Vanguard to Pay $106 Million Over Retirement Fund Violations

Vanguard, one of the world's largest investment management companies, has agreed to pay a $106.41 million settlement to resolve charges related to misleading statements about capital gains distributions and tax implications for retail investors holding Vanguard Investor Target Retirement Funds (Investor TRFs) in taxable accounts. The settlement, announced by the Securities and Exchange Commission (SEC) on January 18, 2025, will be distributed to affected investors through a Fair Fund.

In December 2020, Vanguard lowered the minimum initial investment amount for its Institutional Target Retirement Funds (Institutional TRFs) from $100 million to $5 million. This change prompted many investors to switch from Investor TRFs to the lower-cost Institutional TRFs. To meet the redemption demands, 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, depriving them of the potential compounding growth of their investments.

The SEC's order found that Vanguard Investor TRFs' prospectuses, 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 could vary considerably from year to year as a result of 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. Additionally, 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.

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 $92.91 million in relief ordered by the states' settlements, and a $13.5 million civil penalty. The total $106.41 million will be distributed to affected investors through a Fair Fund. This resolution also includes settlements with the New York Attorney General, the Connecticut Department of Banking, and the New Jersey Attorney General, representing 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 a separate development, Vanguard has agreed to a $40 million settlement in an investor class action lawsuit, which could be added to the Fair Fund if the settlement is terminated or rejected. The Securities and Exchange Commission (SEC) and other regulatory bodies will continue to monitor and enforce the rules and regulations governing the investment industry to protect investors and maintain market integrity.