U.S. Securities and Exchange Commission settles with Two Sigma over investment model vulnerabilities and whistleblower rule violations with USD 90 million penalty

The U.S. Securities and Exchange Commission announced settled charges against Two Sigma Investments LP and Two Sigma Advisers LP for breaching fiduciary duties by failing to reasonably address known vulnerabilities in certain investment models, alongside related compliance and supervisory failures, and for a separate violation of the SEC’s whistleblower protection rule. Two Sigma voluntarily repaid impacted funds and accounts USD 165 million during the investigation and agreed to pay USD 90 million in civil penalties. The SEC’s order found that by March 2019 at the latest, employees had identified vulnerabilities that could negatively impact client returns, but the firm did not address them until August 2023, and had not adopted and implemented written policies and procedures to deal with the issues. The order also cited a failure to supervise an employee who made unauthorized changes to more than a dozen models, leading the advisers to make investment decisions they otherwise would not have made for clients. Separately, the order found that separation agreements required departing individuals to state as fact that they had not filed a complaint with any governmental agency, a condition the SEC said could identify whistleblowers and impede communications with SEC staff, including by threatening post-separation payments and benefits. Without admitting or denying the findings, the advisers agreed to a cease-and-desist order, a censure, and penalties of USD 45 million each, and the SEC said its investigation is continuing.