Transamerica’s errors affected 15 products across its mutual fund, SMA, variable annuity and variable life insurance investment portfolios, the SEC said in an order, including the Transamerica Dynamic Allocation fund and the Transamerica Tactical Income fund.

The errors related to models used by the subadvisor of the products, Aegon USA Investment Management (AUIM), from July 2011 to June 2015.

The SEC said that the quantitative models used in the funds did not work as promised and that despite AUIM discovering some errors in the summer of 2013, the firm only stopped using at least one of the models in September that year and failed to disclose the errors or inform investors.

AUIM was subsequently dropped as subadvisor on the mutual funds in April 30 2015 and the remaining portfolios on June 30 2015.

You can read the SEC’s order in full, here.

What went wrong?

The SEC claims that in 2010, Aegon USA asked a single inexperienced analyst to develop quantitative models, which were ultimately rolled out across the products in question.

‘The analyst did not follow any formal process to confirm the accuracy of his work,’ the SEC said in an order. Products utilizing the model – including the Transamerica Tactical Income fund – launched in 2011. AUIM later launched the Transamerica Tactical Allocation fund and Transamerica Tactical Rotation fund in November 2012.

In the summer of 2013, AUIM found that the models contained over 50 errors, including ‘incorrect calculations, inconsistent formulas and the use of whole numbers where percentages were intended,’ the SEC said.

Though AUIM stopped using the model for the Transamerica Tactical Income fund in September 2013, it allegedly failed to disclose the decision or the errors in the model to its clients.

By September of 2014, Aegon USA rolled out a validated asset allocation model for the three mutual funds. The affected variable annuity strategies received fixed models by April of 2015, the SEC said.

Transamerica ultimately rebranded the Transamerica Tactical Rotation fund as the Transamerica Dynamic Allocation fund and the Transamerica Tactical Allocation fund as the Transamerica Dynamic Allocation II fund in May of 2015. The firm ended its model manager agreement with Aegon USA in April of 2015 but did not disclose the errors in the asset allocation model.

Payout pain 

Transamerica and the other entities have agreed to settle the SEC’s investigation by returning $53.3 million in profits, $8 million in interest and paying a $36.3 million fine without admitting or denying guilt. The money will be returned to investors through a fair fund.

Citywire first reported the SEC’s investigation into Transamerica and  AUIM, in August of 2017.

‘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,’ SEC asset management enforcement co-chief C. Dabney O’Riordan said in a statement.

Aegon USA’s former global chief investment officer, Bradley Beman, has been ordered to pay $65,000 after the SEC found that he did not take reasonable steps to make sure the fund’s models worked as intended. Beman departed Aegon in 2015 and currently serves as chief investment officer of $4 billion investment manager Tortoise Credit Strategies.

Aegon USA’s former director of new initiatives, Kevin Giles, has been fined $25,000 for allegedly contributing to the firm’s compliance failings alongside Beman.

Dutch insurer Aegon bought Transamerica in 1999 in a deal worth $10.8 billion. AUIM has since been appointed a subadvisor on a number of Transamerica mutual funds and variable annuity portfolios.

A spokesperson for Transamerica and the affiliated firm said: ‘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.

‘We remain confident in our investment process and are committed to continuously improving our business. We cooperated fully with the SEC throughout the regulatory investigation of the issues and are pleased to put this matter behind us.’