Vanguard's brokerage arm has agreed to pay a $950,000 fine after a Financial Industry Regulatory Authority (FINRA) investigation found that it provided inaccurate cost basis information on client statements, trade confirmations, and Forms 1099 for roughly 11 years. The errors, which stemmed from technology glitches, caused some investors to report incorrect capital gains or losses on their tax returns, according to the regulator.
Vanguard Marketing Corp., the Malvern, Pennsylvania-based broker-dealer, accepted the censure and fine in a letter of acceptance, waiver, and consent made public on Wednesday. This marks the second time in just over three years that FINRA has penalized the unit for flawed customer communications, following a May 2023 case involving overstated money market yields.
Cost basis—the original purchase price of a security, adjusted for reinvested dividends and commissions—is critical for determining taxable gains or losses when shares are sold. FINRA identified three distinct technology problems, some involving an unnamed third-party vendor, that distorted this figure across various documents.
Three systemic failures
The first issue, dubbed "rollback reruns," occurred when Vanguard received updated cost information on a multi-lot position after a client had already sold part of it. The vendor's system reprocessed the entire position as if the new data had always been in place, effectively overriding the client's instructions about which specific tax lots to sell. In about 6,000 transactions, this led to incorrect lot selection, causing some clients to overpay or underpay taxes.
A second problem arose during manual share class conversions of mutual funds and ETFs. When multiple funds in the same account were converted on the same day, each converted share received an identical transaction identification number. The vendor's system then could not distinguish between positions, spreading cost bases across funds. This affected roughly 200 accounts and about 8,500 statements. A similar flaw in automated conversions impacted an additional 3,000 accounts, particularly when clients held the same fund in both cash and margin accounts.
The third and most widespread issue involved a rounding mismatch between Vanguard's stock records and the vendor's system, which calculated share quantities to different decimal places. This created "position breaks" in about 150,000 positions across 100,000 accounts, potentially affecting up to 5.7 million statements. FINRA noted that nearly all discrepancies were less than one share and did not alter the number of shares owned or trade execution.
Red flags ignored
Although Vanguard self-reported the issues under FINRA Rule 4530(b), the regulator criticized the firm for failing to act on warning signs. At least 25 clients filed written complaints, including 18 about position breaks, seven about rollback reruns, and one about share class conversions. Vanguard produced periodic position-break reports and corrected breaks when a sale occurred, but it never verified whether prior statements had shown accurate cost basis. The firm also knew the vendor sometimes overwrote transaction histories but did not systematically address the problem until a comprehensive internal review in 2023.
FINRA found violations of rules on communications with the public, books and records, supervision, and standards of commercial honor. In setting the penalty, the regulator credited Vanguard for taking substantial corrective steps, including adding controls, hiring additional staff, and voluntarily paying approximately $1.9 million to clients who may have overpaid taxes or incurred costs from refiling returns.
"Vanguard remains committed to supporting everyday investors and retirement savers," the firm said in a statement. "We are pleased to have resolved this matter."
The settlement comes as Vanguard deepens its push into the independent advisor channel. Late last month, the firm announced plans to acquire Altruist, the RIA custody and technology platform, in a deal reported at $4.6 billion. The acquisition is expected to close later this year, with Altruist operating as a standalone business. This regulatory action, however, underscores the operational risks that can accompany rapid growth and technology integration.
