FINRA Fines Vanguard for Overstating Money Market Projections

A ‘technical’ issue led to overstated projections of yield and income for nine money market funds for about 8.5 million accounts.


The Financial Industry Regulatory Authority has fined Vanguard $800,000 for transgressions including overstating money market fund data projections on about 8.5 million account statements, according to a letter of acceptance.

Vanguard’s marketing division accepted and consented to the financial industry regulator’s charges without admitting or denying them on May 25. From November 2019 to September 2020, Vanguard overstated projected yield and projected annual income for nine money market funds, according to the letter.

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“For example, in September 2020, VMC account statements displayed an estimated yield of 1.87 percent for the Vanguard Federal Money Market Fund but, after the error was corrected, the October 2020 account statements included an estimated yield of 0.06 (approximately 30 times less),” FINRA wrote in the letter. “Because the earlier account statements did not reflect the correct figures, they were inaccurate, and therefore, misleading.”

The overstated projections were caused by a “technical error” by which information received by a data feed did not overwrite existing data, which in turn caused Vanguard to miscalculate the estimated yield and annual income presented for certain money market funds. The firm alerted FINRA to the issue and investors in its October 2020 statements.

Money market fund assets account for more than $5.3 trillion in investments in the U.S., including in defined contribution saving plans, according to the Investment Company Institute. As of May 25, money market funds held $1.96 trillion in investments in tax-deferred investment vehicles, including employer-sponsored retirement plans, according to the latest data from the association.

In addition to the money market fund errors, certain Vanguard account statements “inaccurately presented market appreciation/depreciation and investment returns” from October 2019 to June 2021, according to FINRA.

In one instance, when customers deposited a paper or electronic check into an account, the personal performance section of the account statement “incorrectly identified the deposit as an increase in market value instead of a cash deposit,” according to the notice. The error would be corrected automatically in the next month’s account statement as a decrease in market value, causing an inaccurate presentation of the “investment return.” This error affected about 23,000 statements from at least October 2019 until May 2021, according to FINRA.

Another error found that Vanguard statements inaccurately reflected margin credits and debits—such as paying down margin debt or purchasing a security on margin—as market appreciation or depreciation when a customer maintained an open position spanning multiple months. This error affected about 57,000 statements from at least October 2019 until May 2021.

Finally, for about 50 corporate actions, such as stock splits, Vanguard account statements inaccurately reported differences in the value of shares before and after the corporate action as a purchase or withdrawal instead of market appreciation or depreciation, in which the “investment return” was again inaccurate. This error affected an unknown number of statements from at least October 2019 to June 2021, according to FINRA.

In May and June 2021, Vanguard corrected the errors, and subsequent statements contained correct information.

Vanguard has agreed to a censure and the fine of $800,000 from Washington-based FINRA. The agreement is still awaiting acceptance by FINRA’s National Adjudicatory Councilor its Office of Disciplinary Affairs, according to the letter.

Gensler Defends Swing Pricing Proposal at ICI Conference

Managers who asked the Fed for help during the pandemic but who oppose swing pricing should “look in the mirror,” according to Gensler.


The Chairman of the Securities and Exchange Commission defended the commission’s swing pricing proposal at an annual conference hosted by the Investment Company Institute. The SEC’s proposal would require most open-end funds to keep at least 10% of their net assets in highly liquid assets, would impose a hard close at 4 p.m. eastern time, update liquidity classifications, and implement swing pricing.

Swing pricing is a pricing mechanism which requires the NAV of a fund to adjust to account for trading costs and thereby passes those costs to the traders in the form of a reduced redemption price, instead of absorbing the costs back into the fund and effectively forcing remaining fundholders to bear the cost. The proposal is intended to reduce dilution of the fund and disincentivize additional redemptions.

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The motivation for this proposal is primarily the stress placed on mutual funds in 2020, early in the pandemic, which required intervention from the Federal Reserve. Gensler has emphasized that the SEC should use its authority to reduce the necessity of emergency Fed intervention. In his remarks at ICI, he noted the Fed was intended to be a lender of last resort to banks and not to funds.

Gensler explained that there have been many policy changes in U.S. history that were designed to reduce the damage done by financial panics and market runs. He cited President Woodrow Wilson creating the Federal Reserve after the Panic of 1907, and President Franklin Roosevelt creating the SEC and Federal Deposit Insurance Company in response to the Great Depression.

When describing the risk of economic panics, Gensler turned to a metaphor he cites often: the camper who escapes the hungry bear, not because he was the fastest camper, but because he was not the slowest. In other words, the last investor to sell is the one who gets eaten (by the market), and the urge to not be last encourages panic selling.

Eric Pan, the president and CEO of ICI and moderator of the conversation with Gensler, responded by asking if the threat of dilution was “really a bear or is it a cub?” Pan argued that investor dilution, even during the pandemic was relatively small, or at least manageable; and that in any case, the “knock on effects” of dilution are not a threat to financial stability on a national level.

Gensler answered that fund dilution from large redemption volume is not “an unsubstantiated hypothesis.” The chairman explained that many mutual funds requested liquidity from the Fed in 2020 so that they could meet the large number of redemption requests that were coming in due as Covid lockdowns began.

The Fed providing liquidity to funds in 2020 was a theme that Gensler would come back to during his address to the conference. He noted that many of the same fund managers were in the conference audience, telling them  “you recall who you were,” and saying that some audience members should “look in the mirror.” When Pan expressed skepticism that dilution is a major problem, Gensler recommended that he “ask your members who were making those phone calls in 2020.”

The key goal of the swing pricing proposal, according to Gensler, is that “redeeming shareholders bear the appropriate costs associated with their redemptions, particularly in times of stress” and that the proposal was an important element of “liquidity risk management.” Investors should be protected from dilution so that they can get a price that reflects the value of the underlying portfolio, he said.

Other market participants and observers have raised concerns about the proposal that include its potential negative effect on those saving for retirement and on investors based in states on Pacific Time, who could struggle to get trades in on time in Eastern Time in order to get that day’s price.

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