Vanguard Fined by SEC for Misleading Retail TDF Investors

The regulator found that the firm did not provide accurate information about the capital gains and tax implications of a change to investment minimums.

The Vanguard Group Inc. will pay $106.41 million to settle charges by the Securities and Exchange Commission that the firm misled retail investors in taxable accounts holding Vanguard Investor Target Retirement Funds, the SEC announced Friday. The settlement money will be distributed to harmed investors.

According to the commission, Vanguard’s statements about capital gains distributions and tax consequences for retail investors in the TRFs violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act. Vanguard settled the charges without admitting or denying the SEC’s findings and agreed to be censured, cease and desist from future violations, and pay $106.41 million to be distributed to affected investors. That fine is in addition to the $40 million Vanguard had agreed to pay to investors as part of a class action suit.

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A Vanguard spokesperson, in response to a request for comment, commented that the firm, “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 case stems from Vanguard’s December 2020 decision to cut the minimum initial investment amount for Vanguard Institutional Target Retirement Funds to $5 million from $100 million. In the months following that change, many retirement plan investors redeemed their retail-oriented Investor TRFs and switched to the Institutional TRFs, which had lower expenses.

To meet the demand for the redemptions, according to the SEC’s order, the Investor TRFs had to sell underlying assets that had experienced gains due to the rising financial markets. The order stated that, as a result, retail investors in 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 SEC’s order also states 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. But, according to the SEC’s order, 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 SEC order also states 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.

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

This settlement resolves the SEC’s investigation, along with settlements of parallel investigations of Vanguard announced today by state officials in New York, Connecticut and New Jersey on behalf of the North American Securities Administrators Association.

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