SPRINGFIELD - Several thousands of Illinois residents are eligible to receive a share of a $106 million multi-state settlement with mutual fund investor company Vanguard, which is accused of failing to disclose tax implications of its retirement funds, Illinois Secretary of State Alexi Giannoulias announced.

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According to the settlement, Vanguard failed to disclose potential tax consequences to investors that resulted in higher capital gains taxes for some investors. In Illinois, it led to approximately 9,000 investors paying higher than expected capital gains taxes on some retirement funds, Giannoulias added.

“The Secretary of State’s office is committed to protecting Main Street investors and ensuring that companies operating in Illinois follow securities laws and are held accountable when they fail to do so,” said Giannoulias, who serves as co-chair of the National Association of Secretaries of State’s (NASS) Securities Committee. “Investment companies must operate in a transparent fashion and disclose the necessary information regarding retirement funds and the potential risks and costs as required by law.”

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 U.S. Securities and Exchange Commission (SEC).

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The SEC has established a fund and will notify the investors who were impacted and distribute remediation payments to compensate for the capital gains taxes.

The investigation revealed that in 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 their Investor TRF shares to purchase Institutional TRF shares.

The large number of redemptions caused Vanguard to sell highly appreciated assets in the Investor TRF, which triggered significant capital gains taxes for hundreds of thousands of retail investors who remained invested in the Investor TRF. Vanguard did not disclose the potential capital gains and tax implications to Investor TRF shareholders which was a consequence of the migration of shareholders from the Investor TRF to the Institutional TRF.

The Vanguard Group, Inc. is the parent company of Vanguard Marketing Corporation, a Financial Industry Regulatory Authority (FINRA) and state-registered broker-dealer. 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, contact the Illinois Secretary of State Securities office at (217) 782-2256.