Vanguard settles SEC charges over misleading statements for $106.41 million

Investing.com — The Vanguard Group, Inc. has agreed to pay $106.41 million to settle charges from the Securities and Exchange Commission (SEC) over misleading statements related to capital gains distributions and tax consequences for retail investors. The funds in question are Vanguard Investor Target (NYSE:) Retirement Funds (Investor TRFs) held in taxable accounts. The settlement amount will be distributed to affected investors.

The SEC order, issued today, reveals that Vanguard had announced on December 11, 2020, that the minimum initial investment amount for Vanguard Institutional Target Retirement Funds (Institutional TRFs) was reduced from $100 million to $5 million. In the months following this announcement, a significant number of retirement plan investors moved their investments from Investor TRFs to the Institutional TRFs due to lower expenses.

To meet the demand for these redemptions, the Investor TRFs had to sell underlying assets with gains, given the rising financial markets that had recovered from pandemic lows. As a result, retail investors in the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced larger capital gains distributions and tax liabilities, thereby missing out on potential compounding growth of their investments.

The SEC order also found that the prospectuses of Vanguard Investor TRFs, distributed in 2020 and 2021, were materially misleading. They stated that the funds’ distributions may be taxable as ordinary income or capital gains, and that capital gains distributions could vary significantly from year to year due to the funds’ “normal” investment activities and cash flows. However, the prospectuses did not 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 found that Vanguard failed to adopt and implement written policies and procedures to prevent violations related to the accuracy of the funds’ disclosures.

Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit, emphasized the importance of accurate information about capital gains and tax implications for investors saving for their retirements. He stated that firms must ensure that they accurately describe to investors the potential risks and consequences associated with their investments.

The settlement resolves the SEC’s investigation and parallel investigations of Vanguard announced today by the Office of 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.

The SEC’s order finds that Vanguard violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act. Vanguard has agreed to be censured, cease and desist from future violations, and pay $18.2 million in disgorgement and prejudgment interest. This payment 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. This amount is in addition to $40 million that Vanguard agreed to pay to settle an investor class action in the U.S. District Court for the Eastern District of Pennsylvania. If this settlement is terminated or rejected, the $40 million will be added to the Fair Fund.

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