Key Takeaways
- • The SEC settled charges against hedge fund Two Sigma, which holds $60 billion in assets under management, over failure to address known vulnerabilities in its investment models, according to Reuters.
- • Two Sigma agreed to pay $90 million in civil penalties and had already voluntarily repaid $165 million to impacted funds and accounts during the SEC's investigation.
- • The SEC said Two Sigma employees identified model vulnerabilities in or before March 2019 but the firm did not address them until August 2023.
- • An employee made unauthorized changes to more than a dozen models, leading Two Sigma to make investment decisions it otherwise would not have made on behalf of clients, per the SEC.
- • Two Sigma said it proactively reported the issue in 2023, remediated affected clients, and has enhanced its operational policies, procedures, and oversight.
Summary
The U.S. Securities and Exchange Commission on Thursday, January 16, 2025, settled charges against hedge fund Two Sigma over its failure to address known vulnerabilities in its investment models, according to Reuters. Two Sigma voluntarily repaid $165 million to impacted funds and accounts during the SEC's investigation and agreed to pay $90 million in civil penalties to resolve the charges, the agency said in a statement.
According to the SEC, Two Sigma employees identified and recognized vulnerabilities in certain of the firm's investment models in or before March 2019 that could negatively affect clients' investment returns. The firm did not act on the issues until August 2023. The regulator said Two Sigma failed to adopt and implement written policies and procedures to address the vulnerabilities and failed to supervise an employee who made unauthorized changes to more than a dozen models. As a result, the firm made investment decisions on behalf of its clients that it otherwise would not have made.
In a statement, a Two Sigma spokesperson said the firm proactively reported the issue in 2023, promptly remediated negatively impacted clients, and reached a resolution with the SEC that puts the matter behind it. The firm, which has $60 billion in assets under management, said it is committed to acting with the utmost integrity and has made a range of enhancements to its operational policies, procedures, and oversight.
Additional coverage noted that the repayments primarily affected outside investors in funds and separately managed accounts, totaling approximately $165 million, and that the firm took more than four years to address the model issues.
According to the SEC, Two Sigma employees identified and recognized vulnerabilities in certain of the firm's investment models in or before March 2019 that could negatively affect clients' investment returns. The firm did not act on the issues until August 2023. The regulator said Two Sigma failed to adopt and implement written policies and procedures to address the vulnerabilities and failed to supervise an employee who made unauthorized changes to more than a dozen models. As a result, the firm made investment decisions on behalf of its clients that it otherwise would not have made.
In a statement, a Two Sigma spokesperson said the firm proactively reported the issue in 2023, promptly remediated negatively impacted clients, and reached a resolution with the SEC that puts the matter behind it. The firm, which has $60 billion in assets under management, said it is committed to acting with the utmost integrity and has made a range of enhancements to its operational policies, procedures, and oversight.
Additional coverage noted that the repayments primarily affected outside investors in funds and separately managed accounts, totaling approximately $165 million, and that the firm took more than four years to address the model issues.
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