Transamerica entities to pay $97 million to investors over model portfolio snafus

SEC says that the Transamerica units failed to inform investors that certain investment models were flawed and did not work as planned

Aug 27, 2018 @ 12:30 pm

By Bruce Kelly  

Four Transamerica Corp. related businesses were ordered to pay $97.6 million in penalties and disgorgement to retail investors on Monday by the Securities and Exchange Commission for misconduct related to faulty investment models.

According to the SEC's order, investors put billions of dollars into mutual funds and strategies using the faulty models developed by an investment adviser, AEGON USA Investment Management.

AUIM and three related Transamerica businesses claimed that investment decisions would be based on AUIM's quantitative models, according to the SEC.

The models, which were developed solely by an inexperienced, junior analyst, contained numerous errors, and did not work as promised, according to the SEC. When AUIM and one of the related companies, Transamerica Asset Management Inc., learned about the errors, they stopped using the models without telling investors or disclosing the errors, according to the SEC.

Also cited in the SEC's order were Transamerica Financial Advisors Inc., and its affiliated broker-dealer, Transamerica Capital Inc.

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.

"This settlement concludes the SEC investigation into errors in the operation or implementation of asset management quantitative models previously used with certain funds and strategies, as well as related disclosures," said Transamerica spokesman Sean Wood. "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."

Between July 2011 and June 2015, the Transamerica businesses managed 15 quantitative-mode mutual funds, variable life insurance investment portfolios and variable annuity investment portfolios and marketed them as "emotionless," "model-driven" or "model-supported," according to the SEC's order.

"These claims necessarily implied that the models worked as intended," according to the SEC.

"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 SEC Enforcement Division's asset management unit, said in a statement.

In separate orders, the SEC found that AUIM's former global chief investment officer, Bradley Beman, and former director of new initiatives, Kevin Giles, each were a cause of the company's violations.

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