In re The Vanguard Group

 
 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES ACT OF 1933 
Release No. 11359 / January 17, 2025 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6830 / January 17, 2025 
 
INVESTMENT COMPANY ACT OF 1940 
Release No. 35453 / January 17, 2025 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-22435 
 
 
 
In the Matter of 
 
 The Vanguard Group, Inc., 
 
Respondent. 
 
 
 
ORDER INSTITUTING 
ADMINISTRATIVE AND CEASE-AND-
DESIST PROCEEDINGS, PURSUANT TO 
SECTION 8A OF THE SECURITIES ACT 
OF 1933, SECTIONS 203(e) AND 203(k) OF 
THE INVESTMENT ADVISERS ACT OF 
1940, AND SECTION 9(f) OF THE 
INVESTMENT COMPANY ACT OF 1940, 
MAKING FINDINGS, AND IMPOSING 
REMEDIAL SANCTIONS AND A CEASE-
AND-DESIST ORDER 
   
 
I. 
 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 203(e) 
and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), and Section 9(f) of the 
Investment Company Act of 1940 (“Investment Company Act”) against The Vanguard Group, Inc. 
(“Vanguard” or “Respondent”). 
 
II. 
 
 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over Respondent and the subject matter of these 
proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 

 2 
Administrative and Cease-and-Desist Proceedings, Pursuant to Section 8A of the Securities Act of 
1933, Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, and Section 9(f) of the 
Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a 
Cease-and-Desist Order (“Order”), as set forth below. 
 
III. 
 
 On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that 
 
Summary 
 
1. These proceedings arise out of misleading statements by Vanguard concerning 
potential tax consequences to investors in the Vanguard Investor Target Retirement Funds 
(“Investor TRFs”).  In November 2020, Vanguard made a recommendation to lower the minimum 
initial investment amount for a separate series of Vanguard target date retirement funds designed for 
institutional investors (“Institutional TRFs”) that resulted in historically larger capital gains 
distributions and tax consequences for certain retail investors in the Investor TRFs who held them in 
taxable accounts.   
 
2. The Investor TRFs’ prospectuses that were effective and distributed in 2020 and 
2021 by Vanguard were materially misleading.  These prospectuses stated that the funds’ 
distributions may be taxable as ordinary income or capital gains, and that capital gains distributions 
may vary considerably from year to year as a result of the funds’ “normal” investment activities and 
cash flows.  But these representations, which were prepared by Vanguard for the funds, failed to 
disclose the potential for increased capital gains distributions resulting from the redemptions of fund 
shares by newly-eligible investors switching from the Investor TRFs to the Institutional TRFs to 
benefit from the lower expense ratios of the Institutional TRFs as a result of the lowered minimum 
investment.  Vanguard also failed to adopt and implement written policies and procedures 
reasonably designed to prevent violations of the Advisers Act and rules thereunder with respect to 
the accuracy of the funds’ disclosures. 
 
Respondent 
 
3. Vanguard is a registered investment adviser with its principal place of business in 
Malvern, Pennsylvania.  Vanguard has been registered with the Commission since August 23, 1976.  
Vanguard is one of the largest investment advisers in the world and reported in its Form ADV dated 
October 24, 2024 that it had approximately $7.9 trillion in regulatory assets under management.  
Respondent provides investment advisory, corporate management, administrative, marketing, and 
distribution services to over two hundred index and actively managed funds.  These services 
include, among other things, preparing and distributing the prospectuses and other disclosures for 
 
1
  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 
binding on any other person or entity in this or any other proceeding. 
 

 3 
the funds.  Vanguard is owned by its U.S. mutual funds and provides services to the funds at 
Vanguard’s cost of operations. 
 
Other Relevant Entities 
 
4. Vanguard Chester Funds (“Trust”) has been organized as a Delaware statutory 
trust since 1998.  The Trust is registered with the Commission under the Investment Company Act 
as an open-end management investment company.  Each of the target retirement funds (“TRFs”) 
relevant to this matter is a series of the Trust and a fund of funds that invests in a portfolio of 
Vanguard index funds.  The Trust’s trustees and officers are also directors and employees, 
respectively, of Vanguard. 
 
5. The Trust has offered the following Investor TRFs each as a series of the Trust:  the 
Vanguard Target Retirement Income Fund (VTINX), Vanguard Target Retirement 2015 
Fund (VTXVX), Vanguard Target Retirement 2020 Fund (VTWNX), Vanguard Target 
Retirement 2025 Fund (VTTVX), Vanguard Target Retirement 2030 Fund (VTHRX), 
Vanguard Target Retirement 2035 Fund (VTTHX), Vanguard Target Retirement 2040 Fund 
(VFORX), Vanguard Target Retirement 2045 Fund (VTIVX), Vanguard Target Retirement 
2050 Fund (VFIFX), Vanguard Target Retirement 2055 Fund (VFFVX), Vanguard Target 
Retirement 2060 Fund (VTTSX), and Vanguard Target Retirement 2065 Fund (VLXVX). 
 
6. Beginning in 2015, the Trust offered the following Institutional TRFs for certain 
institutional investors each as a separate series of the Trust:  the Vanguard Institutional Target 
Retirement Income Fund (VITRX), Vanguard Institutional Target Retirement 2015 Fund 
(VITVX), Vanguard Institutional Target Retirement 2020 Fund (VITWX), Vanguard 
Institutional Target Retirement 2025 Fund (VRIVX), Vanguard Institutional Target 
Retirement 2030 Fund (VTTWX), Vanguard Institutional Target Retirement 2035 Fund 
(VITFX), Vanguard Institutional Target Retirement 2040 Fund (VIRSX), Vanguard 
Institutional Target Retirement 2045 Fund (VITLX), Vanguard Institutional Target 
Retirement 2050 Fund (VTRLX), Vanguard Institutional Target Retirement 2055 Fund 
(VIVLX), Vanguard Institutional Target Retirement 2060 Fund (VILVX), and Vanguard 
Institutional Target Retirement 2065 Fund (VSXFX).  These funds were merged with the 
Investor TRFs in 2022 as described further below. 
 
Background 
 
7. The Trust first offered and sold TRFs in 2003 to retirement plan participants and 
individual investors as low-cost, comprehensive, and diversified products for retirement savings.  
At the time, there were six series (or vintages) of TRFs, a group of mutual funds that separately 
invested in other Vanguard funds.  Each vintage of a TRF was designed for investors who planned 
to retire close to the target year indicated in the fund’s name.  For example, the Vanguard Target 
Retirement 2025 Fund was designed for investors who planned to retire in or around 2025.  Each 
TRF has an asset allocation strategy that follows a glide path to become more conservative or to 
have less risk by, for example, investing more in bond funds than stock funds as the target 
retirement date draws closer. 
 

 4 
8. By 2019, the Trust had offered two separate groups of TRFs: the Investor TRFs for 
investors with assets of less than $100 million, including small- and medium-sized retirement plans 
and individual investors; and the Institutional TRFs for institutional investors (primarily larger 
retirement plans) with assets greater than $100 million.  Each group offered twelve vintages of 
TRFs with different target retirement dates.  The asset allocation strategies of each vintage of the 
Investor and Institutional TRFs were substantially similar. 
 
9. Among the key differences between the Investor and Institutional TRFs were the 
acquired fund fees and expenses (“AFFEs”), which formed the annual operating expenses of each 
fund as a percentage of the fund’s average net assets (“expense ratios”), and the minimum 
investment amounts to invest in the TRFs.  The Investor TRFs had an average expense ratio of 
0.14%, and the Institutional TRFs had an expense ratio of 0.09% across all vintages.  The 
minimum investment amount was $1,000 to invest in the Investor TRFs, and $100 million to invest 
in the Institutional TRFs. 
 
10. As disclosed in the TRFs’ prospectuses for the offering of fund shares to investors 
and potential investors, each TRF distributed to shareholders virtually all of its net income and net 
short- or long-term capital gains realized from the sale of its holdings or received from the TRFs’ 
underlying funds.  The prospectuses also stated that investors holding the TRFs in taxable accounts 
should be aware that, among other things, capital gains distributions are taxable as short- or long-
term under federal and state law, and capital gains distributions may vary considerably from year 
to year as a result of the TRFs’ normal investment activities and cash flows. 
 
The Growth in Vanguard TRF Assets Created a Gap in Fund Pricing and Expenses 
 
11. As part of the services provided to the TRFs, Vanguard monitors the TRFs’ 
expense ratios, which consist only of the AFFE from the underlying funds, relative to the allocated 
expenses that Vanguard incurs to service the TRFs and the TRFs’ direct expenses.  Under authority 
delegated to Vanguard by the Trust’s Board of Trustees, Vanguard periodically reviews the TRFs’ 
expense ratios and Vanguard’s expenses to ensure that any difference between the expense ratios 
and expenses does not exceed certain guidelines. 
 
12. By mid-2019, investor demand for TRFs had increased, and the Investor TRFs’ 
assets had grown substantially, to approximately $276 billion in assets under management.  This 
growth was mainly driven by increased investments by small- and medium-sized retirement plans, 
which combined held approximately $100 billion in Investor TRF assets.  The growth in assets 
resulted in economies of scale that lowered Vanguard’s expenses in servicing the Investor TRFs, 
creating a gap between the expense ratios and Vanguard’s expenses described above. 
 
Vanguard Formed a Working Group to Address the Gap in Fund Pricing and Expenses  
 
13. To reduce the gap between the expense ratios and Vanguard’s allocated expenses 
for the Investor TRFs, and to return value to shareholders, in early 2020 Vanguard formed a 
Pricing Working Group (“Working Group”) to analyze and recommend options to Vanguard’s 
Global Investment Committee, comprised of Vanguard’s senior management, and ultimately to the 
Trust’s Board of Trustees.  The Working Group comprised various employees of Vanguard’s 

 5 
business groups representing institutional client-facing groups as well as finance, legal, and 
portfolio management.  Vanguard’s retail client-facing groups were not represented in the Working 
Group, though they had the opportunity to review the Working Group’s final recommendation. 
 
14. From early to mid-2020, the Working Group considered several options to return 
value to Investor TRF shareholders and evaluated those options using the following criteria: the 
ability to reduce the gap between the Investor TRFs’ expense ratios and allocated expenses; the 
ability to provide adequate time before further expense reduction measures would be required; the 
cost and revenue impact to Vanguard; client and business implications; and operational support.  
Using those criteria, the Working Group considered, among other options, lowering the minimum 
investment of the Institutional TRFs from $100 million to $5 million, expense reductions, and 
merging the Investor and Institutional TRFs.   
 
15. One reason why the Working Group considered lowering the minimum investment 
for the Institutional TRFs was to allow small- and medium-sized retirement plans, which had over 
$100 billion in combined assets and had contributed to the Investor TRFs’ growth, to switch to the 
Institutional TRFs.  This option met several of the criteria considered by the Working Group.  
Switching from the Investor TRFs to the Institutional TRFs immediately reduced expenses for 
these small- and medium-sized plans from 0.14% to 0.09%, which had the benefit of both 
returning value to investors and enhancing Vanguard’s competitiveness among other mutual fund 
companies offering target date retirement funds with expense ratios of 0.09% or lower.  
Additionally, switching better aligned Vanguard’s expenses and revenue concerning those plans, 
and would also reduce the gap between the Investor TRFs’ expense ratios and Vanguard’s 
allocated expenses.   
 
Vanguard Failed to Adequately Consider Potential Capital Gains and Tax Consequences for 
Investor TRF Investors in Taxable Accounts 
 
16. By March 2020, the Working Group determined that the movement of investors 
switching from the Investor TRFs to Institutional TRFs could result in potential capital gains 
impacts, not just for investors who switched but also for investors who purchased or continued to 
purchase Investor TRFs.  Investors would realize capital gains because the Investor TRFs and 
Institutional TRFs were separate funds and not separate share classes of the same fund.  To switch 
from an Investor TRF to an Institutional TRF required the redemption of the Investor TRF shares 
and the subsequent purchase of Institutional TRF shares.  If those redemption requests outpaced 
new investments in the Investor TRFs, the Investor TRFs would have to satisfy redemption 
requests from their available cash or the sales of underlying fund assets.  The Working Group 
understood that the redemptions likely would generate capital gains distributions for Investor TRF 
shareholders remaining in the funds because of the likelihood of selling underlying fund assets that 
had increased in value. 
 
17. The Working Group also incorrectly concluded that, while capital gains impacts 
were likely, they were not a significant factor for their recommendation for several reasons.  First, 
because most of the Investor TRF investors held the funds in tax-advantaged accounts, such as 
employer-sponsored retirement plans or individual retirement accounts, they would not experience 
any capital gains or tax consequences.   

 6 
 
18. Second, the Working Group estimated that approximately 5.79% or $17 billion of 
Investor TRFs’ assets were held by investors in taxable accounts at Vanguard, and those 
investors—who were all retail investors—would have capital gains and tax consequences.  
Approximately 40%, or $110 billion, of all Investor TRF assets were held in non-Vanguard 
accounts.  The Working Group failed to fully consider whether any of those non-Vanguard 
accounts were taxable and might also realize capital gains and tax consequences.   
 
19. Third, the Working Group underestimated the potential capital gains impact on 
taxable investors.  The Working Group observed that, through early 2020, accumulated realized 
capital gains in the Investor TRFs averaged 0.5%, consistent with historical numbers.  However, 
this observation was based on evaluations of capital gains during a one-month period between late 
February and March 2020.  Because the financial markets had declined substantially at the time 
due to consequences from the COVID-19 pandemic, the Working Group assumed that capital 
gains would continue to be modest for Investor TRFs in the foreseeable future.  The Working 
Group also assumed that newly-eligible investor redemptions from the Investor TRFs to purchase 
the Institutional TRFs would be staggered over time, moderating any potential realization of capital 
gains.  The Working Group planned to make its recommendations to the Global Investment 
Committee and the Trust’s Board of Trustees in the fall of 2020.  The Working Group did not 
reevaluate the market conditions and potential impacts on accumulated capital gains between 
March and the fall of 2020, when the Working Group ultimately made its recommendation.  By the 
third quarter of 2020, the markets had rebounded significantly and as a result the accumulated 
capital gains as a percentage of net asset value in the Investor TRFs had increased from 0.5% to 
1.4%.  However, the Working Group did not consider whether continued market appreciation in 
2021 could impact its evaluation of potential capital gains or tax consequences resulting from 
investors switching from Investor TRFs to Institutional TRFs.   
 
20. Based on these limited evaluations, by March 2020 the Working Group determined 
that potential capital gains and tax consequences to the small percentage of Investor TRF investors 
holding the funds in taxable accounts did not “present a hindrance” to recommending the lowering 
of the minimum investment for the Institutional TRFs. 
 
Vanguard Recommended Lowering the Minimum Investment for Institutional TRFs to 
Allow Certain Retirement Plans to Switch from Investor TRFs to Institutional TRFs 
 
21. Based on the analysis described above, the Working Group determined that the best 
option to reduce the gap between the expense ratios and allocated expenses for the Investor TRFs 
was to lower the minimum investment of the Institutional TRFs from $100 million to $5 million, 
and also to lower the Investor TRFs’ expense ratios by 0.01% to 0.02%.  Lowering the minimum 
investment would allow the small- and medium-sized retirement plans with $5 million or more in 
assets to switch from the Investor TRFs to the Institutional TRFs and immediately lower their 
expense ratio from 0.14% to 0.09%.  Lowering the Investor TRFs’ expense ratios by 0.01% to 
0.02% would result in lower expenses for new or existing investors in the Investor TRFs who had 
less than $5 million in assets and were not eligible to invest in the Institutional TRFs. 
 

 7 
22. The Working Group also considered and rejected recommending the option of 
merging the Investor and Institutional TRFs as a single group of funds.  Although merging the 
funds would have eliminated the gap between the Investor TRFs’ expense ratios and Vanguard’s 
allocated expenses, and could have been achieved with no capital gains or tax consequences for 
taxable investors, the Working Group decided not to recommend this option to the Global 
Investment Committee because it would result in an immediate reduction of approximately $148 
million in Vanguard’s revenue from the Investor TRFs—more than the other options considered—
and would impair Vanguard’s ability to make expense reductions in other products.  In contrast, 
the Working Group estimated that lowering the minimum investment for the Institutional TRFs 
would result in a reduction of approximately $61 million in revenue to Vanguard over two to three 
years, which was more favorable for Vanguard’s U.S. funds than giving up substantially more 
revenue by merging the Retail and Institutional TRFs. 
 
23. The Working Group determined that the combined solution of lowering the 
Institutional TRF minimum investment and lowering the Investor TRF expense ratios would 
materially reduce the gap between the Investor TRFs’ expense ratios and allocated expenses.  This 
solution also had the additional benefit of minimizing an immediate, negative impact to 
Vanguard’s revenue and of strengthening Vanguard’s competitiveness among other mutual fund 
companies in attracting small- and medium-sized retirement plans to the Institutional TRFs. 
 
24. In October 2020, the Working Group made its recommendation to the Global 
Investment Committee based on its prior analyses from February and March 2020.  By this time, 
the financial markets had recovered from the pandemic lows in March and April 2020 and reached 
record highs, but the Working Group did not further consider potential capital gains or tax 
consequences if a substantial number of small- and medium-sized retirement plan investors in the 
Investor TRFs switched to the Institutional TRFs in a rising market.  The Global Investment 
Committee approved the recommendation and directed Vanguard to recommend the solution to the 
Trust’s Board of Trustees.  
 
25. In November 2020, Vanguard recommended that the Trust’s Board of Trustees 
reduce the minimum investment for the Institutional TRFs from $100 million to $5 million.  
Vanguard did not recommend lowering the expense ratios of the Investor TRFs because that 
decision did not require the Trustees’ approval, though Vanguard advised the Trustees that it 
intended to lower the Investor TRF expense ratios in 2021.  Vanguard, in fact, did not lower the 
Investor TRF expense ratios because, as discussed below, it later recommended the merger of the 
Investor and Institutional TRFs in 2021. 
 
26. Vanguard did not disclose to the Trustees the Working Group’s evaluation of 
potential capital gains and tax consequences to Investor TRF investors resulting from investors 
redeeming Investor TRFs to purchase Institutional TRFs   
 
27. The Trustees approved Vanguard’s recommendation and on December 11, 2020 the 
Trust and Vanguard announced in a supplement to the Institutional TRFs’ prospectuses and a press 
release that the minimum investment for the Institutional TRFs would be lowered from $100 
million to $5 million effective immediately.  The Investor TRFs’ prospectuses and the press release 
did not mention any potential capital gains and tax consequences to Investor TRF investors in 

 8 
taxable accounts that could result from the lowering of the minimum investment for the 
Institutional TRFs, and the anticipated movement of a substantial number of Investor TRF 
investors to the Institutional TRFs. 
 
Substantial Redemptions of Investor TRFs Caused Historically Higher Capital Gains and 
Tax Consequences for Investor TRF Investors in Taxable Accounts 
 
28. During the first half of 2021, a substantial number of small- and medium-sized 
retirement plan investors in the Investor TRFs redeemed fund shares to switch to the Institutional 
TRFs due to the lower minimum investment amount and lower expense ratio.  To meet these 
redemptions, the Investor TRFs had to sell underlying assets at elevated prices due to the rising 
financial markets that had rebounded from pandemic lows and reached new highs.   
 
29. From December 2020, when Vanguard and the Trust announced the lowering of the 
minimum investment for the Institutional TRFs, to October 2021, redemptions in the Investor 
TRFs totaled approximately $130 billion, compared with approximately $41 billion in redemptions 
in the prior period from November 2019 to October 2020.  Capital gains distributions for the 
Investor TRFs as a percentage of net asset value from November 2020 to October 2021 averaged 
9.69%, nearly seven times larger than the 1.39% average from November 2019 to October 2020. 
 
30. As a result, Investor TRF investors who held the funds in taxable accounts at 
Vanguard and at other firms realized unexpected, historically high capital gains distributions and 
tax consequences for 2021.  These capital gains distributions accelerated the investors’ incurrence 
of tax liability and deprived them of the potential compounding growth of their investments in the 
Investor TRFs through retirement.   
 
31. In early 2021, continued improvement in market conditions generated excess 
revenue for Vanguard compared to 2020.  This also contributed to a persistent gap between the 
Investor TRFs’ expense ratios and Vanguard’s allocated expenses.  To return additional value to 
investors, better align the expense ratios to allocated expenses, and further enhance Vanguard’s 
competitiveness among other mutual fund companies in the target date retirement fund business, in 
September 2021 Vanguard recommended to the Trust’s Board of Trustees to merge the Investor 
TRFs and Institutional TRFs—the option that Vanguard did not recommend in 2020—and to lower 
the expense ratios for all of the combined TRFs to 0.08%.  The Trustees approved the 
recommendation later that month, and the Trust merged the Investor and Institutional TRFs in 
February 2022.   
 
Vanguard’s Inadequate Representations Concerning Potential Capital Gains Consequences 
 
32. Vanguard was responsible for preparing all disclosures of the Trust, including 
prospectuses for the Investor and Institutional TRFs, and distributing the prospectuses to investors.  
The Investor TRFs’ prospectuses that were effective and distributed by Vanguard in 2020 and 
2021 for the continuous offers and sales of fund shares in this period stated that the funds’ 
distributions “may be taxable as ordinary income or capital gain[]” and “[c]apital gains 
distributions may vary considerably from year to year as a result of the Funds’ normal investment 
activities and cash flows” (emphasis added). 

 9 
 
33. These disclosures were materially misleading because they described certain 
normal investment activities and cash flows that could affect capital gains, but failed to disclose, 
when discussing capital gains distributions, what Vanguard and the Trust knew or should have 
known was likely to be unusually large capital gains distributions for Investor TRF investors 
holding the funds in taxable accounts, resulting from the lowering of the minimum investment for 
the Institutional TRFs and the redemptions from the Investor TRFs.   
 
34. Specifically, Vanguard was aware that lowering the minimum investment for 
Institutional TRFs was designed to attract a substantial number of retirement plans to switch from 
the Investor TRFs to Institutional TRFs.  Vanguard was also aware, and the Trust should have been 
aware, that those retirement plans’ redemptions of their Investor TRF holdings to switch to the 
Institutional TRFs would cause potential capital gains and tax consequences to those remaining 
Investor TRF investors who held their investments in taxable accounts.  Vanguard was further 
aware, and the Trust should have been aware, that such redemptions were not normal investment 
activities and cash flows of the Investor TRFs, but extraordinary redemptions that resulted from 
Vanguard’s goal to lower expenses for those retirement plans that provided economies of scale and 
generated increased revenue for Vanguard in servicing the Investor TRFs. 
 
35. As a result, the disclosures to Investor TRF investors were materially misleading. 
 
Vanguard’s Inadequate Compliance Policies and Procedures 
 
36. During 2020 and 2021, Vanguard did not have in place, adopt, or implement 
written policies and procedures reasonably designed to prevent violations of the Advisers Act and 
the rules promulgated thereunder.  Specifically, Vanguard never had in place, adopted, or 
implemented written policies and procedures to address the accuracy of disclosures with respect to 
the Trust, such as those concerning potential capital gains and tax consequences resulting from 
fund decisions and initiatives that may not be directly related to the Investor TRFs’ normal 
investment activities.  As a result, Vanguard’s written policies and procedures were inadequate. 
 
Violations 
 
37. As a result of the conduct described above, Vanguard caused the Trust to violate 
Section 17(a)(2) of the Securities Act, which makes it unlawful for any person in the offer or sale 
of securities to obtain money or property by means of any untrue statement of a material fact or 
any omission to state a material fact necessary in order to make statements made not misleading.  
A violation of Section 17(a)(2) may rest on a finding of negligence; scienter is not required.  Aaron 
v. SEC, 446 U.S. 680, 697 (1980). 
 
38. As a result of the conduct described above, Vanguard willfully
2
 violated Section 
206(4) of the Advisers Act, and Rule 206(4)-8 promulgated thereunder, which make it unlawful for 
 
2
  “Willfully,” for purposes of imposing relief under Section 203(e) of the Advisers Act 
“‘means no more than that the person charged with the duty knows what he is doing.’” Wonsover 
 

 10 
any investment adviser to a pooled investment vehicle to make any untrue statement of a material 
fact or to omit to state a material fact necessary to make the statements made, in the light of the 
circumstances under which they were made, not misleading, or otherwise engage in any act, 
practice, or course of business that is fraudulent, deceptive, or manipulative with respect, to any 
investor or prospective investor in the pooled investment vehicle.  A violation of Section 206(4) or 
Rule 206(4)-8 may rest on a finding of negligence and scienter is not required.  See SEC v. 
Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992).   
 
39. As a result of the conduct described above, Vanguard further willfully violated 
Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require investment 
advisers to adopt and implement written policies and procedures reasonably designed to prevent 
violation of the Advisers Act and its rules by the adviser and its supervised persons.   
 
40. As a result of the conduct described above, Vanguard caused the Trust to violate 
Section 34(b) of the Investment Company Act, which makes it unlawful for any person to make 
any untrue statement of a material fact in any registration statement, or other document filed or 
transmitted pursuant to the Investment Company Act, or for any person so filing or transmitting to 
omit to state therein any fact necessary in order to prevent the statements made therein, in light of 
the circumstances under which they were made, from being materially misleading.  Establishing a 
violation of Section 34(b) does not require proof of scienter.  Fundamental Portfolio Advisors, Inc., 
Advisers Act Rel. No. 2146, 2003 WL 21658248, at *8 (July 15, 2003) (Comm. Op.). 
 
Cooperation and Remediation 
 
41. In determining to accept the Offer, the Commission considered cooperation 
afforded the staff and remedial acts undertaken by Vanguard since the commencement of the 
Commission’s investigation.  These acts include providing Commission staff with factual 
summaries and key documents and augmenting its policies and procedures concerning fund 
initiatives and its compliance program. 
 
42. Further, Respondent enhanced fund prospectus disclosures to disclose the risk of 
movement across Vanguard products that may result from the launch of competing funds or the 
reduction of expenses in other products. 
 
 
v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. 
Cir. 1949)).  There is no requirement that the actor “also be aware that he is violating one of the 
Rules or Acts.”  Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).  The decision in The Robare Group, 
Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured 
statutory provision, does not alter that standard.  922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting 
forth the showing required to establish that a person has “willfully omit[ted]” material 
information from a required disclosure in violation of Section 207 of the Advisers Act). 

 11 
Vanguard’s Settlements With the Office of the New York State Attorney General and  
North American Securities Administrators Association 
 
43. Vanguard, including through its affiliates, has entered into settlement agreements 
with the Office of the New York State Attorney General (“NYAG”) and members of the North 
American Securities Administrators Association (“NASAA”) concerning substantially the same 
facts as alleged herein. 
 
44. Under those settlements, Vanguard has agreed to resolve certain charges and pay 
$135 million in remediation within 10 days of the effective date of the settlements for the benefit of 
harmed investors of the Investor TRFs in taxable accounts who received historically high capital 
gains distributions in 2021.  According to those settlements, Vanguard is entitled to an offset to the 
$135 million by (a) the amount of $40 million for Vanguard’s settlement of a class action against it 
and certain related parties pending in the U.S. District Court for the Eastern District of 
Pennsylvania captioned, In re Vanguard Chester Funds Lit., Case No. 2:22-cv-955-JFM, under a 
Stipulation of Settlement submitted by plaintiffs for preliminary and final Court approval (“Class 
Action Settlement”), and (b) the amount of $2.09 million for Vanguard’s settlement of certain 
individual investor arbitration claims filed or threatened to be filed before the Financial Industry 
Regulatory Authority.   
 
45. The total amount of remediation inclusive of these offsets is $92.91 million, which 
Vanguard shall, under the NYAG and NASAA settlement agreements and pursuant to Section 
308(b) of the Sarbanes-Oxley Act of 2002 (“SOX”) pay to a Fair Fund established by the 
Commission for the benefit of investors as described below in paragraph IV.E.  Under the 
settlement agreements with the NYAG and NASAA, in the event Vanguard does not pay the $40 
million under the Class Action Settlement, as a result of the termination or withdrawal of the 
Stipulation of Settlement or the Court’s rejection of the Class Action Settlement, Vanguard will be 
obligated to pay the $40 million into the Commission’s Fair Fund pursuant to Section 308(b) 
within 10 days of such termination or rejection. 
 
46. Further, under the NYAG and NASAA settlement agreements, Vanguard will pay a 
penalty in the amount of $13.5 million, which will be deemed satisfied by the payment of the 
penalty ordered by the Commission below in paragraph IV.D. 
 
Disgorgement, Prejudgment Interest, Remediation, and Civil Penalties  
 
47. The disgorgement and prejudgment interest ordered below in paragraph IV.C is 
consistent with equitable principles and does not exceed Vanguard’s net profits from its 
violations.  The funds collected under the NYAG and NASAA settlement agreements as 
described in paragraphs 43 to 46 above and the civil money penalty ordered in paragraph IV.D 
below will be distributed to harmed investors to the extent feasible.  The Commission will hold 
all funds paid in an account at the United States Treasury pending distribution.  Upon approval 
of the distribution final accounting by the Commission, any amounts remaining that are 
infeasible to return to investors, and any amounts returned to the Commission in the future that 

 12 
are infeasible to return to investors, may be transferred to the general fund of the United States 
Treasury, subject to Section 21F(g)(3) of the Securities Exchange Act of 1934. 
 
IV. 
 In view of the foregoing, the Commission deems it appropriate and in the public interest to 
impose the sanctions agreed to in Vanguard’s Offer. 
 
 Accordingly, pursuant to Section 8A of the Securities Act, Sections 203(e) and 203(k) of 
the Advisers Act, and Section 9(f) of the Investment Company Act, it is hereby ORDERED that: 
 
A. Vanguard cease and desist from committing or causing any violations and any future 
violations of Section 17(a)(2) of the Securities Act, Section 206(4) of the Advisers Act and Rules 
206(4)-7 and 206(4)-8 promulgated thereunder, and Section 34(b) of the Investment Company Act. 
 
B. Vanguard is censured. 
 
C. Vanguard is ordered to pay disgorgement in the amount of $14,700,000 and 
prejudgment interest thereon in the amount of $3,500,000.  These amounts will be deemed satisfied 
upon Vanguard’s payment of $92,910,000 in remediation into the Fair Fund under the settlement 
agreements with the NYAG and NASAA as described in paragraphs 43 to 46 above. 
 
D. Vanguard shall, within 10 days of the entry of this Order, pay a civil money penalty 
in the amount of $13,500,000 to the Commission.  If timely payment is not made, additional 
interest shall accrue pursuant to 31 U.S.C. § 3717.  
 
Payment must be made in one of the following ways:   
 
(1) Respondent may transmit payment electronically to the Commission, which 
will provide detailed ACH transfer/Fedwire instructions upon request;  
 
(2) Respondent may make direct payment from a bank account via Pay.gov 
through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
 
(3) Respondent may pay by certified check, bank cashier’s check, or United 
States postal money order, made payable to the Securities and Exchange 
Commission and hand-delivered or mailed to:  
 
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter 
identifying The Vanguard Group, Inc. as a Respondent in these proceedings, and the file number of 
these proceedings; a copy of the cover letter and check or money order must be sent to Corey 

 13 
Schuster, Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., 
Washington, DC 20549.   
 
E. Pursuant to Section 308(a) of SOX, a Fair Fund is created for the penalty referenced 
in paragraph IV.D above.  The proceeds for remediation under Respondent’s settlement agreements 
with the NYAG and NASAA shall be received and accepted by the Commission for the Fair Fund 
under SOX 308(b) as described above in paragraphs 43 to 46.  Amounts ordered to be paid as a 
civil money penalty pursuant to this Order shall be treated as penalties paid to the government for 
all purposes, including all tax purposes.  To preserve the deterrent effect of the civil penalty, 
Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor 
shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any 
part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  If the court in 
any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 
days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this 
action and pay the amount of the Penalty Offset to the Commission.  Such a payment shall not be 
deemed an additional civil penalty and shall not be deemed to change the amount of the civil 
penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 
means a private damages action brought against Respondent by or on behalf of one or more 
investors based on substantially the same facts as alleged in the Order instituted by the 
Commission in this proceeding. 
 
 By the Commission. 
 
 
 
Vanessa A. Countryman 
       Secretary 
 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES ACT OF 1933 

Release No. 11359 / January 17, 2025 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6830 / January 17, 2025 

 

INVESTMENT COMPANY ACT OF 1940 

Release No. 35453 / January 17, 2025 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-22435 

 

 

 

In the Matter of 

 

 The Vanguard Group, Inc., 

 

Respondent. 

 

 

 

ORDER INSTITUTING 

ADMINISTRATIVE AND CEASE-AND-

DESIST PROCEEDINGS, PURSUANT TO 

SECTION 8A OF THE SECURITIES ACT 

OF 1933, SECTIONS 203(e) AND 203(k) OF 

THE INVESTMENT ADVISERS ACT OF 

1940, AND SECTION 9(f) OF THE 

INVESTMENT COMPANY ACT OF 1940, 

MAKING FINDINGS, AND IMPOSING 

REMEDIAL SANCTIONS AND A CEASE-

AND-DESIST ORDER 

   

 

I. 

 

 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 203(e) 

and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), and Section 9(f) of the 

Investment Company Act of 1940 (“Investment Company Act”) against The Vanguard Group, Inc. 

(“Vanguard” or “Respondent”). 

 

II. 

 

 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings 

herein, except as to the Commission’s jurisdiction over Respondent and the subject matter of these 

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 



 2 

Administrative and Cease-and-Desist Proceedings, Pursuant to Section 8A of the Securities Act of 

1933, Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, and Section 9(f) of the 

Investment Company Act of 1940, Making Findings, and Imposing Remedial Sanctions and a 

Cease-and-Desist Order (“Order”), as set forth below. 

 

III. 

 

 On the basis of this Order and Respondent’s Offer, the Commission finds1 that 

 

Summary 

 

1. These proceedings arise out of misleading statements by Vanguard concerning 

potential tax consequences to investors in the Vanguard Investor Target Retirement Funds 

(“Investor TRFs”).  In November 2020, Vanguard made a recommendation to lower the minimum 

initial investment amount for a separate series of Vanguard target date retirement funds designed for 

institutional investors (“Institutional TRFs”) that resulted in historically larger capital gains 

distributions and tax consequences for certain retail investors in the Investor TRFs who held them in 

taxable accounts.   

 

2. The Investor TRFs’ prospectuses that were effective and distributed in 2020 and 

2021 by Vanguard were materially misleading.  These prospectuses stated that the funds’ 

distributions may be taxable as ordinary income or capital gains, and that capital gains distributions 

may vary considerably from year to year as a result of the funds’ “normal” investment activities and 

cash flows.  But these representations, which were prepared by Vanguard for the funds, failed to 

disclose the potential for increased capital gains distributions resulting from the redemptions of fund 

shares by newly-eligible investors switching from the Investor TRFs to the Institutional TRFs to 

benefit from the lower expense ratios of the Institutional TRFs as a result of the lowered minimum 

investment.  Vanguard also failed to adopt and implement written policies and procedures 

reasonably designed to prevent violations of the Advisers Act and rules thereunder with respect to 

the accuracy of the funds’ disclosures. 

 

Respondent 

 

3. Vanguard is a registered investment adviser with its principal place of business in 

Malvern, Pennsylvania.  Vanguard has been registered with the Commission since August 23, 1976.  

Vanguard is one of the largest investment advisers in the world and reported in its Form ADV dated 

October 24, 2024 that it had approximately $7.9 trillion in regulatory assets under management.  

Respondent provides investment advisory, corporate management, administrative, marketing, and 

distribution services to over two hundred index and actively managed funds.  These services 

include, among other things, preparing and distributing the prospectuses and other disclosures for 

 
1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 

binding on any other person or entity in this or any other proceeding. 

 



 3 

the funds.  Vanguard is owned by its U.S. mutual funds and provides services to the funds at 

Vanguard’s cost of operations. 

 

Other Relevant Entities 

 

4. Vanguard Chester Funds (“Trust”) has been organized as a Delaware statutory 

trust since 1998.  The Trust is registered with the Commission under the Investment Company Act 

as an open-end management investment company.  Each of the target retirement funds (“TRFs”) 

relevant to this matter is a series of the Trust and a fund of funds that invests in a portfolio of 

Vanguard index funds.  The Trust’s trustees and officers are also directors and employees, 

respectively, of Vanguard. 

 

5. The Trust has offered the following Investor TRFs each as a series of the Trust:  the 

Vanguard Target Retirement Income Fund (VTINX), Vanguard Target Retirement 2015 

Fund (VTXVX), Vanguard Target Retirement 2020 Fund (VTWNX), Vanguard Target 

Retirement 2025 Fund (VTTVX), Vanguard Target Retirement 2030 Fund (VTHRX), 

Vanguard Target Retirement 2035 Fund (VTTHX), Vanguard Target Retirement 2040 Fund 

(VFORX), Vanguard Target Retirement 2045 Fund (VTIVX), Vanguard Target Retirement 

2050 Fund (VFIFX), Vanguard Target Retirement 2055 Fund (VFFVX), Vanguard Target 

Retirement 2060 Fund (VTTSX), and Vanguard Target Retirement 2065 Fund (VLXVX). 

 

6. Beginning in 2015, the Trust offered the following Institutional TRFs for certain 

institutional investors each as a separate series of the Trust:  the Vanguard Institutional Target 

Retirement Income Fund (VITRX), Vanguard Institutional Target Retirement 2015 Fund 

(VITVX), Vanguard Institutional Target Retirement 2020 Fund (VITWX), Vanguard 

Institutional Target Retirement 2025 Fund (VRIVX), Vanguard Institutional Target 

Retirement 2030 Fund (VTTWX), Vanguard Institutional Target Retirement 2035 Fund 

(VITFX), Vanguard Institutional Target Retirement 2040 Fund (VIRSX), Vanguard 

Institutional Target Retirement 2045 Fund (VITLX), Vanguard Institutional Target 

Retirement 2050 Fund (VTRLX), Vanguard Institutional Target Retirement 2055 Fund 

(VIVLX), Vanguard Institutional Target Retirement 2060 Fund (VILVX), and Vanguard 

Institutional Target Retirement 2065 Fund (VSXFX).  These funds were merged with the 

Investor TRFs in 2022 as described further below. 

 

Background 

 

7. The Trust first offered and sold TRFs in 2003 to retirement plan participants and 

individual investors as low-cost, comprehensive, and diversified products for retirement savings.  

At the time, there were six series (or vintages) of TRFs, a group of mutual funds that separately 

invested in other Vanguard funds.  Each vintage of a TRF was designed for investors who planned 

to retire close to the target year indicated in the fund’s name.  For example, the Vanguard Target 

Retirement 2025 Fund was designed for investors who planned to retire in or around 2025.  Each 

TRF has an asset allocation strategy that follows a glide path to become more conservative or to 

have less risk by, for example, investing more in bond funds than stock funds as the target 

retirement date draws closer. 

 



 4 

8. By 2019, the Trust had offered two separate groups of TRFs: the Investor TRFs for 

investors with assets of less than $100 million, including small- and medium-sized retirement plans 

and individual investors; and the Institutional TRFs for institutional investors (primarily larger 

retirement plans) with assets greater than $100 million.  Each group offered twelve vintages of 

TRFs with different target retirement dates.  The asset allocation strategies of each vintage of the 

Investor and Institutional TRFs were substantially similar. 

 

9. Among the key differences between the Investor and Institutional TRFs were the 

acquired fund fees and expenses (“AFFEs”), which formed the annual operating expenses of each 

fund as a percentage of the fund’s average net assets (“expense ratios”), and the minimum 

investment amounts to invest in the TRFs.  The Investor TRFs had an average expense ratio of 

0.14%, and the Institutional TRFs had an expense ratio of 0.09% across all vintages.  The 

minimum investment amount was $1,000 to invest in the Investor TRFs, and $100 million to invest 

in the Institutional TRFs. 

 

10. As disclosed in the TRFs’ prospectuses for the offering of fund shares to investors 

and potential investors, each TRF distributed to shareholders virtually all of its net income and net 

short- or long-term capital gains realized from the sale of its holdings or received from the TRFs’ 

underlying funds.  The prospectuses also stated that investors holding the TRFs in taxable accounts 

should be aware that, among other things, capital gains distributions are taxable as short- or long-

term under federal and state law, and capital gains distributions may vary considerably from year 

to year as a result of the TRFs’ normal investment activities and cash flows. 

 

The Growth in Vanguard TRF Assets Created a Gap in Fund Pricing and Expenses 

 

11. As part of the services provided to the TRFs, Vanguard monitors the TRFs’ 

expense ratios, which consist only of the AFFE from the underlying funds, relative to the allocated 

expenses that Vanguard incurs to service the TRFs and the TRFs’ direct expenses.  Under authority 

delegated to Vanguard by the Trust’s Board of Trustees, Vanguard periodically reviews the TRFs’ 

expense ratios and Vanguard’s expenses to ensure that any difference between the expense ratios 

and expenses does not exceed certain guidelines. 

 

12. By mid-2019, investor demand for TRFs had increased, and the Investor TRFs’ 

assets had grown substantially, to approximately $276 billion in assets under management.  This 

growth was mainly driven by increased investments by small- and medium-sized retirement plans, 

which combined held approximately $100 billion in Investor TRF assets.  The growth in assets 

resulted in economies of scale that lowered Vanguard’s expenses in servicing the Investor TRFs, 

creating a gap between the expense ratios and Vanguard’s expenses described above. 

 

Vanguard Formed a Working Group to Address the Gap in Fund Pricing and Expenses  

 

13. To reduce the gap between the expense ratios and Vanguard’s allocated expenses 

for the Investor TRFs, and to return value to shareholders, in early 2020 Vanguard formed a 

Pricing Working Group (“Working Group”) to analyze and recommend options to Vanguard’s 

Global Investment Committee, comprised of Vanguard’s senior management, and ultimately to the 

Trust’s Board of Trustees.  The Working Group comprised various employees of Vanguard’s 



 5 

business groups representing institutional client-facing groups as well as finance, legal, and 

portfolio management.  Vanguard’s retail client-facing groups were not represented in the Working 

Group, though they had the opportunity to review the Working Group’s final recommendation. 

 

14. From early to mid-2020, the Working Group considered several options to return 

value to Investor TRF shareholders and evaluated those options using the following criteria: the 

ability to reduce the gap between the Investor TRFs’ expense ratios and allocated expenses; the 

ability to provide adequate time before further expense reduction measures would be required; the 

cost and revenue impact to Vanguard; client and business implications; and operational support.  

Using those criteria, the Working Group considered, among other options, lowering the minimum 

investment of the Institutional TRFs from $100 million to $5 million, expense reductions, and 

merging the Investor and Institutional TRFs.   

 

15. One reason why the Working Group considered lowering the minimum investment 

for the Institutional TRFs was to allow small- and medium-sized retirement plans, which had over 

$100 billion in combined assets and had contributed to the Investor TRFs’ growth, to switch to the 

Institutional TRFs.  This option met several of the criteria considered by the Working Group.  

Switching from the Investor TRFs to the Institutional TRFs immediately reduced expenses for 

these small- and medium-sized plans from 0.14% to 0.09%, which had the benefit of both 

returning value to investors and enhancing Vanguard’s competitiveness among other mutual fund 

companies offering target date retirement funds with expense ratios of 0.09% or lower.  

Additionally, switching better aligned Vanguard’s expenses and revenue concerning those plans, 

and would also reduce the gap between the Investor TRFs’ expense ratios and Vanguard’s 

allocated expenses.   

 

Vanguard Failed to Adequately Consider Potential Capital Gains and Tax Consequences for 

Investor TRF Investors in Taxable Accounts 

 

16. By March 2020, the Working Group determined that the movement of investors 

switching from the Investor TRFs to Institutional TRFs could result in potential capital gains 

impacts, not just for investors who switched but also for investors who purchased or continued to 

purchase Investor TRFs.  Investors would realize capital gains because the Investor TRFs and 

Institutional TRFs were separate funds and not separate share classes of the same fund.  To switch 

from an Investor TRF to an Institutional TRF required the redemption of the Investor TRF shares 

and the subsequent purchase of Institutional TRF shares.  If those redemption requests outpaced 

new investments in the Investor TRFs, the Investor TRFs would have to satisfy redemption 

requests from their available cash or the sales of underlying fund assets.  The Working Group 

understood that the redemptions likely would generate capital gains distributions for Investor TRF 

shareholders remaining in the funds because of the likelihood of selling underlying fund assets that 

had increased in value. 

 

17. The Working Group also incorrectly concluded that, while capital gains impacts 

were likely, they were not a significant factor for their recommendation for several reasons.  First, 

because most of the Investor TRF investors held the funds in tax-advantaged accounts, such as 

employer-sponsored retirement plans or individual retirement accounts, they would not experience 

any capital gains or tax consequences.   



 6 

 

18. Second, the Working Group estimated that approximately 5.79% or $17 billion of 

Investor TRFs’ assets were held by investors in taxable accounts at Vanguard, and those 

investors—who were all retail investors—would have capital gains and tax consequences.  

Approximately 40%, or $110 billion, of all Investor TRF assets were held in non-Vanguard 

accounts.  The Working Group failed to fully consider whether any of those non-Vanguard 

accounts were taxable and might also realize capital gains and tax consequences.   

 

19. Third, the Working Group underestimated the potential capital gains impact on 

taxable investors.  The Working Group observed that, through early 2020, accumulated realized 

capital gains in the Investor TRFs averaged 0.5%, consistent with historical numbers.  However, 

this observation was based on evaluations of capital gains during a one-month period between late 

February and March 2020.  Because the financial markets had declined substantially at the time 

due to consequences from the COVID-19 pandemic, the Working Group assumed that capital 

gains would continue to be modest for Investor TRFs in the foreseeable future.  The Working 

Group also assumed that newly-eligible investor redemptions from the Investor TRFs to purchase 

the Institutional TRFs would be staggered over time, moderating any potential realization of capital 

gains.  The Working Group planned to make its recommendations to the Global Investment 

Committee and the Trust’s Board of Trustees in the fall of 2020.  The Working Group did not 

reevaluate the market conditions and potential impacts on accumulated capital gains between 

March and the fall of 2020, when the Working Group ultimately made its recommendation.  By the 

third quarter of 2020, the markets had rebounded significantly and as a result the accumulated 

capital gains as a percentage of net asset value in the Investor TRFs had increased from 0.5% to 

1.4%.  However, the Working Group did not consider whether continued market appreciation in 

2021 could impact its evaluation of potential capital gains or tax consequences resulting from 

investors switching from Investor TRFs to Institutional TRFs.   

 

20. Based on these limited evaluations, by March 2020 the Working Group determined 

that potential capital gains and tax consequences to the small percentage of Investor TRF investors 

holding the funds in taxable accounts did not “present a hindrance” to recommending the lowering 

of the minimum investment for the Institutional TRFs. 

 

Vanguard Recommended Lowering the Minimum Investment for Institutional TRFs to 

Allow Certain Retirement Plans to Switch from Investor TRFs to Institutional TRFs 

 

21. Based on the analysis described above, the Working Group determined that the best 

option to reduce the gap between the expense ratios and allocated expenses for the Investor TRFs 

was to lower the minimum investment of the Institutional TRFs from $100 million to $5 million, 

and also to lower the Investor TRFs’ expense ratios by 0.01% to 0.02%.  Lowering the minimum 

investment would allow the small- and medium-sized retirement plans with $5 million or more in 

assets to switch from the Investor TRFs to the Institutional TRFs and immediately lower their 

expense ratio from 0.14% to 0.09%.  Lowering the Investor TRFs’ expense ratios by 0.01% to 

0.02% would result in lower expenses for new or existing investors in the Investor TRFs who had 

less than $5 million in assets and were not eligible to invest in the Institutional TRFs. 

 



 7 

22. The Working Group also considered and rejected recommending the option of 

merging the Investor and Institutional TRFs as a single group of funds.  Although merging the 

funds would have eliminated the gap between the Investor TRFs’ expense ratios and Vanguard’s 

allocated expenses, and could have been achieved with no capital gains or tax consequences for 

taxable investors, the Working Group decided not to recommend this option to the Global 

Investment Committee because it would result in an immediate reduction of approximately $148 

million in Vanguard’s revenue from the Investor TRFs—more than the other options considered—

and would impair Vanguard’s ability to make expense reductions in other products.  In contrast, 

the Working Group estimated that lowering the minimum investment for the Institutional TRFs 

would result in a reduction of approximately $61 million in revenue to Vanguard over two to three 

years, which was more favorable for Vanguard’s U.S. funds than giving up substantially more 

revenue by merging the Retail and Institutional TRFs. 

 

23. The Working Group determined that the combined solution of lowering the 

Institutional TRF minimum investment and lowering the Investor TRF expense ratios would 

materially reduce the gap between the Investor TRFs’ expense ratios and allocated expenses.  This 

solution also had the additional benefit of minimizing an immediate, negative impact to 

Vanguard’s revenue and of strengthening Vanguard’s competitiveness among other mutual fund 

companies in attracting small- and medium-sized retirement plans to the Institutional TRFs. 

 

24. In October 2020, the Working Group made its recommendation to the Global 

Investment Committee based on its prior analyses from February and March 2020.  By this time, 

the financial markets had recovered from the pandemic lows in March and April 2020 and reached 

record highs, but the Working Group did not further consider potential capital gains or tax 

consequences if a substantial number of small- and medium-sized retirement plan investors in the 

Investor TRFs switched to the Institutional TRFs in a rising market.  The Global Investment 

Committee approved the recommendation and directed Vanguard to recommend the solution to the 

Trust’s Board of Trustees.  

 

25. In November 2020, Vanguard recommended that the Trust’s Board of Trustees 

reduce the minimum investment for the Institutional TRFs from $100 million to $5 million.  

Vanguard did not recommend lowering the expense ratios of the Investor TRFs because that 

decision did not require the Trustees’ approval, though Vanguard advised the Trustees that it 

intended to lower the Investor TRF expense ratios in 2021.  Vanguard, in fact, did not lower the 

Investor TRF expense ratios because, as discussed below, it later recommended the merger of the 

Investor and Institutional TRFs in 2021. 

 

26. Vanguard did not disclose to the Trustees the Working Group’s evaluation of 

potential capital gains and tax consequences to Investor TRF investors resulting from investors 

redeeming Investor TRFs to purchase Institutional TRFs   

 

27. The Trustees approved Vanguard’s recommendation and on December 11, 2020 the 

Trust and Vanguard announced in a supplement to the Institutional TRFs’ prospectuses and a press 

release that the minimum investment for the Institutional TRFs would be lowered from $100 

million to $5 million effective immediately.  The Investor TRFs’ prospectuses and the press release 

did not mention any potential capital gains and tax consequences to Investor TRF investors in 



 8 

taxable accounts that could result from the lowering of the minimum investment for the 

Institutional TRFs, and the anticipated movement of a substantial number of Investor TRF 

investors to the Institutional TRFs. 

 

Substantial Redemptions of Investor TRFs Caused Historically Higher Capital Gains and 

Tax Consequences for Investor TRF Investors in Taxable Accounts 

 

28. During the first half of 2021, a substantial number of small- and medium-sized 

retirement plan investors in the Investor TRFs redeemed fund shares to switch to the Institutional 

TRFs due to the lower minimum investment amount and lower expense ratio.  To meet these 

redemptions, the Investor TRFs had to sell underlying assets at elevated prices due to the rising 

financial markets that had rebounded from pandemic lows and reached new highs.   

 

29. From December 2020, when Vanguard and the Trust announced the lowering of the 

minimum investment for the Institutional TRFs, to October 2021, redemptions in the Investor 

TRFs totaled approximately $130 billion, compared with approximately $41 billion in redemptions 

in the prior period from November 2019 to October 2020.  Capital gains distributions for the 

Investor TRFs as a percentage of net asset value from November 2020 to October 2021 averaged 

9.69%, nearly seven times larger than the 1.39% average from November 2019 to October 2020. 

 

30. As a result, Investor TRF investors who held the funds in taxable accounts at 

Vanguard and at other firms realized unexpected, historically high capital gains distributions and 

tax consequences for 2021.  These capital gains distributions accelerated the investors’ incurrence 

of tax liability and deprived them of the potential compounding growth of their investments in the 

Investor TRFs through retirement.   

 

31. In early 2021, continued improvement in market conditions generated excess 

revenue for Vanguard compared to 2020.  This also contributed to a persistent gap between the 

Investor TRFs’ expense ratios and Vanguard’s allocated expenses.  To return additional value to 

investors, better align the expense ratios to allocated expenses, and further enhance Vanguard’s 

competitiveness among other mutual fund companies in the target date retirement fund business, in 

September 2021 Vanguard recommended to the Trust’s Board of Trustees to merge the Investor 

TRFs and Institutional TRFs—the option that Vanguard did not recommend in 2020—and to lower 

the expense ratios for all of the combined TRFs to 0.08%.  The Trustees approved the 

recommendation later that month, and the Trust merged the Investor and Institutional TRFs in 

February 2022.   

 

Vanguard’s Inadequate Representations Concerning Potential Capital Gains Consequences 

 

32. Vanguard was responsible for preparing all disclosures of the Trust, including 

prospectuses for the Investor and Institutional TRFs, and distributing the prospectuses to investors.  

The Investor TRFs’ prospectuses that were effective and distributed by Vanguard in 2020 and 

2021 for the continuous offers and sales of fund shares in this period stated that the funds’ 

distributions “may be taxable as ordinary income or capital gain[]” and “[c]apital gains 

distributions may vary considerably from year to year as a result of the Funds’ normal investment 

activities and cash flows” (emphasis added). 



 9 

 

33. These disclosures were materially misleading because they described certain 

normal investment activities and cash flows that could affect capital gains, but failed to disclose, 

when discussing capital gains distributions, what Vanguard and the Trust knew or should have 

known was likely to be unusually large capital gains distributions for Investor TRF investors 

holding the funds in taxable accounts, resulting from the lowering of the minimum investment for 

the Institutional TRFs and the redemptions from the Investor TRFs.   

 

34. Specifically, Vanguard was aware that lowering the minimum investment for 

Institutional TRFs was designed to attract a substantial number of retirement plans to switch from 

the Investor TRFs to Institutional TRFs.  Vanguard was also aware, and the Trust should have been 

aware, that those retirement plans’ redemptions of their Investor TRF holdings to switch to the 

Institutional TRFs would cause potential capital gains and tax consequences to those remaining 

Investor TRF investors who held their investments in taxable accounts.  Vanguard was further 

aware, and the Trust should have been aware, that such redemptions were not normal investment 

activities and cash flows of the Investor TRFs, but extraordinary redemptions that resulted from 

Vanguard’s goal to lower expenses for those retirement plans that provided economies of scale and 

generated increased revenue for Vanguard in servicing the Investor TRFs. 

 

35. As a result, the disclosures to Investor TRF investors were materially misleading. 

 

Vanguard’s Inadequate Compliance Policies and Procedures 

 

36. During 2020 and 2021, Vanguard did not have in place, adopt, or implement 

written policies and procedures reasonably designed to prevent violations of the Advisers Act and 

the rules promulgated thereunder.  Specifically, Vanguard never had in place, adopted, or 

implemented written policies and procedures to address the accuracy of disclosures with respect to 

the Trust, such as those concerning potential capital gains and tax consequences resulting from 

fund decisions and initiatives that may not be directly related to the Investor TRFs’ normal 

investment activities.  As a result, Vanguard’s written policies and procedures were inadequate. 

 

Violations 

 

37. As a result of the conduct described above, Vanguard caused the Trust to violate 

Section 17(a)(2) of the Securities Act, which makes it unlawful for any person in the offer or sale 

of securities to obtain money or property by means of any untrue statement of a material fact or 

any omission to state a material fact necessary in order to make statements made not misleading.  

A violation of Section 17(a)(2) may rest on a finding of negligence; scienter is not required.  Aaron 

v. SEC, 446 U.S. 680, 697 (1980). 

 

38. As a result of the conduct described above, Vanguard willfully2 violated Section 

206(4) of the Advisers Act, and Rule 206(4)-8 promulgated thereunder, which make it unlawful for 

 
2  “Willfully,” for purposes of imposing relief under Section 203(e) of the Advisers Act 

“‘means no more than that the person charged with the duty knows what he is doing.’” Wonsover 

 



 10 

any investment adviser to a pooled investment vehicle to make any untrue statement of a material 

fact or to omit to state a material fact necessary to make the statements made, in the light of the 

circumstances under which they were made, not misleading, or otherwise engage in any act, 

practice, or course of business that is fraudulent, deceptive, or manipulative with respect, to any 

investor or prospective investor in the pooled investment vehicle.  A violation of Section 206(4) or 

Rule 206(4)-8 may rest on a finding of negligence and scienter is not required.  See SEC v. 

Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992).   

 

39. As a result of the conduct described above, Vanguard further willfully violated 

Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require investment 

advisers to adopt and implement written policies and procedures reasonably designed to prevent 

violation of the Advisers Act and its rules by the adviser and its supervised persons.   

 

40. As a result of the conduct described above, Vanguard caused the Trust to violate 

Section 34(b) of the Investment Company Act, which makes it unlawful for any person to make 

any untrue statement of a material fact in any registration statement, or other document filed or 

transmitted pursuant to the Investment Company Act, or for any person so filing or transmitting to 

omit to state therein any fact necessary in order to prevent the statements made therein, in light of 

the circumstances under which they were made, from being materially misleading.  Establishing a 

violation of Section 34(b) does not require proof of scienter.  Fundamental Portfolio Advisors, Inc., 

Advisers Act Rel. No. 2146, 2003 WL 21658248, at *8 (July 15, 2003) (Comm. Op.). 

 

Cooperation and Remediation 

 

41. In determining to accept the Offer, the Commission considered cooperation 

afforded the staff and remedial acts undertaken by Vanguard since the commencement of the 

Commission’s investigation.  These acts include providing Commission staff with factual 

summaries and key documents and augmenting its policies and procedures concerning fund 

initiatives and its compliance program. 

 

42. Further, Respondent enhanced fund prospectus disclosures to disclose the risk of 

movement across Vanguard products that may result from the launch of competing funds or the 

reduction of expenses in other products. 

 

 

v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. 

Cir. 1949)).  There is no requirement that the actor “also be aware that he is violating one of the 

Rules or Acts.”  Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).  The decision in The Robare Group, 

Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured 

statutory provision, does not alter that standard.  922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting 

forth the showing required to establish that a person has “willfully omit[ted]” material 

information from a required disclosure in violation of Section 207 of the Advisers Act). 



 11 

Vanguard’s Settlements With the Office of the New York State Attorney General and  

North American Securities Administrators Association 

 

43. Vanguard, including through its affiliates, has entered into settlement agreements 

with the Office of the New York State Attorney General (“NYAG”) and members of the North 

American Securities Administrators Association (“NASAA”) concerning substantially the same 

facts as alleged herein. 

 

44. Under those settlements, Vanguard has agreed to resolve certain charges and pay 

$135 million in remediation within 10 days of the effective date of the settlements for the benefit of 

harmed investors of the Investor TRFs in taxable accounts who received historically high capital 

gains distributions in 2021.  According to those settlements, Vanguard is entitled to an offset to the 

$135 million by (a) the amount of $40 million for Vanguard’s settlement of a class action against it 

and certain related parties pending in the U.S. District Court for the Eastern District of 

Pennsylvania captioned, In re Vanguard Chester Funds Lit., Case No. 2:22-cv-955-JFM, under a 

Stipulation of Settlement submitted by plaintiffs for preliminary and final Court approval (“Class 

Action Settlement”), and (b) the amount of $2.09 million for Vanguard’s settlement of certain 

individual investor arbitration claims filed or threatened to be filed before the Financial Industry 

Regulatory Authority.   

 

45. The total amount of remediation inclusive of these offsets is $92.91 million, which 

Vanguard shall, under the NYAG and NASAA settlement agreements and pursuant to Section 

308(b) of the Sarbanes-Oxley Act of 2002 (“SOX”) pay to a Fair Fund established by the 

Commission for the benefit of investors as described below in paragraph IV.E.  Under the 

settlement agreements with the NYAG and NASAA, in the event Vanguard does not pay the $40 

million under the Class Action Settlement, as a result of the termination or withdrawal of the 

Stipulation of Settlement or the Court’s rejection of the Class Action Settlement, Vanguard will be 

obligated to pay the $40 million into the Commission’s Fair Fund pursuant to Section 308(b) 

within 10 days of such termination or rejection. 

 

46. Further, under the NYAG and NASAA settlement agreements, Vanguard will pay a 

penalty in the amount of $13.5 million, which will be deemed satisfied by the payment of the 

penalty ordered by the Commission below in paragraph IV.D. 

 

Disgorgement, Prejudgment Interest, Remediation, and Civil Penalties  

 

47. The disgorgement and prejudgment interest ordered below in paragraph IV.C is 

consistent with equitable principles and does not exceed Vanguard’s net profits from its 

violations.  The funds collected under the NYAG and NASAA settlement agreements as 

described in paragraphs 43 to 46 above and the civil money penalty ordered in paragraph IV.D 

below will be distributed to harmed investors to the extent feasible.  The Commission will hold 

all funds paid in an account at the United States Treasury pending distribution.  Upon approval 

of the distribution final accounting by the Commission, any amounts remaining that are 

infeasible to return to investors, and any amounts returned to the Commission in the future that 



 12 

are infeasible to return to investors, may be transferred to the general fund of the United States 

Treasury, subject to Section 21F(g)(3) of the Securities Exchange Act of 1934. 

 

IV. 

 In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Vanguard’s Offer. 

 

 Accordingly, pursuant to Section 8A of the Securities Act, Sections 203(e) and 203(k) of 

the Advisers Act, and Section 9(f) of the Investment Company Act, it is hereby ORDERED that: 

 

A. Vanguard cease and desist from committing or causing any violations and any future 

violations of Section 17(a)(2) of the Securities Act, Section 206(4) of the Advisers Act and Rules 

206(4)-7 and 206(4)-8 promulgated thereunder, and Section 34(b) of the Investment Company Act. 

 

B. Vanguard is censured. 

 

C. Vanguard is ordered to pay disgorgement in the amount of $14,700,000 and 

prejudgment interest thereon in the amount of $3,500,000.  These amounts will be deemed satisfied 

upon Vanguard’s payment of $92,910,000 in remediation into the Fair Fund under the settlement 

agreements with the NYAG and NASAA as described in paragraphs 43 to 46 above. 

 

D. Vanguard shall, within 10 days of the entry of this Order, pay a civil money penalty 

in the amount of $13,500,000 to the Commission.  If timely payment is not made, additional 

interest shall accrue pursuant to 31 U.S.C. § 3717.  

 

Payment must be made in one of the following ways:   

 

(1) Respondent may transmit payment electronically to the Commission, which 

will provide detailed ACH transfer/Fedwire instructions upon request;  

 

(2) Respondent may make direct payment from a bank account via Pay.gov 

through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  

 

(3) Respondent may pay by certified check, bank cashier’s check, or United 

States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to:  

 

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter 

identifying The Vanguard Group, Inc. as a Respondent in these proceedings, and the file number of 

these proceedings; a copy of the cover letter and check or money order must be sent to Corey 

http://www.sec.gov/about/offices/ofm.htm


 13 

Schuster, Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., 

Washington, DC 20549.   

 

E. Pursuant to Section 308(a) of SOX, a Fair Fund is created for the penalty referenced 

in paragraph IV.D above.  The proceeds for remediation under Respondent’s settlement agreements 

with the NYAG and NASAA shall be received and accepted by the Commission for the Fair Fund 

under SOX 308(b) as described above in paragraphs 43 to 46.  Amounts ordered to be paid as a 

civil money penalty pursuant to this Order shall be treated as penalties paid to the government for 

all purposes, including all tax purposes.  To preserve the deterrent effect of the civil penalty, 

Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor 

shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any 

part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  If the court in 

any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 

days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this 

action and pay the amount of the Penalty Offset to the Commission.  Such a payment shall not be 

deemed an additional civil penalty and shall not be deemed to change the amount of the civil 

penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 

means a private damages action brought against Respondent by or on behalf of one or more 

investors based on substantially the same facts as alleged in the Order instituted by the 

Commission in this proceeding. 

 

 By the Commission. 

 

 

 

Vanessa A. Countryman 

       Secretary