Vanguard is set to pay $106.41 million to settle charges from the Securities and Exchange Commission for reportedly making misleading statements regarding its target date retirement funds.
In an order published Friday, the SEC said Vanguard misled investors with respect to capital gains distributions and resulting tax consequences for retail investors who held those target retirement funds in taxable accounts.
The SEC order cited Vanguard’s decision in December 2020 to lower the minimum investment for its institutional target retirement funds from $100 million to $5 million.
That move led to widespread redemptions among retirement plan investors, who switched from Vanguard's investor target retirement funds to the institutional products, which came with lower expenses.
To meet the demand from redeeming investors, the SEC said Vanguard's investor target-date funds had to sell underlying assets that had appreciated in value. The retail investors who stayed in the funds and held shares in taxable accounts were effectively punished, the SEC explained, as they faced significant tax liabilities from higher-than-normal capital gains distributions.
The SEC also found that the 2020 and 2021 prospectuses for its investor target retirement funds were materially misleading. While they stated that capital gains distributions could vary due to "normal" investment activities, the documents failed to disclose the risk of elevated distributions stemming from the redemptions by newly eligible investors switching to lower-cost institutional funds.
The SEC concluded that Vanguard lacked adequate policies to ensure the accuracy of its disclosures.
“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” Corey Schuster, chief of the SEC’s Division of Enforcement’s Asset Management Unit, said in a statement Friday. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”
As part of the settlement, Vanguard agreed to be censured and to cease and desist from future violations. The $106.41 million penalty includes $18.2 million in disgorgement and interest, a $13.5 million civil penalty, and payments that will satisfy $92.91 million in relief ordered through settlements with states, including New York, New Jersey, and Connecticut.
The settlement comes in addition to $40 million that Vanguard agreed to pay to resolve a separate investor class-action lawsuit in federal court in Pennsylvania, according to the SEC.
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