Four investment advisers and several related individuals settled SEC charges for allegedly advertising the use of quantitative investment models while failing to notify their Boards of Trustees and investors that certain models were inoperable and/or not in use.
According to the Order, AEGON USA Investment Management, LLC ("AUIM"), Transamerica Asset Management, Inc. ("TAM"), Transamerica Financial Advisors, Inc. and Transamerica Capital, Inc. (collectively, the "Transamerica entities") allegedly failed to disclose that certain of its 15 quantitative-model-based mutual funds, variable life insurance investment portfolios, and variable annuity investment portfolios and separately managed account strategies did not function as intended. Allegedly, when AUIM and TAM (its adviser) discovered multiple errors and stopped using at least one of the models, they neglected to inform the Board of Trustees. Additionally, AUIM and TAM told investors and the Board of Trustees that a "senior, experienced asset manager" was overseeing these products when, in fact, an "inexperienced quantitative research analyst . . . was the day-to-day manager," according to the SEC.
Without admitting to or denying the charges, the Transamerica entities agreed to pay approximately $53.3 million in disgorgement, $8 million in interest, and a $36.3 million civil monetary penalty. The Transamerica entities will implement a fund to distribute the $97.6 million among affected retail investors.
In separate but related Orders, the SEC alleged that AUIM's former Global Chief Investment Officer, Bradley Beman, and AUIM's former Director of New Initiatives, Kevin Giles, allegedly caused certain AUIM violations. According to the SEC, Mr. Beman failed to take the necessary steps to ensure that the mutual funds' models worked as intended, and Mr. Giles did not implement appropriate policies and procedures to address the risks associated with the models, as raised in an internal AUIM audit. Without admitting to or denying the charges, Mr. Beman and Mr. Giles agreed to pay $65,000 and $25,000, respectively, in penalties.
Commentary / ">Steven Lofchie
When things go wrong with quantitative, computer-based trading strategies, they tend to go wrong in a big way. See, for example, Quantitative Investment Models and Compliance Policies and Procedures: the Securities and Exchange Commission Order Involving the AXA Rosenberg Entities. The discussion in that memo and the related enforcement order remain relevant.
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