Vanguard agreed to pay $106.4 million to settle charges that its statements misled retail investors over capital gains distributions and tax consequences for some target date funds that were held in taxable accounts, the Securities and Exchange Commission and other authorities said Friday.
The mutual fund giant will pay the associated Fair Fund $92.9 million in remediation and $13.5 million as a civil penalty.
The $106.4 million in ordered relief follows $40 million that Vanguard agreed to pay in November to settle an investor class action suit in the U.S. District Court for the Eastern District of Pennsylvania.
Without admitting or denying SEC findings, Vanguard agreed to be censured, to cease and desist from future violations and to pay financial penalties.
Vanguard said in December 2020 that the minimum initial investment amount for its institutional target retirement funds was lowered to $5 million from $100 million, according to the SEC.
In the following months, numerous retirement plan investors redeemed their investor TRFs and switched to the institutional funds because the latter had lower expenses.
To meet the demand for these redemptions, the investor TRFs had to sell underlying assets with gains due to the rising financial markets that had rebounded from pandemic lows, the SEC explained.
As a result, retail investors in the investor TRFs who did not switch funds (and continued to hold their fund shares in taxable accounts) faced historically larger capital gains distributions and tax liabilities. They also were deprived of the potential compounding growth of their investments, the commission found.
In addition, the SEC order concluded that Vanguard's 2020 and 2021 investor TRF prospectuses were materially misleading because they stated that the funds’ distributions may be taxable as ordinary income or capital gains, and that the capital gains distributions could vary considerably from year to year as a result of the funds’ “normal” investment activities and cash flows.
Plus, the prospectuses failed to disclose the potential for increased capital gains distributions resulting from the redemptions of fund shares by newly eligible investors switching from the investor TRFs to the institutional TRFs, the SEC said.
The order also finds that Vanguard failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and rules tied to the accuracy of the funds’ disclosures.
“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” Corey Schuster, SEC enforcement division asset management unit chief, said. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”
This settlement resolves the SEC’s investigation along with settlements of parallel investigations of Vanguard announced Friday by the New York attorney general's office, the Connecticut Department of Banking, the New Jersey attorney general's office and the North American Securities Administrators Association.
The SEC’s order finds that Vanguard violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act.
The asset manager, in an email to ThinkAdvisor on Friday, said, "Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings. We're pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options."
Over the past three years, regulators in Connecticut, New Jersey and New York, coordinated through NASAA’s Enforcement Section Committee, co-led a 40-state task force to conduct a comprehensive investigation, parallel to the SEC's concurrent investigation.
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