Fund giant Vanguard Group, Inc. is paying upwards of US$100 million to settle allegations that it failed to disclose the risk that hefty redemptions from certain investment funds could result in large capital gains distributions and tax bills for certain investors.
The firm reached a settlement with the U.S. Securities and Exchange Commission (SEC), and with a group of U.S. state regulators (led by the North American Securities Administrators Association), to address the fallout from the firm’s decision in December 2020 to lower the minimum investment for a family of institutional target date funds from US$100 million to US$5 million. As a result, a large number of investors switched to the institutional funds, which carried lower expenses.
According to the SEC’s order, the funds had to sell assets to meet the surge in redemptions, including assets that had significant capital gains — as a result, investors that stayed in the retail funds, and held their shares in taxable accounts, had unexpected capital gains distributions and tax liabilities.
Regulators alleged that the funds’ prospectuses were misleading because they didn’t disclose the risk that investors could face large capital distributions due to increased redemptions.
Under the settlement with regulators, without admitting or denying the SEC’s findings, Vanguard agreed to pay US$106.4 million, which will be distributed to harmed investors. That amount is in addition to the US$40 million that Vanguard agreed to pay to settle an investor class action over the same incident, the SEC noted.
“Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements,” said Corey Schuster, chief of the SEC enforcement division’s asset management unit, in a release on Friday.
“Firms must ensure that they are accurately describing to investors the potential risks and consequences associated with their investments,” Schuster added.
Along with the SEC, 45 state regulators signed onto the settlement.