In a statement on Wednesday, Vanguard Investments Australia said it accepts the Federal Court’s ruling on misrepresentations related to the exclusionary screens applied to securities in its Ethically Conscious Global Aggregate Bond Index Fund and ETF.
“Vanguard apologises to its clients for these errors, which were unintentional. Vanguard acknowledges the importance of accurate product and marketing information in helping consumers to make informed investment decisions,” the fund manager said.
Earlier on Wednesday, the Federal Court issued a judgment imposing a $12.9 million fine on Vanguard for contravening Australia’s financial services laws.
According to court documents, not only will Vanguard need to pay the hefty fine but it will also have to publish a “notification of misconduct by Vanguard” on its website for a period of 12 months.
The court first found Vanguard guilty of contravening financial services law back in March. At the time, it explained that the fund manager did so by making false or misleading statements about the Vanguard Ethically Conscious Global Aggregate Bond Index Fund in 12 product disclosure statements, a media release, material on its website, an interview that was published on YouTube, and a presentation that was given at a fund manager event and then published online.
While Vanguard admitted to most of the Australian Securities and Investments Commission’s (ASIC) allegations, according to the original ruling, the parties remained in dispute over a narrow range of issues concerning liability.
“By Vanguard’s own admission, it misled investors on a number of its claims,” ASIC’s Sarah Court said in March.
“In this case, Vanguard promised its investors and potential investors that the product would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case.”
On Wednesday, Vanguard reiterated its cooperation with ASIC throughout the matter, which first began in 2021.
“There were no findings of financial loss to investors,” the fund manager said, stressing that payment of the penalty will not be borne by Vanguard Australia investors.
The fund manager also assured that, following a self-initiated independent review of relevant internal processes, it has “strengthened its procedures, governance, technology and training to reflect the high standards investors expect of Vanguard products and services”.
Although the court did rule in favour of ASIC, it also criticised certain aspects of the allegations made by the regulator, including the presence of “conceptual flaws” in its submission to the court.
ASIC first publicly announced it had commenced civil penalty proceedings against Vanguard back in July last year.
At the time, the regulator said that the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and the Bloomberg SRI Index included issuers that violated the applicable ESG criteria. For the index, this included 42 issuers which collectively issued at least 180 bonds, and for the fund, at least 14 issuers which collectively issued at least 27 bonds.
ASIC alleged that these bonds exposed investor funds to investments with ties to fossil fuels, including those with activities linked to oil and gas exploration.
In its response to these allegations, Vanguard admitted that it had identified and self-reported a breach to the regulator in early 2021 in relation to the product disclosure for the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and ETF.
“While the fund was managed by Vanguard in alignment with the index methodology, Vanguard identified that the descriptions of the exclusionary screens published by the index provider and within Vanguard’s product disclosure statement were not sufficiently detailed,” the investment manager said back in 2023.
“At the time, the description of the exclusionary screens did not provide a sufficiently detailed explanation that certain debt issuers lacking research coverage were still included in the benchmark. As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors.”
Vanguard added that as soon as the disclosure weakness was identified, it acted swiftly to inform investors and enhance the disclosure.
“There was never any intention to mislead, but Vanguard recognises it has not lived up to the high standards it holds itself accountable to and apologises for the concern this matter may cause for our clients.”
