Vanguard settles SEC charges with $106.4M fine

Vanguard, one of the world’s largest asset managers, has agreed to pay a $106.4 million fine to settle charges brought by the Securities and Exchange Commission (SEC). The SEC found that Vanguard made “misleading statements related to capital gains distributions and tax consequences” for investors in its Vanguard Investor Target Retirement Funds (TRF) held in taxable accounts. In December 2020, Vanguard lowered the minimum investment for its lower-expense Institutional TRFs from $100 million to $5 million. This change led many retirement plan investors to sell shares of the Investor TRFs and switch to the Institutional TRFs. However, this triggered capital gains distributions for those who sold, resulting in larger tax liabilities and missed growth opportunities for retail investors who remained in the Investor TRFs. Corey Schuster, chief of the Division of Enforcement’s asset management unit at the SEC, stated, “Materially accurate information about capital gains and tax implications is critical to investors. Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments. Vanguard agreed to pay the $106.4 million in penalties and relief to affected investors without admitting or denying the allegations.

Vanguard’s SEC penalty highlights transparency

This penalty is in addition to a $40 million settlement Vanguard agreed to pay to settle a related class action lawsuit. Target-date funds are mutual funds based on the year the saver plans to retire. They are actively managed, rebalancing to adjust risk as the investor gets closer to retirement. Factors to consider when selecting a target-date fund include diversification, fees, risk, and asset allocation. The settlement with Vanguard was part of a joint investigation led by New York, New Jersey, and Connecticut, along with other regulatory agencies. The investigation found that Vanguard failed to notify investors of revisions in the terms of some of its retirement funds, leading to higher capital gains taxes for hundreds of thousands of individual investors who held the funds in taxable accounts. In settling with regulators, Vanguard neither admitted nor denied wrongdoing but was censured by the SEC. The restitution and penalty aim to compensate investors for the unexpected tax burdens they faced due to Vanguard’s lack of transparency.