The Securities and Exchange Commission has ordered Transamerica affiliates to pay $97.6 million to retail investors after allegedly misleading them with faulty quantitative investment models.
Investors placed billions of dollars into mutual funds and strategies that used models developed solely by an inexperienced analyst at Transamerica affiliate Aegon USA Investment Management, the SEC said in a statement Monday. The models contained numerous errors and did not work as promised, the regulator alleged.
Transamerica settled with the SEC without admitting or denying its findings.
The firm’s quant-based mutual funds and strategies that relied on the faulty investment models were marketed as “emotionless,” the SEC said in an order, also issued Monday. While sub-advisor Aegon USA Investment Management stopped using at least one of the models after discovering errors in 2013, the firm and Transamerica Asset Management allegedly failed to tell investors about the problem, according to the document.
“Investors were repeatedly misled about the quantitative models being used to manage their investments, which subjected them to significant hidden risks and deprived them of the ability to make informed investment decisions,” C. Dabney O’Riordan, co-chief of the asset management unit within the SEC’s enforcement division, said in the statement on the refund.
Four Transamerica entities — including the Aegon unit and Transamerica Asset Management —agreed to pay nearly $53.3 million in disgorgement, $8 million in interest, and a $36.3 million penalty. Under the settlement, they will create a fair fund to distribute the total $97.6 million to affected investors.
“While the models at issue are no longer in use, we recognize we must do better, and we have taken steps to enhance our policies, procedures and disclosure processes,” a spokesperson for the Transamerica affiliates said in an emailed statement. “We remain confident in our investment process and are committed to continuously improving our business.”
Aegon USA Investment Management’s former chief investment officer, Bradley Beman, did not take reasonable steps to ensure the mutual funds’ models worked as intended, while its former director of new initiatives, Kevin Giles, also contributed to related compliance failures, according to the statement.
Separate SEC orders issued Monday show that Beman will pay a civil penalty of $65,000 to the fair fund. Giles will pay $25,000. They each settled with the SEC without admitting or denying its allegations against them.
In 2010, Aegon USA Investment Management allegedly tasked the inexperienced analyst with developing quant models for managing investment strategies. The analyst, who had recently earned a master of business administration degree, lacked experience in portfolio management and formal training in financial modeling, according to the SEC.
Between July 2011 and June 2015, Transamerica entities violated federal securities laws and rules in offering, selling, and managing the products and strategies tied to the faulty quant models, the regulator said in the order naming the four respondents. During the summer of 2013, Aegon USA Investment Management discovered the models contained errors and concluded that at least one was unfit, the regulator alleged.
The model manager agreement with Transamerica was terminated in 2015. While Transamerica promptly advised its clients that it was no longer offering the related strategies, the firm allegedly did not disclose the reason for the decision, according to the SEC.
