SACRAMENTO — The California Department of Financial Protection and Innovation (DFPI) has joined 49 states and the U.S. Virgin Islands, Puerto Rico and Guam as part of a $106 million settlement with Vanguard Marketing Corp. and The Vanguard Group, Inc. (Vanguard) for failing to supervise certain registered persons and failing to disclose potential tax consequences to investors following a change in investment minimums for certain target date retirement funds.
The settlement stems from a three-year multi-state task force investigation coordinated through the North American Securities Administrators Association’s Enforcement Section Committee, to conduct a comprehensive investigation, parallel to a concurrent investigation by the SEC.
The investigation revealed that in 2020, Vanguard lowered the investment minimums for its Institutional Target Retirement Funds (TRFs) and failed to take measures to ensure that investors who remained in its retail Investor Product (the Investor TRF) were informed of the substantial tax implications created by this move. The move triggered significant capital gains taxes for hundreds of thousands of retail investors who remained in the Investor TRF. By not disclosing the potential capital gains and tax implications to Investor TRF shareholders, these shareholders were unable to protect themselves and take mitigating action.
“DFPI is committed to protecting investors in California by making sure they get the disclosures they are entitled to receive,” DFPI Commissioner KC Mohseni said. “Vanguard’s failure to inform investors about the high-cost consequence of lowering the investment minimums is unacceptable, and our work with regulatory partners has resulted in the appropriate remedy.”
The Vanguard Group, Inc. is the parent company of Vanguard Marketing Corporation, a FINRA- and state-registered broker-dealer. Vanguard markets and sells target retirement funds to investors who hold shares in qualified accounts that offer special tax treatment, including deferred taxes, as well as to investors who hold shares in taxable accounts. Historically, the amount of capital gains distributions and resulting tax liability for shareholders in Investor TRFs has been modest. The SEC will notify the investors that were impacted by this action and will administer the remediation payments, through its Fair Fund program, to compensate investors for the capital gains taxes.
About DFPI
The California Department of Financial Protection and Innovation (DFPI) protects consumers, regulates financial services, and fosters responsible innovation. The DFPI protects consumers by establishing and enforcing financial regulations that promote transparency and accountability. We empower all Californians to access a fair and equitable financial marketplace through education and preventing potential risks, fraud, and abuse. Learn more at dfpi.ca.gov.