Illinois Secretary of State Participates in $106 Million Multi-State Settlement with Vanguard

Illinois Secretary of State Alexi Giannoulias recently announced a $106 million multi-state settlement with Vanguard, benefiting around 9,000 Illinois residents who were affected by the investment fund’s failure to disclose tax implications of its retirement funds. The settlement revealed that Vanguard did not inform investors about potential tax consequences, resulting in higher capital gains taxes for some individuals in Illinois.

Giannoulias emphasized the importance of holding companies accountable for following securities laws and ensuring transparency for investors. As the co-chair of the National Association of Secretaries of State’s Securities Committee, he highlighted the commitment to safeguarding Main Street investors and upholding legal standards in the financial sector.

The settlement stemmed from a thorough three-year investigation conducted by a multi-state task force coordinated through the North American Securities Administrators Association’s (NASAA) Enforcement Section Committee. This investigation ran parallel to a separate inquiry by the U.S. Securities and Exchange Commission (SEC), demonstrating a collaborative effort to address the issue.

Following the investigation, the SEC established a fund to provide remediation payments to impacted investors, compensating them for the unexpected capital gains taxes. The inquiry uncovered that Vanguard’s decision to lower investment minimums for its Institutional Target Retirement Funds (TRFs) in 2020 led to a significant number of retirement plan investors redeeming their Investor TRF shares to purchase Institutional TRF shares.

Subsequently, the mass redemptions prompted Vanguard to sell highly appreciated assets in the Investor TRF, resulting in substantial capital gains taxes for remaining retail investors. Vanguard’s failure to disclose these potential capital gains and tax implications to Investor TRF shareholders exacerbated the situation, arising from the shift of shareholders from the Investor TRF to the Institutional TRF.

The Vanguard Group, Inc., the parent company of Vanguard Marketing Corporation, faced scrutiny for its marketing and sales practices, particularly concerning the target retirement funds offered to investors with special tax treatment advantages. While past capital gains distributions and tax liabilities for shareholders in Investor TRFs had been minimal, the recent events highlighted the need for greater transparency and disclosure in the financial industry.

For individuals with concerns about their investments or financial professionals, the Illinois Secretary of State Securities office offers assistance and guidance. By contacting the office at (217) 782-2256, investors can seek clarification and support regarding their financial matters, ensuring that they are well-informed and protected in their investment endeavors.