New York Attorney General Letitia James, in collaboration with a coalition of 45 securities regulators and the Securities and Exchange Commission (SEC), has reached a $106 million settlement with Vanguard Group, Inc. and its subsidiary Vanguard Marketing Corporation. This resolution follows an investigation into Vanguard's failure to inform investors about changes to its retirement funds, which led to increased capital gains tax liabilities for many.
The Office of the Attorney General (OAG) discovered that Vanguard reduced the minimum investment requirement on one of its retirement funds without notifying investors about the potential tax implications. Over 15,000 New York investors faced higher capital gains taxes due to these undisclosed changes. As part of the settlement, Vanguard will compensate hundreds of thousands of affected investors with $106 million in restitution.
Attorney General James stated, "New Yorkers deserve the peace of mind that when they rely on trained professionals to help them save for retirement, those professionals won’t end up costing them extra money." She emphasized that investors were left uninformed about changes that resulted in additional financial burdens.
Vanguard is recognized as one of the largest investment advisors globally, managing approximately $7.9 trillion in retirement savings. The company offered two types of target date retirement funds: Investor Target Date Retirement Funds (TRFs) and Institutional Target Date Retirement Funds. In December 2020, Vanguard lowered the minimum investment amount for its Institutional TRFs from $100 million to $5 million. This change prompted many investors to switch from Investor TRFs to Institutional TRFs, leading to significant capital gains taxes due to asset sales within Investor TRFs.
The OAG found that while Vanguard was aware that these changes could lead to tax liabilities for investors, it did not communicate this information effectively.
The settlement mandates Vanguard to pay into a fair fund managed by the SEC for distribution as restitution. Affected investors will be contacted by the SEC regarding their eligibility for compensation.
Forty-five jurisdictions have signed onto the settlement agreement including states such as California, Florida, Illinois, and Texas among others.
The investigation by OAG involved Senior Enforcement Counsel Hannah K. Flamenbaum and Assistant Attorneys General Melissa Gable and Stephanie Torre among others under supervision from various officials within the division dedicated to investor protection and economic justice.