State Street Bank and Trust Co. agreed Tuesday to pay $382.4 million in a global settlement with the SEC, DOJ and DOL, for misleading mutual funds and other custody clients by applying hidden markups to foreign currency exchange trades.
State Street must pay $167.4 million in disgorgement and penalties to the Securities and Exchange Commission, a $155 million penalty to the Department of Justice, and at least $60 million to ERISA plan clients in an agreement with the Department of Labor.
According to the regulators, as part of its custody bank line of business, State Street safeguards clients’ financial assets and offers such services as indirect foreign currency exchange trading (Indirect FX) for clients to buy and sell foreign currencies as needed to settle their transactions involving foreign securities.
An SEC investigation found that State Street realized “substantial revenues by misleading custody clients about Indirect FX, telling some clients that it guaranteed the most competitive rates available on their foreign currency exchange trades, provided ‘best execution,’ or charged ‘market rates’ on the transactions.”
State Street instead set prices largely driven by predetermined, uniform markups and made no effort to obtain the best possible prices for these clients, the regulators said.
Under the terms of the agreement, the SEC will issue its order instituting the settled administrative proceeding only after a federal court approves State Street’s proposed settlement with private plaintiffs in pending securities class-action lawsuits concerning its pricing of foreign currency exchange trades.
State Street has agreed to admit certain findings in the SEC’s order.
“State Street misled custody clients about how it priced their trades and tucked its hidden markups into a corner where they were unlikely to notice,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a statement. “Financial institutions cannot mislead their customers about their trading costs.”
Paul Levenson, director of the SEC’s Boston Regional Office, added, “Mutual funds and other registered investment companies should not face overreaching by the very banks hired to safeguard their assets.”
State Street said in a statement that the Boston-based firm has “negotiated settlement agreements which we expect, subject to final approval, to resolve the pending litigation and regulatory matters in the United States related to our indirect foreign exchange (FX) business.”
Each agreement depends upon certification, for settlement purposes, of a class of State Street’s custody customers that executed indirect foreign exchange transactions with State Street between 1998 and 2009, and final approval by the United States District Court for the District of Massachusetts of the settlement agreement between State Street and the class.
“Matters of this nature can drain both time and resources; so where possible and appropriate we feel it is in our and our clients’ best interests to pursue settlements. Our previously established reserve will be sufficient to cover all costs associated with these agreements,” State Street said.
The SEC’s order will find that State Street willfully violated Section 34(b) of the Investment Company Act of 1940 and caused violations of Section 31(a) of the Investment Company Act and Rule 31a-1(b) by providing its registered investment company custody clients with trade confirmations and monthly transaction reports that were materially misleading in light of the representations it made about how it priced foreign currency exchange transactions.
State Street will be required to pay $75 million in disgorgement plus $17.4 million in interest to harmed clients as well as a $75 million penalty.