Vanguard to Pay $106 Million to Settle SEC Charges of Misleading Investors on Retirement Fund Tax Impacts

The U.S. Securities and Exchange Commission in Washington on Sept. 18, 2008. Chip Somodevilla/Getty Images

The U.S. Securities and Exchange Commission (SEC) has announced that asset management giant Vanguard will pay $106.41 million to resolve charges of misleading retail investors about the tax consequences tied to some of the company’s retirement fund products.

Vanguard failed to adequately inform investors of the tax implications stemming from its 2020 decision to lower the minimum investment for its Institutional Target Retirement Funds (TRFs) from $100 million to $5 million, the SEC said in a Jan. 17 press release. This policy change led many retirement plan investors to shift from the more expensive Investor TRFs to the lower-cost Institutional TRFs, the SEC said.

As these investors redeemed their shares in the Investor TRFs, the funds were forced to sell underlying assets, many of which had appreciated in value due to rebounding markets, according to the SEC. This led to large capital gains distributions, which disproportionately affected retail investors holding the Investor TRFs in taxable accounts, who faced unexpected tax liabilities, it said.

The SEC found that Vanguard prospectuses failed to disclose the potential for increased capital gains distributions caused by these redemptions. The agency also determined that Vanguard lacked sufficient compliance measures to ensure accurate fund disclosures, in violation of the Advisers Act.

“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, chief of the SEC’s Division of Enforcement’s Asset Management Unit. “Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments.”

To resolve the SEC’s allegations, Vanguard agreed to the settlement, the terms of which are laid out in an order. The settlement does not require any admission of wrongdoing on Vanguard’s part but it does include a cease-and-desist order against future violations, along with a formal censure.

The settlement involves a $13.5 million civil penalty, $14.7 million in disgorgement, and $78.21 million to be distributed to affected investors through a Fair Fund created under the Sarbanes-Oxley Act, for a total of $106.41 million.

In November 2024, Vanguard settled a lawsuit brought by fund investors over similar claims for $40 million. Additionally, in July 2022, Vanguard agreed to pay $6.25 million to resolve comparable allegations brought by Massachusetts Secretary of State William Galvin.

Asked for comment on the settlement, a Vanguard spokesperson told The Epoch Times in an emailed statement that the company remains focused on supporting investors.

“Vanguard is committed to supporting the more than 50 million everyday investors and retirement savers who entrust us with their savings,” the spokesperson said. “We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options.”

Vanguard, headquartered in Malvern, Pennsylvania, is among the world’s largest investment managers, with approximately $7.9 trillion in regulatory assets under management as of October 2024, according to the settlement order.