Maryland Joins Multistate Settlement with Vanguard to Compensate Investors for Unexpected Tax Bills

Maryland Attorney General Anthony G. Brown announced the conclusion of a $106 million multistate settlement with Vanguard Marketing Corporation and The Vanguard Group, Inc. The settlement resolves allegations that Vanguard failed to adequately supervise certain registered individuals and did not disclose potential tax consequences to investors following changes to investment minimums for specific target retirement funds. This agreement is the result of a collaborative investigation involving state securities regulators and the U.S. Securities and Exchange Commission (SEC).

Under the terms of the settlement, investors will receive compensation for capital gains taxes incurred due to Vanguard’s actions. The SEC will administer these remediation payments through its Fair Fund program, with affected investors being notified directly. The compensation amounts will be determined based on each individual investor’s tax situation and the capital gains taxes related to their investment.

The case stems from Vanguard’s 2020 decision to lower the investment minimums and fees for its Institutional Target Retirement Funds (TRFs). This change prompted a significant number of retirement investors to sell their shares in the Investor TRF to purchase shares in the lower-minimum Institutional TRF. The substantial volume of sales from the Investor TRF necessitated the liquidation of highly appreciated assets within that fund. This liquidation, in turn, resulted in substantial capital gains tax liabilities for hundreds of thousands of retail investors who remained invested in the Investor TRF. Vanguard did not disclose the potential capital gains and tax consequences that could arise from this anticipated sell-off to shareholders of the Investor TRF, which was a direct result of the lowered investment minimums for the Institutional TRFs.

Vanguard Group, Inc. is the parent company of Vanguard Marketing Corporation, which is registered as a securities brokerage firm with FINRA and various states. Vanguard offers target retirement funds to investors holding shares in both tax-advantaged accounts, which typically offer deferred taxes, and in taxable accounts. Historically, capital gains distributions and the associated tax liabilities for shareholders in Investor TRFs were modest. Vanguard has not admitted or denied any wrongdoing in connection with this settlement. Investors with questions or concerns regarding their investments or financial professionals are encouraged to contact the Maryland Securities Division.

Article by Mel Anara, based upon information from the Maryland Attorney General’s Office

---