S&P Prevails - Vanguard Loses Landmark Lawsuit


The judgment is in. Standard & Poor's prevailed over The Vanguard Group in a closely-watched lawsuit. According to a statement released by Standard & Poor's parent company, McGraw Hill Companies, U.S. District Court Judge Alvin K. Hellerstein ruled that S&P was entitled to an order preventing Vanguard from launching the proposed VIPERS that were to be based on the S&P 500, S&P/BARRA 500 Value and S&P/BARRA 500 Growth indices.

"Today's decision represents an important precedent and supports Standard & Poor's position that its valuable and respected indexes are highly proprietary and that issuers of S&P index-based financial products must strictly adhere to the terms of our license agreements," said Leo C. O'Neill, president of Standard & Poor's. "This ruling will strengthen our ability to continue global expansion of our Index franchise and is a total vindication of Standard & Poor's legal position."

The judge essentially held that Vanguard is not entitled to use the S&P indices under the terms of the existing licensing agreement that they have with S&P for their traditional open-ended mutual funds based on S&P 500 indices. Judge Hellerstein ruled that the terms of the original agreement, which the McGraw-Hill press release says was drafted in the 1980s were sufficiently detailed to rule out the possibility of ETFs being included under the original license agreement. The Vanguard 500 fund, the first retail index fund, has been in existence since 1976.

The ruling is a sharp blow to Vanguard's exchange-traded fund (ETF) effort, because the terms of their existing licensing agreement with S&P are extremely favorable to Vanguard. Essentially, licensing fees collected by S&P from Vanguard on the S&P 500 index are limited to $50,000 per year. Most ETF's and open-ended index funds are paying index providers somewhere in the range of 1.5 and 16 basis points (0.015%-0.16%) in licensing fees. The Vanguard 500 fund alone has over $100 billion in assets.