A request by the McGraw-Hill Companies of New York for a public hearing on the Vanguard Group's efforts to add an exchange-traded share class will most likely be denied, allowing Vanguard to launch the new shares, according to industry analysts.

The hearing request, filed with the Securities and Exchange Commission Oct. 30 by McGraw-Hill, the parent company of Standard & Poor's of New York, seeks an examination of a request from Vanguard for an SEC order that would grant exemptions to the 1940 Investment Company Act needed to launch the new share class. That order was expected from the SEC early last week, but had not been issued by mid-week.

But, the SEC will most likely grant Vanguard its order and deny S&P its hearing request, said Mercer Bullard, president and founder of Fund Democracy LLC of Chevy Chase, Md., and former assistant chief counsel at the SEC's division of investment management.

"This is about the trademark dispute and there is no bona fide investor protection issues in the request," he said.

The hearing request is a last ditch effort on the part of S&P to delay the launch of the shares, said Geoff Bobroff, president of Bobroff Consulting, of East Greenwich, R.I.

"Traditionally, the SEC likes to avoid these types of issues," he said. "To some extent, this may be trying to do in a regulatory setting what you don't believe you're going to be able to do in a court setting."

On June 8, McGraw-Hill sued Vanguard in U.S. District Court claiming it did not have the right to use the S&P trademark on its new exchange-traded share class known as Vanguard Index Participation Equity Receipts (VIPER's). Vanguard filed a motion to dismiss the case, but that motion was denied in August. A trial date has not been set in the suit.

In its request for a hearing, S&P contends that Vanguard's request for an exemption does not meet the Investment Company Act of 1940's standards for granting exemptions, according to a copy of the request. Any exemption must be in the public's best interests and must not jeopardize investor protections listed in the 1940 Act, the request says.

"If Vanguard were to issue VIPERs, but then an unfavorable [to Vanguard] court ruling were to [be issued], a potentially chaotic situation could develop in which many investors might be left holding orphaned shares or perhaps shares that were subject to an unwieldy recall," the hearing request says.

Vanguard addresses that issue in a Sept. 13 preliminary prospectus for the Vanguard Investment Trust, which includes VIPER shares. Vanguard included a section about its pending legal proceedings with McGraw-Hill in a section on special risks of exchange-traded shares. The section states that in the lawsuit, McGraw-Hill is seeking the right, "to terminate the license agreement that grants Vanguard the right to use certain S&P indexes and S&P trademarks." Vanguard believes that it will win the lawsuit but can not guarantee that result, the prospectus says.

S&P's hearing request also raises objections to Vanguard's position that VIPER shares fall under its existing licensing agreement with S&P. In its application for an exemptive order, Vanguard said that it would not market VIPER shares as mutual fund investments. But in its motion to dismiss the lawsuit with S&P, Vanguard said:

"[VIPER Shares] will simply be an additional class of shares of the 500 Index Fund that will, like the existing class of shares of the Fund, represent undivided interests in the Fund's assets."

S&P also wants the hearing to explore Vanguard's plans to charge existing shareholders a fee in order to convert to VIPER shares when the firm has stated the purpose of the shares was to draw market-timers, according to the hearing request. Hearings would also examine Vanguard's desire to waive prospectus delivery requirements for the VIPER shares, it says.

If the SEC denies S&P a hearing, the firm can still file an appeal, which would continue to delay the launch of VIPERs. But, that is not likely to happen because that would be viewed by commission staff as acting in bad faith, Bullard said.

In a somewhat similar situation, Fund Democracy and the Consumer Federation of America filed a request with the SEC May 4, seeking a public hearing on a request for an exemptive order for a series of exchange-traded funds offered by Barclays Global Investors of San Francisco.

In that case, the hearing would determine whether exchange-traded funds should disclose their net asset values and premiums or discounts at which the fund's shares are trading, throughout the day. Barclays eventually launched the series of funds, but not before it agreed to post daily on its website, the funds' net asset values and premiums or discounts.

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