Two New York based investment advisors have been fined $90 million by the Securities and Exchange Commission for failing to address vulnerabilities in their investment models.
The firms were also found to have breached the whistleblower protection rule by requiring outgoing employees to state that they had not filed a complaint with any governmental agency, which could have identified whistleblowers and may deter others from reporting wrongdoing fearing that they would lose post-separation payments or other benefits.
Two Sigma Investments LP and Two Sigma Advisers LP were investigated by the SEC which determined that employees of the firms identified vulnerabilities in some of its investment models in March 2019. The issues could have negatively impacted clients’ investment returns, but they were not addressed until August 2023, more than four years after the concerns were raised.
The SEC says that the firm failed to implement written policies and procedures to remedy the vulnerabilities and failed to correctly supervise an employee who made changes to more than a dozen models that led to the firms making investment decisions that they would not otherwise have done.
Sanjay Wadhwa, acting director of the SEC’s Division of Enforcement, said that the firm failed in its fiduciary duties to minimize potential risk to investors.
“As investment advisers rely more heavily on models and advanced technology when investing client assets, the importance of a robust compliance program grows. When an investment adviser identifies material vulnerabilities to its core investment operations that may substantially impact client returns, it must address those vulnerabilities promptly and fully. Doing nothing for years is not the answer.”
Two Sigma told InvestmentNews:
“After proactively reporting the issue in 2023 and promptly remediating negatively impacted clients, Two Sigma is pleased to have reached a resolution with the SEC, putting this matter behind us. We are committed to acting with the utmost integrity and have made a range of enhancements to our operational policies, procedures, and oversight. We are focused on the future and delivering value for our clients.”
The two firms did not admit or deny the charges made in the SEC Order but agreed to pay $45 million each in civil penalties and also voluntarily repaid impacted funds and accounts $165 million during the SEC’s investigation.
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