Find details of recent SEC decision on: CNBC, Reuters, Yahoo, Courthouse News Service, Plan Advisor, Investment News, Barrons and Reuters. This is a big headline, resulting from 2020 decision by the Vanguard Group 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.
In a review of recent post of actions invoked by the SEC, The Vanguard Group, the mutual fund powerhouse brokerage firm was determined to have caused harm to its investors by failing to disclose all risks related to capital gains distributions in its retail target-date retirement funds, resulting in hundreds of thousands of ordinary investors getting stuck with inflated tax bills.
Vanguard has been ordered 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.
The SEC said Vanguard misled investors regarding capital gains distributions and resulting tax consequences to retail investors who held those targets retirement funds in taxable accounts.
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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