Vanguard Settles SEC Charges Over Surprise Capital-Gains Taxes

In a significant development, The Vanguard Group, Inc. has agreed to pay $106.41 million to settle charges related to misleading statements about capital gains distributions and tax consequences for retail investors who held Vanguard Investor Target Retirement Funds (Investor TRFs) in taxable accounts. The settlement, announced by the Securities and Exchange Commission (SEC), highlights the importance of accurate and timely disclosures in the investment industry.

The SEC's order finds that Vanguard 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. This lack of disclosure led to retail investors facing historically larger capital gains distributions and tax liabilities, as well as being deprived of the potential compounding growth of their investments.

Vanguard's prospectuses, effective and distributed in 2020 and 2021, were found to be materially misleading because they did not adequately warn investors about the potential tax implications of the fund switch. The SEC also found that 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.

As part of the settlement, 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 payment of $92.91 million in relief ordered by the states' settlements. Additionally, Vanguard will pay a $13.5 million civil penalty, bringing the total amount to be distributed to affected investors through a Fair Fund to $106.41 million.

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 Corey Schuster, Chief of the Division of Enforcement's Asset Management Unit.

This settlement serves as a reminder to investors of the importance of carefully reviewing fund prospectuses and staying informed about potential risks and tax implications associated with their investments. It also underscores the need for fund managers to maintain accurate and transparent disclosures to protect the interests of their investors.