In re TWO SIGMA

 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 102207 / January 16, 2025 
 
INVESTMENT ADVISERS ACT OF 1940 
Release No. 6824 / January 16, 2025  
 
ADMINISTRATIVE PROCEEDING 
File No. 3-22418 
 
In the Matter of 
 
TWO SIGMA 
INVESTMENTS, LP, and 
            TWO SIGMA  
            ADVISERS, LP, 
 
Respondents. 
 
ORDER INSTITUTING ADMINISTRATIVE 
AND CEASE-AND-DESIST PROCEEDINGS, 
PURSUANT TO SECTION 21C OF THE 
SECURITIES EXCHANGE ACT OF 1934 
AND SECTIONS 203(e) AND 203(k) OF THE 
INVESTMENT ADVISERS ACT OF 1940, 
MAKING FINDINGS, AND IMPOSING 
REMEDIAL SANCTIONS AND A CEASE-
AND-DESIST ORDER 
   
 
I. 
 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 
public interest that public administrative and cease-and-desist proceedings be, and hereby are, 
instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and 
Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against Two 
Sigma Investments, LP (“TSI”) and Two Sigma Advisers, LP (“TSA”) (collectively, “Two Sigma” 
or “Respondents”).  
II. 
 In anticipation of the institution of these proceedings, Respondents have submitted Offers 
of Settlement (the “Offers”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over them and the subject matter of these 
proceedings, which are admitted, Respondents consent to the entry of this Order Instituting 
Administrative and Cease-and-Desist Proceedings, Pursuant to Section 21C of the Securities 
Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, 
Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as 
set forth below. 

 
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III. 
 On the basis of this Order and Respondents’ Offers, the Commission finds
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 that: 
Summary 
1. These proceedings arise out of failures by registered investment advisers TSI and 
TSA to exercise reasonable care in addressing known material vulnerabilities to a subset of their 
computer-based algorithmic investment models (“Models”) in breach of their fiduciary duty of care, 
deficiencies in their written compliance policies and procedures, and TSI’s failure to reasonably 
supervise one of its employees (“Modeler A”), as well as TSI’s and TSA’s violations of the 
Commission’s whistleblower protection rule.  Two Sigma is a large quantitative-analytics-based 
hedge fund manager that uses Models when making investment decisions for its clients, including 
private funds and separately managed accounts (each, an “SMA”), as well as for its own proprietary 
funds.    
2. Between March 2019 and October 2023 (the “Relevant Period”), TSI recognized 
significant vulnerabilities to certain of its Models that could materially adversely impact clients’ 
investment returns.  Specifically, beginning in at least March 2019, Two Sigma employees 
expressed concern that numerous Two Sigma personnel had unfettered read and write access to a 
firm database that stored Model “parameters”—variable inputs that impact the stock predictions 
generated by Models—used by certain of Two Sigma’s live-trading Models.  These employees 
expressed concern that such personnel could make changes to these Model parameters without 
review or approval and that such changes could materially impact Two Sigma’s investment 
decisions for its clients.  Despite Two Sigma employees identifying and providing senior 
management with proposed solutions, TSI failed to reasonably address these vulnerabilities for 
years.  And, despite also knowing about these vulnerabilities, TSA also failed to take reasonable 
steps to address them.  
3. Additionally, between November 2021 and August 2023, TSI failed to supervise one 
of its modelers, Modeler A, who had read and write access to this database and changed Model 
parameters without approval for fourteen Models that Two Sigma was using in live trading.  
Modeler A’s unauthorized changes caused these Models to perform differently than expected such 
that Two Sigma made investment decisions that it otherwise would not have made in the client 
funds and SMAs it advised.  Modeler A’s changes, which went undetected until August 2023, 
demonstrated the significance of the vulnerabilities that Two Sigma had first identified in early 2019 
but failed reasonably to address.  Modeler A’s changes resulted in certain funds and SMAs 
overperforming by more than $400 million and other funds and SMAs underperforming by 
approximately $165 million.  Two Sigma voluntarily repaid the negatively impacted funds and 
SMAs, which primarily included outside investors, approximately $165 million in December 2023 
and January 2024. 
                                                 
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  The findings herein are made pursuant to Respondents’ Offers of Settlement and are not 
binding on any other person or entity in this or any other proceeding.  

 
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4. Two Sigma also failed to adopt and implement written policies and procedures 
reasonably designed to prevent violations of the Advisers Act during the Relevant Period.  
Specifically, Two Sigma failed to adopt and implement written policies and procedures to address 
the recognized access control vulnerabilities to the Models described above.    
5. Accordingly, both TSI and TSA violated Sections 206(2) and 206(4) of the Advisers 
Act and Rule 206(4)-7 thereunder.  TSI also failed reasonably to supervise Modeler A, within the 
meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing and detecting 
Modeler A’s violations of the federal securities laws.   
6. Separately, between at least April 2019 and February 2024, Two Sigma entered into 
separation agreements with employees (“Separation Agreements”) that required departing 
employees to represent to Two Sigma that they had not filed a complaint with any governmental 
agency in order to receive certain post-separation payments and benefits.  As a result, Two Sigma 
violated Rule 21F-17(a) under the Exchange Act, which prohibits any person from taking any action 
to impede an individual from communicating directly with the Commission staff about a possible 
securities law violation. 
Respondents 
7. TSI is a Delaware limited partnership that is headquartered in New York, NY.  TSI 
was founded in July 2001 and has been registered with the Commission as an investment adviser 
since August 2009.  TSI provides advisory services on a discretionary basis to various clients, 
including private investment funds.  According to its Form ADV filed on March 28, 2024, TSI had 
regulatory assets under management of approximately $84 billion.   
8. TSA is a Delaware limited partnership that is headquartered in New York, NY.  
TSA was founded in December 2001 and has been registered with the Commission as an 
investment adviser since February 2010.  TSA provides advisory services on a discretionary basis to 
various clients, including private investment funds, a registered investment company, foreign funds, 
and SMAs.  According to its Form ADV filed on March 28, 2024, TSA had regulatory assets under 
management of approximately $76 billion.   
Background 
9. Two Sigma is a quantitative-analytics-based hedge fund manager with 
approximately 1,700 employees worldwide.  Two Sigma manages dozens of private funds, and 
TSA also manages SMAs, which use sophisticated computer-based algorithmic trading Models.  
The Models create forecasts that Two Sigma uses to make investment decisions for client 
portfolios as well as in its own proprietary funds.  Two Sigma uses hundreds of different Models 
across its various investment strategies.   
10. TSI and TSA are affiliates and share certain of the same owners and certain of the 
same employees.   
11. TSI personnel called “researchers” or “modelers” develop the Models.  TSI uses the 
Models when making investment decisions for itself and its private fund clients.  TSI also licenses 

 
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the Models to TSA for TSA’s use when making investment decisions for itself, its private fund 
clients, and SMAs it advises.   
12. During the Relevant Period, Two Sigma managed private funds that employed a 
“master-feeder” or “fund-of-funds” structure whereby investors purchased interests in a fund and 
that fund’s assets were then invested, directly or indirectly, through various TSI- and TSA-
managed strategies and/or funds that used the Models.  TSA also managed SMAs for numerous 
clients during the Relevant Period that also were invested, directly or indirectly, through various 
TSI- and TSA-managed strategies and/or funds that used the Models. 
A. Two Sigma’s Storage of Model Parameters and Process for Approving Models 
13. Two Sigma’s Models are made available for live trading after being vetted through 
an internal approval process.  Members of Two Sigma’s portfolio management teams then evaluate 
each approved Model and determine whether and how to incorporate each approved Model into 
Two Sigma’s investment strategies. 
i. Model Storage 
14. Two Sigma’s live trading system uses Model code that is stored in a secure file 
called the “Jar.”  Only members of an engineering team can update the live trading system to use a 
new version of the Jar file.  Beginning with the advent of machine learning-based Models, the 
parameters necessary to run such Models outgrew the data size constraints of the Jar.  Thus, 
modelers began using a database, called “celFS,” to store certain Model parameters that were too 
large to be stored in the Jar.  The Model parameters stored in celFS were accessible by certain 
modelers and a variety of other Two Sigma personnel, each of whom had unrestricted read and 
write access to celFS and the parameters stored therein.  Modelers could then code their Models to 
run by linking the Model code stored in the Jar to the Model parameters stored in celFS.  
15. Certain Two Sigma modelers used Model parameters stored in celFS to increase or 
decrease the impact of specific Model code contained in the Jar, including decreasing one Model’s 
correlation to other existing Models.  This use of Model parameters was important to Two Sigma 
because it removed redundancy that could result in Two Sigma buying or selling more or less of a 
specific security than it otherwise desired or intended. 
ii.  Model Approval Process 
16. Two Sigma required its modelers to complete several steps before new Models, or 
certain changes to existing Models, could be approved and released for use in live trading.   
17. During the Relevant Period, Two Sigma’s primary policy and procedure governing 
the approval of new Models was called Productionalize a Model (or “PAM”).  The PAM manual, 
which was available to modelers and other Two Sigma employees, incorporated detailed guidance 
on the Model approval and release processes, including that new Models would be evaluated based 
on their correlation to existing Models.  Modelers frequently used parameters to help control their 
new Models’ expected correlation to existing Models.    

 
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18. As an initial step, PAM required modelers to draft and submit a document—
referred to internally as a “white paper”—detailing the Model’s objective and providing 
information about the Model’s analytics and key metrics.  PAM then required modelers to 
complete and submit several forms which summarized these key attributes, including the proposed 
Model’s correlation to existing Models.  Two Sigma management then reviewed these documents 
and forms, and Models could be approved where, among other things, the modeler’s 
documentation reported that the proposed Model’s correlation to existing Models was below a 
specified threshold.  As part of that review process, designated Two Sigma personnel could reject 
the proposed new Model, approve the proposed new Model for live trading, or require changes to 
the proposed new Model.  Once approved, members of Two Sigma’s portfolio management teams 
would evaluate the new Model and determine whether and how to incorporate it into Two Sigma’s 
investment strategies.  
19. The PAM manual also outlined the approval process for changes to existing 
Models, which was called “Mini-PAM.”  The use of Mini-PAM depended on the proposed 
changes’ “smallness”—the degree of change in the expected performance of the existing Model.  
Where proposed changes exceeded the smallness threshold, modelers were required to follow the 
same steps required for a new Model (i.e., PAM). 
B. Vulnerabilities to Two Sigma’s Model Parameters Stored in celFS 
i. Two Sigma Personnel Identify Significant Vulnerability in celFS 
20. Two Sigma personnel first identified significant vulnerabilities to the Model 
parameters stored in celFS in at least early 2019.  By March 2019, TSI employees began sharing 
emails and a memorandum outlining concerns regarding security vulnerabilities to Model 
parameters stored in celFS.  These emails and the memorandum focused on the lack of access 
controls (i.e., read and write controls) that could result in Two Sigma employees inadvertently 
making changes to, or overwriting entirely, Model parameters stored in celFS.  The memorandum 
also identified proposed fixes to address these security vulnerabilities by, among other things, 
limiting read and write access in celFS to a smaller group of Two Sigma employees.   
21. Over the next several months, these concerns and proposals were shared with senior 
employees in the TSI Machine Learning and Engineering groups.  Employees in these two groups 
suggested various pragmatic approaches, including the use of tighter access controls in celFS, 
process enhancements that would ensure that changes to Model parameters stored in celFS were 
accompanied by PAM or Mini-PAM approvals, encrypting the Model parameters stored in celFS, 
and/or removing the Model parameters from celFS entirely and using an alternate storage database.   
ii. Two Sigma Fails to Correct Vulnerabilities to Model Parameters in celFS 
22. Two Sigma employees failed to reach a consensus on the best way to address these 
known vulnerabilities to Model parameters stored in celFS, which persisted even after one of Two 
Sigma’s co-founders expressed concern about Model parameters stored in celFS in 2019.  Two 
Sigma made no changes to the controls governing Model parameters stored in celFS in 2019 or 
2020. 

 
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23. In late January 2022, a senior TSI engineer circulated to one of Two Sigma’s co-
founders and other Two Sigma executives his own memorandum about Model controls.  In this 
memorandum, the senior engineer raised concerns about the lack of access controls for Model 
parameters stored in celFS and the absence of controls to ensure modelers followed an approval 
process for changes to these Model parameters.  In the same memorandum, the senior engineer 
also explained that while no prior incidents had been malicious or caused significant issues to Two 
Sigma’s trading, “[i]t is nevertheless dangerous to allow this and efforts are in place to limit and 
eventually allow only Data Engineering to have write access.”   
24. Despite these concerns, Two Sigma made no changes to address the vulnerabilities 
to Model parameters stored in celFS until after a TSI employee accidentally overwrote Model 
parameters in that database in May 2022. 
iii. May 2022 celFS Incident Reinforces Vulnerability Concerns 
25. On May 9, 2022, a TSI employee inadvertently overwrote an entire volume in 
celFS containing several Models’ parameters before certain markets opened for trading that day.  
This change prevented the Models from generating the forecasts that Two Sigma used to make 
investment decisions on behalf of certain of its client funds and SMAs.  Although Two Sigma was 
able to reverse these changes before markets opened, this incident reinforced the validity of the 
concerns expressed by Two Sigma employees about the vulnerabilities to the celFS database 
beginning in 2019.   
26. In an internal post-mortem document circulated among the TSI Engineering group 
and with Two Sigma senior management on May 10, 2022, Two Sigma employees identified the 
same access control issues that had been identified previously in 2019 and noted that these 
vulnerabilities had enabled this incident. 
27. In response, in June 2022, Two Sigma implemented a new procedure that limited 
access to Model parameters stored in the celFS database to a small, dedicated team of engineers 
and allowed changes to Model parameters only upon receipt of a written request, called a ticket, 
from a modeler.  This new procedure prevented modelers from making direct changes to Model 
parameters stored in celFS.  However, since it merely required modelers to document their changes 
on a ticket and to submit the ticket to a team of engineers for implementation, it was insufficient to 
address errors in modelers’ tickets and did not prevent modelers from intentionally changing Model 
parameters because modeler tickets were not reviewed, tested, or approved.  Rather, Two Sigma 
automatically—i.e., without review or analysis by the engineers who received the tickets —
implemented the Model parameter changes reflected on a modeler’s ticket.   
C. Modeler A Makes Unauthorized Changes to Model Parameters Stored in 
celFS 
28. Between November 2021 and August 2023, Modeler A, a TSI employee who had 
used celFS to store certain Model parameters for years, made dozens of unauthorized changes to 
Model decorrelation parameters stored in celFS for fourteen different Models that Two Sigma used 

 
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in live trading.  These Models included both Models that Modeler A developed himself as well as 
Models developed by Modeler A’s direct reports and with which Modeler A assisted. 
29. Modeler A effected these parameter changes in at least two ways.  First, between 
November 2021 and May 2022, Modeler A himself changed Model decorrelation parameters stored 
in celFS, which were linked to the Model code stored in the Jar.  By adjusting these Model 
parameters, in many cases to zero (i.e., nullifying the parameter), Modeler A increased these 
Models’ expected correlation to Two Sigma’s other Models without detection.  Second, between at 
least February and August 2023, Modeler A submitted tickets for changes to Model decorrelation 
parameters stored in celFS that he knew, based on his understanding of the ticket process, would not 
be substantively reviewed or questioned.  Modeler A later acknowledged to certain colleagues that 
he should have filed a Mini-PAM for these Model parameter changes in celFS.  
30. These changes caused the Models to perform differently than expected such that 
Two Sigma made investment decisions that it otherwise would not have made.  Specifically, 
Modeler A’s unauthorized changes resulted in Two Sigma buying or selling more or less of specific 
securities than it otherwise would have, which caused certain funds and SMAs to overperform by 
more than $400 million and other funds and SMAs to underperform by approximately $165 million.  
Modeler A received millions of dollars of additional compensation from Two Sigma as a result of 
the net overperformance attributable to these changes. 
31. TSI knew since at least March 2019 of the risk that its modelers could use the 
vulnerabilities to Model parameters stored in celFS to make unauthorized changes to these Model 
parameters.  Despite recognizing this risk, TSI failed to adopt or implement written policies and 
procedures that were reasonably designed to confirm that its modelers did not make such 
unauthorized changes during the Relevant Period.  In August 2023, TSI began monitoring the celFS 
database to confirm that its modelers had not made, and were not making, unauthorized changes to 
Model parameters and discovered Modeler A’s changes. 
D. Two Sigma’s Failure to Reasonably Address Model Vulnerabilities 
 
32. An investment adviser’s fiduciary duty includes a duty of care.  To fulfill this 
obligation, an adviser, among other things, must provide investment advice in the best interest of 
its client based on the client’s objectives, and take steps to protect client interests from being 
placed at risk because of the adviser’s inability to provide advisory services.  This includes taking 
steps to minimize known or reasonably foreseeable operational risks that could lead to significant 
business disruptions.  
33. During the Relevant Period, TSI and TSA breached their fiduciary duty to take 
reasonable steps to protect their clients’ interests from recognized material vulnerabilities to certain 
Models, which were a core function of its advisory business as a quantitative-analytics-based hedge 
fund manager.  Specifically, despite having first recognized vulnerabilities to live trading Model 
parameters stored in celFS in March 2019—and being aware of various reasonable methods to 
mitigate them—TSI did not adequately address these vulnerabilities until October 2023.  And, 
TSA, despite knowing about the vulnerabilities, also failed to take reasonable steps to address 
them. 

 
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E.  Two Sigma Failed to Adopt and Implement Reasonably Designed Written 
Compliance Policies and Procedures 
34. During the Relevant Period, Two Sigma’s written policies and procedures were not 
reasonably designed to prevent violations of the Advisers Act.  Specifically, while TSI had written 
policies and procedures governing changes to existing Models (e.g., PAM and Mini-PAM), these 
policies and procedures were deficient because they contained no mechanism to check whether all 
changes to Model parameters stored in celFS that required a PAM or Mini-PAM were in fact made 
pursuant to a PAM or Mini-PAM.  And, TSA, as a licensee of TSI’s Models that shared certain 
employees with TSI, failed to adopt and implement written policies and procedures that were 
reasonably designed to address these same recognized vulnerabilities.   
35. In October 2023, to help the firm better fulfill its fiduciary obligations, Two Sigma 
adopted and implemented additional policies and procedures to monitor, identify, and address 
vulnerabilities to the security of its Models. 
F.  Two Sigma’s Separation Agreements Raised Impediments to Its Employees’ 
Ability to Communicate Directly with The Commission Staff about Possible 
Securities Laws Violations 
36. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank 
Act”), enacted on July 21, 2010, amended the Exchange Act by adding Section 21F, 
“Whistleblower Incentives and Protection.” The purpose underlying these provisions was “to 
encourage whistleblowers to report possible violations of the securities laws by providing financial 
incentives, prohibiting employment-related retaliation, and providing various confidentiality 
guarantees.”  See Implementation of the Whistleblower Provisions of Section 21F of the Securities 
Exchange Act of 1934, Release No. 34-64545, at p. 197 (Aug. 12, 2011). 
37. To fulfill this Congressional purpose, the Commission adopted Rule 21F-17, which 
provides in relevant part: 
(a) No person may take any action to impede an individual from communicating directly 
with the Commission staff about a possible securities law violation, including enforcing, or 
threatening to enforce, a confidentiality agreement ... with respect to such 
communications. 
Rule 21F-17 became effective on August 12, 2011. 
38. From at least April 2019 until February 2024, Two Sigma required departing 
employees to sign Separation Agreements in order to receive certain post-separation payments and 
benefits.  The Separation Agreements required employees to represent that they had not filed any 
complaints against Two Sigma prior to signing the Separation Agreement, but also stated that 
employees were not prohibited from reporting possible violations of law to any governmental 
agency or making other disclosures that are protected under whistleblower laws or regulations.   
39. Specifically, Section 6(d) of the Separation Agreements (the “Employee 
Representation”) required departing employees to make the following representation: “You 

 
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represent that you have not filed against any Two Sigma Party any charges, complaints or lawsuits 
regarding any acts or omissions occurring prior to your execution of this Agreement with any 
international, federal, state, city or local court, governmental agency or arbitration tribunal.”   
40. The Separation Agreements also contained a prospective carve-out in Section 14(c) 
(the “Carve Out”), which stated: “Nothing in this Agreement (including without limitations 
Sections 5(g), 6, 7 and 8), the Company’s policies or any other agreement between you and the 
Company prohibits you from making a good faith reporting of possible violations of law or 
regulation to any governmental agency or entity or making other disclosures that are protected 
under whistleblower laws or regulations.”   
41. The Separation Agreements further authorized Two Sigma to file an arbitration 
seeking various financial and non-financial remedies against any employee who breached the 
Separation Agreements.   
42. Two Sigma’s use of the Separation Agreements violated Rule 21F-17(a) under the 
Exchange Act because the Employee Representation required departing employees to disclose to 
Two Sigma whether they had previously reported possible violations of the federal securities laws 
to the Commission and barred such departing employees from receiving the post-separation 
payments and benefits that Two Sigma offered in exchange for receiving signed Separation 
Agreements.  Further, departing employees who may have breached the Separation Agreements by 
falsely making the Employee Representation ran the risk of facing an arbitration and being held 
liable to Two Sigma for various financial and non-financial remedies.  
43. The Carve Out did not remedy the impeding effect of the Employee Representation, 
which addressed past employee conduct (i.e., it required disclosure of already-made complaints), 
because the Carve Out was prospective in application (i.e., it did not prohibit departing employees 
from making future complaints).  
44. From April 2019 until February 2024, nearly three hundred (300) departing 
employees signed Separation Agreements containing the Employee Representation.  
45. In February 2024, Two Sigma revised the Separation Agreements such that the 
Employee Representation read: “You represent that you have not filed against any Two Sigma 
Party any charges, complaints or lawsuits regarding any acts or omissions occurring prior to your 
execution of this Agreement with any international, federal, state, city or local court, governmental 
agency or arbitration tribunal.  However, this representation does not apply to any charges, 
actions, or proceedings before, or engaging in communications with, the SEC . . . about possible 
fraud or other securities law violations occurring prior to the date you execute this agreement.” 
(Emphasis added.)   
46. This revision made clear that the Employee Representation did not apply to 
instances where departing employees had previously reported possible securities laws violations to 
the SEC, and that departing employees who had already made such a report to the SEC did not 
need to identify themselves, could still honestly make the required Employee Representation, and 

 
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could still receive the post-separation payments and benefits set forth in the Separation 
Agreements. 
47. The Commission staff is not aware of specific instances in which Two Sigma took 
any action against any departing employee for breaching the Separation Agreements, in which a 
current or former Two Sigma employee was prevented from communicating with the Commission 
staff about potential violations of securities laws, or in which Two Sigma took action to otherwise 
prevent such communications, including with respect to the events described herein. 
Violations and Failure to Supervise 
48. As a result of the conduct described above, TSI and TSA willfully
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 violated 
Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging “in any 
transaction, practice or course of business which operates as a fraud or deceit upon any client or 
prospective client.”  Scienter is not required to establish a violation of Section 206(2), which may 
rest on a finding of simple negligence. SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992) 
(citing SEC v. Cap. Gains Rsch. Bureau, Inc., 375 U.S. 180, 194-95 (1963)). 
49. As a result of the conduct described above, TSI and TSA willfully violated Section 
206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt and implement written 
policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules 
thereunder.  Proof of scienter is not required to establish a violation of Section 206(4) of the 
Advisers Act and the rules thereunder.  Steadman, 967 F.2d at 647. 
50. As a result of the conduct described above, TSI failed reasonably to supervise 
Modeler A within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing 
and detecting Modeler A’s violations of the federal securities laws. 
51. As a result of the conduct described above, TSI and TSA willfully violated Rule 
21F-17(a) of the Exchange Act, which prohibits any person from taking any action to impede an 
individual from communicating directly with the Commission staff about a possible securities law 
violation. 
  
                                                 
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  “Willfully,” for purposes of imposing relief under Sections 203(e) and (f) of the Advisers 
Act, “‘means no more than that the person charged with the duty knows what he is 
doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 
969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor “also be aware that he is 
violating one of the Rules or Acts.”  Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). The decision in 
The Robare Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently 
structured statutory provision, does not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) 
(setting forth the showing required to establish that a person has “willfully omit[ted]” material 
information from a required disclosure in violation of Section 207 of the Advisers Act). 

 
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Two Sigma’s Cooperation and Remedial Efforts 
52. In determining to accept the Offers, the Commission considered the cooperation 
Two Sigma afforded the Commission staff and remedial acts Two Sigma promptly undertook.   
53. Two Sigma provided substantial cooperation in the Division of Enforcement’s 
investigation, and its efforts assisted the Commission staff in its collection of evidence, including 
information that might not otherwise have been available to the Commission staff.   
54. In October 2023, Two Sigma, during the course of an examination by the 
Division of Examinations (“Examinations”), disclosed to investors and the Examinations staff 
that one of its modelers engaged in what Two Sigma described as “intentional misconduct” by 
circumventing Two Sigma’s modeling practices, and stated that it would remediate investors for 
any negative impacts arising therefrom. 
55. In December 2023 and January 2024, Two Sigma voluntarily repaid the negatively 
impacted client funds and SMAs approximately $165 million to account for the underperformance 
that these funds suffered as a result of Modeler A’s unauthorized changes.   
56. In 2023 and 2024, Two Sigma reviewed its written disclosures, written policies and 
procedures, and internal controls relating to, among other things, the security of Model parameters 
stored in celFS, the integrity of Model code, the approval of new Models and changes to existing 
Models, and the supervision of its associated persons, and adopted and implemented changes 
thereto. 
57. Additionally, upon learning of the Commission’s separate investigation concerning 
its Separation Agreements, Two Sigma promptly initiated a remediation program concerning 
compliance with Rule 21F-17 under the Exchange Act.  Within two weeks, Two Sigma:  
(i) reviewed and, as necessary, revised its Separation Agreements, as well as 
various other employment-related agreements and training programs, to 
comply with Rule 21F-17;  
(ii) reviewed and, as necessary, revised its written policies and procedures for 
compliance with Rule 21F-17;  
(iii) enhanced its annual compliance training materials for all employees to 
ensure compliance with Rule 21F-17;  
(iv) communicated with all current employees to advise them of the protections 
afforded them by Rule 21F-17, including their right to communicate 
directly with the Commission staff regarding any potential violation of the 
federal securities laws; and 
(v) communicated with the nearly three hundred (300) employees who had 
signed the Separation Agreements between April 2019 and February 2024, 
advising them of the protections afforded them by Rule 21F-17, including 

 
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their right to communicate directly with the Commission staff regarding any 
potential violation of the federal securities laws. 
Undertakings 
58. Two Sigma agrees to cooperate fully with the Commission in any and all 
investigations, litigations, or other proceedings relating to or arising from the matters described 
in the Order.  In connection with such cooperation, Two Sigma shall: (i) produce, without service 
of a notice or subpoena, any and all non-privileged documents and other information reasonably 
requested by the Commission staff; (ii) use their best efforts to cause Two Sigma’s officers, 
employees, and directors to be interviewed by the Commission staff at such time as the 
Commission staff may reasonably direct; (iii) provide any certification or authentication of 
business records of TSI and TSA as may be reasonably requested by the Commission staff; and 
(iv) use their best efforts to cause Two Sigma’s officers, employees, and directors to appear and 
testify without service of a notice or subpoena in such investigations, depositions, hearings or 
trials as may be requested by the Commission staff.  
59. In determining whether to accept the Offers, the Commission has considered these 
undertakings. 
IV. 
 In view of the foregoing, the Commission deems it appropriate and in the public interest to 
impose the sanctions agreed to in Respondents Offer. 
 Accordingly, pursuant to Section 21C of the Exchange Act, and Sections 203(e) and 203(k) 
of the Advisers Act, it is hereby ORDERED that: 
 A. Respondents cease and desist from committing or causing any violations and any 
future violations of Rule 21F-17(a) under the Exchange Act and Sections 206(2) and 206(4) of the 
Advisers Act and Rule 206(4)-7 promulgated thereunder.  
B. Respondents are censured. 
 C. Respondents TSI and TSA shall, within 10 days of the entry of this Order, each pay 
a civil money penalty in the amount of $45,000,000, for a total of $90,000,000, to the Securities 
and Exchange Commission for transfer to the general fund of the United States Treasury, subject to 
Exchange Act Section 21F(g)(3).  If timely payment is not made, additional interest shall accrue 
pursuant to 31 U.S.C. § 3717.  
Payment must be made in one of the following ways:   
(1) Respondent may transmit payment electronically to the Commission, which 
will provide detailed ACH transfer/Fedwire instructions upon request;  
(2) Respondent may make direct payment from a bank account via Pay.gov 
through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  

 
13 
(3) Respondent may pay by certified check, bank cashier’s check, or United 
States postal money order, made payable to the Securities and Exchange 
Commission and hand-delivered or mailed to:  
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
Payments by check or money order must be accompanied by a cover letter identifying TSI 
and/or TSA as a Respondent in these proceedings, and the file number of these proceedings; a copy 
of the cover letter and check or money order must be sent to Lee A. Greenwood, Assistant 
Regional Director, Asset Management Unit, Division of Enforcement, Securities and Exchange 
Commission, 100 Pearl Street, Suite 20-100, New York, NY 10004.   
 D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 
treated as penalties paid to the government for all purposes, including all tax purposes.  To 
preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor 
Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of 
any award of compensatory damages by the amount of any part of Respondents’ payment of a civil 
penalty in this action (“Penalty Offset”).  If the court in any Related Investor Action grants such a 
Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order 
granting the Penalty Offset, notify the Commission’s counsel in this action, and pay the amount of 
the Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be 
deemed an additional civil penalty and shall not be deemed to change the amount of the civil 
penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 
means a private damages action brought against Respondents by or on behalf of one or more 
investors based on substantially the same facts as alleged in the Order instituted by the 
Commission in this proceeding. 
 By the Commission. 
 
Vanessa A. Countryman 
        Secretary 
 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 102207 / January 16, 2025 

 

INVESTMENT ADVISERS ACT OF 1940 

Release No. 6824 / January 16, 2025  

 

ADMINISTRATIVE PROCEEDING 

File No. 3-22418 

 

In the Matter of 

 

TWO SIGMA 

INVESTMENTS, LP, and 

            TWO SIGMA  

            ADVISERS, LP, 

 

Respondents. 

 

ORDER INSTITUTING ADMINISTRATIVE 

AND CEASE-AND-DESIST PROCEEDINGS, 

PURSUANT TO SECTION 21C OF THE 

SECURITIES EXCHANGE ACT OF 1934 

AND SECTIONS 203(e) AND 203(k) OF THE 

INVESTMENT ADVISERS ACT OF 1940, 

MAKING FINDINGS, AND IMPOSING 

REMEDIAL SANCTIONS AND A CEASE-

AND-DESIST ORDER 

   

 

I. 

 The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and 

Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) against Two 

Sigma Investments, LP (“TSI”) and Two Sigma Advisers, LP (“TSA”) (collectively, “Two Sigma” 

or “Respondents”).  

II. 

 In anticipation of the institution of these proceedings, Respondents have submitted Offers 

of Settlement (the “Offers”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings 

herein, except as to the Commission’s jurisdiction over them and the subject matter of these 

proceedings, which are admitted, Respondents consent to the entry of this Order Instituting 

Administrative and Cease-and-Desist Proceedings, Pursuant to Section 21C of the Securities 

Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, 

Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as 

set forth below. 



 
2 

III. 

 On the basis of this Order and Respondents’ Offers, the Commission finds1 that: 

Summary 

1. These proceedings arise out of failures by registered investment advisers TSI and 

TSA to exercise reasonable care in addressing known material vulnerabilities to a subset of their 

computer-based algorithmic investment models (“Models”) in breach of their fiduciary duty of care, 

deficiencies in their written compliance policies and procedures, and TSI’s failure to reasonably 

supervise one of its employees (“Modeler A”), as well as TSI’s and TSA’s violations of the 

Commission’s whistleblower protection rule.  Two Sigma is a large quantitative-analytics-based 

hedge fund manager that uses Models when making investment decisions for its clients, including 

private funds and separately managed accounts (each, an “SMA”), as well as for its own proprietary 

funds.    

2. Between March 2019 and October 2023 (the “Relevant Period”), TSI recognized 

significant vulnerabilities to certain of its Models that could materially adversely impact clients’ 

investment returns.  Specifically, beginning in at least March 2019, Two Sigma employees 

expressed concern that numerous Two Sigma personnel had unfettered read and write access to a 

firm database that stored Model “parameters”—variable inputs that impact the stock predictions 

generated by Models—used by certain of Two Sigma’s live-trading Models.  These employees 

expressed concern that such personnel could make changes to these Model parameters without 

review or approval and that such changes could materially impact Two Sigma’s investment 

decisions for its clients.  Despite Two Sigma employees identifying and providing senior 

management with proposed solutions, TSI failed to reasonably address these vulnerabilities for 

years.  And, despite also knowing about these vulnerabilities, TSA also failed to take reasonable 

steps to address them.  

3. Additionally, between November 2021 and August 2023, TSI failed to supervise one 

of its modelers, Modeler A, who had read and write access to this database and changed Model 

parameters without approval for fourteen Models that Two Sigma was using in live trading.  

Modeler A’s unauthorized changes caused these Models to perform differently than expected such 

that Two Sigma made investment decisions that it otherwise would not have made in the client 

funds and SMAs it advised.  Modeler A’s changes, which went undetected until August 2023, 

demonstrated the significance of the vulnerabilities that Two Sigma had first identified in early 2019 

but failed reasonably to address.  Modeler A’s changes resulted in certain funds and SMAs 

overperforming by more than $400 million and other funds and SMAs underperforming by 

approximately $165 million.  Two Sigma voluntarily repaid the negatively impacted funds and 

SMAs, which primarily included outside investors, approximately $165 million in December 2023 

and January 2024. 

                                                 
1  The findings herein are made pursuant to Respondents’ Offers of Settlement and are not 

binding on any other person or entity in this or any other proceeding.  



 
3 

4. Two Sigma also failed to adopt and implement written policies and procedures 

reasonably designed to prevent violations of the Advisers Act during the Relevant Period.  

Specifically, Two Sigma failed to adopt and implement written policies and procedures to address 

the recognized access control vulnerabilities to the Models described above.    

5. Accordingly, both TSI and TSA violated Sections 206(2) and 206(4) of the Advisers 

Act and Rule 206(4)-7 thereunder.  TSI also failed reasonably to supervise Modeler A, within the 

meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing and detecting 

Modeler A’s violations of the federal securities laws.   

6. Separately, between at least April 2019 and February 2024, Two Sigma entered into 

separation agreements with employees (“Separation Agreements”) that required departing 

employees to represent to Two Sigma that they had not filed a complaint with any governmental 

agency in order to receive certain post-separation payments and benefits.  As a result, Two Sigma 

violated Rule 21F-17(a) under the Exchange Act, which prohibits any person from taking any action 

to impede an individual from communicating directly with the Commission staff about a possible 

securities law violation. 

Respondents 

7. TSI is a Delaware limited partnership that is headquartered in New York, NY.  TSI 

was founded in July 2001 and has been registered with the Commission as an investment adviser 

since August 2009.  TSI provides advisory services on a discretionary basis to various clients, 

including private investment funds.  According to its Form ADV filed on March 28, 2024, TSI had 

regulatory assets under management of approximately $84 billion.   

8. TSA is a Delaware limited partnership that is headquartered in New York, NY.  

TSA was founded in December 2001 and has been registered with the Commission as an 

investment adviser since February 2010.  TSA provides advisory services on a discretionary basis to 

various clients, including private investment funds, a registered investment company, foreign funds, 

and SMAs.  According to its Form ADV filed on March 28, 2024, TSA had regulatory assets under 

management of approximately $76 billion.   

Background 

9. Two Sigma is a quantitative-analytics-based hedge fund manager with 

approximately 1,700 employees worldwide.  Two Sigma manages dozens of private funds, and 

TSA also manages SMAs, which use sophisticated computer-based algorithmic trading Models.  

The Models create forecasts that Two Sigma uses to make investment decisions for client 

portfolios as well as in its own proprietary funds.  Two Sigma uses hundreds of different Models 

across its various investment strategies.   

10. TSI and TSA are affiliates and share certain of the same owners and certain of the 

same employees.   

11. TSI personnel called “researchers” or “modelers” develop the Models.  TSI uses the 

Models when making investment decisions for itself and its private fund clients.  TSI also licenses 



 
4 

the Models to TSA for TSA’s use when making investment decisions for itself, its private fund 

clients, and SMAs it advises.   

12. During the Relevant Period, Two Sigma managed private funds that employed a 

“master-feeder” or “fund-of-funds” structure whereby investors purchased interests in a fund and 

that fund’s assets were then invested, directly or indirectly, through various TSI- and TSA-

managed strategies and/or funds that used the Models.  TSA also managed SMAs for numerous 

clients during the Relevant Period that also were invested, directly or indirectly, through various 

TSI- and TSA-managed strategies and/or funds that used the Models. 

A. Two Sigma’s Storage of Model Parameters and Process for Approving Models 

13. Two Sigma’s Models are made available for live trading after being vetted through 

an internal approval process.  Members of Two Sigma’s portfolio management teams then evaluate 

each approved Model and determine whether and how to incorporate each approved Model into 

Two Sigma’s investment strategies. 

i. Model Storage 

14. Two Sigma’s live trading system uses Model code that is stored in a secure file 

called the “Jar.”  Only members of an engineering team can update the live trading system to use a 

new version of the Jar file.  Beginning with the advent of machine learning-based Models, the 

parameters necessary to run such Models outgrew the data size constraints of the Jar.  Thus, 

modelers began using a database, called “celFS,” to store certain Model parameters that were too 

large to be stored in the Jar.  The Model parameters stored in celFS were accessible by certain 

modelers and a variety of other Two Sigma personnel, each of whom had unrestricted read and 

write access to celFS and the parameters stored therein.  Modelers could then code their Models to 

run by linking the Model code stored in the Jar to the Model parameters stored in celFS.  

15. Certain Two Sigma modelers used Model parameters stored in celFS to increase or 

decrease the impact of specific Model code contained in the Jar, including decreasing one Model’s 

correlation to other existing Models.  This use of Model parameters was important to Two Sigma 

because it removed redundancy that could result in Two Sigma buying or selling more or less of a 

specific security than it otherwise desired or intended. 

ii.  Model Approval Process 

16. Two Sigma required its modelers to complete several steps before new Models, or 

certain changes to existing Models, could be approved and released for use in live trading.   

17. During the Relevant Period, Two Sigma’s primary policy and procedure governing 

the approval of new Models was called Productionalize a Model (or “PAM”).  The PAM manual, 

which was available to modelers and other Two Sigma employees, incorporated detailed guidance 

on the Model approval and release processes, including that new Models would be evaluated based 

on their correlation to existing Models.  Modelers frequently used parameters to help control their 

new Models’ expected correlation to existing Models.    



 
5 

18. As an initial step, PAM required modelers to draft and submit a document—

referred to internally as a “white paper”—detailing the Model’s objective and providing 

information about the Model’s analytics and key metrics.  PAM then required modelers to 

complete and submit several forms which summarized these key attributes, including the proposed 

Model’s correlation to existing Models.  Two Sigma management then reviewed these documents 

and forms, and Models could be approved where, among other things, the modeler’s 

documentation reported that the proposed Model’s correlation to existing Models was below a 

specified threshold.  As part of that review process, designated Two Sigma personnel could reject 

the proposed new Model, approve the proposed new Model for live trading, or require changes to 

the proposed new Model.  Once approved, members of Two Sigma’s portfolio management teams 

would evaluate the new Model and determine whether and how to incorporate it into Two Sigma’s 

investment strategies.  

19. The PAM manual also outlined the approval process for changes to existing 

Models, which was called “Mini-PAM.”  The use of Mini-PAM depended on the proposed 

changes’ “smallness”—the degree of change in the expected performance of the existing Model.  

Where proposed changes exceeded the smallness threshold, modelers were required to follow the 

same steps required for a new Model (i.e., PAM). 

B. Vulnerabilities to Two Sigma’s Model Parameters Stored in celFS 

i. Two Sigma Personnel Identify Significant Vulnerability in celFS 

20. Two Sigma personnel first identified significant vulnerabilities to the Model 

parameters stored in celFS in at least early 2019.  By March 2019, TSI employees began sharing 

emails and a memorandum outlining concerns regarding security vulnerabilities to Model 

parameters stored in celFS.  These emails and the memorandum focused on the lack of access 

controls (i.e., read and write controls) that could result in Two Sigma employees inadvertently 

making changes to, or overwriting entirely, Model parameters stored in celFS.  The memorandum 

also identified proposed fixes to address these security vulnerabilities by, among other things, 

limiting read and write access in celFS to a smaller group of Two Sigma employees.   

21. Over the next several months, these concerns and proposals were shared with senior 

employees in the TSI Machine Learning and Engineering groups.  Employees in these two groups 

suggested various pragmatic approaches, including the use of tighter access controls in celFS, 

process enhancements that would ensure that changes to Model parameters stored in celFS were 

accompanied by PAM or Mini-PAM approvals, encrypting the Model parameters stored in celFS, 

and/or removing the Model parameters from celFS entirely and using an alternate storage database.   

ii. Two Sigma Fails to Correct Vulnerabilities to Model Parameters in celFS 

22. Two Sigma employees failed to reach a consensus on the best way to address these 

known vulnerabilities to Model parameters stored in celFS, which persisted even after one of Two 

Sigma’s co-founders expressed concern about Model parameters stored in celFS in 2019.  Two 

Sigma made no changes to the controls governing Model parameters stored in celFS in 2019 or 

2020. 



 
6 

23. In late January 2022, a senior TSI engineer circulated to one of Two Sigma’s co-

founders and other Two Sigma executives his own memorandum about Model controls.  In this 

memorandum, the senior engineer raised concerns about the lack of access controls for Model 

parameters stored in celFS and the absence of controls to ensure modelers followed an approval 

process for changes to these Model parameters.  In the same memorandum, the senior engineer 

also explained that while no prior incidents had been malicious or caused significant issues to Two 

Sigma’s trading, “[i]t is nevertheless dangerous to allow this and efforts are in place to limit and 

eventually allow only Data Engineering to have write access.”   

24. Despite these concerns, Two Sigma made no changes to address the vulnerabilities 

to Model parameters stored in celFS until after a TSI employee accidentally overwrote Model 

parameters in that database in May 2022. 

iii. May 2022 celFS Incident Reinforces Vulnerability Concerns 

25. On May 9, 2022, a TSI employee inadvertently overwrote an entire volume in 

celFS containing several Models’ parameters before certain markets opened for trading that day.  

This change prevented the Models from generating the forecasts that Two Sigma used to make 

investment decisions on behalf of certain of its client funds and SMAs.  Although Two Sigma was 

able to reverse these changes before markets opened, this incident reinforced the validity of the 

concerns expressed by Two Sigma employees about the vulnerabilities to the celFS database 

beginning in 2019.   

26. In an internal post-mortem document circulated among the TSI Engineering group 

and with Two Sigma senior management on May 10, 2022, Two Sigma employees identified the 

same access control issues that had been identified previously in 2019 and noted that these 

vulnerabilities had enabled this incident. 

27. In response, in June 2022, Two Sigma implemented a new procedure that limited 

access to Model parameters stored in the celFS database to a small, dedicated team of engineers 

and allowed changes to Model parameters only upon receipt of a written request, called a ticket, 

from a modeler.  This new procedure prevented modelers from making direct changes to Model 

parameters stored in celFS.  However, since it merely required modelers to document their changes 

on a ticket and to submit the ticket to a team of engineers for implementation, it was insufficient to 

address errors in modelers’ tickets and did not prevent modelers from intentionally changing Model 

parameters because modeler tickets were not reviewed, tested, or approved.  Rather, Two Sigma 

automatically—i.e., without review or analysis by the engineers who received the tickets —

implemented the Model parameter changes reflected on a modeler’s ticket.   

C. Modeler A Makes Unauthorized Changes to Model Parameters Stored in 

celFS 

28. Between November 2021 and August 2023, Modeler A, a TSI employee who had 

used celFS to store certain Model parameters for years, made dozens of unauthorized changes to 

Model decorrelation parameters stored in celFS for fourteen different Models that Two Sigma used 



 
7 

in live trading.  These Models included both Models that Modeler A developed himself as well as 

Models developed by Modeler A’s direct reports and with which Modeler A assisted. 

29. Modeler A effected these parameter changes in at least two ways.  First, between 

November 2021 and May 2022, Modeler A himself changed Model decorrelation parameters stored 

in celFS, which were linked to the Model code stored in the Jar.  By adjusting these Model 

parameters, in many cases to zero (i.e., nullifying the parameter), Modeler A increased these 

Models’ expected correlation to Two Sigma’s other Models without detection.  Second, between at 

least February and August 2023, Modeler A submitted tickets for changes to Model decorrelation 

parameters stored in celFS that he knew, based on his understanding of the ticket process, would not 

be substantively reviewed or questioned.  Modeler A later acknowledged to certain colleagues that 

he should have filed a Mini-PAM for these Model parameter changes in celFS.  

30. These changes caused the Models to perform differently than expected such that 

Two Sigma made investment decisions that it otherwise would not have made.  Specifically, 

Modeler A’s unauthorized changes resulted in Two Sigma buying or selling more or less of specific 

securities than it otherwise would have, which caused certain funds and SMAs to overperform by 

more than $400 million and other funds and SMAs to underperform by approximately $165 million.  

Modeler A received millions of dollars of additional compensation from Two Sigma as a result of 

the net overperformance attributable to these changes. 

31. TSI knew since at least March 2019 of the risk that its modelers could use the 

vulnerabilities to Model parameters stored in celFS to make unauthorized changes to these Model 

parameters.  Despite recognizing this risk, TSI failed to adopt or implement written policies and 

procedures that were reasonably designed to confirm that its modelers did not make such 

unauthorized changes during the Relevant Period.  In August 2023, TSI began monitoring the celFS 

database to confirm that its modelers had not made, and were not making, unauthorized changes to 

Model parameters and discovered Modeler A’s changes. 

D. Two Sigma’s Failure to Reasonably Address Model Vulnerabilities 

 

32. An investment adviser’s fiduciary duty includes a duty of care.  To fulfill this 

obligation, an adviser, among other things, must provide investment advice in the best interest of 

its client based on the client’s objectives, and take steps to protect client interests from being 

placed at risk because of the adviser’s inability to provide advisory services.  This includes taking 

steps to minimize known or reasonably foreseeable operational risks that could lead to significant 

business disruptions.  

33. During the Relevant Period, TSI and TSA breached their fiduciary duty to take 

reasonable steps to protect their clients’ interests from recognized material vulnerabilities to certain 

Models, which were a core function of its advisory business as a quantitative-analytics-based hedge 

fund manager.  Specifically, despite having first recognized vulnerabilities to live trading Model 

parameters stored in celFS in March 2019—and being aware of various reasonable methods to 

mitigate them—TSI did not adequately address these vulnerabilities until October 2023.  And, 

TSA, despite knowing about the vulnerabilities, also failed to take reasonable steps to address 

them. 



 
8 

E.  Two Sigma Failed to Adopt and Implement Reasonably Designed Written 

Compliance Policies and Procedures 

34. During the Relevant Period, Two Sigma’s written policies and procedures were not 

reasonably designed to prevent violations of the Advisers Act.  Specifically, while TSI had written 

policies and procedures governing changes to existing Models (e.g., PAM and Mini-PAM), these 

policies and procedures were deficient because they contained no mechanism to check whether all 

changes to Model parameters stored in celFS that required a PAM or Mini-PAM were in fact made 

pursuant to a PAM or Mini-PAM.  And, TSA, as a licensee of TSI’s Models that shared certain 

employees with TSI, failed to adopt and implement written policies and procedures that were 

reasonably designed to address these same recognized vulnerabilities.   

35. In October 2023, to help the firm better fulfill its fiduciary obligations, Two Sigma 

adopted and implemented additional policies and procedures to monitor, identify, and address 

vulnerabilities to the security of its Models. 

F.  Two Sigma’s Separation Agreements Raised Impediments to Its Employees’ 

Ability to Communicate Directly with The Commission Staff about Possible 

Securities Laws Violations 

36. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank 

Act”), enacted on July 21, 2010, amended the Exchange Act by adding Section 21F, 

“Whistleblower Incentives and Protection.” The purpose underlying these provisions was “to 

encourage whistleblowers to report possible violations of the securities laws by providing financial 

incentives, prohibiting employment-related retaliation, and providing various confidentiality 

guarantees.”  See Implementation of the Whistleblower Provisions of Section 21F of the Securities 

Exchange Act of 1934, Release No. 34-64545, at p. 197 (Aug. 12, 2011). 

37. To fulfill this Congressional purpose, the Commission adopted Rule 21F-17, which 

provides in relevant part: 

(a) No person may take any action to impede an individual from communicating directly 

with the Commission staff about a possible securities law violation, including enforcing, or 

threatening to enforce, a confidentiality agreement … with respect to such 

communications. 

Rule 21F-17 became effective on August 12, 2011. 

38. From at least April 2019 until February 2024, Two Sigma required departing 

employees to sign Separation Agreements in order to receive certain post-separation payments and 

benefits.  The Separation Agreements required employees to represent that they had not filed any 

complaints against Two Sigma prior to signing the Separation Agreement, but also stated that 

employees were not prohibited from reporting possible violations of law to any governmental 

agency or making other disclosures that are protected under whistleblower laws or regulations.   

39. Specifically, Section 6(d) of the Separation Agreements (the “Employee 

Representation”) required departing employees to make the following representation: “You 



 
9 

represent that you have not filed against any Two Sigma Party any charges, complaints or lawsuits 

regarding any acts or omissions occurring prior to your execution of this Agreement with any 

international, federal, state, city or local court, governmental agency or arbitration tribunal.”   

40. The Separation Agreements also contained a prospective carve-out in Section 14(c) 

(the “Carve Out”), which stated: “Nothing in this Agreement (including without limitations 

Sections 5(g), 6, 7 and 8), the Company’s policies or any other agreement between you and the 

Company prohibits you from making a good faith reporting of possible violations of law or 

regulation to any governmental agency or entity or making other disclosures that are protected 

under whistleblower laws or regulations.”   

41. The Separation Agreements further authorized Two Sigma to file an arbitration 

seeking various financial and non-financial remedies against any employee who breached the 

Separation Agreements.   

42. Two Sigma’s use of the Separation Agreements violated Rule 21F-17(a) under the 

Exchange Act because the Employee Representation required departing employees to disclose to 

Two Sigma whether they had previously reported possible violations of the federal securities laws 

to the Commission and barred such departing employees from receiving the post-separation 

payments and benefits that Two Sigma offered in exchange for receiving signed Separation 

Agreements.  Further, departing employees who may have breached the Separation Agreements by 

falsely making the Employee Representation ran the risk of facing an arbitration and being held 

liable to Two Sigma for various financial and non-financial remedies.  

43. The Carve Out did not remedy the impeding effect of the Employee Representation, 

which addressed past employee conduct (i.e., it required disclosure of already-made complaints), 

because the Carve Out was prospective in application (i.e., it did not prohibit departing employees 

from making future complaints).  

44. From April 2019 until February 2024, nearly three hundred (300) departing 

employees signed Separation Agreements containing the Employee Representation.  

45. In February 2024, Two Sigma revised the Separation Agreements such that the 

Employee Representation read: “You represent that you have not filed against any Two Sigma 

Party any charges, complaints or lawsuits regarding any acts or omissions occurring prior to your 

execution of this Agreement with any international, federal, state, city or local court, governmental 

agency or arbitration tribunal.  However, this representation does not apply to any charges, 

actions, or proceedings before, or engaging in communications with, the SEC . . . about possible 

fraud or other securities law violations occurring prior to the date you execute this agreement.” 

(Emphasis added.)   

46. This revision made clear that the Employee Representation did not apply to 

instances where departing employees had previously reported possible securities laws violations to 

the SEC, and that departing employees who had already made such a report to the SEC did not 

need to identify themselves, could still honestly make the required Employee Representation, and 



 
10 

could still receive the post-separation payments and benefits set forth in the Separation 

Agreements. 

47. The Commission staff is not aware of specific instances in which Two Sigma took 

any action against any departing employee for breaching the Separation Agreements, in which a 

current or former Two Sigma employee was prevented from communicating with the Commission 

staff about potential violations of securities laws, or in which Two Sigma took action to otherwise 

prevent such communications, including with respect to the events described herein. 

Violations and Failure to Supervise 

48. As a result of the conduct described above, TSI and TSA willfully2 violated 

Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging “in any 

transaction, practice or course of business which operates as a fraud or deceit upon any client or 

prospective client.”  Scienter is not required to establish a violation of Section 206(2), which may 

rest on a finding of simple negligence. SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992) 

(citing SEC v. Cap. Gains Rsch. Bureau, Inc., 375 U.S. 180, 194-95 (1963)). 

49. As a result of the conduct described above, TSI and TSA willfully violated Section 

206(4) of the Advisers Act and Rule 206(4)-7 thereunder by failing to adopt and implement written 

policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules 

thereunder.  Proof of scienter is not required to establish a violation of Section 206(4) of the 

Advisers Act and the rules thereunder.  Steadman, 967 F.2d at 647. 

50. As a result of the conduct described above, TSI failed reasonably to supervise 

Modeler A within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing 

and detecting Modeler A’s violations of the federal securities laws. 

51. As a result of the conduct described above, TSI and TSA willfully violated Rule 

21F-17(a) of the Exchange Act, which prohibits any person from taking any action to impede an 

individual from communicating directly with the Commission staff about a possible securities law 

violation. 

  

                                                 
2  “Willfully,” for purposes of imposing relief under Sections 203(e) and (f) of the Advisers 

Act, “‘means no more than that the person charged with the duty knows what he is 

doing.’”  Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 

969, 977 (D.C. Cir. 1949)).  There is no requirement that the actor “also be aware that he is 

violating one of the Rules or Acts.”  Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). The decision in 

The Robare Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently 

structured statutory provision, does not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) 

(setting forth the showing required to establish that a person has “willfully omit[ted]” material 

information from a required disclosure in violation of Section 207 of the Advisers Act). 



 
11 

Two Sigma’s Cooperation and Remedial Efforts 

52. In determining to accept the Offers, the Commission considered the cooperation 

Two Sigma afforded the Commission staff and remedial acts Two Sigma promptly undertook.   

53. Two Sigma provided substantial cooperation in the Division of Enforcement’s 

investigation, and its efforts assisted the Commission staff in its collection of evidence, including 

information that might not otherwise have been available to the Commission staff.   

54. In October 2023, Two Sigma, during the course of an examination by the 

Division of Examinations (“Examinations”), disclosed to investors and the Examinations staff 

that one of its modelers engaged in what Two Sigma described as “intentional misconduct” by 

circumventing Two Sigma’s modeling practices, and stated that it would remediate investors for 

any negative impacts arising therefrom. 

55. In December 2023 and January 2024, Two Sigma voluntarily repaid the negatively 

impacted client funds and SMAs approximately $165 million to account for the underperformance 

that these funds suffered as a result of Modeler A’s unauthorized changes.   

56. In 2023 and 2024, Two Sigma reviewed its written disclosures, written policies and 

procedures, and internal controls relating to, among other things, the security of Model parameters 

stored in celFS, the integrity of Model code, the approval of new Models and changes to existing 

Models, and the supervision of its associated persons, and adopted and implemented changes 

thereto. 

57. Additionally, upon learning of the Commission’s separate investigation concerning 

its Separation Agreements, Two Sigma promptly initiated a remediation program concerning 

compliance with Rule 21F-17 under the Exchange Act.  Within two weeks, Two Sigma:  

(i) reviewed and, as necessary, revised its Separation Agreements, as well as 

various other employment-related agreements and training programs, to 

comply with Rule 21F-17;  

(ii) reviewed and, as necessary, revised its written policies and procedures for 

compliance with Rule 21F-17;  

(iii) enhanced its annual compliance training materials for all employees to 

ensure compliance with Rule 21F-17;  

(iv) communicated with all current employees to advise them of the protections 

afforded them by Rule 21F-17, including their right to communicate 

directly with the Commission staff regarding any potential violation of the 

federal securities laws; and 

(v) communicated with the nearly three hundred (300) employees who had 

signed the Separation Agreements between April 2019 and February 2024, 

advising them of the protections afforded them by Rule 21F-17, including 



 
12 

their right to communicate directly with the Commission staff regarding any 

potential violation of the federal securities laws. 

Undertakings 

58. Two Sigma agrees to cooperate fully with the Commission in any and all 

investigations, litigations, or other proceedings relating to or arising from the matters described 

in the Order.  In connection with such cooperation, Two Sigma shall: (i) produce, without service 

of a notice or subpoena, any and all non-privileged documents and other information reasonably 

requested by the Commission staff; (ii) use their best efforts to cause Two Sigma’s officers, 

employees, and directors to be interviewed by the Commission staff at such time as the 

Commission staff may reasonably direct; (iii) provide any certification or authentication of 

business records of TSI and TSA as may be reasonably requested by the Commission staff; and 

(iv) use their best efforts to cause Two Sigma’s officers, employees, and directors to appear and 

testify without service of a notice or subpoena in such investigations, depositions, hearings or 

trials as may be requested by the Commission staff.  

59. In determining whether to accept the Offers, the Commission has considered these 

undertakings. 

IV. 

 In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Respondents Offer. 

 Accordingly, pursuant to Section 21C of the Exchange Act, and Sections 203(e) and 203(k) 

of the Advisers Act, it is hereby ORDERED that: 

 A. Respondents cease and desist from committing or causing any violations and any 

future violations of Rule 21F-17(a) under the Exchange Act and Sections 206(2) and 206(4) of the 

Advisers Act and Rule 206(4)-7 promulgated thereunder.  

B. Respondents are censured. 

 C. Respondents TSI and TSA shall, within 10 days of the entry of this Order, each pay 

a civil money penalty in the amount of $45,000,000, for a total of $90,000,000, to the Securities 

and Exchange Commission for transfer to the general fund of the United States Treasury, subject to 

Exchange Act Section 21F(g)(3).  If timely payment is not made, additional interest shall accrue 

pursuant to 31 U.S.C. § 3717.  

Payment must be made in one of the following ways:   

(1) Respondent may transmit payment electronically to the Commission, which 

will provide detailed ACH transfer/Fedwire instructions upon request;  

(2) Respondent may make direct payment from a bank account via Pay.gov 

through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  

http://www.sec.gov/about/offices/ofm.htm


 
13 

(3) Respondent may pay by certified check, bank cashier’s check, or United 

States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to:  

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

Payments by check or money order must be accompanied by a cover letter identifying TSI 

and/or TSA as a Respondent in these proceedings, and the file number of these proceedings; a copy 

of the cover letter and check or money order must be sent to Lee A. Greenwood, Assistant 

Regional Director, Asset Management Unit, Division of Enforcement, Securities and Exchange 

Commission, 100 Pearl Street, Suite 20-100, New York, NY 10004.   

 D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be 

treated as penalties paid to the government for all purposes, including all tax purposes.  To 

preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor 

Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of 

any award of compensatory damages by the amount of any part of Respondents’ payment of a civil 

penalty in this action (“Penalty Offset”).  If the court in any Related Investor Action grants such a 

Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order 

granting the Penalty Offset, notify the Commission’s counsel in this action, and pay the amount of 

the Penalty Offset to the Securities and Exchange Commission.  Such a payment shall not be 

deemed an additional civil penalty and shall not be deemed to change the amount of the civil 

penalty imposed in this proceeding.  For purposes of this paragraph, a “Related Investor Action” 

means a private damages action brought against Respondents by or on behalf of one or more 

investors based on substantially the same facts as alleged in the Order instituted by the 

Commission in this proceeding. 

 By the Commission. 

 

Vanessa A. Countryman 

        Secretary 

 


	UNITED STATES OF AMERICA
	Respondents
	Background