Vanguard penalized by SEC for misleading retail TDF investors
Vanguard has agreed to a settlement with the Securities and Exchange Commission, paying $106.41 million, in response to charges of misleading retail investors in taxable accounts holding Vanguard Investor Target Retirement Funds. This settlement will see the funds distributed to affected investors. The SEC found that Vanguard’s statements regarding capital gains distributions and tax implications for retail investors in the TRFs violated the Advisers Act, leading to violations of the Securities Act and Investment Company Act.
The SEC outlined that Vanguard had not provided accurate information to investors, and as a result, they approved the settlement in which Vanguard does not admit or deny the findings but has agreed to be censured, to cease and desist from future violations, and to pay out $106.41 million to compensate affected investors. This settlement adds to the $40 million previously agreed upon for a class-action lawsuit. The allegations stemmed from an adjustment Vanguard made in December 2020 to reduce the minimum initial investment amount for Vanguard Institutional Target Retirement Funds, which led many retirement plan investors to redeem their shares and switch to the Institutional TRFs.
To accommodate these redemptions, the Investor TRFs had to sell assets that had experienced gains due to market increases. This action resulted in increased capital gains distributions and tax liabilities for investors who chose to retain their fund shares in taxable accounts. The SEC’s inquiry also discovered that the information provided to investors through the prospectuses of the Vanguard Investor TRFs was misleading as it failed to reveal the potential for increased capital gains distributions due to the redemptions of fund shares arising from investors transitioning to the Institutional TRFs.
Moreover, Vanguard was found to have neglected to implement policies and procedures to prevent violations of the Advisers Act and its accompanying regulations concerning the accuracy of fund disclosures. Corey Schuster, Chief of the SEC’s Division of Enforcement’s Asset Management Unit, emphasized the significance of providing investors with precise information about capital gains and tax implications to enable them to make informed decisions while saving for retirement.
In addition to the SEC’s investigation, Vanguard has reached settlements with state officials in New York, Connecticut, and New Jersey, on behalf of the North American Securities Administrators Association. The settlement with the SEC marks a significant move to ensure that firms are transparent and responsible in communicating the potential risks and consequences associated with investments to their clients. Vanguard has stated that it remains committed to meeting the needs of the investors who rely on them and is looking forward to serving them with top-notch investment solutions in the future.
