Arkansas Securities Department joins $106 million multi-state settlement with Vanguard over big tax bills, remediation to investors

Arkansas Securities Department joins $106 million multi-state settlement with Vanguard over big tax bills, remediation to investors

LITTLE ROCK, Arkansas - (January 17, 2025) - The Arkansas Securities Department joined a taskforce of state securities regulators and the United States Securities and Exchange Commission (SEC) in a $106 million settlement with Vanguard Marketing Corporation (VMC) 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 (NASAA) Enforcement Section Committee, to conduct a comprehensive investigation, parallel to a concurrent investigation by the SEC.

The investigation revealed that in December 2020, Vanguard lowered the investment minimums for its Institutional Target Retirement Funds (TRFs). As a result of the lowered investment minimums, a large number of retirement plan investors redeemed shares held in Investor TRF to purchase Institutional TRF shares. The large number of redemptions caused Vanguard to sell highly appreciated assets in the Investor TRFs, which triggered significant capital gains taxes for hundreds of thousands of retail investors who remained invested in the Investor TRFs. Vanguard did not disclose the potential capital gains and tax implications to Investor TRF shareholders, which was a consequence of the lowered investment minimums creating the migration of shareholders from the Investor TRFs to the Institutional TRFs.

The SEC will notify the Arkansas investors that were impacted by this action and will administer the remediation payments, through its Fair Fund program, to compensate Arkansas investors for the capital gains taxes.

"This is the appropriate relief that Arkansas investors deserve," said Arkansas Securities Commissioner Susannah T. Marshall. "Many Arkansans were unfairly hit with a large, unexpected tax liability caused by Vanguard's supervisory failures and lack of disclosure. I am pleased to see our investors receiving this remediation following their confidence to hold these investments in taxable accounts."

Vanguard is the parent company of VMC, an SEC and state-registered broker-dealer and member of the Financial Industry Regulatory Authority (FINRA). 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. If you have questions or concerns about your investments or financial professional, please contact the Arkansas Securities Department at (800) 981-4429.