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Vanguard to pay over $106 million for misleading investors about retirement funds

On Behalf of | Jan 27, 2025 | Securities and Compliance

The Securities and Exchange Commission announced that The Vanguard Group, Inc. will pay over $106 million to settle charges involving misleading statements to retirement fund investors, AdvisorHub reports.

The amount will be paid to those who were harmed by the statements, which related to capital gains distributions and tax consequences for retail investors who held Vanguard Investor Target Retirement Funds (Investor TRFs) in taxable accounts.

The SEC said that Vanguard announced in 2020 that the minimum initial investment amount of Vanguard Institutional Target Retirement Funds (Institutional TRFs) was lowered from $100 million to $5 million. Subsequently, a substantial number of retirement plan investors redeemed their Investor TRFs and switched to the Institutional TRFs due to the lower expenses.

But to meet the demand for these redemptions, the SEC said that Investor TRFs had to sell underlying assets with gains due to the rising financial markets that had recovered from lows during the pandemic.

Retail investors of the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced historically larger capital gains distributions and tax liabilities and were deprived of the potential compounding growth of their investments.

Furthermore, the order found that Vanguard Investor TRFs’ prospectuses were misleading because they stated that the funds’ distributions may be taxable as ordinary income or capital gains, and that capital gains distributions could vary  from year to year as a result of the funds’ “normal” investment activities and cash flows.

Those prospectuses did not disclose the potential for increased capital gains distributions resulting from the redemptions of fund shares by newly eligible investors who switched from the Investor TRFs to the Institutional TRFs. Vanguard failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and rules thereunder with respect to the accuracy of the funds’ disclosures, the SEC charged.

“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”

Vanguard did not admit or deny the SEC’s findings, but agreed to be censured, cease and desist from future violations, and pay $18.2 million in disgorgement and prejudgment interest that will be deemed satisfied by the payment of $92.91 million in relief and a $13.5 million civil penalty.  That totals $106.41 million, which will be distributed to affected investors through a Fair Fund.

“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,” the firm said in a statement.

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