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Massachusetts will investigate b/d offering target-date mutual funds

William Galvin, Massachusetts Secretary of the Commonwealth, is conducting a sweep of several broker/dealers for target-date mutual fund information, arguing that small retail investors in some funds were subject to unpredictable and significant tax liabilities.

The Securities Division of Massachusetts announced the investigation this week after becoming aware of “potential tax disclosure issues” with some b/ds’ target-date funds; Such funds typically have an accumulation of assets that become more conservative as the target date approaches for the fund. According to Galvin’s office, they are generally viewed as “hands-off” investments.

Galvin’s office hired Vanguard, Fidelity Brokerage Services, T. Rowe Price Investment Services, American Fund Distributors and BlackRock asking for a wide range of information, including marketing materials, complaints and any disclosures related to the firm’s target-date mutual funds. Offered in Massachusetts among other ingredients.

“Financial institutions cannot be allowed to protect one class of investors at the expense of another,” Galvin said in a statement about the sweep. “Investors need to be made aware of the risks involved and the tax liabilities they may face under certain circumstances, and I want to make sure institutions are up-front about these risks.”

According to a spokesperson for Galvin’s office, the sweep came about because of news reports about Vanguard (is included in wall street journal), indicating that the firm reduced the minimum investment in its institutional target retirement fund from $100 million to $5 million. This reportedly led to several major plans to switch from standard target-date funds to institutional counterparts, a move that ultimately saddled the Standard Fund (and its remaining investors with) capital gains taxes.

Those tax liabilities were distributed among investors who still had balances in the standard fund, including some smaller investors who had funds in taxable accounts. Therefore, they were hit by large capital gains taxes.

Galvin, who recently announced that he was running for re-election As Massachusetts secretary of state for an eighth term, he has long been a staunch advocate for investor protection, and he often contends with firms over his alleged misconduct. After passing Regulation Best Interest by the Securities and Exchange Commission, Galvin followed his fiduciary rule of Massachusetts In existence, the logic of the federal standard fell short.

Over the years, Galvin has liquidated firms such as RBC for failing to supervise the business of a broker and Wells Fargo for failing to properly register agents in the state, and he also alleged trading app robinhood For exposing Massachusetts investors to “unnecessary trading risk” amid the January 2021 ‘meme stock’ market frenzy.

According to letters sent to the five B/Ds, the enforcement section of the Massachusetts Securities Division wants a full response to their inquiries by Feb. 9.

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