Attorney General Office Announces $106 Million Settlement with Vanguard Across the Nation
The State of New Jersey’s Department of Law & Public Safety, in conjunction with the Office of the Attorney General, Division of Consumer Affairs, and Bureau of Securities, has recently been involved in a $106 million settlement with Vanguard Marketing Corporation (VMC) and The Vanguard Group, Inc. This settlement comes as a result of allegations that Vanguard failed to properly supervise certain registered persons and neglected to inform investors of potential tax repercussions following changes in investment minimums for specific target date retirement funds.
The resolution of this case was achieved through a collaborative effort between the state securities regulators, the U.S. Securities and Exchange Commission (SEC), and a task force comprised of multiple states. New Jersey, alongside Connecticut and New York, played a leading role in this investigation under the North American Securities Administrators Association’s (NASAA) Enforcement Section Committee. In addition to the state-level investigations, the SEC conducted a parallel inquiry into the matter.
Vanguard had previously provided two categories of Target Retirement Funds (TRFs): Institutional TRFs and Investor TRFs, each with distinct investment minimums. In December 2020, Vanguard reduced the investment minimum required for its Institutional TRFs from $100 million to $5 million. Consequently, many investors opted to redeem their Investor TRF shares and acquire Institutional TRF shares instead. This influx of redemptions prompted Vanguard to sell off highly appreciated assets in the Investor TRFs, incurring substantial capital gains taxes for numerous retail investors still invested in the Investor TRFs.
Despite these significant consequences, Vanguard omitted to disclose the potential capital gains and tax implications resulting from the migration of shareholders from the Investor TRF to the Institutional TRF. In light of their long-term investment nature, target date funds are intended for individuals planning specific retirement dates.
To redress the situation, the SEC plans to utilize its Fair Fund program to reimburse investors for the capital gains taxes they incurred. First Assistant Attorney General Lyndsay V. Ruotolo expressed satisfaction with the collaborative resolution, emphasizing the importance of regulators safeguarding consumers’ financial interests. Cari Fais, Director of the Division of Consumer Affairs, underscored the need for full transparency concerning investment risks when clients entrust their assets to investment managers. Bureau Chief of the Bureau of Securities, Elizabeth M. Harris, reflected on the unexpected tax liabilities faced by investors in target date retirement funds and highlighted the significance of returning funds to affected New Jersey investors.
This settlement is the second announced this month regarding New Jersey investors. Recently, the State participated in a $17 million nationwide multistate settlement with Edward D. Jones & Co., L.P. following an investigation into the supervision of financial professionals transferring customers’ commission-based brokerage accounts to fee-based investment advisory accounts.
As an SEC-registered investment adviser, The Vanguard Group, Inc., VMC’s parent company, conducts the marketing and sale of target retirement funds to investors with shares in qualified accounts offering special tax treatment. This settlement underscores the authorities’ commitment to protecting investors and ensuring financial transparency in the investment landscape.
