Transamerica to Pay $97 Million for Hiding Faults in Model Portfolios
(Updated with response from Aegon/Transamerica in sixth paragraph.)
The Securities and Exchange Commission said Monday that Transamerica agreed to refund $97 million to retail investors it misled through sale of mutual funds managed through a faulty investment model developed by an inexperienced junior analyst.
Aegon USA Investment Management, which operates through Transamerica Asset Management and affiliated independent broker-dealer Transamerica Capital, Inc. and an RIA, Transamerica Financial Advisors, failed to inform investors who put billions of dollars into mutual funds and separately managed account and wrap account strategies that it discovered errors in the quantitative fund models, the regulator said.
The products and strategies were marketed as “model-driven” and “model-supported,” without confirmation that the model worked as intended and without disclosing the risks, the SEC said.
In addition to failing to disclose fundamental errors in its proprietary funds, the SEC said Transamerica negligently relied on attestations and faulty investments histories from unaffiliated investment adviser F-Squared Investments, a now defunct asset-allocation firm that has gotten several other retail brokerage firms into hot water. F-Squared hosted a website for Transamerica investors containing a materially inflated, hypothetical and back-tested, performance track record, the SEC said.
The Transamerica units reached the settlement without admitting or denying the SEC’s findings. The four units will pay nearly $53.3 million in disgorgement, $8 million in interest, a $36.3 million penalty, and create and administer a fair fund to distribute the entire $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 spokesman for the four Aegon affiliates said in an e-mailed statement. “We remain confident in our investment process and are committed to continuously improving our business.”
Aegon USA’s former Global Chief Investment Officer, Bradley Beman, and former Director of New Initiatives, Kevin Giles, separately settled SEC charges without admitting or denying the findings of contributing to the compliance failings. Beman will pay $65,000 in penalties and Giles $25,000, the SEC said.
“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 prepared statement.
The firm failed to disclose to investors and to the funds boards that the key investment manager on most of the products from inception in May 2011 through his termination in August 2013 was an analyst who had no portfolio management experience, the SEC said. The funds said in marketing materials that a senior manager was responsible for the day-to-day management of the products, when the manager in fact had little idea of how the portfolios were constructed or managed, the SEC said.
The products involved were: Transamerica AEGON Active Asset Allocation–Conservative VP Portfolio; an SMA called Global Tactical Allocation–Conservative; Transamerica AEGON Active Asset Allocation–Moderate VP Portfolio; Transamerica Index 35 VP Portfolio; Transamerica Index 50 VP Portfolio; Transamerica Index 75 VP Portfolio; Transamerica Tactical Allocation Fund; Transamerica Tactical Income Fund, and Transamerica Tactical Rotation Fund.
Transamerica offered “substantial cooperation” to SEC investigators, helping them collect evidence that might not otherwise have been available, the regulator said, an acknowledgment that hints at moderation in the sanctions. The firm also voluntarily retained a compliance consultant to conduct a comprehensive, independent review, implemented the consultant’s proposed changes and retained the consultant for follow-up reviews for fiscal year 2019, the regulator said.