SEC Slams Vanguard with $106M Penalty Over Tax Disclosure Failure

• Vanguard lowered the investment threshold, leading to large tax liabilities.
• SEC settlement aims to compensate investors harmed by the changes.
• Vanguard reached agreement without admitting or denying SEC findings.

In a major settlement, Vanguard will pay $106 million to resolve SEC allegations related to its target date funds. The case centers around failures in disclosing the tax implications of changes made to the investment thresholds in 2020.

SEC Slams Vanguard with $106M Settlement

Vanguard has agreed to pay over $100 million to settle charges related to target date retirement funds. Vanguard allegedly misled investors when it failed to disclose the tax impact of lowering the minimum investment requirement for its institutional target date funds in 2020. The change led to large taxable distributions, harming shareholders who did not switch to the institutional funds.

The SEC found that the reduction of the minimum investment threshold from $100 million to $5 million caused many customers to move into institutional share classes. This caused massive redemptions in the investor share class and sale of underlying assets. Therefore investors who remained in the investor series saw unexpected large capital gains distributions, which they had to pay taxes on.

The SEC determined that Vanguard did not adequately disclose the potential tax consequences of this shift. It stated that the failure to disclose these risks led to harm for retail investors who held the fund in taxable accounts. The tax liabilities placed these investors at a disadvantage compared to those who switched to the institutional share class.

Vanguard agreed to pay a total of $106.41 million, which will be distributed to affected investors. Although the company did not admit or deny the SEC’s findings, it agreed to the settlement. Vanguard emphasized its commitment to serve investors and support for millions of retirement savers.

The SEC also noted that this settlement follows an initial $40 million payment made by Vanguard in relation to a class action lawsuit. Vanguard’s institutional target date funds shift to more conservative investments as the retirement target year approaches. The company’s decision to merge the two series of target date funds in 2021 also influenced SEC’s findings.

In 2023, Vanguard paid an $800,000 fine to the Financial Industry Regulatory Authority over issues with money market fund statements. These incidents occurred during the tenure of former CEO Tim Buckley, who was replaced by Salim Ramji in 2024.

Vanguard is one of the largest asset managers in the world, with more than $10 trillion in assets. However, the company has maintained its reputation for providing low-cost investment options. Vanguard remains committed to meet investors’ needs and address any business issues.