SEC and State Regulators Enter the Arena
Regulators from multiple states, including Connecticut, New Jersey, and New York, were already circling Vanguard over the retirement fund debacle. Their probe culminated in the SEC’s January settlement, which required Vanguard to cough up more than $100 million.
According to regulators, Vanguard misled retail investors about its fund restructuring, unintentionally triggering the tax bomb. Customers who remained in the investor target retirement funds (TRFs) were left absorbing the fallout while those who switched to institutional funds reaped the benefits.
A Settlement With Strings Attached?
Hughes’ main argument hinges on a critical detail: If the class action settlement collapses, Vanguard is still required to pay the $40 million to investors under the SEC deal. This, he claims, makes the class settlement redundant, effectively giving away legal leverage for nothing in return.
“The court’s fiduciary duty to serve as a guardian of absent class members’ rights precludes approving a deal where hundreds of thousands of unsophisticated, mom-and-pop retail investors release enormously valuable claims in exchange for nothing beyond what they can receive from the SEC anyway,” Hughes stated in his objection.
Class leaders, however, countered in a February 25 filing that the SEC’s deal was simply a “backstop” to ensure the recovery amount. They even hinted that the SEC might have structured its settlement to inflate its own enforcement numbers, suggesting political motivations in announcing the deal just before the end of the Trump administration.
