Vanguard to Pay $106M in SEC Settlement Over Tax Misstatements

Vanguard Group has agreed to pay $106 million to settle the charges from the U.S. Securities and Exchange Commission (SEC) for failing to inform its important tax information about the popular target-date funds to its investors. 

This mistake resulted in hundreds of thousands of regular investors facing inflated tax bills. As per reports , the settlement includes $92.9 million in restitution and a $13.5 million civil fine. 

This situation arose from Vanguard’s December 2020 decision to lower the minimum investment for lower-cost fund classes, meant for institutional clients, from $100 million to $5 million. This change attracted many qualifying investors to switch from higher-cost retail fund classes. 

The SEC said, “The retail funds were compelled to sell assets to meet redemptions, which led to significant tax burdens from capital gains being transferred to the remaining investors”. 

Vanguard has told its investors about the target-date funds highlighting that their tax burdens would vary annually.

The SEC noticed that the company did not decently communicate with its investors about the risks involved with shifting from retail funds to institutional funds.

Vanguard’s target-date funds are the combination of a mix of stocks, bonds, and cash, that are marked to have fewer risks as the investors age and are also meant to be tax-efficient.

Corey Schuster, chief of the SEC’s enforcement division’s asset management unit said, “Materially accurate information about capital gains and tax implications is critical to investors saving for their retirements.”

In response to the settlement, Vanguard said, “We’re pleased to have reached this settlement and look forward to continuing to serve our investors with world-class investment options.” However, Vanguard did not admit or deny any offense as part of the settlement.