The Tennessee Department of Commerce & Insurance’s (TDCI) Securities Division has announced its participation in a $106 million settlement with Vanguard Marketing Corporation and The Vanguard Group, Inc. This settlement involves a taskforce of state securities regulators and the United States Securities and Exchange Commission (SEC). The case focuses on Vanguard’s failure to supervise certain registered persons and its lack of disclosure regarding potential tax consequences to investors following a change in investment minimums for particular target date retirement funds.
The settlement emerges from a three-year investigation coordinated through the North American Securities Administrators Association’s (NASAA) Enforcement Section Committee, conducted alongside a parallel investigation by the SEC. The investigation found that in 2020, Vanguard reduced the investment minimums for its Institutional Target Retirement Funds (TRFs). This change led numerous retirement plan investors to redeem their Investor TRF shares to purchase Institutional TRF shares, causing Vanguard to sell appreciated assets in the Investor TRF. This action triggered significant capital gains taxes for many retail investors who remained in the Investor TRF, without a disclosure of the potential tax consequences by Vanguard.
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TDCI Assistant Commissioner for Securities, Elizabeth Bowling, stated, “Working collaboratively allowed regulators to maximize our resources in order to efficiently reach a satisfactory settlement. This settlement is proof that state regulators and the SEC continue to work tirelessly on behalf of investors.”
The Vanguard Group, Inc. is the parent company of Vanguard Marketing Corporation, a broker-dealer registered with FINRA and state authorities. Vanguard markets target retirement funds to investors with qualified accounts offering special tax treatment, including deferred taxes, as well as to those with taxable accounts. Historically, the capital gains distributions and resulting tax liabilities for shareholders in Investor TRFs have been modest.
The SEC will notify affected investors and manage the remediation payments through its Fair Fund program to compensate for the capital gains taxes incurred.
For questions about investments, individuals can contact TDCI’s Securities Division online through the TDCI website, via email at securities.1@tn.gov, or by calling 800-863-9117.
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