The Vanguard Group will pay $106.41 million to settle charges it made misleading statements regarding capital gains distributions and tax consequences for investors holding Vanguard Investor Target Retirement Funds in taxable accounts.
The settlement funds will be distributed to investors harmed by the misleading information, according to a news release from the Securities and Exchange Commission.
Vanguard announced on Dec. 11, 2020, that the minimum initial investment amount of Vanguard Institutional Target Retirement Funds was lowered from $100 million to $5 million, the SEC said. A “substantial number” of retirement plan investors redeemed their Investor TRFs and switched to the Institutional TRFs because the institutional funds had lower expenses.
In response, the Investor TRFs had to sell underlying assets with gains due to the rising financial markets that had rebounded from pandemic lows. As a result, the SEC said, retail investors of the Investor TRFs who did not switch faced historically larger capital gains distributions and tax liabilities and lost the potential compounding growth of their investments.
Vanguard Investor TRF prospectuses misleadingly 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, the SEC alleged.
But the prospectuses did not disclose that capital gains distributions could be higher, resulting from the redemptions of fund shares by investors switching from the Investor TRFs to the Institutional TRFs, according to the SEC. “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,” the SEC stated.
“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 SEC settlement also resolves settlements of parallel investigations of Vanguard by the New York Attorney General the Connecticut Department of Banking and the New Jersey Office of the Attorney General on behalf of the North American Securities Administrators Association (NASAA).
Vanguard agreed, without admitting or denying the SEC findings, to be censured and refrain from future violations. It also agreed to 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.
Additionally, Vanguard agreed to pay $40 million to settle an investor class action, Vanguard Chester Funds Litigation, 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.
