The SEC violations stem from a Vanguard announcement on December 11, 2020 that the minimum initial investment amount of Vanguard Institutional Target Retirement Funds (Institutional TRFs) was lowered from $100 million to $5 million, according to the SEC. As a result, a substantial number of retirement plan investors redeemed their Investor TRFs and switched to the Institutional TRFs because the latter funds had lower expenses.

In order to meet the demand for these redemptions, the Investor TRFs had to sell underlying assets with gains due to the rising financial markets that had rebounded from pandemic lows, said the SEC. The order finds that, as a result, retail investors of the Investor TRFs who did not switch and continued to hold their fund shares in taxable accounts faced historically larger capital gains distributions and tax liabilities and were deprived of any compounding growth of their investments. 

Vanguard Investor TRFs’ prospectuses, distributed in 2020 and 2021, were “misleading because they stated that the funds’ distributions may be taxable as ordinary income or capital gains, and that capital gains distributions could vary considerably from year to year as a result of the funds’ ‘normal’ investment activities and cash flows,” according to the SEC.

The prospectuses 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, according to the SEC. The order also finds that Vanguard failed to implement written policies and procedures designed to prevent violations of the Advisers Act and rules thereunder with respect to the accuracy of the funds’ disclosures.

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

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This settlement also resolves the SEC’s investigation along with settlements of parallel investigations of Vanguard by the Office of the New York Attorney General, the Connecticut Department of Banking, and the New Jersey Office of the Attorney General on behalf of the North American Securities Administrators Association.