Vanguard, Other BDs Under Scrutiny Over Target Date Fund Tax Bills

William Galvin, Massachusetts’ top securities regulator, said Tuesday that he had launched an investigation into the purchase of target date mutual funds by Massachusetts customers in taxable accounts at five broker-dealers — T. Rowe Price Investment Services, American Fund Distributors, BlackRock Investments, Fidelity Brokerage Services and Vanguard Marketing Corp.

Galvin said that he’s particularly concerned by reports of inadequately disclosed fund changes that shifted financial burdens to small-dollar investors, resulting in large tax bills for those who held the funds in non-retirement accounts.

The Massachusetts Securities Division “is looking at issues like those that recently happened with Vanguard,” a spokesperson for Galvin’s office told ThinkAdvisor Tuesday in an email.

“Vanguard reduced the minimum investment in its institutional target retirement funds from $100 million to $5 million, causing many plans to switch from the standard funds to the institutional target funds,” the spokesperson said. “That caused the standard funds to offload holdings, triggering capital gains distributed to the smaller dollar investors who remained, and some of those investors had the funds in taxable accounts.”

In a statement, Galvin said that “financial institutions can’t be permitted to protect one class of investors at the expense of another. Investors need to be made aware of the risks involved and the tax liabilities they could face in certain circumstances, and I want to make sure institutions are being upfront about these risks.”

Galvin wants the broker-dealers to answer questions by Feb. 9.

In a Tuesday letter, Galvin asked the BDs to provide:

• Prospectuses provided to Massachusetts customers for each target date mutual fund;
• Account opening documentation for all Massachusetts customers;
• Marketing materials provided or made available to Massachusetts customers concerning target date mutual funds from Jan. 1, 2020, to the present;
• Marketing materials provided or made available to Massachusetts customers concerning the differences between taxable versus tax-advantaged accounts from Jan. 1, 2020, to the present;
• Compliance policies and written supervisory procedures concerning target-date mutual funds in place from Jan. 1, 2020, to the present;
• Complaints by Massachusetts customers concerning any target date mutual fund identified in response to Request No. 1 from Jan. 1, 2020, to the present;
• Changes to required investment minimums for any target date mutual fund identified over the past two years; and
• Disclosures and/or communications to Massachusetts customers, from Jan. 1, 2020, to the present, regarding the BD’s decision to modify the investment minimum for any target date mutual fund.