Securities Division of TDCI Settles $106 Million Multi-State Case with Vanguard

The Tennessee Department of Commerce & Insurance’s Securities Division recently participated in a $106 million settlement, alongside state securities regulators and the Securities and Exchange Commission (SEC), with Vanguard Marketing Corporation (VMC) and The Vanguard Group, Inc. This settlement arose from a comprehensive investigation conducted by a task force of state securities regulators and the SEC pertaining to a failure of supervision by Vanguard and the lack of disclosure regarding potential tax consequences to investors following a change in investment minimums for specific target date retirement funds.

The investigation revealed that in 2020, Vanguard made adjustments to the investment minimums for its Institutional Target Retirement Funds (TRFs), leading to a significant number of retirement plan investors redeeming their Investor TRF shares to acquire Institutional TRF shares. The resulting influx of redemptions prompted Vanguard to sell highly appreciated assets in the Investor TRF, consequently triggering substantial capital gains taxes for numerous retail investors who retained investments in the Investor TRF. Unfortunately, Vanguard failed to disclose these potential capital gains and tax implications to Investor TRF shareholders, a direct result of the movement of shareholders from the Investor TRF to the Institutional TRF.

Assistant Commissioner for Securities Elizabeth Bowling emphasized the collaborative effort among regulators to efficiently reach a satisfactory settlement. This settlement serves as a testament to the dedication of state regulators and the SEC in safeguarding the interests of investors. Vanguard Marketing Corporation, a FINRA- and state-registered broker-dealer and a subsidiary of The Vanguard Group, Inc., specializes in marketing and selling target retirement funds to investors with shares in qualified accounts entitling them to special tax treatments, including deferred taxes, as well as investors with shares in taxable accounts. Historically, shareholders in Investor TRFs experienced minimal capital gains distributions and related tax obligations.

The SEC is set to notify impacted investors and oversee the distribution of remediation payments through its Fair Fund program to compensate affected investors for the capital gains taxes incurred. Anyone with inquiries regarding investments can reach out to TDCI’s Securities Division through their online portal at tn.gov/securities, via email at securities.1@tn.gov, or by phone at 800-863-9117.