FRAUD AND MANIPULATION—Investment advisers failed to address investment model vulnerabilities and violated the whistleblower rule - 21 January 2025

The advisers ignored investment model vulnerabilities for years.

The SEC has announced settled charges against New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP (Two Sigma) for breaching their fiduciary duties, related compliance and supervisory failures, and for violating the Commission’s whistleblower protection rule (In the Matter of Two Sigma Investments, LP, Securities Exchange Act No. 102207 (Jan. 16, 2025)).

Two Sigma. The SEC press release explains that before March 2019, employees at Two Sigma recognized vulnerabilities in certain Two Sigma investment models that had the potential to negatively impact client investment returns but Two Sigma waited until August 2023 to address the vulnerabilities. Even though Two Sigma recognized the vulnerabilities, it failed to “adopt and implement written policies and procedures to address them,” and it failed to supervise an employee who made changes to the models which resulted in Two Sigma making investment decisions that it otherwise would not have made.

Separately, the SEC’s order found that Two Sigma violated the Commission’s whistleblower protection rule by “requiring departing individuals, in separation agreements, to state as fact that they had not filed a complaint with any government agency,” which effectively allowed Two Sigma to identify whistleblowers and prohibit them from receiving post-separation payments and benefits. Through those prohibitions, Two Sigma impeded the departing individuals from communicating directly with the Commission about possible securities law violations, thereby violating the whistleblower protection rule.

Violations. The SEC’s order found that Two Sigma willfully violated the antifraud provisions of the Investment Advisers Act of 1940 and the Advisers Act’s compliance rule, as well as Rule 21F-17(a) under the Securities Exchange Act of 1934, which prohibits impeding an individual from communicating with SEC staff about a possible securities law violation.

Two Sigma’s cooperation and remedial efforts included, among other things, the voluntarily repayment of $165 million to impacted funds and accounts during the SEC’s investigation, a revision of its separation agreements, a revision of its written policies, and the enhancement of its annual compliance training materials for all employees.

Penalties. Without admitting or denying the SEC’s findings, Two Sigma agreed to cease and desist from future violations, a censure, and a penalty of $45 million each.

The release is No. 34-102207.

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