Vanguard, one of the world’s largest asset managers, has agreed to pay $106.41 million to the Securities and Exchange Commission (SEC). The payment will be distributed to harmed investors. The alleged violations stem from a 2020 change where Vanguard lowered the minimum investment requirement for its institutional target date funds from $100 million to $5 million.
This change led to significant redemptions as Vanguard customers moved from other target date funds into the institutional versions. The SEC asserted that Vanguard failed to properly disclose the potential impact of this change on distributions. “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 the potential compounding growth of their investments,” the SEC said.
Vanguard agreed to the settlement without admitting or denying the SEC’s findings. In their statement, the firm highlighted its commitment to supporting its more than 50 million everyday investors and retirement savers.
Vanguard’s settlement with the SEC
Target date funds are popular retirement vehicles designed to shift gradually from growth-oriented portfolios to more conservative portfolios as the specified retirement year approaches. This shift usually involves replacing riskier stocks with higher exposure to income-generating bonds. The SEC’s order indicated that Vanguard’s investor-series target funds saw $130 billion in redemptions from December 2020 to October 2021, a substantial increase from $41 billion in the same period a year prior.
The large redemptions required Vanguard to sell the underlying assets in the investor share class to meet the outflow, resulting in a large capital gains distribution for remaining shareholders in taxable accounts. Jeff DeMaso, a specialist in tracking Vanguard at Independent Vanguard Adviser, noted that the $106 million settlement was likely the largest regulatory payment imposed on the Pennsylvania-based asset manager. This settlement is in addition to the $40 million Vanguard agreed to pay to investors as part of a class-action lawsuit.
The issue occurred under former CEO Tim Buckley. The current CEO, Salim Ramji, joined Vanguard from BlackRock in 2024. This incident follows another legal challenge for Vanguard in 2023, when the Financial Industry Regulatory Authority sanctioned the firm for issues related to account statements for money market funds in 2019 and 2020.