The Hawai‘i Department of Commerce and Consumer Affairs (DCCA), through its Securities Enforcement Branch, has announced its involvement in a $106 million settlement with Vanguard Marketing Corporation and The Vanguard Group, Inc. The settlement addresses Vanguard’s failure to properly supervise certain registered persons and disclose potential tax consequences to investors when it lowered investment minimums for specific target date retirement funds.

This resolution stems from a three-year investigation led by a multistate task force of state securities regulators, coordinated through the North American Securities Administrators Association’s Enforcement Section Committee, alongside a concurrent investigation by the United States Securities and Exchange Commission (SEC).

In 2020, Vanguard reduced the investment minimums for its Institutional Target Retirement Funds (TRF). As a result, a large number of retirement plan investors transferred their investments from the Investor TRF to the Institutional TRF. This wave of redemptions led to Vanguard selling highly appreciated assets within the Investor TRF, triggering substantial capital gains taxes for hundreds of thousands of retail investors who remained in the Investor TRF. Vanguard failed to notify its Investor TRF shareholders about the potential tax implications stemming from the redemptions and capital gains distributions.

“We are pleased that this settlement will result in relief to those Hawai‘i investors who held Investor TRF, received taxable capital gains distributions in 2021 attributable to the Investor TRF, and paid significant capital gains taxes as a result,” said Commissioner of Securities Ty Y. Nohara.

Vanguard, a parent company of Vanguard Marketing Corporation, is a FINRA- and state-registered broker-dealer that markets target retirement funds to investors in both qualified and taxable accounts. Historically, capital gains distributions and the resulting tax liabilities from the Investor TRF have been minimal.

The SEC is expected to notify impacted investors and administer remediation payments through its Fair Fund program, compensating them for the capital gains taxes incurred due to the unreported tax consequences.

For questions or concerns regarding investments, individuals can contact the DCCA Securities Enforcement Branch at 808-586-2740.