SEC Fines Vanguard And Empower Over $25M For Inadequate Disclosures

Under recent settlements, the U.S. Securities and Exchange Commission (SEC) is requiring Vanguard Advisors and Empower Advisory Group and Financial Services to pay more than $25 million in fines and disgorgement. The move comes after allegations that they failed to properly disclose compensation for advisors enrolling clients in their managed account programs. The sums include $19.5 million in fines for Vanguard concerning compensation for the Personal Advisor Services (PAS) program and over $6 million in fines for Empower related to advising participants whether to enroll in its fee-based Managed Account service.

The Vanguard SEC Settlement
The SEC order states that Vanguard's performance review system, which was in place from August 2020 to December 2023, included metrics incentivizing its advisors to enroll and retain clients in the program. Nonetheless, Vanguard failed to properly disclose this conflict of interest posed by the incentive compensation system, instead making contradictory statements about the system.

The Vanguard PAS Program
The SEC order describes Vanguard's PAS program as providing investment advice and portfolio management by investment advisors. Participants pay an annual advisory fee based on a certain percentage of assets under plan management, which decreases as the assets increase.

Prospective PAS participants typically have an initial consultation to discuss their eligibility for and the advantages of the program. To enroll, individuals must have at least $50,000 in assets in specified Vanguard brokerage accounts, and the type of advisor they consulted, depending on the amount of assets they hold. One set of PAS advisors was eligible for a bonus, but the other set was only eligible for merit raises until promoted to a bonus-eligible position.

Vanguard's PAS brochures disclosed that some advisors were eligible for a discretionary bonus, and its performance review system created a financial incentive for advisors to recommend PAS to individuals. However, another brochure and supplement contained contradictory disclosures, stating that the advisors received no additional compensation. Likewise, Vanguard's marketing materials and website both contained misleading statements concerning the compensation and financial incentives for PAS advisors. Vanguard removed the misleading statements from its website in 2023. Finally, Vanguard's three sets of client disclosures regarding PAS, which clients received before their initial consultations, also failed to adequately disclose the conflicts of interest that Vanguard's incentive compensation structure created.

The Empower SEC Settlement
SEC claims that Empower failed to fully disclose in writing whether retirement plan advisors were acting as registered representatives or investment advisors when they recommended participants enroll in the managed account services. Instead, the advisors only disclosed that they held dual licenses. As with Vanguard, the SEC also found that Empower violated Regulation Best Interest (Reg BI) in failing to disclose the conflict of interest posed by the incentive compensation system for some advisors, thus leading to misleading statements about their role.

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