Faulty Investment Models
The Securities and Exchange Commission charged four distinct Transamerica entities for misconduct involving faulty investment models. Amid the charges, the SEC ordered the entities to refund $97 million to misled retail investors.
According to the SEC’s order, investors put billions of dollars into mutual funds. Unfortunately for the investors, the money fell under the purview of flawed investment strategies and faulty models developed by investment adviser AEGON USA Investment Management LLC (AUIM).
AUIM is one of the affiliated investment advisers for Transamerica Asset Management Inc. (TAM), Transamerica Financial Advisors Inc. and its affiliated broker-dealer Transamerica Capital Inc. Together, the financial advisory entities claimed they would use AUIM’s quantitative models to drive investment decisions.
Inexperienced Junior Analyst
However, the SEC says that an inexperienced junior AUIM analyst developed the models, and they contained numerous errors. Therefore, the financial models did not work as promised.
When AUIM and TAM learned about the errors, they stopped using the models. However, AUIM and TAM did not disclose this error to their investors.
“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,” said C. Dabney O’Riordan, co-chief of the SEC Enforcement Division’s asset management unit.
Without admitting or denying the SEC’s findings, the four Transamerica entities agreed to settle the SEC’s charges and pay nearly $53.3 million in disgorgement, $8 million in interest and a $36.3 million penalty, and will create and administer a fair fund to distribute the entire $97.6 million to affected investors.
In separate orders, the SEC also found that AUIM’s former Global Chief Investment Officer Bradley Beman and AUIM’s former Director of New Initiatives Kevin Giles each caused some of AUIM’s violations. Specifically, the commission found that Beman did not take reasonable steps to make sure the mutual funds’ models worked as intended and that Beman and Giles both contributed to AUIM’s compliance failings related to the development and use of models.
Beman and Giles agreed to settle the SEC’s charges without admitting or denying the findings. They will pay, respectively, $65,000 and $25,000 in penalties that also will be distributed to affected investors.