SEC Fines Vanguard $106M Over Retirement Fund Tax Issues

The Securities and Exchange Commission (SEC) has fined The Vanguard Group, Inc. a total of $106.41 million to settle charges related to misleading statements about capital gains distributions and tax consequences for retail investors who held Vanguard Investor Target Retirement Funds (Investor TRFs) in taxable accounts. The settlement amount will be distributed to harmed investors through a Fair Fund.

The SEC's order finds that Vanguard violated the Advisers Act and caused violations of the Securities Act and the Investment Company Act. Without admitting or denying the SEC's findings, Vanguard agreed to be censured, cease and desist from future violations, and pay $18.2 million in disgorgement and prejudgment interest, which will be deemed satisfied by the payment of $92.91 million in relief ordered by the states' settlements and a $13.5 million civil penalty.

The SEC's investigation revealed that Vanguard's prospectuses for Investor TRFs, effective and distributed in 2020 and 2021, were materially misleading. They stated that the funds' distributions may be taxable as ordinary income or capital gains and that capital gains distributions could vary considerably from year to year due to the funds' "normal" investment activities and cash flows. However, 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.

In December 2020, Vanguard lowered the minimum initial investment amount for Vanguard Institutional Target Retirement Funds (Institutional TRFs) from $100 million to $5 million. This change led to a substantial number of retirement plan investors redeeming their Investor TRFs and switching to the Institutional TRFs due to the latter funds' 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. As a result, 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.

The SEC's 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 thereunder with respect to the accuracy of the funds' disclosures.



The settlement resolves the SEC's investigation along with settlements of parallel investigations of Vanguard announced today by the Office of the New York Attorney General (NYAG), the Connecticut Department of Banking, and the New Jersey Office of the Attorney General (NJAG) on behalf of the North American Securities Administrators Association (NASAA).

The SEC's investigation was conducted by Mark Oh of the Home Office and Marie DeBonis of the Asset Management Unit, with assistance from Mark Dowdell and Andrea Dittert of the Division of Examinations, and supervised by Sarah Lamoree and Mr. Schuster. The SEC appreciates the assistance of the NYAG's Investor Protection Bureau, Connecticut Department of Banking's Securities and Business Investments Division, NJAG's Bureau of Securities, and NASAA.

In response to the settlement, a Vanguard spokesperson stated, "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 SEC's action serves as a reminder for investment firms to ensure accurate and transparent disclosures regarding the potential risks and consequences associated with their investments, particularly in relation to tax implications. Retail investors should also be vigilant in reviewing fund prospectuses and understanding the potential tax liabilities associated with their investments.