The Securities and Exchange Commission (SEC) announced that Vanguard will pay $106.41 million to settle charges related to misleading tax disclosures in its Investor Target Retirement Funds (Investor TRFs). The 2020 and 2021 fund prospectuses failed to inform investors about potential capital gains and tax consequences. Affected investors will receive compensation as part of the settlement.
SEC Findings on Misleading Disclosures
The SEC found that Vanguard’s prospectuses for Investor TRFs contained misleading details about capital gains distributions. They described distributions as part of “normal” investment activity without mentioning the impact of a decision to lower the investment minimum for Institutional TRFs in December 2020.
This change reduced the minimum investment from $100 million to $5 million, prompting many investors to shift from Investor TRFs to lower-cost Institutional TRFs. These redemptions forced the Investor TRFs to sell appreciated assets, triggering unexpected capital gains for remaining investors. Retail investors in taxable accounts faced unanticipated tax bills and reduced growth in their investments.
Settlement Breakdown
The $106.41 million settlement includes:
- $18.2 million in disgorgement and interest (offset by $92.91 million from state settlements).
- $13.5 million in civil penalties.
- Compensation distributed through a Fair Fund mechanism.
Vanguard also agreed to a censure and a cease-and-desist order to prevent future disclosure issues. The settlement aligns with agreements Vanguard reached with authorities in New York, Connecticut, and New Jersey, as well as a $40 million class action lawsuit, which could contribute to the Fair Fund if unresolved.
SEC Criticism and Broader Implications
The SEC criticized Vanguard for failing to implement adequate policies to prevent misleading disclosures, violating the Advisers Act. This case highlights the importance of clear communication and transparency in financial disclosures.
While Vanguard has not commented publicly, the settlement closes investigations by federal and state regulators and reinforces the need to maintain investor trust.
