Vanguard Advisers has been penalized by the Securities and Exchange Commission for failing to adequately disclose a conflict of interest to clients, Advisor Hub reports.
According to the SEC, the violations occurred when the firm recommended that clients enroll in Vanguard Advisers’ managed account program known as Personal Advisor Services (“PAS”), a fee-based advisory service that provides portfolio management of accounts. Vanguard was censured and ordered to pay a civil penalty of $19.5 million.
The matter covers the period from August 2020 through September 2023. The SEC learned that Vanguard gave financial incentives to advisors to recommend that clients enroll and remain in the PAS program. These incentives included bonuses, salary increases, and, at times, promotions.
It is alleged that Vanguard did not adequately disclose the conflict of interest that this incentive compensation system presented because certain disclosures contained contradictory statements about PAS Advisors’ receipt of the compensation.
“The order also finds that, while Vanguard Advisers’ Form ADV Part 2 Brochure for PAS (“PAS Brochure”) disclosed that some PAS Advisors were eligible for a discretionary bonus, both the firm’s Form CRS and Supplement to the PAS Brochure contained contradictory disclosures stating that PAS Advisors received no additional compensation,” the SEC states. “Additionally, the order finds that Vanguard Advisers made similar misleading statements on its website regarding conflicts of interest, including that PAS Advisors received no “outside incentives” or “financial incentives to recommend certain products.”
The commission also determined that Vanguard failed to adopt and implement any written policies and procedures reasonably designed to prevent these violations.
Vanguard was found to have violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. The firm did not admit or deny the SEC’s findings but agreed to the entry of an order requiring that it cease and desist from future violations of these provisions.
In a statement, a spokesperson for Vanguard said, ““Vanguard is committed to supporting everyday investors and retirement savers. We are pleased to have reached an agreement to put this matter behind us.” The SEC took into account that Vanguard cooperated with its investigation and updated all of its disclosure documents by the end of 2023. Vanguard also hired a consultant to review its conflict identification process.
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