State Street to Pay $382M for Misleading Clients, Including Mutual Funds, Over Hidden Markups In Foreign Currency Exchange Trades

The Securities and Exchange Commission has arrived at a global settlement with State Street Bank and Trust Company. According to the regulator, State Street misled custody clients, including mutual funds, about hidden markups that were added to foreign currency exchange trades. The firm will pay $382.4M, including $167M in penalties and disgorgement to the Commission, a $155M penalty to the U.S. Justice Department, and at least $60M to ERISA plan clients.

Among the other services it provides, State Street facilitates indirect foreign currency exchange trading for clients so that they can sell and purchase foreign currencies in transactions involving foreign securities. An SEC probe found that State Street made a substantial chunk of money in revenue when it misled some clients about Indirect FX, claimed that it offered the most competitive rates on trades, charged “market rates,” and provided “best execution.” The Commission contends that the company did not try to get the best prices for clients.

The SEC believes that State Street concealed markups so that custody clients would not notice. It also found that registered investment company custody clients were given monthly transaction reports and trade confirmations that were materially misleading because of misrepresentations about foreign currency exchange transaction pricing.

The SEC’s order instituting settled administrative proceedings will only be issued after a federal court approves the firm’s proposed settlements in securities class actions lawsuits that were brought about the way it allegedly priced foreign currency exchange transactions. The company has put aside $147.6M to settle these private cases.

As part of the SEC settlement, Street Street will admit to specific findings in the regulator’s order. The Commission said that the firm violated certain sections of the Investment Company Act of 1940 and Rule 31a-1(b).

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SEC: State Street Misled Custody Clients About Prices for Foreign Currency Exchange Trades, SEC, July 26, 2016

Investment Company Act of 1940 (PDF)