Attorney General secures $106 million from Vanguard for failing investor notification

Today, New York Attorney General Letitia James, in collaboration with a coalition of 45 securities regulators and the Securities and Exchange Commission (SEC), announced the successful recovery of $106 million from Vanguard Group, Inc. The settlement was reached due to Vanguard’s failure to inform investors about changes to its retirement funds, leading to increased capital gains tax obligations for a large number of individuals. The investigation conducted by the Office of the Attorney General (OAG) revealed that Vanguard altered the minimum investment requirements for one of its retirement funds without disclosing that these changes would result in higher tax liabilities for investors.

In light of these findings, Vanguard is required to pay $106 million in restitution to hundreds of thousands of impacted investors as part of the settlement agreement with the bipartisan coalition composed of New York, Connecticut, New Jersey, and the SEC. New York Attorney General Letitia James emphasized the importance of holding financial institutions accountable for their actions, stating that investors rely on professionals like Vanguard to manage and protect their retirement funds without incurring additional costs. The failure to disclose changes that led to significant financial burdens for investors is a breach of trust that cannot be overlooked.

Vanguard is a prominent investment advisor managing approximately $7.9 trillion in retirement savings globally. The firm offered target date retirement funds under the names of Investor Target Date Retirement Funds (TRFs) and Institutional Target Date Retirement Funds. While both types of funds were designed for investors to retire at a specific year, the key differences lay in the fees, expenses, and minimum investment amounts. Investor TRFs had a slightly higher management cost but required a minimum investment of $1,000, whereas Institutional TRFs were more cost-effective but necessitated a minimum investment of $100 million.

In December of 2020, Vanguard modified the minimum investment threshold for its Institutional TRFs from $100 million to $5 million. Subsequently, many investors sold their Investor TRF shares to purchase shares in the Institutional TRFs. This mass selling caused Vanguard to sell high-value assets in the Investor TRFs, resulting in heightened capital gains taxes for numerous retail investors who held these funds. The firm failed to disclose the potential tax implications of transferring from Investor TRFs to Institutional TRFs, leaving investors unaware of the impending financial consequences.

The OAG’s investigation unearthed that Vanguard was aware of the tax consequences following the changes but neglected to inform investors accordingly. As a result of the settlement, Vanguard is obligated to contribute $106 million to a fair fund administered by the SEC for distribution among affected investors. Eligible investors will be contacted by the SEC to facilitate the restitution process.

The settlement encompasses 45 jurisdictions, including numerous U.S. states and territories. The collaborative efforts of the OAG, the SEC, and the multistate coalition have led to the recovery of funds for investors who were adversely affected by Vanguard’s actions. Moving forward, it is imperative for financial institutions to uphold transparency and accountability in their dealings to safeguard the interests of investors and ensure a secure retirement future for all.