Vanguard Agrees to $106 Million Fine to Settle SEC Charges Over Target Date Fund Violations

Settlement announced by SEC order today stems from Dec. 2020 move to significantly lower minimum initial investment amount of its Institutional TRFs
Vanguard
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Vanguard Group, Inc., will pay $106.41 million to settle charges for misleading statements related to capital gains distributions and tax consequences for retail investors who held Vanguard Investor Target Retirement Funds (Institutional TRFs) in taxable accounts, the SEC announced today.

SEC charge
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The settlement amount will be distributed to harmed investors, the SEC said in a press release today detailing the settlement. Vanguard agreed to the fine without admitting or denying the SEC’s findings.

“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings. We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options,” the company said in a statement provided to 401(k) Specialist today.

“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”

The alleged violations stems from Vanguard’s major announcement in late 2020 that the minimum initial investment amount of its Institutional TRFs was lowered from $100 million to $5 million.

The SEC’s order finds that in the following months after Vanguard’s Dec. 11, 2020 announcement, a substantial number of retirement plan investors redeemed their Investor TRFs and switched to the Institutional TRFs because the latter funds had lower expenses.

According to the order, to meet the demand for these redemptions, the Investor TRFs had to sell underlying assets with gains due to the rising financial markets that had rebounded from pandemic lows. The order finds that, as a result, retail investors of the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced historically larger capital gains distributions and tax liabilities and were deprived of the potential compounding growth of their investments.

The order also finds that Vanguard Investor TRFs’ prospectuses, effective and distributed in 2020 and 2021, were materially misleading because they stated that the funds’ distributions may be taxable as ordinary income or capital gains, and that capital gains distributions could vary considerably from year to year as a result of the funds’ “normal” investment activities and cash flows.

However, the order finds the prospectuses failed to disclose the potential for increased capital gains distributions resulting from the redemptions of fund shares by newly eligible investors switching from the Investor TRFs to the Institutional TRFs. The order also finds that Vanguard failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and rules thereunder with respect to the accuracy of the funds’ disclosures.

This settlement resolves the SEC’s investigation along with settlements of parallel investigations of Vanguard announced today by the Office of the New York Attorney General (NYAG), the Connecticut Department of Banking, and the New Jersey Office of the Attorney General (NJAG) on behalf of the North American Securities Administrators Association (NASAA).

The SEC’s order today finds that Vanguard violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act. Without admitting or denying the SEC’s findings, Vanguard agreed to be censured, cease and desist from future violations, and pay $18.2 million in disgorgement and prejudgment interest that will be deemed satisfied by the payment of $92.91 million in relief ordered by the states’ settlements and a $13.5 million civil penalty, for a total amount of $106.41 million to be distributed to affected investors through a Fair Fund.

The $106.41 million in ordered relief is in addition to $40 million that Vanguard agreed to pay to settle an investor class action captioned, In re Vanguard Chester Funds Litigation, Case No. 2:22-cv-00955-JFM, in the U.S. District Court for the Eastern District of Pennsylvania, which will be added to the Fair Fund if the settlement is terminated or rejected.

In July 2022, a division of Vanguard agreed to pay $6.25 million in “restitution” to Massachusetts investors who regulators say were left with unexpectedly large tax bills stemming from the distribution of capital gains resulting mainly from the broker-dealer’s reduction in investment minimums for certain target-date funds (TDFs).

SEE ALSO:

• Vanguard Faces Lawsuit Over Decision to Lower TDF Investment Minimums

• Fidelity Matches Vanguard Move to Lower Investment Minimum for Institutional TDFs

• Vanguard to Pay ‘Restitution’ Over Target-Date Tax Liabilities

Brian Anderson Editor
Editor-in-Chief at  | banderson@401kspecialist.com |  + posts

Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.

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