor with the U.S. Securities and Exchange Commission, and represents and acknowledges that it is a fiduciary advisor as defined in section 408(g)(11)(A) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and related regulations, and a fiduciary as defined in ERISA section 3(21)(A)(ii). 1 VAI offers the Vanguard Financial Plan (VFP), a set of recommendations designed to meet the financial planning needs of its clients, including ERISA plan participants and beneficiaries and Individual Retirement Account (IRA) beneficiaries. VFP s goal is to help investors determine the most effective and practical solutions for their investment, retirement, college, and tax-planning needs. VAI also provides an advisory service, Ask a CFP Professional (AACFP), which allows clients to engage in telephone consultations with a Certified Financial Planner professional from Vanguard. This service is designed to assist a wide variety of clients with investment decisions on a range of financial topics. This service also permits the advisor to perform a needs assessment to help ensure the most appropriate level of advice is provided to the client. VAI is an affiliate of The Vanguard Group, Inc. (Vanguard) and is wholly owned by Vanguard through an intermediary entity. Vanguard provides a range of investment advisory, administrative, and recordkeeping services to the Vanguard Funds and retirement plans and is the transfer agent for the Vanguard Funds. VAI recommends Vanguard Funds when providing advice. VAI is also an affiliate of Vanguard Marketing Corporation (VMC), the registered broker-dealer that markets and distributes shares of the Vanguard Funds. VAI is also an affiliate of Vanguard Fiduciary Trust Company (VFTC), which provides trust and custody services to retirement plans and IRAs. VAI does not have custody of any assets of clients in connection with VFP or AACFP; VFTC acts as custodian of the assets of participants or beneficiaries in ERISA plans for which VFTC serves as trustee, and as custodian of the traditional and Roth IRA assets of IRA beneficiaries. To the extent that VAI provides investment advice through the VFP or AACFP programs to an IRA beneficiary or a participant or beneficiary of an employee pension benefit plan as defined by section 3(2) of ERISA with respect to assets of such plan, VAI asserts that it has implemented policies and procedures to provide fee leveling advice as described in section 408(g) of ERISA. To comply with these requirements, VAI engages an independent auditor to conduct an examination under the American Institute of Certified Public Accountants (AICPA) Attestation Standards at least annually. 1 Section 4975(d)(17) and (f)(8) of the Internal Revenue Code of 1986, as amended, includes provisions that parallel ERISA section 408(b)(14) and (g). References to those sections of ERISA in this Overview are intended to include references to these parallel provisions of the Internal Revenue Code. 2

3 Management's Assertion Management asserts that VAI provided fee-leveling investment advice for the period January 1, 2016 to March 31, 2016 based on the Criteria below: 1. VFP is a fee-leveling eligible investment advice arrangement that provides investment advice through a written financial plan (Financial Plan) and telephone consultations with advisors. Input is collected from Clients through a questionnaire and conversations with a financial advisor. For purposes of this assertion, Clients are defined as ERISA plan participants and beneficiaries and IRA beneficiaries who have received VFP or AACFP services during the period of January 1, 2016 to March 31, Specifically, the Client s background information including age, specific financial goals, investment time horizon, current investments, tax status, other assets and sources of income, investment preferences, planned spending from the Client s account, and the Client s willingness to assume risk with the cash and securities being invested in the account is obtained. A Financial Plan is developed based on that information, to the extent furnished, and Vanguard s investment methodology, described in more detail in #3 below, which reflects generally accepted investment theories embodied in Vanguard s Principles of Investing Success and the Vanguard Financial Plan Brochure (VFP Brochure or, together with the Ask a CFP Professional Brochure, the Brochure). The Financial Plan includes two proposed portfolios. The Integrated Portfolio will maintain current holdings (where possible) to achieve the strategic asset allocation. The Consolidated Portfolio will provide recommendations to move assets into Vanguard Funds to achieve the strategic asset allocation. 2. AACFP is a fee-leveling eligible investment advice arrangement that is designed to provide access to an advisor for recommendations specific to a financial question or topic. Similar to VFP above, AACFP advice is based on Vanguard s investment methodology, described in more detail in #3 below, which reflects generally accepted investment theories embodied in Vanguard s Principles of Investing Success and the Ask a CFP Professional Brochure (Ask a CFP Brochure or, together with the VFP Brochure, the Brochure), but advice is rendered based on the specific Client financial question or topic and the Client s background information, to the extent furnished and relevant to the Client s question or topic, including age, specific financial goals, investment time horizon, current investments, tax status, other assets and sources of income, investment preferences, planned spending from the Client s account, and the Client s willingness to assume risk with the cash and securities being invested in the account. 3. The following methodology is used when providing advice under VFP. For AACFP, the applicable sections of the following methodology are applied, if needed, to address the Client s investment question or topic. Recommendations are provided using a top down approach to portfolio construction with each decision being made within a hierarchy focused on diversification and overall portfolio risk: a. Strategic Asset Allocation: a strategic asset allocation recommendation is based on the results of discussions with the Client and an investment risk questionnaire and takes into account, to the extent furnished, the background information referenced above that is provided in those discussions and questionnaire. Recommendations also take into account the historic risks and returns of different asset classes over defined periods of time. b. Security selection: i. Investment advice takes into account the fees and other costs attendant to recommendations to purchase, sell or hold investments in the account. As such, when Vanguard Funds including ETFs are recommended, the most favorable (lowest cost) share class available is selected. 3

4 ii. Investment advice takes into account other costs, including tax impact, attendant to recommendations. As such, for accounts containing both taxable and tax-advantaged accounts, VFP recommends less tax-efficient securities in the tax-advantaged accounts. 4. Neither VAI nor any investment advisor representative (including any employee, agent, or registered representative of VAI) that provides investment advice receives from any party (including an affiliate), directly or indirectly, any fee or other compensation (including commissions, salary, bonuses, awards, promotions within Vanguard or its affiliates, or other things of value) that is based in whole or in part on a Client s selection of an investment option. 5. VFP or AACFP is only offered to a Client with the express authorization by a plan fiduciary or, in the case of an IRA, by the Client who established the IRA account (Authorizing Fiduciary) which, except in the case of the Vanguard Retirement and Savings Plan, shall not be VAI or any of its affiliates. In connection with this authorization, VAI will provide the Authorizing Fiduciary (or, in the case of an IRA, the Client who established the IRA account) with a written notice of the following: a. That VAI intends to comply with the conditions of ERISA section 408(g) and the regulations thereunder; b. That VAI s arrangement will be examined annually under the American Institute of Certified Public Accountants (AICPA) Attestation Standards by an independent accountant (the Report of Independent Accountants) for compliance with the requirements of ERISA section 408(g) and the regulations thereunder; and c. That VAI provides a copy of the Report of Independent Accountants to Authorizing Fiduciaries who have made available or used the VFP or Ask a CFP program during the audit period. VAI will provide such findings to the Authorizing Fiduciary within 60 days of its completion of the audit (or, for IRA Clients, will make a copy of the Report of Independent Accountants available within 30 days of VAI s receipt of the report from the accountant). 6. VAI provided a copy of the previous year's annual Report of Independent Accountants to each Authorizing Fiduciary who has made available or used the VFP or Ask a CFP program during the audit period within 60 days of VAI s receipt of the previous year's report, or, for IRA Clients, within 30 days of VAI s receipt of the previous year's report from the accountant. 7. The VFP or AACFP arrangement provided to participants and beneficiaries in The Vanguard Retirement and Savings Plan, a plan sponsored by an affiliate of VAI, is the same arrangement VAI provides to participants and beneficiaries in plans unaffiliated with VAI in the ordinary course of its business. 8. VAI or its affiliates provides, without charge and before the initial provision of investment advice with regard to any security offered as an investment option: a. the VFP or AACFP written Brochure, filed with the Securities and Exchange Commission as required by the Investment Advisers Act of 1940; b. Vanguard s Privacy Policy; and c. a written Agreement. The Brochure, Agreement and Privacy Policy provide notification of: a. the role of any party that has a material affiliation or material contractual relationship with VAI in the development of the investment advice program; b. the availability of past performance and historical rates of return of the designated investment options available under the plan, to the extent that such information is not otherwise provided on Vanguard.com; 4

5 c. all fees or other compensation that VAI or any affiliate thereof is to receive in connection with the provision of the advice, the sale, acquisition, or holding of any security or other property pursuant to such advice, or any rollover or other distribution of IRA or plan assets or the investment of distributed assets in any security or other property pursuant to such advice; d. any material affiliation or material contractual relationship of VAI or any affiliate thereof in the security or other property offered as an investment recommendation; e. the manner, and under what circumstances any Client information provided under the arrangement will be used or disclosed; f. the types of services provided by VAI in connection with the provision of this investment advice; g. VAI s statement of its responsibility to act as a fiduciary of the IRA or plan in connection with the provision of this advice; and h. the Client s right to separately arrange for the provision of advice by another advisor that could have no material affiliation with and receive no fees or other compensation in connection with the security or other property offered as an investment option. 9. The Brochure, Agreement and Privacy Policy discussed in item 8 are maintained with accurate, up-to-date information. The Brochure, Agreement and Privacy Policy are provided without charge to the Client at the inception of the VFP or AACFP service and anytime upon request. For purposes of this assertion, "accurate, up-to-date information" is measured by the Brochure, Agreement and Privacy Policy being reviewed annually, or more frequently as needed, by the Vanguard Legal department, and updated as needed. Material changes to the information are provided at no charge to the Client within a time reasonably contemporaneous to the change in information. For purposes of this assertion, material changes to the information, as identified by the Vanguard Legal department, are reviewed upon occurrence and the updated Brochure, Agreement and Privacy Policy are provided to the Client within 60 days of the update. 10. All sales, acquisitions, or holding of a security occur solely at the direction of the Client. 11. VAI and its affiliates provide disclosure, in accordance with the sale, acquisition or holding of securities offered as an investment recommendation, in accordance with all applicable securities laws. For purposes of this assertion, all applicable securities laws is defined as the following: (a) the prospectus delivery requirements of section 5(b) of the Securities Act of 1933, (b) transaction confirmation delivery requirements of Rule 10b-10 of the Securities Exchange Act of 1934, as amended, and (c) periodic account statement delivery requirements of National Association of Securities Dealers Rule The compensation received by VAI and its affiliates in connection with all sales, acquisitions or holding of a security is reasonable, and the terms of all sales, acquisitions or holding of the security are at least as favorable as an arm s length transaction would be. For purposes of this assertion, reasonable means the compensation received by VAI for its investment services through VFP will not exceed $1000 per engagement, and AACFP is provided without charge to anyone who has elected to receive and is eligible to receive the AACFP service. The terms of and any additional compensation received by VAI s affiliates in connection with sales, acquisitions or holdings of securities in the account is no greater than that received by VAI s affiliates for identical transactions with Clients who have not engaged VAI to provide VFP or AACFP. Mutual fund sales, acquisitions or holding are transacted at a price that is no less favorable than the price that is a publicly available market price on the trade date, meaning that Clients are granted the share price next computed by the applicable 5

6 Fund on the date of the trade so long as the transaction was deemed to be received in good order prior to the close of trading on that date. 13. VAI has policies to retain, for a period of not less than six years after the provision of investment advice, records necessary for determining whether the Criteria noted above have been met. For purposes of this assertion, these records are defined as copies of the versions of the Brochure, Agreement, and Privacy Policy, evidence of the delivery of the Brochure, Agreement, Privacy Policy and the Report of Independent Accountants, and evidence of the advice provided by VAI to the Client. /s/ Douglas R. Mento Douglas R. Mento Principal, Retail Investor Group Vanguard Advisers, Inc. Vanguard National Trust Company /s/ Claire E. McCusker Claire E. McCusker Principal, Retail Investor Group Vanguard Advisers, Inc. 6